Law 463 Securities Regulation
see bcsc.bc.ca before exam
In class notes:
9/18
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Canada is one of few modern nations to have non-federal securities regulation
Through time, regulation has evolved as a provincial domain.
R v W. Mackenzie Securities Inc 1966 Man CA established that if you trade in a
province, you should be registered in that province. Customer’s province has
jurisdiction.
Multiple Access v McCutcheon Provincial legislation is allowed to stand where it
doesn’t contradict Federal legislation.
Various proposals for regulatory reform:
Wise persons committee:
- proposal for a single regulator/single regulatory act
- Canada is perceived internationally as a country that is weak on enforcement of
regulatory standards, this proposal is meant to change that.
- problem: regulators are now self-funded, what if they couldn’t afford to be under
the new proposal?
- bonus: it would eliminate the inefficiency of 10 offices doing the same thing in
ten different provinces.
CSA
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An umbrella group to which all provincial regulators belong, develop policy
together
Uniform Securities Legislation Project: They came up with a platform legislation
that incorporates stuff that everyone agrees on. This is still just a proposal.
4 areas that push the envelope:
o The power of a regulator to delegate decision making abilities to another
o Streamlined multijurisdictional registration
o Civil liability for 2ndary market participants
o Streamlined Act.
Passport system
- Company that registers only needs to register in one jurisdiction the “primary
regulator” then that company can go to “host regulators” who accept the
registration in the other province.
- ON doesn’t like this proposal because the majority of trading is in ON.
- Enforcement is an issue: primary/host/both  who gets involved?
- In May, BC changed its regulatory act to make the passport system closer to real
o language closer to the acts of other provinces
o Power to delegate authority to other regulators
- This seems like the most popular system except for ON’s reluctance
9/20
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Each province has broad statutes allowing the right to regulators to do most of
their own policymaking
Some of these policies are then challenged
Ainsley Financial v Ontario: OSC’s right to regulate penny stocks was
successfully challenged, the problem is that the legislature took too long to
regulate it themselves.
Pezim Defined the role of commissioners, said they have no law making authority
As a result of these two cases, the govt started a notice-comment type of system.
They let regulators give notice of their proposed reforms and then the govt has 60
days to comment if they don’t like what they see.
Most rules are now NIs or MIs
A companion policy statement aids with the interpretation of most instruments
BCSC able to give blanket orders, which differ from regular rules b/c there is no
notice-comment period. If something arises several times with various
companies, BCSC develops a policy for each single instance of that particular
thing.
Investment Dealers Association:
o National association
o Aims to protect investors
o Regulates the actions of dealers
o provides industry education
o Reprimands, fines, suspension and expulsion are all enforcement methods
o No transparency to their investigations, people have problems with this,
especially since Investment dealers fund them.
Mutual Fund Dealers Association
o National, self regulatory
o regulates members
o Aims to protect investors
o Standards for members are high, reviews occur and sometimes even
investigations
o Investor protection fund (for if your dealer screws you).
Market Regulation Services Inc.  regulator owned by TSX is this fair?
9/25
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FOFI must contain a cautionary note that its not a crystal ball in order to be free
of liability
Can’t distribute a security without a prospectus
9/27
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Waiting period: between receipt for preliminary prospectus and receipt for final
prospectus, there is a chance to vet your prospectus (meaning a chance to check it
out and make any necessary comments etc.)
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Waiting period allows the public a chance to reflect
Ontario has a risk-based review:
o basic review  accounts for regular stuff like prospectus
o detailed review  Basic plus some accounting stuff etc
o Issue oriented review  Search for a specific issue
10/2
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Common law stance: innocent misrepresentation leads to rescission but not
damages
Anyone signing a prospectus and anyone quoted in it are liable for misreps.
Pearson v Boliden BCCA 2002 reviewed concept of lex loci delicti which holds
that the laws of the place where the wrong occurred are the laws that apply. It
was determined that this principle doesn’t apply to securities regulation.
Secondary market purchasers were out of luck, b/c s. 131 of BCSA was
interpreted to mean they had nothing to do with representations made in the
prospectus
Interestingly, OSA part 23.1 allows secondary market purchasers to sue
o Also specifies that there are three new causes of action for disclosure
violations:
 misrepresentation in public documents
 misrepresentation in public statements by a person with
real/apparent knowledge
 Timely disclosure
o You can sue
 The issuer
 Officers
 Directors
 Influential persons (ie people with 20% + of shares)
 Experts
 Spokespersons
Core documents (ie prospectus etc) subject to stricter liability than other
documents which are not as fundamental to the securities market
Must convince a court that the case has a reasonable chance of success before
they will allow it. Loser pays costs. Liability is proportional
10/4
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Enron scandal: they created shell companies to whom they sold assets, then it
looked like the shell had debt, but Enron had profit
Worldcom tallied regular expenses like paperclips as assets, their asset
overstatement was as high as $11b.
Channel stuffing: A practice where manufacturers force retailers to buy stuff
from them at the end of the month in order to accentuate monthly profit
statements. Problem is, the stuff can be returned after the quarter, its not really a
profit at that point.
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Continuous disclosure requirements help build a case against such fraud.
A public company with continuous disclosure obligations is called a reporting
issuer.Canadian Accounting Standards Board sets GAAP, GAAS, GAAT etc.
International Financial Reporting Standards IFRS are set by the IASB. Most of
the world is gravitating toward these practices.
MD&A is a plain language, assailable document that’s supposed to give you the
goods without a lot of impenetrability.
Annual report  promotional document, no required info. Annual Information
Form  Required form, involves negative info etc.
Re Pacific Papers
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This was a company that needed 60% of voting shares in order to accomplish a
proposal. They solicited 60%, but some dude with a large interest wasn’t
consulted, he rose a stink.
The court said you can’t inform some but not others. PP got away with it,
however, since the proxy voters can change their minds at any time. Thus, the
large interest guy had every opportunity to sway the voters back.
Re Cambior
Ratio: Can’t advertise in waiting period in order to further a trade. You can tell
everyone to look at your preliminary prospectus though. Orally pitching your idea is
okay too, but not advertising in papers, TV, radio etc.
Adverse selection  Two similar companies, one’s more expensive, they seem similar
to an untrained eye, so the untrained eye buys the cheaper stock. Others follow and
suddenly, the crappy company is worth more, and the good one worth less. In order to
deal with this effect, regulators require disclosure of various info to the public.
Arbitrage  All investors aren’t rational, but the ones who know what they’re doing
should keep the market on track
Belief Bias  A predisposition to believing something makes you prone to noticing
examples of it, while ignoring or playing down counterexamples
Call option  you pay money, to guarantee you can buy a specific number of shares at a
certain price on a certain day. (get this if you think the market rate will be more than
your deal rate on that day)
Derivative security  gives you value derived from an index like a commodity or an
exchange’s value
Efficient Market Theory  3 forms:
1. Weak form: no pattern to stock market
2. Semi-strong form: Market reacts instantly to public info
3. Strong form: Market reacts instantly to public and private info
Endowment effect  People tend to slightly overestimate the value of their possessions,
thus hold on to them/sell them for a slightly high price, thus all stock prices are slightly
elevated
Fundamental analysis  look at returns and risks
[contrast with Technical Analysis  analysis of patterns in trading etc]
Fundamental vs. Informational efficiency  market reactions to new info not always
indicative of real value
House money effect  Feeling like you’re up, so it doesn’t matter as much if you lose it
IOSCO  International Organization of Securities Commisioners. Trying to harmonize
regulation internationally. Not binding, and thus far not too successful.
Income Trust  A trust holding income producing assets, there are unit holders who
benefit from the income in monthly or quarterly payments. The problem is if the
companies go bankrupt, you’re not a shareholder and thus you can’t get any piece of their
assets.
