Canada Cross-Border Transactions

SEC registration statements and certain annual reports require consents of experts (e.g., technical experts, audit firms, and investment banks that provide fairness opinions) named in the disclosure document. A recent development in Canada is that audit partners are now named in audit reports filed with audited financial statements. From an SEC perspective, the naming of both the audit partner and the audit firm in the audit report could require both parties to provide consent to the inclusion of the audit report in an SEC filing. The SEC has recently provided our firm informal guidance that in accordance with the principles of the multijurisdictional disclosure system (“MJDS”), the SEC will not require a separate consent of the audit partner for an issuer’s initial MJDS registration statement and for any subsequent MJDS registration statement filed before the issuer’s first SEC annual report, if the issuer was required to include the name of the audit partner in the Canadian filing and the audit partner did not provide a consent when the audit report was originally filed in Canada. This guidance only applies to U.S. filings made in accordance with MJDS (e.g., Form 40-F, F-7, F-8, F-10 and F-80). We understand that the SEC is not extending this informal exemption to an issuer’s first SEC annual report or to any subsequent filings, because Canadian issuers can choose to follow PCAOB guidelines for audit reports included with the issuer’s first annual report filed with the SEC and audit partners are not required to be named in a PCAOB compliant audit report. The SEC is also not extending this informal exception to issuers who file with the SEC on non-MJDS forms. SEC registered Canadian issuers should discuss the consent requirements with their auditors and determine if they are permitted, and it makes sense, to prepare a PCAOB audit report going forward to eliminate the need for a consent of the audit partner.

Many of our Canadian clients have decided to list their stock in the United States on the NYSE American exchange, instead of Nasdaq. Why? Stock price flexibility is a big factor. In Canada, it’s considered perfectly normal for a company to have stock with a price of $2, $1, $0.50 or even $0.10 per share. Not in the United States. Here, there is a long tradition of regulations and stock exchange rules disfavoring companies whose shares trade at low prices, regardless of their total market capitalization. Back in the 1990s, there were three main stock exchanges – Nasdaq, the American Stock Exchange, and for larger companies, the NYSE. While each of the exchanges imposed minimum stock price requirements, the American Stock Exchange rules permitted the exchange to grant exceptions in appropriate cases. The availability of this exception allowed the American Stock Exchange to become the preferred choice of Canadian companies with lower stock prices who did not want to complete a reverse stock split in order to list in the United States. Over time, so many Canadian companies listed there, instead of Nasdaq, that Canadian companies with higher stock prices began to join them. Things have changed a bit since those days. The American Stock Exchange has become part of the NYSE family, now known as the “NYSE American” exchange, and its rules no longer allow a waiver of its minimum stock price requirements. That said, the NYSE American has continued the tradition of being the most flexible of the major U.S. stock exchanges when it comes to stock price. For an initial listing, the NYSE American requires a minimum stock price of $2 in many cases, and $3 in others. Nasdaq allows these prices only on its lower tier Capital Market, and subject to certain restrictions that are not imposed by the NYSE American. For the Nasdaq Global Market, a price of $4 is required. Perhaps more importantly, a company that is listed on Nasdaq is subject to delisting if its stock price declines and stays below $1. For the NYSE American, the threshold is a much lower $0.20.[1] While every company hopes that its stock price will increase, the reality is that many companies have volatile stock prices. In areas such as mining, energy, cannabis, and technology, a change in market conditions, a financing overhang, or the failure of a single property or product can result in steep stock price declines. The stock price may also decline slowly over time as a company grows, issues more shares, and becomes a much larger, more valuable company. It’s here where the NYSE American rules really shine, in helping companies minimize the risk that they will be delisted due to a low stock price, or required to undertake a potentially value-damaging reverse stock split in order to avoid a delisting. To see how this works in practice, consider a company listing on the Nasdaq Capital Market at $2. This company could be delisted or required to complete a reverse split if its stock experiences an overall price decline, during the lifetime of the listing, of more than 50%. For a company listing on the Nasdaq Global Market at $4, this threshold is an improved 75%, but only due to the higher starting price. By comparison, a company with a stock price of $2 listing on the NYSE American must lose more than 90% of its stock price before the NYSE American would consider delisting the stock due to low stock price. While many Canadian companies still list on Nasdaq, stock price flexibility continues to give the NYSE American a leg up when all other things are equal.   [1] The NYSE American Company Guide permits the exchange to delist a security if it trades at a “low price” for a substantial period of time. As a matter of policy, the NYSE American considers a price below $0.20 to be a “low price.”

Employers sometimes include fixed terms of employment in their employment agreement. Sometimes a fixed term is meant to prompt the parties to renegotiate at the end of the term. Sometimes a fixed term is meant to document the point in time where the parties have, in fact, agreed that the employment will end. Sometimes a fixed term is designed to create a point in time where the employer can end the employment without having to pay severance. But sometimes employers include a fixed term in an employment agreement without carefully considering the legal consequences. Under U.S. law, those consequences can be significant. One fundamental difference between employment law in Canada and employment law in the United States is the concept of “at-will” employment. Unlike Canada, where an employer must generally have cause to terminate an employee without having to pay damages, in the United States, an employer may generally terminate an employee for any non-discriminatory and non-retaliatory reason, so long as the employer and the employee have not entered into an employment agreement that says otherwise (with the exception of Montana, where employment is not “at-will”). Put another way, as long as the employer is not terminating the employee’s employment for a reason related to the employee’s age, race, gender, sexual orientation, etc., and so long as the employer is not terminating the employee’s employment because the employee engaged in protected activity (such as taking pregnancy leave, whistleblowing, reporting harassment, etc.), the employer can terminate the employee’s employment without paying damages. In the absence of an agreement to the contrary, U.S. law presumes that employees are employed “at will.” Employers and high-level employees in the United States frequently enter into employment agreements that they intend to supersede the presumed at-will relationship. They do so by including provisions in the employment agreement that provide for severance to the employee if the employer terminates the employee’s employment without “Cause” (as defined in the employment agreement), or if the employee quits for “Good Reason” (also as defined in the employment agreement). Employers, however, can sometimes unintentionally destroy the at-will employment relationship by including provisions that U.S. law interprets as incompatible with at-will employment. One way this can happen is if the parties include a provision stating the duration or “term” of the employment agreement. Where an employment agreement states that the employment shall continue for a certain period of time, U.S. courts may interpret that provision as giving the employee the right to employment for the term of the contract. This means that if the employer terminates the agreement before the end of the term and the employee has not breached the agreement, the employer will be liable for the pay and benefits the employer would have paid the employee had the agreement continued through the end of the term. What is worse, the employee’s mere poor performance may not constitute a sufficient breach of the employment agreement to excuse the employer from paying what the employee would have earned through the end of the term. Even where the employment agreement gives the employee a right to severance if the employer terminates the employee without cause, including a fixed term of employment in the employment agreement can potentially entitle the employee to pay through the end of the term in addition to the severance upon which the parties agreed if the employee is terminated without cause. Again, this is because a fixed term can create a right to employment for the duration of that fixed term. If an employer subject to U.S. law intends to employ someone at-will, the employer should simply not include a fixed term of employment, but instead include an “at-will” disclaimer. If an employer subject to U.S. law intends to offer an employee severance if the employee is terminated without cause and has no plans to otherwise limit the duration of employment, that employer should also not include a fixed term of employment. Where an employer does intend to hire an employee for a fixed duration but wants to retain the ability to terminate the employee without paying the employee through the end of the fixed term, the employer must include terms in the employment agreement that make that intent clear. For example, the agreement could specifically state that the parties anticipate the agreement ending on a certain date, but that the employee’s sole entitlement should employment end sooner is the severance package described elsewhere in the agreement. Employers must take care when including fixed terms of employment in their employment agreements. Otherwise, they might be on the hook for a lot more than they bargained for.

