Canada Cross-Border Transactions

Harassment has been in the news a lot lately in the United States, with several high-profile terminations at well-known companies. Companies are losing millions of dollars, not just in settlements and verdicts, but in lost customers and bad publicity. The Equal Employment Opportunity Commission, or EEOC, is the administrative agency responsible for enforcing laws prohibiting workplace harassment in the United States. The EEOC has issued new guidance suggesting that conventional anti-harassment training isn’t enough. So what is an employer to do? Maintaining an effective harassment reporting procedure is simple, but not always easy. Often, it means a willingness by the company to put its money where its mouth is. This involves taking the time and spending the money to educate employees about harassment in the workplace, adopting procedures for employees to report harassment, and educating employees about those procedures. First, the company needs to demonstrate that it takes reports of harassment seriously. This means immediately investigating all complaints and taking swift remedial action where there is evidence of harassment. A track record of taking complaints seriously and dealing with wrongdoers promptly gives other employees confidence that their own concerns will be heard and acted upon. This means taking action against harassers, even if they are rock star performers. Second, the company needs to make its employees aware of its harassment reporting procedures. The best way to do this is during mandatory anti-harassment training and by having employees acknowledge in writing that they have received and reviewed a copy of the company’s anti-harassment policies, which should contain the reporting procedure. Training takes time and money, but it gets the word out and demonstrates the company’s commitment to its anti-harassment policies. In addition to the moral and morale benefits likely to result, an effective reporting procedure can also be part of a legal defense to a harassment claim. Employers can avoid liability if they have an effective reporting procedure that the accusing employee failed to utilize. Courts look at the same issues discussed above when assessing this defense. Does the company have a robust anti-harassment policy? How has the company handled prior complaints? What steps has the company taken to inform employees about its anti-harassment policy and reporting procedure? A hotline is meaningless if a company has a history of ignoring complaints or has failed to inform employees about it. A hotline is really just one tool in the anti-harassment toolbox. Employers should train employees to recognize and report harassment in the workplace, swiftly investigate and respond to complaints, and make sure that employees know how to report harassment. If these other components are not established, an anti-harassment hotline is just a dial-in circular file.

As a reminder to all foreign issuers that have a December 31 fiscal year end, the upcoming end of their second fiscal quarter, June 30, 2017, will be the calculation date for their status as a foreign private issuer (“FPI”) for purposes of both the United States Securities Act of 1933, as amended (the “Securities Act”) and the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). We recommend that issuers begin the analysis early to determine whether actions should be taken prior to the June 30th date to avoid an unintentional loss of FPI status. An early determination of the business nexus test (as described below) is also needed to know whether the issuer needs to request that their transfer agent and depositories provide U.S. resident beneficial shareholder information as of June 30, 2017. As detailed below, the definition of an FPI has two parts, one based on the percentage of the issuer’s U.S. resident shareholdings (the shareholder test), and the other based on its connections with the United States (the business nexus test). As an issuer must meet both of the two parts of the test to lose FPI status, it is often beneficial for an issuer to consider the business nexus test prior to considering the shareholder test. Because many issuers will not meet any of the three elements of the business nexus test (as discussed below), there would be no need to go through the time-consuming and often difficult process of determining the percentage of voting shares held by U.S. resident shareholders. The term “foreign private issuer" is defined by Rule 3b-4 under the Exchange Act and Rule 405 under the Securities Act as any non-U.S. issuer, other than a foreign government, except any issuer meeting the following conditions: (a)   more than 50% of the outstanding voting securities of such issuer are, directly or indirectly, held of record by residents of the United States; and (b)   any one of the following: (i)    the majority of the executive officers or directors are U.S. citizens or residents, or (ii)   more than 50% of the assets of the issuer are located in the United States, or (iii)  the business of the issuer is administered principally in the United States. While the FPI test is a seemingly straightforward calculation, the application of the test in certain circumstances can be challenging. The SEC staff has recently issued guidance that clarifies the application of the tests in certain circumstances and provides comfort for the application of reasonable methodologies that are consistently applied. Our prior blog post on the clarifications can be found here: crossbordercounselor.com/sec-provides-clarification-of-foreign-private-issuer-calculation/. In evaluating the citizenship and residency of executive officers and directors, each test must be separately applied to executive officers as a group and directors as a group. In determining the location from which a business is administered, an issuer must assess, on a consolidated basis, the location from which the issuer’s officers, partners, or managers direct, control, and coordinate the issuer’s business activities. Issuers may look to the geographical segment information determined in the preparation of financial statements for purposes of calculating the location of assets. Alternatively, an issuer may apply any other reasonable methodology on a consistent basis to determine location of assets. If an issuer fails one of more of the business nexus tests, a calculation of the issuer’s U.S. shareholdings is required. For purposes of the shareholder test, each holder identified on the record of security holders counts as a record holder. However, the issuer must look through the record ownership of institutional custodians, such as Cede & Co, CDS, and other commercial depositories, by obtaining the list of accounts for which the securities are held by the depository. In addition, under applicable SEC rules, an issuer must “look through” the record ownership of brokers, dealers, banks, or nominees to the beneficial holders who hold securities through such institutions. The “look through“ provisions of these rules are limited to three jurisdictions: (1) the United States; (2) the foreign company’s home jurisdiction; and (3) the primary trading market for the foreign company’s securities, if different from the foreign company’s home jurisdiction. Foreign private issuer status is of considerable benefit to foreign issuers that access the U.S. markets. Issuers that are in danger of a change in status may find that the recent SEC guidance gives them some additional flexibility in satisfying the FPI test. For those issuers, careful advance planning may make it possible to avoid the loss of the FPI benefits.

Canadian companies exporting products across the border into U.S. markets face significant risks of litigation or regulatory action arising from products sold and distributed in the United States. In a recent article, our colleague Kent Schmidt outlines ideas for managing these risks and creating a litigation risk profile around the four key areas of vulnerability: product liability claims, breach of warranty claims, false advertising and consumer protection claims, and claims related to collection, use, or compromise of consumer data and personal information. The full text of Kent’s article is available at www.dorsey.com/newsresources/publications/articles/2017/05/avoiding-unnecessary-us-litigation. For a more thorough discussion on how Canadian companies can avoid product-related claims in the United States, we invite you to attend one of Kent’s upcoming in-person Cross-Border Product Liability Seminars being held in Vancouver, BC (May 31), or Calgary, AB (June 1). For more information on the seminar and to register, please visit the event page: www.dorsey.com/newsresources/events/event/2017/05/cross-border-product-liability-seminar.