Primary market
1. bought deal
- shares issued to an underwriter who resells the shares to investors
- This helps avoid market price fluctuations during the period when the prospectus
is being prepared.
2. Direct issue
- No underwriter, issuer sells directly
Agency agreement:
- shares not sold to UW
- UW promises to try to sell
Standby UW
- UW buys a chunk, tries to be an agent for the rest
Best efforts underwriting
- In this scenario, the underwriter agrees to act as an agent for the security issuer
without actually buying the securities.
Syndicated underwriting
- Really big issue, thus lots of risk, UW solicits other UWs to share risk
Over the counter trading:
- when securities don’t meet standards of a SE, other exchanges exist that don’t
require standards, they just trade in securities while making no promises about
them
Margin trading:
- brokers loan creditworthy investors part of the price of a purchase. They are
usually limited as to what %age they can lend.
Short selling:
- promising shares at a specific price even though you don’t own the shares yet. Then
you’ve gotta find them. If price drops, you make $, if price goes up you make $.
Representative bias  People tend to see the most recent action as their overall trend, ie
a lucky month makes them forget 5 years of bad luck
Secondary market
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Stock exchanges etc are secondary markets.
Rules emerged to govern trading at markets in order to garner image. Image then
began to dictate prices, so exchanges would charge for a listing.
Open outcry exchange method
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I call my broker (called a client broker) and tell him to buy/sell something. He
calls the floor broker, who tells the floor trader, who goes to a specialist (some
guy who sits on the floor of the exchange and only deals in a few different stocks)
who either matches a buyer with a seller, or buys/sells himself from a company
account
You used to need to own the physical stock certificate, with your name on it.
Clearing houses changed that, by holding the stocks, and just keeping records of
transactions. They own the shares, and you pay them to become the ‘beneficial
owner’ so that we don’t need to reprint a certificate for each transaction.
This can cause problems with voting, etc. But there are ways around those
problems.
[Put option  Same as call option, but selling instead of buying]
Short form prospectus:
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For national companies that have lots of info out there already, if you just want to
change format or list something else, you don’t need to publish all that info again.
Snake bite effect  Once bitten twice shy, applies to investors
Systematic risk  hurts a group of stocks, for instance a spike in oil prices hurts airlines
[ contrasted with unsystematic risks  anomalies only affecting one company]
Global Research Analyst Settlement
Ratio: If an advisor has a bias toward or against a certain stock, that info must be posted
with that advisor’s recommendation for that stock. Because a bank can loan a business
money and also make buy/sell recommendations, they must show two independent
reports in addition to their own report.
YBM Magnex
Facts:
Issue:
Dicta: CEO and CFO must sign a prospectus saying that everything is true. UW only
has to say its true as far as he knows.
Ratio:
Sources of securities law:
Provincial securities acts
Lieutenant Governor
Self regulation (since 1994, under statutory authority to make rules)
- Theses rules are subject to government authority, but they have largely replaced
the LGs role in making regulations
- Some provinces also require each rule to be shown to a government guy who then
has a period during which to object, after which the rule stands.
- In BC, Minister’s consent is required to pass or repeal a rule.
National instruments
- agreed to by all members, but still not binding legally
Policy statements
- These indicate how the commissions (who issue the statements) interpret
legislation
- Securities Commissions in Ontario and Saskatchewan have been expressly given
the power to issue policy statements with a “policy” defined as
a written statement of the Commission of
(i) principles, standards, criteria or factors that relate to a decision or exercise of
discretion by the Commission or the Director under this Act, the regulations or the
rules;
(ii) the manner in which a provision of this Act, the regulations or the rules is
interpreted or applied by the Commission or the Director; or
(iii) the practices of the Commission or administrator in carrying out their
responsibilities under the Act.
Notices and communiqués:
- Securities boards distinguish between documents developing policy and
documents stating in certain language what their policy is.
Memoranda of Understanding (MOUs)
- When commissions try to clarify among themselves, their clarification documents
must be sent to the minister for approval.
Rulings by the commissions
- these can be appealed in court forming more rigid laws
Blanket orders
- When the SC makes an order that applies to situations that arise frequently, these
are called blanket orders, and are intended to pertain to this situation every time it
arises.
Bulletins and websites
Stock exchanges self regulation
- Stock exchanges make their own rules about conduct/threshold standards etc.
Other self regulators
- Investment Dealers Association of Canada must be joined in order to be an
investment dealer, they have rules.
- Provincial authority must recognize a stock exchange in order to allow it to do
business
Securities commissions
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Securities acts of most provinces create two-tiered securities commissions
o first tier: a panel
o Second tier: a commissioner
Pezim SCC 1992
Facts: Company finds gold, stocks soar. Find second tests not so promising. Insiders
sell, then disclosure, then the stocks plummet.
Analysis: Material change: a change in business, operations or capital that is reasonably
likely to affect market price. Mat fact: anything that could affect mkt price.
Ratio: Assess using the ‘market impact test’: Would a reasonable investor consider this
info important?
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10/16
Some people want the stricter US test, but most countries do the Canadian version
Best practices as a result of NP 51-201:
o Establish a corporate disclosure policy
o Disclose by press release
o Maintain website, don’t allow chatrooms etc.
o authorize spokespeople
o Adopt an IT policy, including blackout period.
Reporting issuer: One with continuous disclosure requirements. Non-reporting issuers
are sometimes exempt.
“need to know test”
“common bonds test”
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Ralston Purina: Company offers shares only to employees. Court says that the
employees still needed to know prospectus type info. Thus, it’s still a public sale.
Piepgrass: Guy says that previous relationship with clients waives his obligation
to disclose to them now. Court disagrees. This only works for family.
Ways to sell in a closed system:
o Within the closed system (ie to exempt purchasers)
o Issue a prospectus (thus unclosing the system)
o Resale rules
o Apply to Securities Commission for an exemption
Eron Mortgage: Pyramid scheme of investment with no actual property to invest
in.
Stephen Tsoi article:
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Proposes an overhaul of the regulatory regime where buyers, not sellers, are
regulated according to their relative levels of expertise
This would allow quick access to stocks without having to wait between
prospectuses, especially for the top bracket of investor.
Investing licences would be required
10/18
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Canadian Well Known Securities Issuers (C-WKSIs) Some want to see them
elevated to a different status from other issuers. They also suggest making the
term ‘accredited investor’ apply to those who know a lot and those who seek
professional advice.
Capital raising exemptions to prospectus requirement: rights offerings  where a
current owner is offered more shares (Commision must be alerted to sale so they
can satisfy themselves that there is no new material info). Also plans where
dividends are reinvested into more shares.
“sophisticated investors” are also exempt. This includes charities who have been
advised on investing and people worth $5m, or $1m liquid or claimed $200k net
per year for two straight years.
All these categories and those others in NI 45-106 have hold periods attached in
order to prevent backdoor underwriting.
During a takeover bid, the TOB circular gives enough info that no prosp req’d.
10/23
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Some argue that insider trading should be legal for a number of reasons:
o Gets info to market quicker
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o Just one more advantage of working at a firm
o Fiduciary duty = ample SH protection, no need for more
Its okay to engage in IT when the info is disclosed or not of material importance
After becoming an insider, you must file a report within ten days, and another
report within ten days of each transaction. Exemptions are possible.
4 factors to making a trade illegal:
o Special relationship with the reporting issuer
o Transaction
o With knowledge of material fact/change
o Information not generally disclosed
BCSA s 155 defines penal sanctions
Thinking reasonably that it was generally disclosed is the only defence.