Yesterday, the SEC published guidance regarding Inline XBRL. The SEC adopted rules for Inline XBRL in June 2018. For those of you whose first question is “what is Inline XBRL?”, Inline XBRL allows the XBRL data to be embedded directly into an “EDGARized” HTML document. This eliminates the need to prepare a separate XBRL exhibit. The goal of Inline XBRL was to simplify the XBRL process for issuers and to improve the usability of XBRL data for investors. As a reminder, foreign private issuers will be required to comply with Inline XBRL at the following times: Basis of Accounting Filer Status Fiscal Periods Ending On or After: U.S. GAAP Large accelerated filers June 15, 2019 U.S. GAAP Accelerated filers June 15, 2020 U.S. GAAP All other categories June 15, 2021 IFRS All categories June 15, 2021 For foreign private issuers filing on a Form 20-F or Form 40-F, issuers must comply beginning with the Form 20-F or Form 40-F filed for the fiscal year ending on or after the applicable compliance date shown above. For foreign private issuers filing on domestic forms (10-K, 10-Q and 8-K), issuers must comply beginning with their first Form 10-Q for a fiscal period ending on or after the applicable compliance date shown above. For example, for such issuers with the June 30 fiscal year end, issuers must comply with their first Form 10-Q for the period ended September 30. The new C&DIs also provide guidance regarding technical aspects of XBRL, such as: (i) the identification of Inline XBRL on the exhibit index, (ii) voluntary use of Inline XBRL and (iii) how to comply with cover page tagging requirements where the issuer’s name on the cover page differs from its EDGAR-conformed name.

The SEC has proposed revisions to the definition of an “accelerated filer” that would exempt most companies that have both a public float of common equity of less than $700 million and annual revenues of less than $100 million from the requirements of Section 404 of the Sarbanes-Oxley Act (SOX 404). If adopted, these revisions would exempt many Canadian cross-reporting companies from the SOX 404 auditor attestation requirement, thereby reducing the cost of cross-border reporting. The proposal is subject to a 60-day public comment period. Additional information is available in the SEC’s press release regarding the proposed new amendments here: sec.gov/news/press-release/2019-68.

Canadian companies with interests in Cuba should take note of our recent eUpdate, Trump Administration Allows Lawsuits Against Persons Who Have Used Assets Confiscated by the Cuban Government, Imposes More Sanctions on Venezuela and Nicaragua, regarding new potential exposure to litigation in the United States. On April 17, 2019, the Trump Administration announced that U.S. courts may begin to hear lawsuits against persons who use assets that the Cuban government expropriated in the wake of the Cuban revolution in 1959 or since that time. While the underlying U.S. law (the Helms-Burton Act) has been in effect since 1996, all prior U.S. Presidents have chosen to exercise their discretion to waive that particular provision in the law, so this is the first time that such lawsuits have been allowed to proceed. This watershed event could have major and unprecedented implications for Canadian companies or individuals who have engaged in business in Cuba since 1959 if previously confiscated assets were involved. Such companies and individuals may now find themselves targeted by lawsuits in U.S. courts by the former owners of Cuban properties (such as mines, factories, hotels, and the like). Dorsey attorneys are available to assist Canadian businesses with addressing this significantly increased risk under U.S. law from doing business in Cuba. Our team has extensive experience assisting clients with addressing U.S. economic sanctions, including the trade embargo against Cuba, as well as representing clients in complex commercial litigation across the United States.

The governments of the United States, Mexico, and Canada signed a trade agreement (“USMCA”) in November 2018, which would replace the existing North American Free Trade Agreement (“NAFTA”). The Trump administration has begun seeking support in the U.S. Congress for USMCA. The path for the agreement, however, remains uncertain, with criticisms leveled against USMCA from both Democrats and Republicans. USMCA will adjust the existing NAFTA trade framework in certain ways, such as increasing the regional content requirement for automotive goods, providing greater market access in Canada for U.S. milk producers, and requiring Mexico to implement measures that will enhance organized labor activities. In addition, the USMCA contains new provisions that were unaddressed by NAFTA, such as those relating to digital technology, state-owned enterprises, foreign exchange rates, and termination in the event that a USMCA member enters into a trade agreement with a non-market economy (e.g., China). (See our prior post here for more on this topic.) Much of the core of NAFTA remains unchanged or very similar in the USMCA, a fact illustrated by the limited list of legal changes that the Trump administration has identified as necessary to meet U.S. obligations under the USMCA. According to the Trump administration, most U.S. legal changes relate to tariffs and procedures under which tariffs are determined, imposed and reviewed by agencies and courts. Despite the continuity between USMCA and NAFTA, USMCA’s approval and the timing of its consideration in Congress is uncertain. Speaker Nancy Pelosi and the newly elected democratic majority House of Representatives will have the first say on whether to approve the USMCA. Speaker Pelosi has not endorsed USMCA, and she has identified a number of issues of concern in USMCA, including labor rights, environmental protection, and prescription drugs. In addition, key Republicans and Democrats have stated that the USMCA will not be approved without an agreement from the Trump administration to remove steel and aluminum tariffs imposed on U.S. imports for national security reasons (referred to as “Section 232” tariffs). This demand could be a sticking point to approval because the Trump administration refused to consider lifting the Section 232 tariffs in negotiations with the governments of Canada and Mexico. In addition, Republicans have raised concerns about changes to investor-state dispute resolution under the USMCA. The USMCA has, however, gained support from key business interests, such as the Advanced Medical Technology Association, Biotechnology Innovation Organization, Canadian-American Business Council, Household & Commercial Products Association, International Association of Drilling Contractors, National Association of Manufacturers, PhRMA, and the Washington Council on International Trade. The timing for consideration of USMCA by Congress is uncertain. Under the Trade Promotion Authority (“TPA”) that Congress enacted in 2015, and extended in 2018, Congress must approve or reject the USMCA within 90 days of its introduction in the House. Introduction can occur when the Trump administration submits USMCA to Congress. President Trump recently said the administration plans to submit it “very shortly” to Congress, but doing so would immediately start the clock for Congressional approval. As noted above, it remains far from certain that the USMCA has the support necessary to pass the House of Representatives, let alone that Speaker Pelosi is willing to take up USMCA. If passage is not secured within the 90-day window, the U.S. ratification process could become significantly prolonged and perhaps unattainable, because Congress likely would seek to amend the USMCA, effectively re-opening the negotiating process among the United States, Canada, and Mexico. In short, whether and when USCMA will be approved by the U.S. Congress remains uncertain at this time.