After months of public pronouncements on the future, including threatened withdrawal from, the North American Free Trade Agreement (NAFTA), the Trump Administration announced on May 18, 2017, its intention to begin negotiations with Canada and Mexico. Signed by Robert Lighthizer, the newly confirmed U.S. Trade Representative, the notification letters to Congressional leaders do not contain any details on specific targets for negotiations. The letters describe instead broad aims for discussions with U.S. Congressional leaders and industry constituents, and the administration’s intention to begin negotiations with Canadian and Mexican counterparts in mid-August or later. President Trump previously railed against NAFTA and its alleged impact on the U.S. manufacturing sector. However, the agreement’s impact has not been uniformly negative, as evidenced by the strong growth of U.S. agricultural exports to Canada,[1] among other indicators. It is perhaps with this complex situation in mind that Mr. Lighthizer does not threaten to dismantle NAFTA outright,[2] but rather to “update U.S. approaches” regarding issues in “intellectual property rights, regulatory practices, state-owned enterprises, services, customs procedures, sanitary and phytosanitary measures, labor, environment, and small and medium enterprises,” which have developed since NAFTA entered into force in 1994. The notification specifically references “digital trade” as an issue that is not addressed in the agreement. In an interesting twist, Mr. Lighthizer explicitly cites the same priorities that Congress previously established for trade negotiations prior to President Trump’s election – the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, which granted Trade Promotion Authority (TPA) to the President to negotiate trade deals. At that time, Congress authorized TPA to facilitate final negotiations for the Trans-Pacific Partnership – a 12-nation trade pact that was formalized in February 2016, but which President Trump denounced as harmful to U.S. industries during his election campaign, and from which he announced the United States’ withdrawal soon after taking office. By referencing these Congressional priorities (which include trade in goods, agriculture, digital trade, and other U.S. industry concerns), and “initial consultations” with various Congressional committees and advisory groups, the Trump Administration is signaling its intention to engage with Congressional leaders and industry constituents. President Trump and Mr. Lighthizer will need to garner broad support for its trade agenda (among other issues) at this critical juncture for the current administration. In view of this evolving situation, and the Trump Administration’s outreach to U.S. legislators and industry leaders for the NAFTA negotiation process, Dorsey attorneys will continue to monitor developments.   [1] See our previous eUpdate, “Trump Administration’s First Major Statement on Foreign Trade Affects Agriculture” [2] NAFTA Article 2205 provides for U.S. withdrawal with six months’ notice. Opinion is divided as to whether the President can give such notice to withdraw without Congressional approval. See 19 U.S.C. § 3451.

If a non-U.S. corporation (the “Company”) is a “passive foreign investment company” or “PFIC” for any tax year during which a U.S. shareholder owns shares in the Company, certain adverse U.S. federal income tax consequences of the acquisition, ownership, and disposition of shares will generally apply to such U.S. shareholder. A U.S. shareholder will be subject to the rules of Section 1291 of the Internal Revenue Code (described below) with respect to (a) any gain recognized on the sale or other taxable disposition of shares and (b) any “excess distribution” received on the shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. shareholder’s holding period for the shares, if shorter). Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of shares, and any “excess distribution” received on shares, must be ratably allocated to each day in a U.S. shareholder’s holding period for the respective shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income (and not eligible for certain preferred rates applicable to capital gains). The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A U.S. shareholder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible. For a U.S. shareholder who is an individual that invests in stock of a corporation and holds such stock for more than 12 months, any gain on the sale of such stock is generally subject to a 20% tax rate applicable to long-term capital gains. However, if the stock held is stock in a PFIC, any gain on the sale or other disposition of such PFIC stock is generally taxed at the highest ordinary income tax rate of 39.6%, plus the applicable interest charge, which is not deductible. In addition, in most cases, a Medicare tax of 3.8% on investment income will apply to certain individuals, estates and trusts. Certain elections may be available to U.S. shareholders in certain situations to mitigate such adverse tax consequences.

A Canadian company that proposes to grant stock options or other types of equity compensation to persons in the United States must comply with the securities laws of the state in which the recipient is located, unless the type of equity being issued (e.g., the underlying common shares, in the case of options to purchase common shares) is listed on a “national securities exchange” such as the NYSE, Nasdaq, and NYSE MKT. This means that private companies, Canadian public companies that are not listed in the United States, and Canadian companies that are listed in the United States only in over-the-counter markets such as the OTCQX, OTCQB, or Pink Sheets, are required to comply with state securities laws. Canadian companies should not assume that because they have taken the requisite steps under U.S. federal laws, such as registering the underlying securities by filing a Form S-8 with the SEC or complying with an exemption from registration under SEC Rule 701, that no further actions are required. While some states’ laws do not require additional actions to be taken, many states impose requirements that differ from federal laws. For example, Some states require that an application for exemption be filed and accepted by the state, or another type of notice be filed, and a fee be paid, prior to making the first equity award in that state. Some states’ exemptions from registration requirements restrict the types of awards that can be made, the types of persons that can receive awards, and the types of companies that can rely on the exemption. For example, some states’ exemptions are unavailable for awards to consultants and non-employee directors, are subject to bad boy disqualifications, are available only for certain types of equity plans, or are unavailable for awards made on an SEC-registered basis. Some states have no specific exemption for equity-based compensation, and a company seeking to make equity-based awards in those states must either register the plan or comply with another type of exemption, such as an exemption that might be available for a private placement to a limited number of persons satisfying certain investment criteria. The State of California imposes substantive requirements on the plan itself, including terms related to the number of securities to be issued, minimum vesting criteria, minimum post-termination exercise periods, information delivery requirements, and shareholder approval requirements, in addition to the requirement to file a notice and pay a fee.

Canadian manufacturers who sell products through U.S. distributors should ensure that they take appropriate action to establish their U.S. intellectual property rights, and to deal clearly with those rights in their cross-border distribution agreements. In a recent post on Dorsey’s IP blog, The TMCA, Sandra Edelman discusses the difficulties encountered by Covertech Fabricating, a Canadian manufacturer of protective packaging and reflective insulation, in establishing that it was the rightful owner of the trademarks in its branded products, not its U.S. distributor. Read her analysis of the recent court decision here: thetmca.com/who-owns-that-trademark-the-manufacturer-or-the-exclusive-distributor/