Laura Benny Article (on call)
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Study of effects of IT laws in 33 countries
More stringent laws = more accurate stock prices
More liquidity in stock market = more widely dispersed ownership of shares
Absent IT laws, you would need large investors to monitor, this would
concentrate ownership
Stricter laws are the best regulation method
10/25
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11/1
Federal or Provincial Crown can prosecute
Lots of ‘facial compliance’ or ‘miming’ alluded to by critics
Some argue against extending criminal liability to corporations. They argue that
the entire purpose of a corporation is to put arm’s length between you and it.
Why punish shareholders who don’t know of the crime?
Defences to IT charges:
o BCSA 86 (4) Showing on a balance of prob that there was a reasonable
belief the info had been disclosed
o BCSA 86 (1) Defines the 4 elements of illegal insider trading (see my
presentation notes)
Fingold: trader claimed to believe the bad news would be okay, trading thus not
based on bad news. Court believed him
Harper: Harper was an insider at a mining company. He kept publishing positive
test results, but not negative ones. All the while he was selling his own shares.
Court said there was no reasonable excuse for these actions.
Royal Trustco: RT didn’t want Campo to take them over, tried to find other
companies to take them over. They solicited other companies and gave them lots
of material info. This was not in the normal course of business.
Doman v Benet: Dudes sell $5.9m based on insider info, then start moving on the
info. This is about as wrong as possible.
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Bust up fee/break fee: give one bidder financial guarantee in the event of their bid
failing, ie ‘if you don’t win with this bid, our company will pay you $1m.’ That
gives a disincentive to all but your favourite bidder.
Poison Pill: Needs SH approval
Tactics must be reasonable responses to threats.
Producers Pipeline
Facts: PP wanted to defeat a takeover bid from Saskoil. They offered all SHs but S the
ability to purchase 10 additional shares at ½ price. Also defined a permitted bid, but the
definition gave an outrageous standard. No SH approval.
Ratio: These were unreasonable defensive tactics. NP 62-202 defines the primary
objective of TOB rules as protection of SH rights in the target company. Secondary
objective: allowing open, even market for TOBs.
RE Shareholdings Inc and WIC Western International Communications Ltd et al
Ontario Court General Division 1998
Facts: Canwest and Shaw are trying to buy WIC. Shaw recently acquired a 49.96%
voting interest in WIC, CW is also a big SH, but not a voting SH. CW makes a $39 bid
that gets turned down. Shaw negotiates, gets a $43.50 bid and entitlement to a $30m
break fee and an irrevocable option to purchase radio assets (CW’s target) for $160m.
CW claims oppression. WIC class A voting shares aren’t traded, class B non-voting
shares are. Cathton holds 49.96% of Shaw’s 49.96% of class A shares. Canwest argued
that its takeover bid was in order to give it a voice that the new owners of the voting
shares couldn’t ignore. Canwest’s Class B shares carried ‘coat tail’ rights to transfer to
class A shares upon change in control of the company. WIC got a committee to review
CW offer, they recommended rejecting it. Same board recommends accepting Shaw’s
offer. WIC then offers $30m break fee and discount purchase of major radio assets to
Shaw (crown jewel).
Issue: CW claims oppression as SH and bidder, WIC counters that it maximized
purchase price, thus no oppression.
Analysis: Adopts claim from Revlon that, if a sale is contemplated, maximization of sale
price is the new obligation of the board. Break fees are acceptable when a) They induce
competitive bids, b) That bid represents a better value for SHs, and c) There is a
reasonable balance between its auction-promoting, and auction-ending potential. Asset
options are fine too, subject to similar provisos. WIC properly organized a committee to
assess the respective bids, this was the proper thing to do in order to minimize their
conflict of interest. The composition of that committee, was not appropriate, it included
members whose interests were at stake. Courts should defer to sec. com. on such issues,
due to an imbalance of expertise.
Ratio: Inappropriateness of committee was not enough to invalidate the board decisions
based on its recommendations. The minutes of the meeting indicate that the board duly
considered the pertinent questions. The decision can ultimately be said to have passed
the maximization of SH value test. Oppression remedy only available in capacity as SH,
not as bidder. Every part of the deal was reasonable, thus as an SH Canwest profited, and
has no remedy.
Royal Host v REIT
Issue: Timing, how long can you keep a poison pill effective?
Ratio: Reasonable time, up to SecCom. Can’t last forever.
11/15
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going private is often done by smaller companies that can’t afford disclosure fees
Can be effected by selling all assets to a new company owned by the managers.
Buying/selling at the same time puts management in a conflict of interests.
Seccom has ability to appoint an investigator if they feel such is in the public
interest. This investigator can go to offices + other business properties, demand
evidence
s. 155 of BCSA defines quasi-criminal offences (strict liability) including
prospectus, IT, TOB, Proxies
Crown still brings the charge, but Seccom investigators alert them.
Some worries that the crown can’t actually handle such complex prosecutions.
Cartaway SCC 2004 two guys get max sentences public interest invoked.
IMETS:
o Special branch of RCMP investigating CC securities violations
o Mandate: to protect capital markets
o Investigate big offences, 9 employees in Canada
o Still haven’t laid a single charge
o Investigations said to be very difficult
SEC New market security measures
o 3rd parties now monitor corporate compliance w securities law
o This is instead of levying huge fines, which shouldn’t be the only
compliance mechanism, this should address deeper issues than fines could
o Some say this approach intimidates too much
11/20
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Canadian regulation substantially tracks US regulation. This is an effort to make
us seem credible to American investors.
Ontario copied SOX, BC went more Euro in their approach.
America’s markets are the #1 in every way by a mile. NYSE $13.3 trillion
market cap, #2 is Tokyo at $4.6t, TSX is 1.5. NI 71-101allows American
companies to pass in Canada under their home regulation. Vice versa too.
SEC has 5 commissioners on staggered 4yr terms. Always 2 democrats, 2
republicans, the remaining guy is the same party as the President, who appoints
them.
SEC office of compliance and information exchange regulates the NYSE and the
NASD
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After SOX, state AGs lost a lot of power to investigate stuff. Elliot Spitzer found
some obscure Act, Donnely, to start investigating investment banks.
Federal Reserve  regulates fiscal policy, interest rates, this affects securities.
Sam on call, NYSE merger
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Many SEs thinking about merging recently, this includes LSE and NYSE
This could result in easier access to foreign markets, longer trading hours.
Securities Act ’33 deals with primary markets, Securities Exchange Act ’34 deals
with secondary markets.SEC very efficient govt agency
SEA s. 10 (b) anti fraud including across state lines. s. 13: requires accurate
bookkeeping. s. 17 Anti fraud in primary markets.
SOX established Public Company Accounting Oversight Board. Also s. 404
requires managers to make yearly reports on controls and auditors must report on
that report
Due diligence is now on the head management, this is controversial because they
don’t always know this stuff
Companies have spent billions of dollars trying to comply with SOX
Executive compensation disclosure:
o Options back-dating: Allowing employee options to be granted on days
with historically lower prices
o Investors complain they don’t get the same benefit
o This led to new SEC rules on director’s compensation including principlebased disclosure, with narrative and numerical components
SEC now requires a report within two days of backdating, so its not strictly
illegal.
11/22
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Guest speaker who co-authored NI 58-101
ccgg.ca: Canadian Coalition for Good Governance. They name corporate champs
of governance each year, last two winners CTC and Enbridge.
Dey report: Offered 14 tips for good governance in ’94. TSX adopted in ‘95
“5 years to the Dey report” 1999 – talked about how governance was now going.
2002 – Saucier report: Recommended TSX revise itself to align more with
international standards, before it could happen, SOX came into place in US.
See 58-108, 109, 110.
11/29
Anand reading:
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To restore investor confidence, we should empower SHs regarding relationships
with auditors
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SH right to appoint auditors is not currently meaningful since management does
it.
