Distributing securities to Canadian First Nations and the need to modernize NI45-106
The management of mining projects in Canada must be aware of the unique rights of the Canadian Indigenous groups. These rights, which have their basis in the Canadian Constitution and in various treaties, are protected by a judicially constructed “duty to consult” whenever a government action of decision that may impact these rights is contemplated. The duty to consult may be triggered by any number of decisions in the mining context and might include the issuance of a permit or the approval of an environmental assessment, as examples. While the duty to consult is owed by the government, and not a proponent, it is well-established that the government may delegate various procedural aspects of its consultation obligations to a third party, such as a mining company. Moreover, most mining companies also realize the overall benefit of constructive engagements with Indigenous groups (over and above helping the government meet its duty to consult).
For these reasons, many operators have made the decision to consult early and often with the Indigenous Peoples on whose traditional lands they operate. The aim of these engagements is typically to gain a social license to operate in the project area and to have a measure of Indigenous support to help strengthen the resolve of government decision makers that are called to make permitting and other decisions that impact Indigenous rights. These discussions will sometimes result in commercial arrangements between an operator and an Indigenous group in the form of an exploration, cooperation, or impact benefit agreement (IBA) (or other similar such terms). Sometimes these agreements will provide Indigenous groups with equity participation rights to allow for the participation in the long-term upside of resource development in their traditional territory. These agreements are important, as they provide local Indigenous groups with short- and long-term economic benefits and a myriad of other operational guarantees. Determining whether to include equity participation will require careful consideration by mining companies and depend on the circumstances of each project and negotiation.
Canadian securities laws may make it difficult for mining companies and their Indigenous partners to fulfil the terms of their commercial agreements in some respects. In Canada, the issuance of securities must be preceded by the filing of a prospectus with applicable regulatory authorities, or the issuance must be permitted pursuant to an exemption from the prospectus rules. National Instrument 45-106 – Prospectus Exemptions (NI45-106) contains several exemptions, many of which will be familiar to mining companies, including the ubiquitous “accredited investor” and “family, friends, and business associates” exemptions which junior issuers frequently use in private placements. Unfortunately, NI45-106 does not provide a clear exemption that can easily be used to distribute securities to an Indigenous group. Some First Nations, by virtue of their financial resources will be “accredited investors;” however, the status of First Nations as an exempt entity remains questionable when those financial thresholds are not met. The First Nation’s governance structure often does not fit neatly into any category of accredited investor. In these other cases, companies and their legal counsel may struggle to find a way to distribute these securities in compliance with applicable securities laws.
Certain issuers have availed themselves of little used exemptions in NI45-106 to make one-time distributions. NI45-106 does have an exemption for “isolated distributions by issuer.” This exemption may work to allow for an isolated distribution; however, by its nature, it may not be suitable for agreements that require a series of issuances to a counterparty over a period of months or years. This exemption has been used by issuers in the past for one-off distributions, such as for the settlement of legal disputes. When relied upon, the use of this exemption has been scrutinized by securities regulators and may not be considered appropriate for distributions to First Nations.
Where exemptions have not been clearly available to an issuer, issuers have sought relief from securities regulators. For example, Benchmark Metals Inc. (Re: Benchmark Metals Inc., 2021 ABASC 109) obtained exemption order from their principal regulator, the Alberta Securities Commission (ASC), to allow them to distribute securities in this context. Benchmark entered an exploration, cooperation, and benefits agreement with the Tsay Keh Dene Nation, the Kwadacha Nation and the Takla Nation in connection with advancing their Lawyers Gold-Silver project in British Columbia. As part of that agreement, Benchmark agreed to issue to the First Nations warrants to purchase Benchmark common shares. In the Benchmark case, the company decided, that there was no exemption available to distribute share purchase warrants which had been negotiated for. Benchmark sought and obtained an exemption order from the ASC for the distribution of warrants to the affected First Nations. While exemption orders may provide an avenue for relief, as it did in the Benchmark instance, they can be costly (in terms of application and legal fees) and time consuming and moreover may not be readily available.
In the name of reconciliation and to permit Indigenous communities’ participation in the capital markets and in the financial upside associated with resource development on their traditional territory, the Canadian securities administrators must push the provinces and territories to modernize to NI45-106. More specifically, Indigenous governments and other community groups should be deemed “accredited investors” in the same way as other government entities such as municipalities, public boards, or commissions. To deem school boards as accredited while denying this status to Indigenous governments in certain cases is paternalistic. It makes it more difficult for these groups to fully participate as equity holders in the companies operating in their traditional territory. The Canadian Federal Government identified “creating prosperity with Indigenous Peoples,” “supporting Indigenous economic participation in major projects,” and “advancing economic reconciliation by unlocking the potential of First Nations lands” as major aims of the 2023 budget. The provinces and securities regulators need to do their part to help realize these goals too.
Andrew Spencer and Sasa Jarvis are partners, capital markets and securities, at McMillan LLP. Robin Junger is a partner, Indigenous law environment, at McMillan LLP. Cory Kent is an office management partner, Vancouver, B.C. and a partner, capital markets and securities, at McMillan LLP.