On April 10, 2017, the SEC’s Division of Enforcement brought enforcement actions against 27 individuals and entities behind various alleged stock promotion schemes. These actions arose when public companies, through promoters or communications firms, hired newsletter writers to generate publicity for their securities without publicly disclosing that the writers were being paid. While it is not illegal to hire newsletter writers, Section 17(b) of the Securities Act of 1933 (Securities Act) requires that newsletter writers fully disclose both the amount and the nature of the compensation received, including the dollar amount of a cash payment, the number of shares issued, or any other compensation. Additionally, newsletter writers and persons who adopt, approve or authorize the content of a publication may be liable for untrue statements of material facts or omissions for misleading investors. The Internet provides a ready means for fraudulent promotion of securities though social media, newsletters, chat rooms, emails, online blogs, press releases, and other media. The SEC’s Division of Enforcement is focusing attention on companies using stock promotion schemes that lead investors to believe that they were reading independent, unbiased analyses in newsletters, social media, stock forums, or other media when writers are secretly compensated for promoting a company’s securities. The SEC can bring charges against companies and promoters for these types of violations under various provisions of the Securities Act and Securities Exchange Act of 1934 (Exchange Act), including: Securities Act Section 17(a)/ Exchange Act Section 10(b) and Rule 10b-5: For, directly or indirectly, using interstate commerce to offer or sale any securities by: - employing any device, scheme or artifice to defraud; or - obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or - engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 17(b) of the Securities Act: For, directly or indirectly, using interstate commerce to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof. Exchange Act Section 20(b):  For aiding and abetting violations of Section 17(a) and Section 17(b) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. In addition, violations of securities laws may result in criminal prosecution. Allegations of securities law violations or association with firms that are charged with securities law violations may cause liability and embarrassment to a company and its officers, directors and employees. These violations may result in penalties, fines, imprisonment, or sanctions, including barring persons from serving as an officer or director of a public company or participating in certain securities offerings. Companies may be ultimately responsible for the investor relations work performed by investor relations, communication, social media, marketing, and other firms. Companies can take steps to avoid securities law violations by: Completing due diligence and selecting only reputable investor relations, communication, social media, marketing, and other firms to engage in investor relations activities. Limiting the use of paid newsletter writers and making sure that any compensation paid is properly disclosed. Adopting public communications policies that require authorization of company communications prior to dissemination. Carefully reviewing all materials for accuracy to ensure that the disclosure does not contain untrue statements of a material fact or omissions. Making sure that all content is consistent with the company’s public disclosures filed with regulatory agencies. Including forward looking statement and other disclaimers in all materials that are promotional in nature. Involving legal counsel, auditors and other professionals in the review of investor relations materials. Note: This post was originally published on Dorsey’s Governance & Compliance Insider blog here. 

Recently we blogged about pitfalls and potential adverse tax consequences for U.S. taxpayers with respect to deferred share unit awards that pay out following the participant’s termination of services. Read that blog entry here. But what about restricted share units (RSUs) that are subject to vesting based on continued service and that are settled/paid out immediately after the scheduled vesting date(s)? If you only have a handful of employees in the U.S. who would receive RSUs under your existing RSU Plan, you may wonder whether review by U.S. tax counsel really is necessary. Common sense would suggest that there is no way such RSUs could run afoul of the U.S. tax rules related to deferred compensation (otherwise known as “Section 409A” of the U.S. Internal Revenue Code) because the intent is to pay out as soon as the RSUs vest and hence there is no “deferral” of compensation. Forget common sense. Given the significant adverse tax consequences (20% penalty tax) for the recipient if the RSU is neither exempt from, nor compliant with, Section 409A, the answer is yes, have the terms of the RSU Plan and RSU agreement reviewed by U.S. tax counsel before granting RSUs to U.S. taxpayers. A common problem with respect to RSUs awarded to U.S. taxpayers has to do with the “retirement” provisions in the RSU award. A company may believe that the RSUs will not be deferred compensation that is subject to Section 409A because the RSUs are subject to vesting based on continued service through stated “vesting” dates and they are paid out shortly after the scheduled vesting dates. The company believes the RSUs are exempt under the “short term deferral” exemption, and thus there is no risk of Section 409A penalties for noncompliance. However, many RSU awards have “retirement” provisions which state that upon a participant’s Retirement (as defined in the RSU Plan or RSU agreement), the RSUs will “continue to vest” as though the participant had continued employment or services with the company through the scheduled vesting dates. For U.S. tax purposes the substantial risk of forfeiture lapses once an individual becomes eligible to retire, even if the individual does not in fact retire. Thus, such an RSU awarded to an individual who is retirement eligible, or who will become retirement eligible during the vesting period, will not be subject to a substantial risk of forfeiture as soon as the individual is retirement eligible because the settlement/payout which will occur immediately following the scheduled vesting dates will be outside of the short term deferral period (i.e., the RSUs won’t be settled/paid out in all cases by March 15 of the year following the year in which the RSUs no longer are subject to a substantial risk of forfeiture). Since such RSUs will not be exempt from Section 409A, they must instead meet all of the 409A rules for documentary and operational compliance; hence the need to review the documents before grant in order to structure them to comply with Section 409A. Fortunately, through careful drafting and plan administration, RSU awards can be designed and administered to avoid these and other potential problems. We work regularly with Canadian tax counsel to ensure compliance. Tip: In thinking about whether any recipients of RSUs are U.S. taxpayers, remember that U.S. taxpayers are taxed on worldwide income, regardless of where they reside. U.S. taxpayers are: (i) U.S. citizens regardless of residency; (ii) non-resident aliens (“green card” holders); and (iii) non-citizens, non-green card holders who have a “substantial presence” in the U.S. under the U.S. income tax laws (but exceptions to this category apply – careful analysis of the facts and applicable tax treaties required).

The Trump administration recently issued a presidential permit to TransCanada to operate and construct the Keystone XL pipeline. The presidential permit grants permission to construct, connect, operate, and maintain the pipeline facilities at the international border between the United States and Canada, covering approximately 1.2 miles of pipeline. The remaining 1,200 miles of Keystone XL must be approved by various regulatory bodies in the United States and Canada. The granting of the presidential permit is a big step forward for the pipeline, but many significant regulatory and legal steps remain before TransCanada can start construction of Keystone XL. Read more about the issuance of the presidential permit and the hurdles ahead for Keystone XL in our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/03/despite-trump-approval-keystone-pipeline