SHs should have a role in selection, retention and monitoring of auditors
Replacement should be mandatory after 5 years unless SHs want the auditor to
stay on.
More active SHs  greater auditor independence.
In the Wake of Enron
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Audit Committee: independent group of directors who relate with the auditors
This is a statutory creation provoked by Enron showing the old way didn’t work
The failure is attributable to small group psychology: it has been shown that small
groups exhibit a propensity for extreme decisions, thus there is a greater
likelihood of risk, not a great likelihood of abandoning a course of action
Jack Coffee article
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talks at first about Cutler Speech
o Cutler (SEC guy) says good corporate culture = talk the talk, walk the
walk (ie not just lip service to values or blind adherence to rules)
Create market deterrence by responding to a few specific problems highlighted by
Enron led to much bigger problems.
Auditing firms can fire consultants more easily than corps can fire auditors if
nobody wants to arouse suspicion.
The reaction to Enron affected all because of an isolated event.
The gatekeepers’ authority was undermined in Enron case, the reactions were too
strong.
Gillen
Ch. 1
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Commercial paper: Carries an obligation on part of issuer to pay face value on
maturity date, sometimes with interest, sometimes sold at a value lower than the
face value.
Bonds: secured interest in certain asset/assets of the corporation
Debentures: Unsecured debt.
Often bonds/debentures have a call feature, which allows the issuer to buy them
back after a certain date for a certain rate.
Preferred shares: first access to dividends, first access to assets on liquidation.
Sometimes have redemption/call provisions which allow the company to buy it
back at a fixed price. Sometimes retraction rights, the holder can demand a
certain amount and redeem the share.
Call option: right to buy. Put option: right to sell.
REITs: investments in real estate related stuff like construction, property etc.
derivative securities: Like stock index options etc.
Ch. 2
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Market microstructure: How the market works at the smallest level, ie how does
buyer connect to seller and is efficiency lost therein?
To analyse market efficiency, see whether the market is efficient in producing
information
o does a dollar’s worth of info equal a dollar’s worth of benefit to society?
How quickly does the market respond to information?
To what degree do prices reflect the underlying value of the securities?
Arbitrage: buying low in one market then immediately selling high in another.
Ch. 3
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blue sky regulation: initial forays into the world of regulating markets, it required
provincial registration based on meeting some standards of market-worthiness.
Kimber report: commissioned in 60s to look into insider trading and disclosure.
o recommended ongoing disclosure
o periodic financial statements
Closed system introduced after the Merger Report of 1970. This system allows
certain groups exemption from prospectus etc requirements.
Ch. 4
The long form for a prospectus requires, among other things, that the following kinds
of information be given:
(i)
(ii)
the number and types of securities offered under the prospectus;
the method of distribution including the price to the public (where the securities
are distributed for a fixed price), the underwriting discounts or commissions and
the proceeds to the issuer or selling security holder;
(iii)
the use of the proceeds of the issuance;
(iv)
the name and structure of the corporation or other form of business
organization;
(v)
a description of the issuer’s business and the development of the business over
the past three years;
(vi) attributes of the securities offered;
(vii) for directors (or persons occupying similar positions) and executive officer their
names, their occupations in the past five years, their ownership of securities of
the issuer or its subsidiaries, and their executive compensation;
(viii) indebtedness of directors or executive officers to the issuer or its subsidiaries or
indebtedness of directors or executive officers to other entities that is guaranteed
by the issuer or its subsidiaries;
(ix) information on principal shareholders (and on selling security holders if there
will be sales from the holdings of one or more existing security holders);
(x)
factors that make the purchase of the security a risk or speculation; and
(xi)
arrangements with underwriters.
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Inclusion of future oriented information is allowable, but with clear indications
that it is just that.
- projection: future oriented info that includes one or more hypotheses. Compare
with ‘forecast’: no hypotheses.
- Whether you need to file a prospectus depends on three questions:
(i) Does the transaction involve a “security”?
(ii) Does the transaction involve a “trade”?
(iii) Does the “trade” in the “security” constitute a “distribution”?
- if the answer to all three is “yes” then you need to file one
- Three definitions of security in the act:
o Typical. Bonds, debentures, stocks etc.
o Less typical: an interest in a mining venture or an educational savings plan
and other such things
o Catch all terms: intended to outsmart tricky lawyers/accountants, the
wording here is broad and extends to a wide range of stuff.
Ch. 6
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Disclosure doesn’t stop with the issuing of a prospectus, there are continuous
disclosure requirements.
advantages of disclosure:
o allows public evaluation of business performance
o allows for more effective use of voting
o Ensures that senior management is apprised of important facts
o facilitates proper behaviour
disadvantages
o allowing too much confidential info to slip to rivals
o costs associated with disclosure
o Too much info can bury the important info
o timeliness of disclosure, there is a time and place to speak of upcoming
deals without robbing yourself of the potential advantages you might gain
The following mostly applies to what most provincial acts call ‘reporting issuers’ who
deal with cases we’ll learn more about in ch. 7 called “closed system” cases.
Reporting issuers are required to provide the following types of material:
- annual financial statements, including balance sheets, income statements, retained
earnings statements, cash flow statements, and comparisons to last year’s figures.
These reports must be audited
- Interim financial statements, provided every three months from the end of the
financial year. These don’t need to be audited, but if they aren’t, a notice saying
so must be attached.
Furthermore
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reporting issuers must send letters to shareholders asking if they wish to receive a
copy of the reports
Statements are to be prepared according to GAAP as defined in the CICA
handbook. Exceptions to this rule can exist if the administrator sees fit.
Exemptions can be granted where the securities commission feels that such an
exemption would not be contrary to the public interest.
Most securities commissions have the ability to order exemptions where their
rules for statements conflict with the rules in the company’s home jurisdiction
Management discussions and analysis (MD&A)
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interim statements must be accompanied by the MD&A
MD& A includes information about issuer’s liquidity, success in the most recent
year potential viability of the reporting issuers earnings and cash flow in coming
years.
Annual information form
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must be filed by the reporting issuer, unless s/he is a venture issuer
addresses such things as products, services, specialized skill and knowledge,
competitive conditions, new products, intangible properties, cycles, economic
depedence on major contracts, patents, formulas, trade secrets or processes,
environmental processes, employees, foreign operations
focus is on material that would influence someone to buy or sell
Similar documents required by the SEC can suffice in cross-border cases
Proxy/Information circulars
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Form of proxy is a document that gives a person a right to vote for a shareholder
People can solicit proxies, concerns arose, thus we get proxy and information
circulars
Proxy circular:
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proxy solicitation must indicate if it’s from management, the right of the
shareholder to transfer voting rights or to keep them
They must clearly indicate how the proposed proxy will vote on all matters
You must send an information circular to everyone you solicit.
specific info required by the information circular:
o interest of persons soliciting proxies in the matters being voted on
o Names and holdings of persons with more than 10% ownership of corp.
o Info re people proposed as directors
o Details of executive compensation
o Info respecting compensation plans where issuers equities are authorized
for issuance
o indebtedness of directors/senior officers to the reporting issuer
o Interests of insiders in material transactions
o details of contracts that are largely performed by people other than
executive officers.
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Executive compensation disclosure in the proxy circular must disclose the salaries
and benefits of various top officers of the company
If fewer than 15 shareholders are solicited, the circular isn’t required
If the company is complying with such regulations in its own jurisdiction, it is not
required to do these things
Actual owners are required to forward materials re voting to beneficial owners
Beneficial owners might solicit actual owners to vote for them, but this is
obviously outside of the realm of actions requiring circulars
Some discretionary exemptions
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some conflicts may arise between jurisdictions, in which case the commission
may exempt a company from these rules.