You are invited to join us on February 26, 2019, at 11 am PT/2 pm ET, for a webinar discussing the SEC’s new mining disclosure rules. On October 31, 2018, the SEC adopted final rules effecting a complete overhaul of the technical disclosure requirements applicable to companies engaged in material mining operations, including royalties. Upon effectiveness in 2021, the new rules will replace the SEC’s decades-old guidelines, set forth in Industry Guide 7. The new rules will bring the U.S. reporting regime closer to global reporting standards, and will apply to all SEC reporting companies except those that report exclusively under the Canada-U.S. MJDS system. We will be providing an overview of the new rules, and how U.S. domestic, Canadian, other foreign, and even MJDS filers will be affected. The registration page and details about CLE/CPD credit are available here: dorsey.com/newsresources/events/event/2019/02/understanding-the-secs-new-mining-disclosure-rules. A written discussion of the SEC’s new mining disclosure rules (in Q&A format) is available here: dorsey.com/newsresources/publications/client-alerts/2019/02/new-mining-disclosure-rules-2019.

Under U.S. law, large employers have an obligation to notify their employees at least 60 days before a “plant closing” or “mass layoff.” This requirement can have serious implications for Canadian companies engaged in M&A deals with U.S. companies. The U.S. Federal Worker Adjustment and Retraining Notification Act (“WARN Act”) requires employers with 100 or more employees to give at least 60 days’ notice before a “plant closing” or “mass layoff” to employees affected by the action. Part-time employees who work less than 20 hours per week and employees who work fewer than 6 of the 12 months preceding the date when notice would be required do not count toward the 100 employee threshold. A “plant closing” is any “permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment” that results in an “employment loss” of 50 or more full-time employees during any 30-day period. A mass layoff is any layoff at a single work site which results in an “employment loss,” during any 30-day period, for: (a) at least 33% or more of the workforce and at least 50 full-time employees, or (b) at least 500 employees at the site. An “employment loss” is any loss in employment that lasts longer than six months. It is important to note that to constitute a “mass layoff,” both the 50 full-time employee threshold and the 33% of the workforce thresholds must be met. If fewer than 50 employees lose their jobs, it is not a “plant closing” or a “mass layoff” under the WARN Act. The penalties for failing to give the required notice under the WARN Act can be substantial. Employers must pay each employee to whom they failed to give notice a full day’s pay and benefits for every day of notice the employer failed to provide—that is, up to 60 days’ worth of back pay and benefits per affected employee. Employers are additionally liable for a penalty of up to $500 for each day the employer is in violation of the WARN Act’s notice requirements, up to a $30,000 maximum. In an M&A transaction, the seller is responsible for providing the WARN Act notice for any layoffs that meet the requirements of the statute and occur before the close of the transaction, and the buyer is responsible for providing the notice for any layoffs that meet the requirements of the statute and occur after the close of the transaction. This rule, unfortunately, can give buyers a false sense of security, especially in asset sale transactions. While the buyer is ordinarily not liable for the debts of the seller in an asset sale transaction, the buyer can be deemed a successor to the selling entity and liable for the seller’s failure to give WARN Act notice. Where the buyer purchases the seller’s assets intending to continue the seller’s business essentially intact, courts may deem the buyer responsible for the seller’s liabilities to its employees, including the seller’s liability to its employees for failure to provide the required WARN Act notice. U.S. courts will consider several factors when determining whether the buyer is a successor employer, including: (a) whether the work force is substantially the same; (b) whether there is a substantial continuity of the business operation; (c) whether the work is being performed in the same plant; (d) whether the buyer uses the same supervisors, machinery, and equipment that the seller used; and (e) whether the buyer makes the same products or offers the same services that the seller used to make or sell. While the sale of a business results in a technical termination of employment for all of the seller’s employees (the seller’s employees no longer work for the seller), the WARN Act does not treat such a technical termination of employment as a “loss of employment” if the employees are immediately employed by the buyer after closing. However, where the seller’s business is not sold as a going concern, the seller will be liable for failing to provide WARN Act notice to employees who suffer an employment loss on or prior to the close of the transaction, even if the seller thought the buyer would be hiring its employees if the buyer does not, in fact, do so. To complicate things even further, many states have their own “Mini-WARN” statutes, many of which are stricter than the Federal WARN Act. For example, the California WARN Act applies to employers who employ only 75 or more people, rather than the 100 employee threshold under the Federal WARN Act. The California WARN Act also defines a “mass layoff” as one involving 50 or more employees, regardless of the percentage of employees laid off. The New York WARN Act applies to employers who employ only 50 or more employees and requires employers to provide 90 days’ notice, rather than the 60 days’ notice required under the Federal WARN Act. The Federal WARN Act and its state law counterparts create many traps for the unwary M&A participant. Buyers and sellers alike should be aware and make sure they have knowledgeable legal counsel to avoid these pitfalls.

As a result of the partial U.S. government shutdown that began on December 22, 2018, the U.S. Securities and Exchange Commission (SEC), one of nine federal agencies affected, recently published its Operations Plan Under a Lapse in Appropriations and Government Shutdown (sec.gov/files/sec-plan-of-operations-during-lapse-in-appropriations-2018.pdf), which went into effect on December 27, 2018. The Operations Plan offers important guidance regarding the significant impacts of the shutdown on the agency’s activities. Additional guidance is also available from the SEC’s Divisions of Corporation Finance (here: sec.gov/page/corpfin-section-landing) and Investment Management (here: sec.gov/investment-management). Issuers and practitioners should make contingency plans to address the effects upon ongoing or planned securities offerings, filings, and requests for interpretive guidance, among other things. A few important highlights: The EDGAR system is open and accepting filings, including registration statements, periodic filings (such as 6-Ks), and other filings (such as Form Ds). Issuers should continue to make all required filings by the designated due date. During the government shutdown, the SEC staff will not process or review registration statements or accelerate the effectiveness of registration statements. More information can be found on Dorsey’s recent eUpdate here: dorsey.com/newsresources/publications/client-alerts/2019/01/government-shutdown-limits-sec-operations.