We get asked from time-to-time whether it is advisable for issuers to pay fees to unregistered “finders” for introducing potential investors in the United States to the issuer in connection with securities offerings. The short answer is “no.” Most finders are engaged by issuers under finder’s, advisory, or other arrangements, which typically require payment of “success fees” upon completion of a financing transaction. While these arrangements are sometimes structured to try to hide or disguise the true intent of the arrangement, payment of transaction-based compensation is treated by U.S. securities regulators as a nearly-conclusive indication that a person is engaged in the securities business and should be registered as a broker-dealer. The relevant U.S. federal broker-dealer laws that should be of concern to an issuer using an unregistered finder include: Section 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act), which makes it unlawful for a person to “effect a transaction in securities” or “attempt to induce the purchase or sale of, any security” unless they are registered as a broker or dealer under the rules and regulations of the Financial Industry Regulatory Authority, Inc. (FINRA). FINRA is the regulatory organization designated by the Securities and Exchange Commission (SEC) to license and regulate broker-dealers. Section 29(b) of the Exchange Act, which provides that every contract made in violation of any provision of the broker-dealer registration requirements “shall be void” as to rights of persons who made or engaged in the performance of such contract. It results in the underlying purchase of securities becoming a voidable transaction that gives the investor a right of rescission, effectively granting a put right to the investor or purchaser. Section 20(e) of the Exchange Act, under which the SEC may impose aiding-and-abetting liability on any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act. The theory behind broker-dealer registration is to provide a gatekeeper to protect investors in the marketplace. FINRA members are required to “observe high standards of commercial honor and just and equitable principles of trade” in the conduct of its business, including determining if an investment is "suitable" for its customer. Finders assisting in transactions rarely make such determinations and view themselves simply as middlemen in making introductions to potential investors. Because unregistered broker-dealers may not adhere to these high commercial standards, the SEC broadly construes the broker-dealer laws and narrowly construes the few permitted exceptions. Under SEC guidance derived from no-action letters, the SEC requires all intermediaries effecting transactions in securities to be licensed, subject to a few limited exceptions. Effecting a securities transaction may include, among other factors, receiving transaction-based compensation, recommending a company or the purchase of its securities, negotiating terms of a securities offering or purchase, attending meetings or presentations where the merits of the investment are discussed, performing or accommodating due diligence efforts, providing valuations or estimates of value, and other activities that facilitate a securities transaction. The consequences of engaging an unlicensed finder can be troublesome: Finder Risks:  Any unlicensed person engaging in activities designed to effect a transaction in securities may violate broker-dealer laws. The SEC or state securities regulators may seek to enjoin the unlawful activities or seek monetary penalties or criminal sanctions. Issuer Risks:  Retaining and permitting an unlicensed intermediary to effect a securities transaction may be a violation of federal and many state laws, and may subject the issuer to possible civil and criminal penalties. Any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act may be subject to aiding-and-abetting liability. Rescission Risks:  A violation of broker-dealer laws creates a right of rescission under federal and/or state securities law. The SEC or state securities regulators may require the issuer to offer investors rescission rights, and the issuer may be required to return the investment. State Securities Violations:  Many states have begun reviewing state notice filings on Form D (which report transactions exempt from registration under Regulation D) and actively monitoring finder’s fees paid in connection with securities transactions. Some states have required issuers to provide additional information related to unlicensed broker-dealers and, in some cases, to certify that finder’s fees or commissions have only been paid in compliance with broker-dealer laws. Accounting Liability Risk:  Auditors may raise accounting issues resulting from paying finder’s fees to unregistered broker-dealers and may require an issuer to account for potential liability arising from rescission rights. Bad Actor Consequences:  An issuer or finder that is convicted of any felony or misdemeanor, is subject to any order, judgment, or decree of any court, or is subject to any order of certain regulators may be ineligible to participate in certain types of securities offerings, including Rule 506 of Regulation D offerings and Regulation A offerings. Using an unlicensed finder can result in broker-dealer law violations. Many times the issue arises in the context of state notice filings and direct inquiries from state securities regulators where finder’s fees or commissions are paid in connection with an offering. Other times, they arise from a failed investment where the investor may assert claims related to broker-dealer law violations to establish a right of rescission. Issuers should use caution in determining whether to engage a finder to assist in financing transactions.   Note: This post was originally published on Dorsey's Governance & Compliance Insider blog here. 

Canadian employment law is, in many ways, far more employee favorable than U.S. employment law. With the exception of a few states, employment in the United States is “at-will.” This generally means that either the employer or the employee may terminate the employment relationship without cause and without notice, so long as the reason for the termination is not discriminatory (e.g., based on age, race or gender) or retaliatory (e.g., in retaliation for the employee engaging in whistleblowing activity). U.S. employees also have far fewer privacy rights in the workplace. Employees generally have no expectation of privacy in any computers or other electronic devices provided by the employer. However, there is one aspect of employment law that is far more treacherous and unpredictable in the United States—that is, the monetary damages available to employees who successfully sue their employers. Under U.S. law, an employee alleging that he or she was terminated for a discriminatory reason may seek lost wages including both “back pay” and “front pay.” Back pay consists of all of the wages the employee would have earned, from the date of termination through the date when the court issues an award, had the employee not been terminated. If the employee has not found a new job by that time, this can amount can be well over a year’s pay and includes not just base salary, but any bonus, overtime, and fringe benefits the employee would have earned. Front pay consists of all the wages the employee would have earned going forward from the award. Juries can award lost wages all the way through the employee’s expected date of retirement. A 40-year-old employee could be awarded 25 years of lost wages (through the typical retirement age of 65) where the jury believes that the employee is unlikely to find another job. Even where the employee finds a new job, the former employer can be on the hook for the difference between what the employee is making at the new job and what the employee expected to make at the old job. For example, a 35-year-old employee who is making $20,000 a year less could seek an award of $600,000 in lost wages (through age 65). In addition to lost wages, employees may seek emotional distress and punitive damages. Juries have broad discretion to award employees emotional distress damages resulting from an improper termination. These emotional distress awards can rise well into the six-figures. In 2009, a federal appellate court upheld a $1 million emotional distress award. Employees may be entitled to punitive damages where a jury finds that the employer discriminated against the employee “with malice or reckless indifference.” While punitive damages are limited by statute in certain cases, they are not capped in others. Where punitive damages are uncapped, they can easily reach six figures and can sometimes exceed $1 million where the employer’s conduct is found to be particularly heinous. Finally, employees are usually entitled to recover their attorney fees, even if they recover only a fraction of the damages they are seeking at trial. What is more, employees are rarely required to pay their former employer’s attorney fees if they lose. While employees may appear to have fewer rights under U.S. employment law, the consequences for the employer if those rights are violated can be extreme. Canadian companies who are taking on employees in the United States should take care to consult with experienced employment counsel to assess their employment practices and avoid the substantial liability that can result under U.S. law.

This week, the SEC approved a rule that would require broker-dealers to settle most securities transactions on a T+2 basis (shortening the current regime from T+3), effective September 5, 2017. See additional information in the post from our partner Jason Brenkert here. Will Canadian regulators follow suit?