Other adequate justifications are discretionary
Business acquisition reports
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BARs required by NI 51-102
Within 75 days of acquisition, the business must report on it.
Significant acquisition defined as
o Worth 20% of the acquiring issuer
o Investments in and advances to acquiree exceed 20%
o Income from acquiree exceeds 20% of income
Insider reports
- Insider trading must be reported, insiders: directors or influential people with
more than 10% of the company
timely disclosure
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You must report material changes
o By press release ASAP
o By filing a report ASAP (no longer than 10 days)
Majority of BCCA in Pezim decided material facts don’t require reporting, only
material change.
SCC agreed, but pointed out that securities regulators should be given broad
discretion in determining what is/isn’t material change.
Materiality is determined by the effect on price. This is affected by effect of
improved pricing, benefits vs. cost of disclosure.
A confidential report is possible. The issuer must write a report marked
confidential to the commission and every 10 days thereafter prepare a report
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saying why the info is still confidential. confidential reporting is for situations
where:
o The reporting issuer believes disclosure would be unduly detrimental
(harm of disclosure outweighs benefits, ie if info of imminent purchase
would boost the purchase price)
o The change involves a decision made by senior management that they feel
will likely be adopted, and where they don’t believe anyone is trading
based on that info.
Often, disclosure is made after the trading day, or trading is halted for some time
after disclosure, this ensures that the info is disseminated adequately before trades
can be made.
SEDAR
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SEDAR was set up by regulators to improve access to information. It allows
companies to file everything centrally and instantly
It is owned and operated by Canadian Depository for Securities Ltd.
Paper documents may be filed in some instances, esp. for confidential reports.
Sanctions
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Sanctions can be statutory or common law. Statutes exist to suspend trading,
penal sanctions or compliance orders
You must show that
o The issuer is a reporting issuer or someone with ties to the province
o A misrepresentation was made in their public document
o You bought/sold something based on the misrep during the period when it
still had not been corrected.
If it is not a core document, then you must also show that the defendant (unless
s/he was an expert) knew of the misrepresentation or was negligent in not
knowing
The non-core document test also applies to a public oral statement
The same test applies for timely disclosures, except that the fourth element now
applies to people who aren’t the issuer or an officer of the issuer
People responsible for failure to make timely disclosure: a. Issuer b. Directors and
officers c. Influential persons
Reliance is not a necessary element to prove.
Defences:
o due diligence
o plaintiff’s knowledge
o court consideration of a system to ensure continuous disclosure
o reliance on an expert’s report
o Took steps to avoid it  told the board to fix it, then told commission
within two days if the board didn’t fix it.
o Experts’ withdrawal of consent to use their opinion prior to document’s
publication
o Confidential disclosure: If it was made properly, excuses a lack of timely
disclosure
Damages and limits
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Issuer liable for a max of the greater between 5% market capitalization or $1m
Similar for experts and directors
Fraud on the market theory: you must prove to the court that its reasonable to
believe that you actually read/relied on the document in question. Some argue
that the semi-strong market theory applies, thus market prices reflect fraud and it
was therefore implicitly relied upon. Canadian courts have so far called bullshit
on that.
To the public
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Distribution under a prospectus is not required where the distribution is not a
‘primary distribution to the public.’
The words “to the public” have caused problems for courts. In SEC v Ralston
Purina, the US SC ruled that it didn’t need to mean ‘to the whole world.’ The
real question is whether or not the group in question would need to know the
information that the prospectus would provide.
R v Piepgrass, a leading Canadian case ruled that the people sold to were not
‘friends or associates of the accused.’ They said it was not ‘to the public.’
“closed system” developed to address the uncertainty of these words. In this
system, no unregulated trading is allowed. When companies gain special
exemption from the requirement to file a prospectus, subsequent trading is limited
to a few people, all of whom know the info a prospectus would have.
Trading outside of the closed market will only be possible if there is continuous
disclosure
NI 45-102 sets out resale restrictions. Resale of securities sold under exemption
is deemed a ‘distribution.’ Two situations where it isn’t:
First, a situation where:
o The issuer is a reporting issuer for the four months preceding the trade
(with continuous disclosure requirements)
o Four months have elapsed since the distribution under exemption
o Security certificate/ownership statement says when securities can/can’t be
traded
o Distribution is not a control distribution.
o No unusual effort has been made to prepare the market or create demand
for the securities.
o No extraordinary commission has been paid respecting the trade.
o If the seller is an insider or officer of the issuer, they have no grounds to
believe the issuer is in default of regulations.
In the other situation, it’s the same, but minus a, d, e, f, g from above.
Different rules apply to control persons making distributions
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A restricted period sometimes exists to prevent ‘backdoor underwriting.’ This
period is a period during which resale is prohibited.
SEC v Joiner
Ratio: Selling a right to prospecting is trading in securities.
Howey
Facts: People sold interests in orange groves, but not to actually own the oranges, rather
to profit from the vendor company’s harvesting thereof.
Dicta: The court set out a test for the identification of “investment contracts” that has
been applied in many subsequent U.S. decisions. The test, known as the “common
enterprise” test, requires:
(i) a contract, transaction or scheme whereby a person invests;
(ii)that the investment be in a common enterprise; and
(iii) that the person is led to expect profits solely from the efforts of a promoter or
third party.
Furthermore, the act embodies a flexible principle, to be applied at the court’s discretion,
for determining what does and doesn’t conform to its definitions.
State of Hawaii v. Hawaii Market Center Inc.
Facts: A store in which only members could shop. The capital for the store was raised by
the sale of founding memberships for which the members paid $320 or $820 for
merchandise (a sewing machine and/or cookware) worth $70 or $140. They earned
returns by selling other memberships and by commissions.
Issue: An investment contract?
Ratio: Yes, even though they could profit from their own actions (selling memberships)
Dicta: definition from Howey too narrow, new definition:
(i) the offeree furnish initial value;
(ii)a portion of the initial value is subjected to risks of the enterprise;
(iii) the furnishing of the initial value is induced by promises or representations
leading to a reasonable expectation or understanding that a benefit above initial
value will accrue; and
(iv) the offeree does not have the right to exercise practical and actual control over
the managerial decisions of the enterprise.
Pacific Coast Coin Exchange v. O.S.C. SCC
Facts: customers could buy bags of silver coins through Pacific Coast Coin Exchange.
For a commission, Pacific would buy coins and deliver them to customers who demanded
delivery of silver coins in specie. The price at which Pacific sold silver coins to its
customers was fixed by Pacific several times each day. The price was the market value
quoted by Pacific plus commissions and other charges. They allowed buying on margin
for 35% of cost of coins, but if the cost of silver fell, you’d have to pay the difference so
that your loan only represented 65% of the value of the silver.
Ratio: This is securities trading since profit depends on risks and, more specifically, the
health of the company.
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Trade, security and distribution: All with long explanations, but also open ended
definitions.
Must file a preliminary prospectus, then a final prospectus after a waiting period.
This is to give potential investors time to consider buying.
After primary prospectus, comes vetting process. This is where regulators
determine whether everything has been complied with by the company that’s
trying to list.
Then the regulator sends a letter with any concerns, then these concerns must be
addressed.
Then a waiting period in which there can be no selling and only limited forms of
advertising.
In NP 11-201 there are now four conditions under which such stuff can be
submitted electronically:
o Recipient must be notified that the document will be sent electronically
o Recipient should have easy access to the document.
o Deliverer must have evidence that the document was either delivered or
made available to the recipient
o Document received must be the same as the document delivered (it is the
responsibility of the deliverer to make sure all reasonable measures are
taken to make it so)
Because so many different regulators can cause overlap and other problems, NP
43-201 allows for one regulator to control the handling of the prospectus, it is
usually the one in the company’s home province.
