Photo of Joe BrennanBy Joe BrennanApril 01 2015
Business Law

Insider Reporting - Don't Forget Stock Based Compensation Instruments

It is well known that insiders of public companies must file insider reports disclosing their beneficial ownership or control or direction over securities of a reporting issuer.  What is less well known is the obligation of insiders to also disclose their interest in “related financial instruments”.  This includes a reporting requirement for grants under various stock-based compensation instruments, including phantom stock units, deferred share units (DSUs), restricted share awards (RSAs), performance share units (PSUs), stock appreciation rights (SARs) and similar instruments. 

Therefore, public companies and their insiders need to be aware of these requirements when adopting stock-based compensation instruments even when the instrument itself is cash settled and is not convertible into a security of the company.

Statutory Requirement

Pursuant to National Instrument 55-104 - Insider Reporting Requirements and Exemptions,

Section 3.2 – Initial Report – A reporting insider must file an insider report in respect of a reporting issuer within 10 days of becoming a reporting insider disclosing the reporting insider’s:

  1. beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer; and
  2. interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer.

Section 3.3 – Subsequent Report – A reporting insider must within five days of any of the following changes file an insider report in respect of a reporting issuer disclosing a change in the reporting insider’s:

  1. beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer; and
  2. interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer.

Definition of “Related Financial Instrument”

For these purposes, “related financial instrument” means:

  1. an instrument, agreement, security or exchange contract the value, market price or payment obligations of which are derived from, referenced to or based on the value, market price or payment obligations of a security; or
  2. any other instrument, agreement, or understanding that affects, directly or indirectly, a person or company’s economic interest in a security or an exchange contract.

Stock-Based Compensation Instruments

As stated in the Companion Policy to National Instrument 55-104 - Insider Reporting Requirements and Exemptions, to the extent the following derivative instruments do not, as a matter of law, constitute securities, they will generally be related financial instruments:

  • a forward contract, futures contract, stock purchase contract or similar contract involving securities of the insider’s reporting issuer;
  • options issued by an issuer other than the insider’s reporting issuer;
  • stock-based compensation instruments, including phantom stock units, deferred share units (DSUs), restricted share awards (RSAs), performance share units (PSUs), stock appreciation rights (SARs) and similar instruments; and
  • a debt instrument or evidence of deposit issued by a bank or other financial institution for which part or all of the amount payable is determined by reference to the price, value or level of a security of the insider’s reporting issuer (a linked note).

Conclusion

As stated above, public companies and their insiders need to be aware of these requirements when adopting stock-based compensation instruments even when the instrument itself is cash settled and is not convertible into a security of the company.

Invitation for Discussion:

If you would like to discuss insider reporting requirements, share-based compensation plans or any business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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