Now that Canada allows using and producing marijuana and marijuana-related products, and bordering U.S. states like Washington, Maine, and Michigan have similarly relaxed marijuana-related laws, it seems natural that industries on both sides of the border will look for cross-border business opportunities. But cross-border transactions between the Canadian and U.S. marijuana industries face a potentially insurmountable obstacle: items primarily intended for the marijuana industry are considered prohibited drug paraphernalia and are illegal to import into or export from the United States. We refer to this statute as the Paraphernalia Statute. The Paraphernalia Statute prohibits paraphernalia from being imported into, exported from, or transported across U.S. state lines. The statute also prohibits the use of the mail to transport drug paraphernalia. Even merely offering paraphernalia for sale in the United States is a federal criminal offense. U.S. Customs and Border Protection (“CBP”) takes custody of each import prior to release the goods to the importer or consignee, giving CBP a powerful means to enforce the Paraphernalia Statute. CBP has the authority to seize and forfeit any merchandise that is considered to be contraband under federal law. Likewise, CBP can halt an outward bound shipment of an item prohibited for exportation from the United States and seize and forfeit drug paraphernalia. Besides the loss of the merchandise itself, importers and exporters also could become subject to criminal penalties. Most people would not be surprised to learn that CBP may seize items intended to inhale or ingest drugs, but the breadth of what is considered “paraphernalia” under U.S. law may not be widely understood, and goes far beyond items merely designed for marijuana consumption. The Paraphernalia Statute defines paraphernalia as equipment, products, or materials primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance. The Supreme Court has interpreted the phrase designed for to mean that items principally used with illegal drugs by virtue of features designed by the manufacturer are prohibited items under the Paraphernalia Statute. In addition, the phrase primarily intended, according to the Supreme Court, focuses not only on the objective features of the item, but also what the “likely use” of the item is by users. By way of example, production and harvesting equipment likely would be considered drug paraphernalia if it had particular attributes unique to the marijuana plant. CBP has found, for example, that cannabis grinders are prohibited by the Paraphernalia Statute from being imported because they were marketed for marijuana grinding, and the importer did not submit evidence of non-drug uses for the grinders. The statute could potentially cover health- or production-related equipment primarily used with drugs or drug plants. Companies should not take comfort in the legally ambiguous test about what constitutes prohibited paraphernalia because the penalties for being wrong are severe, and CBP and third parties can raise the issue. CBP can independently assess whether an import or export is prohibited under the Paraphernalia Statute, even if no party raises the issue. In addition, carriers and importers can ask CBP to interpret the Paraphernalia Statute to determine whether the import ban applies. This happened most recently in April 2017 when a carrier received confirmation from CBP that items shipped by the not-so-cleverly-named Stashlogix were in fact prohibited from import. The penalties for violating the Paraphernalia Statute, moreover, are severe and include potential prison time, CBP seizures, and hefty fines as a result of an offense. CBP has rejected arguments that statutory exceptions permit state laws to provide a safe harbor for importing or exporting drug paraphernalia. The Paraphernalia Statute exempts persons “authorized by…state…law to manufacture, possess or distribute such items.” An importer argued to CBP that, even assuming its marijuana accessories are paraphernalia, the Paraphernalia Statute authorized its activities because they were legal under Colorado law. CBP rejected the argument holding, among other things, that the statute could not be read as proposed by the importer and, in any event, the U.S. Constitution prohibited the result, because, under the “Supremacy Clause,” federal legislation supersedes and displaces inconsistent state law. Until a federal court overrules CBP on this interpretation of the law, importers and exporters must assume that state law is not a viable defense under the Paraphernalia Statute. CBP’s interpretation also raises the question: what is the status of state-licensed or authorized distributors of marijuana-related equipment under the Paraphernalia Statute? As with federal law generally, it remains to be seen how vigorously enforcement authorities will penalize violators of the Paraphernalia Statute. CBP’s actions to date, however, suggest that it will take action against offending imports or exports. For example, CBP has indicated that it could cite a non-citizen’s investment in cannabis business as grounds to bar admission into the United States under immigration law. Entities that are focused on the marijuana industry should take action to prevent cross-border transactions unless they are certain the items involved are not considered paraphernalia. Finally, application of the Paraphernalia Statute to trade between Canada and the United States could become a flashpoint in the larger debate about the extent to which federal prohibitions related to marijuana should be enforced. At the least, companies should avoid testing the boundaries of what are prohibited items under the Paraphernalia Statute and CBP’s willingness to enforce the statute.

Canadian companies interested in cross-border natural resource projects should be aware of a regulatory development in the United States that significantly revises the jurisdictional scope of the Clean Water Act. On December 11, 2018, two federal agencies, the Environmental Protection Agency and the U.S. Army Corps of Engineers, proposed a new rule dramatically altering federal regulatory authority under the Clean Water Act (CWA) by redefining what constitutes a “water of the United States.” If enacted, the new rule proposes to limit and simplify the CWA’s jurisdictional analysis and provide regulatory certainty for resource development projects. Canadian companies with, or interested in, a cross-border project should follow, and consider participating, in the rule’s 60-day notice and comment period to ensure their interests are communicated to the agencies prior to the drafting of the final regulation. To learn more, see Dorsey's recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2018/12/clarifying-muddy-waters-epa.

We have written about this in the past [here], but the message bears repeating each year. It is easy to overlook that employment agreements, change-in-control agreements, and severance agreements with U.S. taxpayers frequently contain provisions that subject them to U.S. Internal Revenue Code Section 409A ("Section 409A"), and failure to comply can result in onerous tax penalties. However, to the extent that rights under such agreements are not yet vested, it may be possible to correct them before year-end without penalty. Even if rights under an agreement are vested, in some cases correction is available with payment of reduced penalties under IRS correction programs. It is important to remember that U.S. residents, and U.S. citizens regardless of country of residence, are taxed on worldwide income. This means that compensatory arrangements for employees and directors who are U.S. citizens working outside the U.S. will be subject to U.S. federal income tax. If compensation arrangements have not been reviewed for Section 409A compliance, we recommend doing so now, especially with respect to arrangements that will or may become vested during 2019. For a more detailed explanation, see our Dorsey publication from October 6, 2015 here.

On October 31, 2018, the United States Securities and Exchange Commission (the “SEC”) announced that it adopted rules to modernize mining property disclosure in order to harmonize SEC disclosure requirements with international standards. The SEC had proposed rules in June 2016 which received numerous comments and as a result a number of changes were made to the original proposed rules. A high level summary of the final rules and changes compared to the proposed rules can be found here: www.sec.gov/news/press-release/2018-248 The final rules provide for a two-year transition period so that a registrant will not be required to begin to comply with the new rules until its first fiscal year beginning on or after January 1, 2021. The new rules permit Canadian issuers who file reports with the SEC in accordance with the multijurisdictional disclosure system (“MJDS”) to continue to comply with the standards set forth in National Instrument 43-101 (“NI 43-101”). This includes issuers who file annual reports on Form 40-F or registration statements on Form F-10, Form 40-F or Form F-7. However, Canadian issuers who are not MJDS eligible (i.e. those who file annual reports on Form 20-F or who file registration statements on Form F-1, F-3 or F-4 that refer to the annual report on Form 20-F), or issuers who file using U.S. domestic issuer forms, will need to comply with the new rules and will not be able to include disclosure solely compliant with NI 43-101. Dorsey will provide a more comprehensive analysis on the new rules in the coming weeks and will be conducting a webinar to discuss the new rules in early 2019. The full rules are available here: www.sec.gov/rules/final/2018/33-10570.pdf

With the legalization of marijuana going into effect in Canada tomorrow, October 17, we encourage our Canadian contacts to be careful when crossing the U.S. Border. For more information, see the recent article authored by Dorsey’s Immigration Practice Group posted on our Cannabis Blog here: dorseycann.com/at-the-intersection-of-cannabis-and-u-s-immigration-law-issues-that-canadians-and-other-non-citizens-should-be-aware-of/.