NI 71-101 allows for prospectuses prepared in USA to apply here under certain
conditions
“Blue-Sky” rights to refuse any prospectus that wouldn’t be in the public interest
belong to most regulators in Canada. These rights are broad and sweeping.
Failure to deliver a prospectus can result in penal, administrative or civil sanctions
including rescission, reprimand, suspension of trading, fines and jail time.
Ontario has common law backing for claims of rescission etc for failure to do the
appropriate prospectus stuff
BC has no common law rule, but statutes void contracts where prospectus
regulations weren’t followed.
Chapter 5
What types of common law remedies were available for failure to disclose in a
prospectus?
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May be entitled to rescission even if misrepresentation is innocent
No right to damages b/c of innocent misrep.
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If the buyer can show that the representation formed part of the contract for sale
of the security or induced the sale, they may be able to win damages for breach of
contract.
If not part of the contract, suing in tort was an option. Derry v Peek was an
important precedent.
Derry v Peek UK 1889
Issue: What is the nature of liability in cases of misrepresentations in a prospectus?
Ratio: One must show that the misrepresentation was fraudulent. This requires
knowing, or the reasonable expectation of knowing that a representation you made would
be relied on by the buyer and that it was relied on by the buyer. Also, that you made it
knowing it was false or reckless as to whether it was false.
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Ontario securities act 1891 included a clause allowing the director to argue that he
had reasonable grounds to believe that the misrepresentation was true.
Hedley Byrne and Queen v Cognos are cited. the five requirements for negligent
misrepresentation are:
o Duty of representor to the representee
o Representation must have been untrue
o Representor must have been inaccurate in making the representation
o Representee reasonably relied on representation
o Reliance on it led to damages.
Greater skill in the representor makes liability more likely, advice given casually,
in a social situation makes liability less likely. These parameters are likely both
met in the case of prospectuses such that liability is more likely.
Statute re prospectuses goes beyond this. It lists people who owe a duty, it says it
applies to misstatements or omissions and it makes reliance, negligence and
causation defences, but not elements necessary for the plaintiff to prove. This
makes the plaintiff’s claim much easier.
BCSA 131: purchase of the security during the distribution period and a
misrepresentation in the prospectus together = rescission and possible damages
(subject to some defenses).
Prospectuses also can’t contain half-truths designed to mislead according to
Danier Leather.
People liable for misreps in a prospectus:
o issuer
o underwriters
o directors
o experts who consented to their opinions being cited in the prospectus
o CEO
o CFO
o anyone else who signed the thing
There are several ways to defend against your liability including:
o Purchasers knew of the misrepresentation when they bought the security
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o The person did not consent to the publication of the prospectus, or
withdrew their support within a reasonable time preceding the purchase.
o Statement not made by the defendant or defendant had no reason to
believe and did not believe that it was a misrepresentation
o Reasonable effort was taken to ensure that there was no misrepresentation
o Depreciation in value of the security was not caused by the misrep.
The issuer is subject to strict liability, not able to use defence of due diligence or
statements not having been made by them. a and e above are still available for
issuers.
If you use an authority’s comments in your prospectus, in the belief that you use
them properly, then you’re not on the hook if that’s a misrep.
If you want to use a due diligence defence, you’d better do some research before
publishing the prospectus.
Escott v Barchris USA
Facts: Barchris is a construction company, built bowling alleys, bowling market goes
bust and now they have lots of delinquent debt. The owners are illiterate immigrants who
don’t know what the hell the prospectus is/says. They issue a prospectus for debentures
that downplays how much they’re owed, plays up how much they have etc. Underwriters
argued that the whole thing was based on the authority of experts (the lawyers who wrote
it). This argument was thrown out by the judge. CFO and treasurer tried to say that they
didn’t know what a prospectus was, and they relied on advice of others in preparing it.
Ratio: Not understanding the prospectus is no excuse if you signed it. Treasurer and
CFO didn’t conduct a reasonable investigation, there were several omissions of which
they were/should have been aware. Pres and VP also liable b/c their positions couldn’t
excuse the lack of disclosure in the prospectus. Controller liable, b/c either he knew of
some facts or failed in his due diligence duty. Basically everyone who knew/ought to
have known about any of the inaccuracies was found liable. Underwriters liable for
failing to inspect claims of company.
Dicta: Liability of directors not based on whether or not they read/understand the
prospectus. Even a new director is liable because the purpose of the relevant statute was
to ensure full disclosure in order to protect investors. Same deal for underwriters, they
can’t just rely on what they were told by officers of the company.
Feit v Leasco USA
Facts: One company taking over another. They offer shares in their company in
exchange for shares in the takeover target. This means they need to file something
similar to a prospectus. This thing fails to disclose certain assets held by the target and
thus, may have led target shareholders to not realize the full value of their shares.
Ratio: Liable, no due diligence exercised
Dicta: “reasonable investigation” is a term that varies with expertise, level of
involvement and access to pertinent info. Inside directors may be held to higher
standards than outside directors.
Kerr v Danier Leather 1998 OCA
Facts: Danier issues an initial prospectus. Before final prospectus, sales info comes in
that potentially affects the info in original prospectus.
Issue: Should they have included the changes?
Ratio: No, the prospectus contains cautionary language saying that projections are not
guarantees. They made a business decision, many possible interpretations, as long as
theirs was reasonable it is okay. Also, they came close to projections despite the sales
blip, this can be used as evidence of reasonableness of projection.
Re YBM Magnex Ontario Securities Commission Report
Facts (abridged): YBM founding members were still largely in control of the company.
They were linked by authorities to Russian mafia and money laundering schemes. They
didn’t disclose this in a prospectus despite knowing about it.
Dicta: A CFO or a lawyer who is also a director might be held to a higher standard than
those who are not directors, because they have two reasons they should know what to put
in the prospectus. An underwriter can’t just rely on company officers, they must do their
own research wherever possible. The person YBM got to investigate for them had an
interest in the company, thus was not impartial, thus no due diligence was employed.
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Lawyers are to provide their clients with advice about due diligence, otherwise
those lawyers could be sued for negligence
Also should advise clients if their prospectus is deliberately misleading, may even
be required to blow the whistle if the client persists with the misinformation.
Lots of factors involved in a due diligence defence (See Gillen p. 142 for more
info.)
Lawyer should keep a file showing all steps taken toward ensuring due diligence.
There are other administrative sanctions possible including: cease trade orders,
removal of exemptions, order for correction of the misrepresentation or removal
of that person as director
Also, CC C-46 s. 400 provides for penal punishment for issuing false info in a
prospectus.
Reasons for exemptions:
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Several reasons exist to exempt companies from the requirement to produce a
prospectus etc. These include:
o Cost of producing prospectus outweighs its benefits
o Investors are sophisticated, or have common bonds with the issuer
o Prospectus might yield no new info
o Safety of securities renders the protection a prospectus affords useless
The main rationale is that, for whatever reason, the investors don’t need to know
the info that the prospectus would contain. Subcategories include:
o Sophisticated investors (who know what they need to know)
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o Large purchases, which imply expertise, or at least a need to consult an
expert (a need that was hopefully fulfilled).
o Wealthy investors: who are presumed to have experience managing a
portfolio, or access to investment planners. Also, more capable of
swallowing a loss.
o Common bonds with the owner: close to business, or family member/best
friend etc.