Many cross-border loan transactions involve subsidiaries that are organized in the United States and/or U.S. based collateral. To the extent that the underlying loan is made to a Canadian borrower by a Canadian lender, these transactions are typically documented with loan agreements governed by Canadian law (often under the law of the Province where the primary Canadian borrower is organized, but sometimes based on the law of a Province selected by the Canadian lender). In many of these transactions, in addition to the Canadian law governed documents, the Canadian lenders will also require the use of U.S. law governed documents for guarantees provided by U.S. organized subsidiaries and Security Agreements for collateral owned by U.S. subsidiaries or otherwise located in the United States. Whether or not the requirement to add these additional U.S. law governed documents is prudent and cost effective often depends on several factors, including: 1) the total amount of the loan, 2) the importance of the U.S. subsidiary guarantor to the consolidated balance sheet of the Canadian borrower, 3) the value of any U.S. based collateral, and 4) the nature of the U.S. based collateral. It is also important to understand the reason a Canadian lender would request the additional documentation when the Canadian law governed documents already cover any U.S. based subsidiaries and any U.S. based collateral. Primarily, the additional U.S. law governed documents aid a Canadian lender if and when the lender needs to realize on the U.S. based collateral or otherwise collect against the U.S. organized subsidiary in U.S. courts. As a general matter, U.S. courts should typically give effect to and recognize Canadian law as a valid choice of law, absent fraud or some other public policy concern. Therefore, Canadian law loan documents should be sufficient regardless of the jurisdiction of the subsidiary or the location of the collateral. Canadian borrowers can therefore argue that adding U.S. law governed documents in addition to the Canadian law documents is unnecessary. While there is merit to this argument, the reality is that while U.S. courts should give effect to and recognize Canadian law and they should be able to interpret and impose Canadian law in any proceeding brought in a U.S. court, many lenders simply don’t want to take the risk that a U.S. court would look for an opportunity to negate or invalidate a guaranty or security agreement simply because of the choice of Canadian law when a viable alternative is available. The other argument that is sometimes proffered is that it is better to have a U.S. law governed document if a filing under the Uniform Commercial Code (“UCC”) will be made in the United States for U.S. based collateral or for a U.S. organized subsidiary. Fundamentally, the reasonableness of the request hinges on the cost to draft and negotiate the additional documents vs. the likelihood that they would ever be used and if so the value of any U.S. based subsidiaries as guarantors or the value of any U.S. based collateral. Assuming the borrower is willing to agree to use additional U.S. law governed guarantees and security agreements, lenders will often request that the U.S. law governed documents be “typical” or “market” for similar transactions governed under U.S. law. While this request may be reasonable, in an effort to make the documentation and negotiation as efficient as possible, Canadian borrowers may counter that any U.S. law governed documents simply mirror all of the provisions of their Canadian law counterparts – other than the choice of law provisions and other truly jurisdiction-specific provisions (e.g., referencing the UCC instead of the Personal Property Security Act (“PPSA”)). In addition, because most lenders require legal opinions as to the enforceability of loan documents, most borrowers will need to engage separate U.S. counsel to negotiate the documents and provide the necessary legal opinions. Ultimately, the best approach to the form of the documentation and the scope of any opinions will again depend on the cost to draft and negotiate the additional documents vs. the likelihood that they would ever be used and if so the value of any U.S. based subsidiaries as guarantors or the value of any U.S. based collateral. As with any loan transaction, the costs associated with additional U.S. law governed documents needs to be balanced with the reality that there are some advantages to a lender in having different options in the event they need to enter U.S. courts to enforce their loan documents, while at the same time keeping in mind the value of the guarantees and the U.S. based collateral relative to the total value of the loans.

On March 1, 2017, the United States Securities and Exchange Commission (SEC) published the taxonomy for the eXtensible Business Reporting Language (XBRL) for financial statements prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (IFRS). Accordingly, foreign private issuers that prepare their financial statements in accordance with IFRS may immediately begin submitting their financial statements in SEC filings in the XBRL format. While Rule 405 of Regulation S-T would require foreign private issuers that prepare their financial statements in accordance with IFRS to submit financial data in XBRL upon publication of the taxonomy, the SEC has stated that such foreign private issuers are only required to submit financial data in XBRL with their first annual report on Form 20-F or 40-F for a fiscal period ending on or after December 15, 2017. Therefore, foreign private issuers who prepare their financial statements in accordance with IFRS are not required to submit XBRL data for the fiscal year ended December 31, 2016. The full text of the SEC’s release can be found at the following link: https://www.sec.gov/rules/other/2017/33-10320.pdf See our previous postings on the topic here: SEC delays XBRL compliance for foreign private issuers that prepare their financial statements in accordance with IFRS SEC Mandates Use of XBRL for Financial Statements

A Canadian corporation will generally be a passive foreign investment company or “PFIC” if, for a tax year, (a) 75% or more of its gross income is passive income (the “PFIC income test”) or (b) 50% or more of the value of its assets either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the “PFIC asset test”). Gross income generally includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and passive income generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Cash and cash equivalents are generally treated as assets held for the production of passive income. For purposes of the PFIC income test and PFIC asset test described above, if the Canadian corporation owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, such Canadian corporation will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and PFIC asset test described above, and assuming certain other requirements are met, passive income does not include certain interest, dividends, rents, or royalties that are received or accrued from certain related persons (as defined in Internal Revenue Code Section 954(d)(3)), to the extent such items are properly allocable to the income of such related person that is not passive income. Canadian corporations that are in the development or exploration stage commonly constitute PFICs under the PFIC income test because their only source of gross income is interest income and other investment income earned on their cash balances. The same rules apply for other non-U.S. corporations.

Canadian miners and oil & gas companies should be aware that on February 14, 2017, President Trump approved a joint resolution of Congress that disapproved a recent SEC rule requiring specific disclosure by resource extraction issues. The obligation to report was imposed by Rule 13q-1 under the Exchange Act. The rules would have required resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments, including foreign subnational governments, for the commercial development of oil, natural gas or minerals. See the full discussion from our partner Kimberley Anderson here.

Anyone who has owned or operated a project involving public lands in the United States knows of the complex jigsaw puzzle of land ownership that defines the landscape of the United States. Jurisdictional governance is divided among Federal, state, Indian, and private ownership, resulting in regulatory tides to which natural resources, energy, and mining projects are subject. The collection of applicable laws, rules, orders, guidance documents, environmental reviews, permits, approvals, and administrative processes create a challenge for parties looking to develop mineral resources. With the election of President Donald Trump and Republican majorities in both the U.S. House and Senate, the tide is changing, and natural resources development—including the mining and energy industries—will be affected by the policies of the new administration. Here are a handful of areas where changes are anticipated. Permitting. U.S. energy and mining projects face a host of challenges from U.S. permitting processes—especially those impacting Federal lands—which are widely identified as some of the more lengthy and cumbersome in the world. Regulatory reform has been a signature pledge of President Trump and a host of Federal agencies, including the Environmental Protection Agency, the Bureau of Land Management, the Office of Surface Mining Reclamation and Enforcement, and the Army Corp of Engineers, are likely to be targets of such reform. Land Withdrawals. President Obama designated a record 34 national monuments during his two terms in the White House resulting in a withdrawal of those lands from traditional natural resource development. During the same period, both the Forest Service and the Bureau of Land Management adopted significant land use designations and moratoriums resulting in restrictions on natural resource development for thousands of additional acres of Federal lands. Many of these withdrawals and re-designations will be targets of the new administration and Congress. Republicans are expected to introduce legislation that would curb presidential authority to designate monuments under the Antiquities Act. Other members of Congress are seeking to have the President reverse certain monument designations, such as the Bears Ears National Monument and the Grand Staircase-Escalante National Monument. Revocation of Regulations. Congress intends to introduce legislation and pass resolutions that would reverse dozens of Obama Administration public land initiatives and regulations believed to seriously hinder the development of energy and mining projects on Federal lands, including blocking programs to protect endangered species, prohibiting EPA from implementing rules expanding the definition of wetlands, and halting adoption of methane emissions standards. Energy Policy. President Trump has released a draft energy plan that promises to expand energy development on the public lands. While it is unlikely that the new administration will successfully recraft years of public land law, there is little doubt that new policies will recast available uses of public lands for energy and resource development. We frequently assist Canadian companies looking to acquire, finance, permit, and develop mining and energy projects on public lands in the United States.