The SEC’s settlement with Tesla and Elon Musk teaches us some important corporate governance lessons on monitoring and vetting executive use of social media. As background, on August 7, 2018, the markets were surprised by a series of tweets initiated by Elon Musk, the CEO of Tesla, Inc., in which Musk mused about taking Tesla private at $420 per share (a significant premium to the then-market price), with funding secured. The stock price jumped, trading in Tesla stock was halted, and Tesla rushed to catch up with official announcements. The deal didn’t happen, and it was questioned whether Musk was really serious, and whether funding was really “secured.” The SEC commenced an investigation. On September 27, 2018, the SEC announced charges against Musk for securities fraud in connection with his tweets, which it said were inaccurate and misleading. Among the remedies sought was a permanent ban on Musk being eligible to serve as a director or officer of any public company, effectively seeking to sever him from Tesla, a company of which he is the heart and soul. Tesla’s stock dropped 14%. If this remedy was included by the SEC as leverage, that leverage worked, and on September 29, 2018, the SEC announced a settlement with Musk, as well as charges against and a settlement with Tesla. Tesla’s stock increased 17%. As part of the settlement, Musk will remain Tesla’s CEO and a director, but Musk and Tesla agreed that: Musk will step down as Tesla’s Chairman for at least three years and be replaced as Chairman by an independent director; Tesla will appoint two additional independent directors; Tesla will establish a committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications; and Musk and Tesla will each pay $20 million to harmed investors under a court-approved process. The SEC alleges that Tesla failed to implement adequate disclosure controls and procedures over Musk’s use of Twitter. Tesla had publicly announced in 2013 that Musk’s Twitter account would be among the means by which Tesla intended to release material information, Musk had amassed 22 million Twitter followers, and important information about Tesla had been released through this account, but the SEC says that Tesla had not adopted any specific policies regarding Musk’s use of Twitter, such as procedures to determine whether proposed tweets were accurate and complete, and whether they contained information requiring disclosure in Exchange Act reports. In effect, the SEC says Tesla had given Musk carte blanche to release material information about Tesla, without subjecting it to the normal controls to which other, more formal, types of disclosures would be subject, and as a result, the market was misled. Investors harmed included short sellers and those who purchased shares after Musk’s announcement temporarily drove up stock prices, only to see those prices drop afterwards. The SEC’s settlement with Tesla and Musk teaches us some important corporate governance lessons: If a public company allows its executives to use Twitter or other social media accounts to disclose material information about the company, it is not enough to notify the public that material disclosures may be made by these means. Companies must ensure that their disclosure controls and procedures adequately cover executives’ use of social media. In deciding what disclosure controls and procedures to implement, consideration should be given to such matters as: what topics are permitted or prohibited; procedures for review and approval of disclosures before they are made; the inclusion of risk factors or other cautionary or explanatory language to help prevent disclosures from being potentially misleading; coordination of social media disclosures with other company disclosures as needed to satisfy public reporting requirements; and monitoring actual disclosures and resulting market and media reactions for any surprises. Companies that do not allow executives to use social media accounts to disclose material information should adopt policies clearly prohibiting such use, and monitor executives’ use of social media for any inadvertent violations of policy.  

On Sunday, September 30, 2018, the U.S. and Canadian governments announced that they had reached agreement on a new trilateral trade agreement with Mexico, which will replace the North American Free Trade Agreement (NAFTA). This long-awaited text, released late in the day as the “United States-Mexico-Canada Agreement (USMCA),” is now available for public inspection.[1] The two governments announced this agreement just before a key deadline was set to expire at midnight. As reported in May 2017,[2] the Trump Administration commenced a process to renegotiate NAFTA, citing the need to update the cornerstone trilateral agreement that has governed trade among the three countries since 1994. At that time, U.S. Trade Representative Robert Lighthizer informed Congress that the renegotiation would include the key trade negotiation objectives that underpin the Trade Promotion Authority (TPA) that Congress granted in 2015, and extended in mid-2018.[3] Adherence to that TPA framework is key, because it would allow for a simplified legislative process that avoids proposals for significant amendments. TPA requires the Trump Administration to publish the proposed agreement 60 days before the President enters into the agreement. Because of the Trump Administration’s negotiation tactics, that deadline fell on September 30.[4] The Trump Administration reached tentative agreement with Mexico at the end of August. Because Mr. Lighthizer initially announced his intention to renegotiate NAFTA with both Canada and Mexico, it appeared that TPA required all three countries to reach agreement. The public was kept in suspense, as Canada did not indicate its intention to join until just a few days before the deadline. The USMCA text released late Sunday appears to cover the objectives announced in May 2017.[5] In addition to sections that appear in the current NAFTA, there are new provisions relating to digital trade, regulatory practices, labor, environment, and small and medium enterprises. There are also enhanced provisions relating to state-owned enterprises that contains express prohibitions, and enhanced protection of intellectual property. According to Mr. Lighthizer, these were the areas that required updating because of significant advancements since 1994. (It is interesting to note that these objectives also appeared in the Trans Pacific Partnership of Pacific Rim nations that the Obama Administration negotiated, and from which President Trump withdrew in early 2017.) A notable difference from the current NAFTA is that the USMCA, unlike NAFTA, would automatically terminate if not renewed. During the sixth year, each country must give notice of its desire for the agreement to continue for another 16 years. If such consent is given, the process would repeat 6 years later. Although the United States had indicated a desire to abolish NAFTA dispute settlement panels, it appears Canada succeeded in pressuring the Trump Administration to preserve a key aspect of the panels. Currently, NAFTA provides for a panel to review of any tariff-related measures imposed under a country’s domestic laws as “trade remedies.” In a major concession to Canada, the USMCA preserves the panels to review trade remedies. At the same time, the USMCA curtails a separate provision regarding disputes relating to private investments; that mechanism will be limited to certain disputes between Mexico and the United States. Although the text has been released, the USMCA still must overcome Congressional scrutiny (as well as any obstacles to ratification in Canada and Mexico) before it can enter into force. For instance, Congress must be satisfied that the USMCA satisfies the TPA parameters to avoid a drawn-out legislative process. Because that process may not occur until 2019, the mid-term elections in November 2018 may determine whether the Republicans retain control of Congress to push through the Trump Administration’s USMCA text. All eyes will be on Congress to see whether USMCA will replace NAFTA and become law. [1] https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico [2] https://www.crossbordercounselor.com/trump-administration-announces-nafta-renegotiation/ [3] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/june/ustr-lighthizer-welcomes-extension [4] https://www.politico.com/story/2018/09/30/nafta-trade-canada-819081 [5] https://ustr.gov/sites/default/files/files/Press/Releases/NAFTA%20Notification.pdf