When no new information will realistically result from the production of a
syllabus, it is not required. This usually occurs because the potential recipient(s)
of the info received such info in other documents. Examples include:
o A rights offering  The purchaser already holds some of the security
being sold. An exemption is likely in such circumstances
o Stock dividends  reinvestment of dividends, it’s the same security.
o Takeover bids  Often a takeover is paid for by a new issue from the
prospective purchaser. In this case, a ‘takeover bid circular’ is required
for all the holders of security in the takeover target. This circular contains
info similar to that found in a prospectus. Similarly in an amalgamation,
shareholder approval is obtained by a proxy circular, thus a new
prospectus would be redundant and unnecessary.
o Reinvestment plan  When cash dividends are directed toward
reinvestment in the same security, it is not the directors choice to issue
these shares every time, so there is no concern that the director is trying to
sell because of overvaluation in the market.
Safe investments are another exempt form. In this case, the government issuing
the bonds has a tax base from which it can pay the debt, thus there is no fear of
default, and no need for a prospectus.
When there are few investors and/or little cash involved there may be an
exemption granted based on the relative impact of a lack of prospectus type info.
There is also an exemption in cases where the offering is not made ‘to the public’
but this term is ambiguous, it is unclear so far how we are to interpret it. One
subgroup of this is a group who has ‘common bonds’ with the issuer, meaning
close friends, family and directors and officers of the company.
Groups of wealthy investors can create an exemption since they are presumed to
be sophisticated or to be able to solicit the advice of a registered investment
planner. The company must still provide some disclosure documents in such
cases. No vetting of these documents takes place. These investors are often
‘angel-investors’ who make a living on venture capital deals. They have a
reputation for being very demanding re info re the company.
If the security is already regulated in another market, an exemption may be
granted on the basis that there are already protective measures in place.
Reliance on the efficient market can lead to an exemption, where the prospectus
refers to other documents instead of simply disclosing the facts found therein, this
is an acceptable amount of disclosure if there are enough sophisticated investors
following the security to ensure that these facts have been checked, and the
market price therefore reflects the true value of the stock.
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Some specific industries are sometimes promoted by granting them an exemption
from disclosure requirements. This includes charities and religious organizations.
For more info see NI 45-106
Re Donnini OCA 2005
Facts: Donnini had an interest in a securities company. In this role, he got insider info
and traded based on that info. He tried to conceal the identity of the person making the
trades (himself). Commission banned him from trading for 15 yrs (except personal
accounts) also banned him from being a director for the same period. Trial court reduced
from 15 to 4 and said the costs sheet was too vague, redirected the matter to the
commission. This is an appeal/cross-appeal from that decision.
Issue: Is he liable, what is an appropriate length of ban, what is an appropriate damages
amount?
Analysis: Donnini claims he didn’t have any solid facts to act on. He’s asking to
overturn a mistake of fact, not one of law. He is denied by the OCA His volume of
trading and his motivation both = material fact. Caselaw establishes that courts
reviewing decisions of the commission should review them on the basis of
reasonableness. If the reasons given can somehow support the conclusion of the tribunal,
a court should not interfere. Great deal of deference to be given to the commission
because of the expertise they possess in such matters. Lower court failed to consider the
reasons given by the commission for its decision, instead used its own factors in
reversing the commission’s ruling. This is reversed by the OCA. Denying one’s own
liability is one’s own prerogative and should not put a greater punishment on that person.
Ratio: Liability is shown, 15 year ban is restored, being based on articulable and
reasonable considerations. Costs were not duly considered by the commission. The issue
of costs is referred back to the commission with instructions to disclose the relevant
documents to Donnini so that he can answer the calculations of costs.
Condon et al excerpt on Insider Trading
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Generally disclosed: an ambiguous term. NP 51-201 says any disclosure that is
calculated to reach the public effectively and, the public has had time to digest
said info.
No strict method for determining if dissemination is adequate, courts use many
different factors
Lewis v Fingold 1999 OSCourt
Facts: He sold with knowledge of material fact.
Ratio: A reasonable belief that the fact was not material is a valid defence
Royal Trustco Ltd. v Ontario Securities Commission 1983 Ont div. ct.
Ratio: Securities commission has a lot of deference from courts in determining
whether something was done in the ordinary course of business.
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Insider trading restrictions are tough to enforce and often too costly to be effective
Prosecutions are infrequent (less than one per year), lengthy (4 yrs avg.), and
disparate in damages (small thousands to multi millions)
Although easy to check, many insider trading rules are not followed in Ontario
(such as buyback rules). This implies that a lot of directors are not reporting their
insider trades too.
More trading by insiders occurs preceding disclosure of good news than at any
other time. This is highly suspicious
Authors recommend implementing more US-style laws, which they say are more
effective. For example, allow tipsters a portion of the fines levied against the
insiders they expose.
Info given to the OSC can easily be cross-referenced with info given to stock
exchanges. These bodies should consider a uniform reporting system
Also recommended: Disclosure should be at the same time as the trade, insiders
should not be allowed to trade after plans have been made to announce some
change/fact
Re Siddiqi BCSecCom 2005
Facts: Siddiqi in a special relationship with a company he was trading in. Previous
hearing found him guilty of insider trading. Executive director now recommends a
twelve year ban on S trading, directing etc plus some hefty fines.
Analysis: when making decisions, the commission reviews
the seriousness of respondent’s conduct,
the harm suffered by investors as a result of the respondent’s conduct,
the damage done to the integrity of the capital markets in British olumbia by the
respondent’s conduct,
the extent to which the respondent was enriched,
factors that mitigate the respondent’s conduct,
the respondent’s past conduct,
the risk to investors and the capital markets posed by the respondent’s continued
participation in the capital markets of British Columbia,
the respondent’s fitness to be a registrant or to bear the responsibilities associated with
being a director, officer or adviser to issuers,
the need to demonstrate the consequences of inappropriate conduct to those who enjoy
the benefits of access to the capital markets,
the need to deter those who participate in the capital markets from engaging in
inappropriate conduct, and
orders made by the Commission in similar circumstances in the past.
Ratio: In this case, he only manipulated one stock, not a habitual offender etc, thus his
penalty should be smaller than the worst offenders. After reviewing some more
egregious offenders, the court rules that 6 yrs is a plentiful ban.
Thomas Hazen Principles of Security Regulation [American]
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Two national exchanges: NYSE and National SE. 7 smaller ones incl. Cincinnati,
Philadelphia, Inter-mountain, Pacific, Midwest, Boston and the Chicago Board
Options exchange.
In 2000, SEC approved International SE, a fully electronic exchange.
Attempts are being made to unite national exchanges with over the counter ones.
So far unsuccessfully. The national exchanges’ prestige makes them unlikely to
go away, but the ability to buy extra-market shares in listed companies shows that
some movement toward consolidation is taking place.
Glass-Steagal Act of 1933, banks prohibited from dealing in securities other than
government bonds.
Most distributions will require registration of securities.
Commodities are regulated by the Commodity Futures Trading Commission
CFTC. Some overlap has caused disputes, but most things fall into one category.
SEC has broad rule-making abilities, issues 3 types of rules:
o Procedural: how to file documents, when the SEC office is open etc.
o Rules that fill in blanks left open to the SEC by statute, ie where a statute
says blah blah blah... as the SEC sees fit.
o Definitions of terms
SEC also forwards ‘releases’ to the media. Though not binding, they often
become the source for rules.
“No-action” rules  set forth in letters requiring an opinion about how to proceed
with a certain transaction the company/law firm has inquired about. The SEC
staff defines in these letters the way in which the company can act without
incurring penalties etc.
SEC has no power to force the injuring party to make restitution, however they
can make recommendations that the courts often follow.
Lots of uncertainty because the court may overrule what the SEC desires. 1978,
American panel of lawyers completed an 8 year project to produce a unified
securities code that would replace all other securities laws and introduce more
certainty to the field. It was not adopted by congress, but some of its provisions
have come into force in the SEC rules.
More recently, no action letters have been made available through several sources
including westlaw and quicklaw.
First securities laws in the US grew out of the 1933 SA, part of the new deal.