In December 2015, the Canadian Securities Administrators (CSA) announced an amended regime for a prospectus-exempt rights offering in Canada. This amended regime allows certain public companies in Canada to conduct a prospectus-exempt rights offering without prior CSA review of the rights offering circular, and using a greatly simplified rights offering circular that assumes, without incorporation by reference, that the shareholder is familiar with the issuer’s other continuous disclosures. While the new regime revitalized the market in Canada for rights offerings, it raised several questions regarding the extension of the rights offering to U.S. shareholders. Form F-7 under the Multi-Jurisdictional Disclosure System (MJDS) has historically provided a means for eligible Canadian issuers to register securities issued in a rights offering under the U.S. Securities Act of 1933, as amended (the 1933 Act). Based on the SEC’s determination that Canadian disclosure requirements are adequate, Form F-7 allows the offering document (whether prospectus or rights offering circular) to comply principally with Canadian requirements, imposing only a few additional SEC requirements. Unlike most SEC registration forms, conducting an offering on Form F-7 does not subject the issuer to ongoing SEC reporting requirements. However, because the securities are treated as having been issued in a registered offering, the issuer is liable under the 1933 Act for any material misstatement or omission in the offering document, as it is in other registered public offerings. Following the passage of the December 2015 amendments, it was unclear whether the SEC would allow the use of Form F-7 under the new, abbreviated Canadian regime. Preliminary verbal guidance received from the SEC’s staff suggested that the staff was not, at that time, sufficiently comfortable with the new regime to give any assurance of Form F-7’s availability in such circumstances. It was also unclear how, if such registration was permitted, an issuer would protect itself from liability under the 1933 Act for material misstatements or omissions, given the limited amount of disclosure that is required or permitted under the new Canadian regime. As a result, since December 2015, Canadian issuers have not extended rights offerings under the new regime into the United States on Form F-7, and have often prevented U.S. shareholders from participating in the rights offering. Last week, the SEC published a no action letter allowing the use of Form F-7 for rights offerings by eligible Canadian issuers under NI 45-106, as amended by the CSA. The no action letter was issued following the receipt of an acknowledgment from the law firms submitting the request that: “When so registering securities on Form F-7, an issuer would need to assure that the registration statement and the prospectus satisfied the antifraud and liability provisions under the [1933 Act]”, and assurances that: “To do so, for purposes of the offering materials made available to U.S. holders, the issuer could provide a brief description of its business, risk factors, discussion of results of operations and capital resources and such other matters as it deemed material or otherwise in the offering circular.” Therefore, it appears that the SEC will allow the use of Form F-7 for rights offerings extended under NI 45-106, as amended by the CSA; however, a Canadian issuer taking advantage of this form of registration must include in the offering document sufficient information to protect itself from liability under the 1933 Act for material misstatements or omissions. It remains to be seen how the market will react to the SEC’s no action letter, including (1) the amount of disclosure that issuers will be comfortable including, and omitting, from a rights offering circular that is filed on Form F-7, knowing that the offering will be subject to U.S. prospectus liability, and (2) how frequently issuers will decide to follow this approach.

In recent years, many Canadian companies have sought to create a U.S. market for their shares by listing on the OTCQX. Qualifying Canadian companies that have their primary listing on the Toronto Stock Exchange, the TSX Venture Exchange or the Canadian Securities Exchange may generally obtain a quotation on the OTCQX or the next lower tier of the OTC Markets, the OTCQB, without filing a registration statement with, or becoming subject to ongoing reporting requirements with, the U.S. Securities and Exchange Commission. During 2016, the initial listing requirements for OTCQX included a minimum share price of US$0.25, a minimum market capitalization of US$10 million, an operating business, no current bankruptcy or reorganization proceedings, at least 50 beneficial round lot shareholders, an exemption from SEC reporting, and an exemption from penny stock status (typically satisfied through net tangible assets of at least US$2 million, or US$5 million if the company has been in operations for less than three years). A company obtaining an OTCQX quotation was also required to retain an attorney or broker approved by the OTC Markets to serve as the company’s Principal American Liaison, or PAL.  PALs were tasked with confirming the company’s compliance with OTCQX listing qualifications, delivering a letter of introduction to the OTC Markets, and providing an annual letter to the OTC Markets confirming the company’s continued satisfaction of the OTCQX continued listing qualifications. Effective January 1, 2017, the OTCQX has eliminated the requirement for an annual PAL letter. Approved attorney or broker PALs, now referred to as “Sponsors,” will only be required to provide an initial letter of introduction, thereby reducing the ongoing cost of an OTCQX listing. Dorsey has assisted more than 80 Canadian clients in obtaining OTCQX quotations, and is an approved Sponsor (previously, an approved PAL).

A Canadian company is planning to adopt a deferred share unit plan (DSU plan) for its directors. Only one or two of its directors are U.S. citizens or U.S. residents (“U.S. Directors”). With only one or two U.S. Directors, you wonder whether it is important to consider U.S. tax implications. The answer is a resounding yes because the typical form of Canadian DSU plan will not comply with U.S. tax laws governing deferred compensation. Participation by a U.S. Director will result in significant adverse tax consequences for the U.S. Director under Section 409A of the Internal Revenue Code. Specifically, for U.S. federal income tax purposes, the value of the DSUs as of December 31st of the year in which the DSUs vest (i.e. the year in which the DSUs are awarded for the majority of DSU plans) will be included in the U.S. Director’s income for that year, regardless of whether actual payment/settlement of the DSUs is deferred until later termination of board service. In addition, a 20% penalty tax will be imposed. A typical Canadian DSU Plan runs afoul of Section 409A in two ways. First, such plans frequently allow the director to “redeem” the units following termination of services by electing a redemption date either during the year of termination or during the following calendar year. This violates section 409A because it allows the director to choose, at or after termination of service, which tax year the payment/settlement will occur. Since Section 409A requires both documentary and operational compliance, the mere inclusion of the problematic language in the document constitutes a 409A violation and triggers adverse tax consequences for the U.S. Director. In other words, you can’t simply postpone the U.S. tax review until later, figuring that you will fix it before the U.S. Director terminates board service. The second common Section 409A problem arises because most Canadian DSU plans are designed to comply with the requirements of Income Tax Regulation 6801(d), which provides a specific prescribed exception to the salary deferral arrangement rules for Canadian income tax purposes. However, the payment timing requirements under Section 409A upon the U.S. Director’s “Separation from Service” are in some circumstances inconsistent with the requirements of Income Tax Regulation 6801(d). Fortunately, through careful drafting and plan administration, a DSU plan can be designed and administered to avoid these problems. We work regularly with Canadian tax counsel to ensure compliance. Tip: In thinking about whether any of a company’s directors are U.S. taxpayers, remember that U.S. taxpayers are taxed on worldwide income, regardless of where they reside. U.S. taxpayers are: (i) U.S. citizens regardless of residency; (ii) non-resident aliens (“green card” holders); and (iii) non-citizens, non-green card holders who have a “substantial presence” in the United States under the U.S. income tax laws (but exceptions to this category apply – careful analysis of the facts and applicable tax treaties required).