When one thinks of the law, one often thinks of hard and fast rules. Employers cannot fire employees for a discriminatory or a retaliatory reason. Employees must be paid at least minimum wage. And so on. The law governing hostile work environment claims in the United States, however, is not so easily defined and applied. At first glance, the elements of a hostile work environment sexual harassment claim seem definite enough. In order to prove a claim for hostile work environment sexual harassment, a plaintiff has to prove that he or she has been subject to behavior that is: Sexual in nature or directed at an individual solely because of his or her gender; Uninvited or unwelcome; Offensive to a reasonable person; and Severe or pervasive enough to adversely affect a person’s work environment. The first two elements are clear enough conceptually. Was the conduct sexual or about the plaintiff’s gender and was the plaintiff a willing participant in the conduct? Like anything in the law, there are tough cases. For example, what about someone who participates in the conduct at first, but stops participating later? The last two elements, however, are based entirely on the subjective feelings of the jurors in any given case. What exactly is offensive to a reasonable person? Who is this reasonable person and what is she or he like? When exactly would any particular conduct affect that person’s ability to do her or his job? When a judge instructs a jury in a hostile work environment case, she or he will tell the jury that, in order to find for the plaintiff, you must find that the conduct complained of is offensive to a reasonable person. When assessing this issue, the vast majority of jurors will ask themselves, “do I find the conduct offensive?” The reason for this is simple—most people consider themselves reasonable. If I find conduct highly offensive, then it is offensive to a reasonable person because I myself am reasonable. The difficulty with this standard is that it makes hostile work environment claims a moving target. What is offensive in a small rural town may not be offensive in a big city. What is offensive in a very socially liberal area may not be offensive in a conservative area, or vice versa. What is more, standards for what is or isn’t offensive change over time and across generations. A recent survey by The Economist/YouGov found that almost 25% of millennial men in the United States believe that asking someone out for a drink is sexual harassment. This statistic is, to say the least, surprising to many in older generations. What does this mean for companies looking to employ workers in the United States? First, it means you cannot be too careful. Even if you think that certain behavior is just harmless flirtation or joking around, you need to ask yourself, how confident are you that 12 strangers in the city where your employees live would agree with you? Sexual harassment verdicts frequently reach into the six and seven figures range when attorney fees and emotional distress damages are added to an employee’s lost wages. Are you willing to bet that kind of money on your ability to tell whether a sexually charged joke at work crossed the line? Furthermore, as a practical matter, it is not enough to have a case that will win a trial. Between document discovery, depositions, motion practice, trial preparation, and the actual trial, “winning” a sexual harassment case at trial will cost a company hundreds of thousands of dollars. To really win, your case has to be so good that a court will dismiss it as a matter of law. Recently such victories have become harder to come by. In early 2017, the Ninth Circuit Court of Appeals, which hears cases from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington, overturned a trial court’s order dismissing a harassment case where the plaintiff claimed she was hugged too much by her boss, but never complained of the hugging to her boss or human resources. Courts are increasingly unwilling to say what is or isn’t offensive to a reasonable person as a matter of law. As an employer, it is important to set policies that keep employees from coming close to what they consider to be “the line” and to address employees’ concerns regarding possible harassment quickly and thoroughly. You might think the behavior was harmless, but how much are you willing to bet that 12 strangers will agree with you? Well-crafted policies written in consultation with your employment lawyer can make it clear to your employees that your company has zero tolerance for inappropriate behavior. Wherever your employees think the line is, they shouldn’t even come close.

As a continuation of our August 9 post regarding the deadline for Canadian companies to file a Form D for a private placement in the United States, we now address the questions, “What if our company missed the deadline to file a Form D with the SEC?” And, more importantly, “Have we lost our ability to rely upon the exemption?” The good news is that the exemption provided by Regulation D is not dependent upon the filing of the Form D. So, an issuer that fails to file the Form, or files it late, need not be concerned about the liability associated with a non-exempt offering. However, the failure to file exposes the issuer to risk of administrative action and possible loss of the ability to rely upon Regulation D in the future, and a willful failure to file Form D is a potential criminal violation. Accordingly, a company that discovers it has inadvertently failed to file a Form D with the SEC by the 15th day after the date of first sale of securities in an offering is best served by making the filing late unless counsel can identify an available alternative exemption. Unless the offering is otherwise exempt from state law, a late filed Form D must also be filed with, and a filing fee paid to, any state in which purchasers are located that requires such a filing. States differ in their response to late filings. Some states welcome them, and are happy to get the filing fees. Many states, including Illinois, impose an additional late filing fee when the filing is late. A few states, including Hawaii, have claimed that an exemption from state law is not available if the Form D is filed late, and demanded that the company give investors the right to get their money back. While I believe this view misinterprets federal law, it will usually be worth checking whether the late Form D must be filed in any of the states that take this position or that impose an onerous late filing fee and, if so, whether an alternative exemption is available under state law that would allow the company not to file the Form D in that state.

Canadian companies that sell securities to U.S. investors under Regulation D must file a Form D with the SEC within 15 days after “the date of first sale.” Most people would assume that the closing of the offering is the date of sale. However, in the instructions to Form D, the SEC explains that the date of first sale is “the date on which the first investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor's subscription agreement or check.” Therefore, the deadline for the Form D will depend on the wording of the agreement and how those words are interpreted under the governing law of the agreement. Companies whose agreements say a subscription is “irrevocable” should consider what that language is intended to mean. If it is intended to mean that the subscriber is contractually obligated to purchase the securities, regardless of whether the company has accepted the subscription agreement, then the receipt of the subscription may begin the 15-day clock and the Form D may be late by the date of closing. This problem can be addressed either by rewording the subscription agreement or by filing a Form D at the start of the offering, covering the maximum amount that may be sold in the offering. If instead, the “irrevocable” language is intended to be effective only upon the company counter-signing the agreement, the company should refrain from counter-signing the agreement until it is ready to begin the 15-day clock for filing of the Form D. Next week we will address the consequences of filing a Form D late.

The United States isn’t the only country addressing its history of gender inequality, sexual abuse, and sexual harassment. However, the United States is having its own unique experience in doing so. For U.S. employers, the current focus on these issues poses challenges, but also opportunities to address problems of diversity and harassment in the workplace. Non-U.S. companies looking to hire employees in the United States should be aware of the issues facing U.S. employers and be prepared to address them. One major change in the U.S. workplace resulting from the #MeToo movement is that employees who allege sexual harassment are far more likely to be believed. According to a November 2017 Quinnipiac University poll, 60% of U.S. women report that they have been sexually harassed, but according to the Equal Employment Opportunity Commission (the U.S. Federal Agency charged with investigating claims of sexual harassment in the workplace), 90% of women who have been sexually harassed never formally report it. That second statistic is changing rapidly. The deluge of credible allegations of sexual harassment against previously well-regarded public figures such as Bill Cosby, Matt Lauer, and Charlie Rose has eroded the view that “nice guys” aren’t capable of such behavior and that sexual harassment is relatively rare. In the post #MeToo era, the presumption favors the accuser, and the burden is on the accused to prove that the harassment didn’t occur. Since the #MeToo movement began, the standard for what constitutes sexual harassment has changed as well. Sexually harassing behavior is legally defined, in part, as behavior that is “offensive to a reasonable person.” This definition is fluid and depends upon prevailing social norms. In the post #MeToo era, behavior that used to be considered merely crude or boorish can now qualify as sexual harassment. In early 2017, the Ninth Circuit Court of Appeals, which hears cases from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington, held that excessive hugging in the workplace could constitute sexual harassment. Companies with U.S. customers also face public relations challenges over and above any legal liability resulting from sexual harassment allegations. U.S. customers are voting with their dollars, and if a company is perceived as turning a blind eye to sexual harassment in the workplace—or, worse, actively concealing it—many U.S. consumers and advertisers will cease doing business with the company. After numerous sexual harassment claims surfaced against then Fox News host Bill O’Reilly, more than a dozen marketers withdrew their ads from Mr. O’Reilly’s show, The O’Reilly Factor. Fox News had paid roughly $13 million to settle harassment claims against Mr. O’Reilly over the years, but it was the withdrawal of ad revenue that eventually led the company to fire Mr. O’Reilly. How can companies with U.S. employees adapt to this new reality? First, the bad news. As discussed above, what constitutes sexual harassment depends on prevailing social norms and those norms are rapidly changing in the United States. Employers cannot simply give employees a list of behaviors to avoid. Traditional anti-harassment training, which often focuses on such lists of bad behaviors, is not enough. Instead, employers must train their employees to be mindful of their impact on others and to be alert to signs that their behavior is unwanted or unwelcome. Employers should also establish strong anti-harassment policies and procedures for reporting workplace harassment. U.S. law provides employers with a defense to certain types of harassment claims where the employer has established an anti-harassment policy and procedure for employees to report harassment in the workplace, but the employee fails to do so. When employees do report harassment, employers should thoroughly investigate and make sure that the reporting employee is not subject to any retaliation—even if the employer determines that the harassment complaint is meritless. Finally, the revelations of the #MeToo movement—that sexual harassment and assault is pervasive and often goes unreported—have been deeply upsetting to many employees. Consider creating forums for discussion, such as pre-scheduled and moderated company meetings, where employees can express their concerns regarding these revelations without distracting co-workers from their jobs. The #MeToo movement has raised important issues regarding pervasive sexual harassment in the workplace. Companies that do not take this opportunity to assess their own practices are likely to face increased scrutiny and liability.

One of the principal sources of uncertainty, expense, and delay in the permitting process for many mining and infrastructure projects in the United States, especially those generating public controversy, is compliance with the environmental review process under the National Environmental Policy Act (NEPA). On June 20, 2018, the Council on Environmental Quality (CEQ) issued an advance notice of proposed rulemaking (ANPR) seeking public comment on potential revisions to its implementing regulations for the procedural provisions of NEPA. NEPA documentation is generally required for any project, public or private, that requires approvals from the federal government. The ANPR is a continuation of the Trump administration’s efforts to address inefficiencies in the federal permitting process and follows recent proposals from the Department of Interior and other agencies to streamline their NEPA review processes. The ANPR is significant because revisions to the CEQ’s NEPA regulations would apply government-wide, while the previous reform efforts have been on an agency-by-agency basis. Specifically, CEQ published a list of 20 questions for which it is seeking comments. These questions relate to ways to streamline the NEPA process, including potential revisions to the definitions of key terms, issues to be considered in NEPA documents, the range of alternatives that must be considered, the timing and preparation of NEPA documents, and interagency coordination. The ANPR presents a valuable opportunity for Canadian companies with mining or infrastructure projects in the United States and other interested parties to help shape revisions to CEQ’s NEPA regulations to ensure that the regulations serve NEPA’s purpose of informed decision making while minimizing unnecessary litigation, cost, and delay for project proponents. The deadline for submitting comments is July 20, 2018. Dorsey regularly represents companies in rulemaking processes through the submission of comments that communicate to the regulatory agencies our clients’ concerns and objectives. If you have any questions or would like to learn more about participating in this important comment process, please contact us. The Federal Register notice announcing the ANPR and requesting public comments is available at www.federalregister.gov/documents/2018/06/20/2018-13246/update-to-the-regulations-for-implementing-the-procedural-provisions-of-the-national-environmental.

Since January 1, 2016, the SEC has publicly released its correspondence relating to 60 comment letters sent to Canadian issuers with respect to annual reports filed on Form 40-F pursuant to the Canada-U.S. Multi-Jurisdictional Disclosure System (MJDS). We have analyzed the content and key takeaways from these letters, including: The SEC’s most common areas of focus; Recent trends; and Common errors to be avoided. Background The MJDS system allows Canadian issuers that satisfy certain market capitalization and other requirements to file an annual report with the SEC on Form 40-F. Except for a few items, a Form 40-F does not impose U.S. disclosure requirements upon a Canadian issuer and, instead, includes and relies upon the disclosures contained in the issuer’s annual information form, MD&A, and audited financial statements filed in Canada. The incremental requirements of Form 40-F include that the issuer’s financial statements comply with IFRS as issued by the IASB or be reconciled to U.S. GAAP, that the audit report meet certain requirements, that the auditor be independent, that certain disclosures be included with respect to the issuer’s disclosure controls and procedures and internal control over financial reporting, that certain officer certifications and third-party consents be included, and that certain additional MD&A disclosures be included. While the limited nature of Form 40-F reduces the number of areas in which the SEC may comment, Congress has directed the SEC to review the filings of SEC reporting issuers at least once every three years. For this reason, all companies that report with the SEC, even those that report under the MJDS, should expect their filings to be reviewed from time to time. If upon such review, the SEC has questions or believes that the issuer’s filing is deficient, it may provide comments to the issuer by letter. The issuer must then respond to the SEC’s comments, and may need to amend its filings to address the comments. Industry Breakdown The industry breakdown of the 60 most recent Form 40-F comment letters was: Twenty-four to companies involved in mining, mineral exploration, or the holding of mineral royalties or minerals; Five to energy companies; Five to technology and telecommunications companies; Four to life sciences companies; Four to banking and insurance companies; Three to real estate companies; and Six to companies involved in other industries, including transportation, manufacturing, entertainment, publishing, and professional services. Repeat Letters An issuer’s chance of receiving a comment letter may increase once the SEC has taken an interest in the issuer’s filings. The recipients of the comment letters included nine issuers who received a comment letter in both of the fiscal years covered by our review. Self-Inflicted Wounds Some comments could easily have been avoided. For example: Six letters noted technical problems with the audit report (missing auditor name, signature, date, or entire report; or failed to say financials comply with IFRS “as issued by the IASB”); Four noted technical problems with officer certifications or the internal control attestation report (wrong period, date, or content; or missing entirely); Four noted technical problems with the content of the controls sections of the Form 40-F; Three related to non-IFRS measures that the SEC considered misleading because terms were used inconsistently or the titles of the terms did not match the definitions (e.g., using the term EBITDA but calculating it in a manner inconsistent with market norms); Two noted technical problems with the contractual obligation table; and Two objected to an issuer’s conclusion that disclosure controls were effective when the issuer had disclosed that internal controls were ineffective. Paying Attention The SEC pays attention to an issuer’s website and earnings calls and may comment on inconsistencies between the Form 40-F and these other disclosures or raise other comments based on these disclosures. For example, several comment letters asked issuers about their business activities in sanctioned countries based on disclosures on their website. One letter questioned why management touted improvements in internal controls on the earnings call but disclosed no material change in internal controls in its Form 40-F. Another requested a different presentation of revenues based on sales information disclosed on an earnings call. Most Common Topics By far the most common topic of an SEC comment letter was the issuer’s financial disclosures. Forty-two of the 60 letters included comments relating to the issuer’s financial statements, audit report, auditor, or MD&A. These included, among others: Twenty-four with questions regarding revenue recognition policies, breakout of revenues by product (usually asking why further breakouts of revenue were not provided), methodology and disclosures around asset valuation and capitalization of expenditures, tax assets and rates, depletion/depreciation, or impairment analysis; Thirteen with questions about the accounting treatment of a specific other matter; and Nine requesting improvements to the disclosure of period-to-period changes, a particular accounting analysis, liquidity, cash flow, or other matters. Second-most common was comments relating to technical disclosure requirements for issuers involved in the mining or oil & gas industries, accounting for 13 of the 60 letters. Ten letters addressed mining company technical disclosures, including supplemental requests for copies of technical reports, studies, or other information in support of disclosures (the SEC does not require such reports to be publicly filed, unless also filed in Canada and material), and comments relating to: the issuer’s failure to comply with NI 43-101 (compliance with NI 43-101 is a pre-requisite for not complying with SEC Industry Guide 7); the issuer’s failure to update reserve calculations, for past production or more generally; and inconsistent or unclear disclosures. Three letters related to oil & gas company technical disclosures, all of which requested enhanced disclosures and alleged failures to satisfy FASB disclosure standards. The third-most common topic of the comment letters was comments relating to deficiencies in the officer certifications or disclosures relating to disclosure controls and internal controls. This topic was addressed in eight of the 60 comment letters, most of which related to failures to satisfy the form requirements. Fourth-most common was comments inquiring about the issuer’s business dealings in sanctioned countries (usually Sudan and Syria) or with companies known to operate in those countries and the adequacy of any related disclosures, usually triggered by the SEC’s realization that this may be relevant to the issuer. Seven of the 60 letters included such inquiries. Waves and Trends Comment letters have tended to come in waves. The letters from January 2016 through June 2017 dealt primarily with financial statement and MD&A issues; Two of the three letters issued to real estate companies were issued in the same week of September 2016; All of the letters issued to banks were issued in March 2017; All of the letters dealing with oil & gas technical disclosures were issued in the fourth quarter 2017; and Eight of the 10 letters dealing with mining technical disclosures were issued between June and December of 2017. It’s not yet clear if the shift toward commenting on mining technical disclosures is a trend. Lessons To reduce the likelihood of SEC comments, a Canadian issuer that files SEC annual reports on Form 40-F should attend to the technical compliance of its audit report, officer certifications, controls disclosures, and other Form 40-F mandated disclosures; include a robust and understandable MD&A; avoid the inconsistent or misleading use of non-IFRS terms; and, for resource extraction issuers, comply with the technical disclosure requirements applicable to it under Canadian and U.S. laws.  