A Canadian SEC reporting company that looks to acquire a company with outstanding equity grants in the United States will frequently need to address the question: What alternatives are available for the assumption of the target’s outstanding options or other equity-based compensatory awards? Under U.S. law, both the grant of the equity award and the exercise or conversion of the equity award must be registered under the 1933 Act or satisfy an available exemption. For Canadian issuers that are SEC reporting companies, the alternative approaches available to satisfy the 1933 Act requirements for the exercise or conversion of the assumed awards were formerly restricted to (i) an S-8 registration statement (either existing or newly filed) or (ii) an alternative exemption, such as Rule 506 of Regulation D, which would typically be available only in limited circumstances. Under recent SEC guidance, however, SEC reporting issuers may now also rely on Rule 701 for the exercise of outstanding equity awards of the target that are assumed by the issuer if the target relied upon Rule 701 for the original issuance. Rule 701 is commonly used by U.S. private companies and Canadian and other foreign public companies that aren’t subject to SEC reporting obligations to structure their compensatory equity programs. Greatly simplified, Rule 701 is available to issuers that do not report with the SEC in connection with offers and sales of securities pursuant to written compensatory benefit plans to employees, officers and directors, and certain limited types of consultants and other persons, subject to limits on the amount of awards and, in certain cases, the need to deliver specified disclosures. Notwithstanding the express language in Rule 701 that the exemption is available only to an issuer that is not subject to SEC reporting requirements, an SEC reporting issuer may rely upon Rule 701 for the exercise of the assumed awards, provided that the target satisfied the requirements of 701 at the time of the original grant. Issuers should note that this change in guidance does not provide an exemption for the issuance of the acquiror options or other securities in connection with the assumption or exchange of the target options. For purposes of that transaction, the acquiror must rely upon (i) another exemption (such as Rule 3(a)(10) in a typical plan of arrangement) or (ii) a “no sale” position, which would be available if the terms of the target compensatory plan, at the time of the original grant, permitted the assumption of the options without the consent of the option holders. This new guidance will provide issuers with additional flexibility in structuring acquisitions of companies that aren’t SEC reporting companies. Due to the technical nature of the 701 exemption, however, an acquiror and its advisors should carefully review the target company’s compliance with Rule 701 to satisfy themselves that the exemption was available to the target at the time of original issuance.

It is generally a good idea for companies not to disclose biographical information about their employees, such as marital status, religion, or age. Good HR professionals counsel managers not to ask for such information during interviews, for example, in order to avoid claims of discrimination in hiring. Under U.S. law, however, there is an important exception to this well-advised general rule. Under the Older Workers Benefit Protection Act (“OWBPA”), employers terminating two or more employees as part of a layoff and offering severance in exchange for a release must disclose the following information to each employee over 40 who is being terminated and offered severance: 1) a description of the class of employees considered for termination (e.g., all sales people in the state of Washington); 2) the age and title of each employee in the class considered for termination; and 3) whether or not each of the employees in the class considered for termination is in fact being terminated and offered severance. The employer must give these employees 45 days in which to consider the release agreement and must specifically advise the employees in writing to seek legal counsel. Canadian employers are often shocked to discover that such disclosures are not only allowed, but required under U.S. law. These disclosures allow each employee over 40 who is being offered severance to quickly assess whether the layoff will have a “disparate impact” against employees over 40 and thus to bring a suit for age discrimination. Whether a layoff has such a “disparate impact” involves some moderately complex math. However, it basically boils down to whether employees over 40 (or other protected classes) are disproportionately chosen for termination out of the pool of employees considered for layoff. When Canadian companies acquire businesses in the United States, they often engage in reductions in force post merger. It is important for these companies to not only comply with the disclosure requirements of the OWBPA, but also to vet the contemplated layoff for possible disparate impacts upon protected classes such as age, gender, religion, race and national origin. It is particularly important to assess whether the layoff has a disparate impact upon employees over 40, given the disclosures required by the OWBPA. Canadian companies laying off U.S. employees should make sure they have knowledgeable counsel regarding the requirements of the OWBPA to avoid setting themselves up for costly litigation.

Canadian companies should be aware that if they engage in certain “organizational actions” that affect the tax basis of shares held by U.S. persons (including many types of acquisitions and business combinations where shares are issued to U.S. persons), they are required by the U.S. tax laws to evaluate the effect of the action on the U.S. holder’s tax basis and disclose this information in a completed Form 8937 promptly following the action. Internal Revenue Code Section 6045B and IRS From 8937 require corporations to report an “organizational action” that affects the tax basis of its shares held by U.S. individuals and certain other tax entities. Canadian residents who are U.S. citizens or green card holders are treated as U.S. individuals for this purpose. The required reporting may be satisfied by filing Form 8937 with the IRS within 45 days of the organizational action (or if earlier, by January 15th of the following year) and also providing the Form 8937 to the impacted shareholders by January 15th of the following year. In the alternative, a corporation may satisfy the reporting requirements by timely posting the Form 8937 on its public website and maintaining it there for 10 years. Many public companies choose to post the Form 8937 on their public websites because this is administratively easier. “Organizational actions” include tax-deferred mergers and acquisitions under Code Section 368, contributions of property to controlled corporations under Code Section 351, contributions to capital without the issuance of additional shares, tax-free stock distributions, share consolidations, tax-free spin-offs, distributions that are treated as a return of capital (i.e., a distribution in excess of earnings and profits), taxable liquidations under Code Section 331 which involve more than one distribution in liquidation, recapitalizations and conversions under Code Section 368 and modifications of certain debt instruments. The instructions to Form 8937 specifically provide that reporting with respect to a corporation’s stock is required only if an organizational action impacts the tax basis of all holders of the issuer’s stock or all holders of a class of stock. A non-U.S. corporation is subject to the same rules as a U.S. domestic corporation, provided it has at least one shareholder who is a U.S. individual or partnership. For this purpose, a corporation includes any business entity that is treated as a corporation for U.S. federal income tax purposes. For example, a Canadian unlimited liability company which elects to be treated as a corporation for U.S. federal income tax purposes is treated as a corporation for Form 8937 reporting purposes. Penalties apply for failure to properly report an organizational action.