Earlier this week, a panel of Dorsey attorneys presented a webinar on the SEC’s recent guidance on cybersecurity disclosures and policies, which included a detailed walk-through of the SEC’s 2018 guidance, including issues related to enhanced disclosure, insider trading, and Reg FD policies. The panel also discussed the impact of the SEC’s guidance within the changing landscape of cybersecurity and current developments in shareholder litigation, SEC enforcement actions, and other regulatory and legislative initiatives such as the GDPR. The Equifax data breach is used as a case study to illustrate how the SEC’s guidance might play out in this broader context. The webinar recording and presentation materials are available on our website at www.dorsey.com/newsresources/events/videos/2018/06/seminar-playback-sec-guidance-on-cybersecurity.

With the listing on May 24th of Canopy Growth Corporation (Canopy) on the New York Stock Exchange (NYSE), both NASDAQ and the NYSE have permitted Canadian cannabis companies to trade on their respective exchanges. Canopy, the first Canadian cannabis company to list on the NYSE, follows Cronos Group Inc. (Cronos), which was the first Canadian cannabis company to list on a national stock exchange in the United States when it listed on NASDAQ in February. While neither exchange has formally adopted a policy on the listing of cannabis companies, informally they are willing, on a case-by-case basis, to accept a company with cannabis operations, so long as the company complies with all relevant laws in the jurisdictions where it operates. This is similar to the policies adopted by the Toronto Stock Exchange and TSX Venture Exchange, which prohibit the listing of cannabis companies with U.S. operations. In order to list in the United States, each of Canopy and Cronos filed listing applications with the respective exchange and registered their class of common shares with the United States Securities and Exchange Commission (SEC). A Canadian company that has been a reporting issuer in Canada for at least 12 months and has a public float of at least US$75 million is eligible to take advantage of the Multijurisdictional Disclosure System (MJDS) in order to register with the SEC. The MJDS permits such Canadian companies to file a Form 40-F registration statement, which is essentially a wrap around the company’s Canadian disclosure documents and is not subject to the typical burdensome SEC comment process. This generally permits for a quicker and less costly process for Canadian companies wishing to enter the U.S. markets. For more information on listing in the United States, contact your relationship attorney at Dorsey. For more information about Dorsey's cannabis industry practice, visit www.dorsey.com/services/cannabis.

Canadian companies with U.S. subsidiaries and investments should note upcoming deadlines for filing reports required by U.S. Department of Commerce rules. These mandatory reports are required to be filed with the Bureau of Economic Analysis (“BEA”) within the U.S. Department of Commerce by May 31, 2018, if made by hardcopy, or by June 30, 2018, if made electronically. The affected U.S. subsidiary companies are those in which a non-U.S. person owns or controls, directly or indirectly, 10 percent or more of the company’s voting securities if the U.S. subsidiary company is incorporated, or in which a non-U.S. person holds that same degree of ownership or control through other means if the U.S. subsidiary company is unincorporated. For more detailed information, see our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2018/05/foreign-owned-us-subsidiaries-federal-survey.

The NYSE has made a few recent announcements affecting the obligations of NYSE and NYSE American listed Canadian companies with respect to providing information to the exchange. An NYSE listed company that files its shareholder meeting materials (e.g., proxy, management information circular, proxy card, etc.) on EDGAR is no longer required to provide physical copies of the meeting materials to the NYSE. However, if a listed company does not file its meeting materials on EDGAR or does not include all relevant materials on EDGAR, it must provide three copies of all materials not available on EDGAR to the NYSE no later than the date on which such materials are sent or given to any securityholder. In addition, if the listed company files the materials on EDGAR on a form other than U.S. domestic Schedule 14A, it must advise the exchange via email or web portal where the materials can be found on EDGAR. Many Canadian cross-listed companies are foreign private issuers that file their shareholder meeting materials with the SEC on a Form 6-K. These issuers will now be required to provide the exchange with this electronic notice in lieu of hard copy delivery. The full rule change can be found at the following link: www.nyse.com/publicdocs/nyse/regulation/nyse/Proxy_Rule_Change_Summary.pdf In addition, the NYSE recently reminded issuers that they are not required to send the NYSE physical copies of forms related to changes in ownership of securities (i.e. Forms 3, 4, 5 and Form 144). The full notice can be found here: www.nyse.com/publicdocs/nyse/regulation/nyse/2018_Listed_Company_Regulation_Guidance_Memo.pdf Effective April 1, 2018, issuers listed on the NYSE American must notify the NYSE American at least 10 minutes in advance of notifying the public about any action relating to dividends. The notification can be made through Listing Manager. The full notice can be found here: www.nyse.com/publicdocs/nyse/regulation/nyse-american/Revised_Dividend_Notification_Policy.pdf