For Canadian issuers and their advisers, compliance with U.S. securities laws generally begins with the question: Is the issuer a “foreign private issuer”? The FPI definition, which is set out in Rule 405 under the Securities Act and 3b-4(c) of the Exchange Act, involves the following four inquiries: Are more than 50% of the issuer’s outstanding voting securities held of record, directly or indirectly, by residents of the United States? Are a majority of the issuer’s executive officers and directors citizens or residents of the United States? Are a majority of the issuer’s assets in the United States? Is the issuer’s business principally administered from within the United States? While the FPI test is a seemingly straightforward calculation, the application of the test in certain circumstances can be challenging.  The SEC staff has recently issued guidance that clarifies the application of the tests in certain circumstances and provides comfort for the application of reasonable methodologies that are consistently applied. Multiple Classes of Voting Securities.  Issuers that have multiple classes of outstanding voting securities with different voting rights may choose to make the calculation on the basis of voting power or the number of outstanding securities, provided that the methodology is applied on a consistent basis. United States Residency.  A person who has permanent resident status in the United States (a “Green Card” holder) is presumed to be a U.S. resident.  For purposes of other holders, an issuer may select other reasonable criteria, and apply them consistently, such as tax residency, nationality, mailing address, physical presence, location of financial or legal relationships, or immigration status. Officers and Directors.  In evaluating the citizenship and residency of executive officers and directors, each test must be separately applied to executive officers as a group and directors as a group. Administration of Business.  No single factor or group of factors is determinative of the location from which a business is administered.  An issuer must assess, on a consolidated basis, the location from which the issuer’s officers, partners or managers direct, control and coordinate the issuer’s business activities.  Absent other factors, shareholder meetings or occasional meetings of the board of directors in the United States would not indicate that the issuer’s business was administered in the United States. Location of Assets.  Issuers may look to the geographical segment information determined in the preparation of financial statements for purposes of calculating the location of assets.  Alternatively, an issuer may apply any other reasonable methodology on a consistent basis to determine location of assets. Foreign private issuer status is of considerable benefit to Canadian issuers that access the U.S. markets.  Issuers that are in danger of a change in status may find that the recent SEC guidance gives them some additional flexibility in satisfying the FPI test.  For those issuers, careful advance planning may make it possible to avoid the loss of the FPI benefits.

One of the biggest differences between employment in Canada and employment in the United States is the fact that, with the exception of a few jurisdictions, employment in the United States is “at will.”  While in Canada employees who are terminated without cause often must be paid severance, in the absence of a contract requiring severance, a U.S. employer is generally not obligated to pay severance when an employee is fired without cause. This fact has important implications for Canadian companies taking on employees in the United States.  While it might make sense for a Canadian employer to include a probationary period in its employment agreement to avoid paying severance after an early termination, this practice can backfire with U.S. employees.  U.S. courts have interpreted such probationary periods as evidence of an agreement that the employee will only be terminated for cause after the probationary period ends—undermining the presumption of at-will employment under U.S. law. Canadian companies should be sure to include disclaimers in any employment agreements or employee handbooks used with U.S. employees explaining that their employment is at-will.  While the presumption of at-will employment in the United States can be great for employers, there are many ways in which this presumption can be lost.  Promises that employment will continue for a particular period of time or that employees will be subject to particular progressive discipline procedure can undermine an employer’s ability to fire an employee at will.  Clear at-will disclaimers help prevent the presumption of at-will employment from being undermined. It is also important to understand the limitations of at-will employment in the United States.  While employers do not need cause to terminate employees, employers may not terminate employees for a long list of reasons that are deemed illegal such as the employee’s age, gender, race, religion, national original, disability, or age (if over 40), or the fact that the employee made a protected work-related complaint, for example, about being discriminated against or a safety issue in the workplace. Canadian companies taking on employees in the United States should make sure they have knowledgeable counsel regarding the benefits and limitation of at-will employment—both to enjoy its benefits and to avoid its pitfalls.

Being a “foreign private issuer” is very important to a Canadian company’s treatment under U.S. securities laws.  If a Canadian company ceases to qualify as a foreign private issuer under the rules of the U.S. Securities Exchange Commission (SEC), it must generally: Change the way in which it offers and sells its own securities to persons in Canada and other non-U.S. jurisdictions, including the imposition of U.S. legends regardless of the jurisdiction of the purchaser, Begin reporting with the SEC unless its securities are held by a sufficiently small number of persons, and Report with the SEC on U.S. domestic forms rather than the more liberal forms that apply to most Canadian companies that report with the SEC. In addition, its directors, executive officers and 10% shareholders may become subject to the reporting and liability provisions of Section 16 of the U.S. Securities Exchange Act, which is a significant inconvenience and may require restructuring some of the company’s benefit plans and practices. A company incorporated under the laws of Canada or any Canadian province will be a foreign private issuer unless, as of the last business day of its most recently completed second fiscal quarter: More than 50% of the outstanding voting securities of the company are directly or indirectly owned of record by residents of the United States (Part 1), and Any of the following (Part 2): The majority of the company’s executive officers or directors are U.S. citizens or residents, More than 50% of the assets of the company are located in the United States, or The business of the company is administered principally in the United States. Because the result under Part 2 is often easier to determine, many companies will first assess the results of Part 2 in order to determine whether analysis of security ownership under Part 1 is necessary.  If analysis under Part 1 is necessary, a company may generally rely on the address of a securityholder as set forth in properly maintained securityholder records; however, it must generally “look through” the ownership of commercial depositaries such as CDS and Cede & Co., and other nominees such as brokers and banks that hold securities for the account of their customers.  In addition, it must generally take into account information set forth in beneficial ownership reports, and cannot give credence to a structure established to evade the U.S. securities laws.  The test set forth in Part 1 therefore generally requires, for a publicly traded company, a review of beneficial ownership reports and the company’s securityholder records and the commissioning of a beneficial ownership search through a service such as Broadridge. Companies that determine they are majority owned by U.S. residents may find themselves able to maintain foreign private issuer status by ensuring that they do not satisfy any of the criteria in Part 2 – by ensuring that their board and executive officers include a sufficient number of persons that are not U.S. citizens or residents, that their business is primarily administered outside the United States, and that a majority of their assets are located outside the United States. We frequently assist Canadian companies with assessing and maintaining their status as a foreign private issuer and, where appropriate, complying with the new regulations to which they are subject when they lose such status.