State ‘blue sky’ laws preceded the federal laws, focusing on disclosure of info and
qualification of securities.
1996 Securities Markets Improvement Act took away a lot of the state authority in
regulating securities. Gave it to Feds.
1933 act focused on disclosure, not qualifying criteria, the thought being that
anyone can invest as they see fit, but they do have to know the relevant facts.
Congress created SEC to oversee implementation of securities legislation
Additional sources of federal regulation:
o Public utility holding company act of 1935  regulates securities in large
public utilities
o Trust Indenture Act, 1939  regulates bond offerings as debt management
tools
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o Investment Company Act, 1940  Regulates mutual funds etc.
o Investment Advisers Act, 1940  Just what it sounds like.
o Securities Investor Protection Act, 1970  Addressed the then problem of
insolvent brokerages
The Sarbanes-Oxley Act, 2002 introduced reforms based on scandals like
Worldcom and Enron. These targeted corporate governance, accounting etc. It
also gave protection to corporate whistleblowers.
The 96 Improvement Act exempted lots of different securities from state laws.
SEC has four divisions:
o Enforcement  decides whther to fine, let be or refer to Justice
Department for prosecution
o Corporate finance  Checks all documents to ensure compliance with
regulations.
o Market Regulation  develops internal policies re markets.
o Investments management  oversees regulation of mutual fund investors
etc.
Also offices:
o General counsel  advises other branches on issues of law.
o Accountant  Generates policy on accounting practices.
SEC rulemaking is limited to the power granted by the statute.
Interpretive rulemaking, trying to capture what statutes mean, is often done. One
type of this is ‘safe harbour’ rulemaking  statements of what the SEC will
interpret as having complied with the law.
SEC investigates all potential violations of all acts it oversees.
They can go to court to bar directors from associating with companies
Securities activities of banks are now SEC’s jurisdiction, all other banking is
regulated by other authorities.
Gillen ch 11
Ways to effect takeover bids:
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Proxy contest: dissident shareholders attempt to align other shareholders with
them in order to vote in new management
Acquisition/merger
Purchase
Motivation for takeover bids:
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inefficient management
Synergy
Market power
Tax considerations
Undervaluation
Emperialism/managerialism
Looting: selling assets after a takeover, often at minority SH’s expense
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Hubris: A belief that the takeover will result in some gain. Some evidence
suggests that takeovers lose $ on average.
Reasons for regulation:
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Defending against ‘Saturday night specials.’  Bidder makes an offer on
Saturday night after the market is closed and says it is only good until Monday
morning a couple of hours after the market opens. This gives the target company
very little time to develop a defensive strategy.
Insufficient info  The offeror was often an agent for an unknown third party,
thus the offerees often didn’t know who was offering the money, for what purpose
etc. This was a problem for regulators.
Insufficient time to respond Such a short window of opportunity put undue
pressure on the offerees.
Lock up of tendered shares  Once shares were tendered under an offer, they
were not withdrawable. Thus if another bid came along and you already tendered,
you were screwed
Unequal consideration  If company A bids $12 per share, but only gets half the
shares they wanted, they might now bid $13 to get the other half. They would
still only pay $12 per share to the first half of people who signed on though.
Looting  The takeover might result in new management bullying minority
shareholders.
No strict rules on payment due dates etc.
Response to these problems:
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Takeover bid circular is require to be distributed to all holders in the relevant
province
This circular must include info such as the identity of the offeror, the nature of the
bid, the source of the payment, the method and due date of payment and other
relevant info.
A director’s circular follows within 10 days. This gives the offeree directors a
chance to respond and make their recommendations re the bid. Also, they must
indicate their direct interests in the offeror, and intentions regarding the bid.
Civil penalties for misreps in these docs similar to that for misrep in prospectuses
Minimum bid period of 21 days
No first come first served offers allowed. Ie: if the bid is for 750 shares and 1000
are offered, each shareholder is entitled to have ¾ of the shares they offered
purchased.
No lock up period  within the 21 days, offers can be withdrawn. A variation of
the bid extends this period by 10 days.
Bids must be extended to all holders of the securities sought.
Laws prevent forcing minority shareholders to sell at unfair rates after a takeover.
A formal valuation of the target by an independent evaluator is required in
circumstances where the offeror might otherwise take advantage of minority
shareholders. ie a going private transaction or an insider type of situation.
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Ontario Policy 9.1 goes further. In a going private trasaction, it requires a review
by an independent board and the consent of a majority of minority shareholders.
If the offer is less than the valuation price, approval must be by 2/3 of the
minority SHs
Bidders are restricted on how many shares they can buy during the bid period.
Also, they can’t sell shares they’ve acquired under the bid to a competing bidder.
When do the rules apply?
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A takeover bid is defined by the legislation as a bid in which 20% of voting shares
are sought.
Exceptions to the rules include: when an owner of 20% or more buys 5% or less
of the remaining shares in one year.
Purchase of one person’s control block is not subject to these rules, but any
premium of 15% or more over market rate is not allowed, unless made to all
holders of the same class of security. Any offer to 5 or fewer persons is not
subject to these rules unless the 15% contingency is met.
Exemptions also exist where there are very few holders of the securities in
question in the jurisdiction where the rules apply (<2% of SHs or <50 SHs in
province).
The offeror might try to avoid these regulations by buying futures. Legislation
combats this possibility by deeming the offeror to own any shares it has the right
to within 60 days of the date when their ownership of securities is being assessed.
Broad anti-avoidance clause holds that the rules apply to direct or indirect offers.
ie no holding company whose assets are the controlling block then I buy the
holding company... type of deals will be under the radar.
If you make private transactions within 90 days of your takeover bid, you’ve gotta
match the highest price paid in either transaction for the sellers in the other
transaction.
You can’t acquire any shares for 20 days after the bid in any way other than
means available to all SHs or for any terms other than the bid terms.
Early warning disclosure
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Any person acquiring 10% of shares must issue a press release.
They must do so again on each subsequent 2% acquistion. These rules allow
early warning of potential takeovers.
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Interested persons can apply to have takeover bid documents banned from
publication, or asking for any measures appropriate to any violation of these rules.
Takeover defences
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White knight  Seeking a company more desirable than the offeror
Issuing shares into friendly hands in quantities that will defeat the bid.
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Crown jewel defence  selling the assets the bidder seeks
White knight bust up fee  pledge to pay the white knight some exorbitant fee if
their bid fails. Thus if the other bidder gets the company, they get some massive
debt along with it.
Start litigation and seek an injunction until the action is resolved
Poison-pill shares  options for conversion into actual shares if a bidder obtains
some percentage of the company.
Poison-rights  Rights conferred as dividends, they provide that if a takeover
occurs, the target SHs now have rights to buy the new company’s shares at a
(usually) drastically low price. This is a disincentive to the offerors. These rights
are usually rescindable by the target, which encourages any bidders to negotiate
with them.
Fox in S-Ox, by Ron Davis.
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Adopting SOX in Canada doesn’t make sense because of market differences
between here and the US.
SOX reacted to major breakdowns in corporate disclosure and the monitoring of
directors.
Enron developed ‘prepay’ contracts, where they were paid up front for a delivery
that took years.
Also, they kept ‘asset light’ meaning they did not carry a lot of assets. Assets
they did have, they got investors in on, these investors were not on the books, so
Enron’s share prices didn’t accurately reflect risks/ liability.
Raptors: Special Purpose Entities created solely to deal with Enron. Their
purpose was to be invested in, then pay out a greater amount 6 months later. This
made it appear that Enron had receivables, when really all they had was indebted
assets. Since reporting didn’t count these debts as enron’s, it looked like $1b of
debt didn’t exist, when it actually did.
Investigation revealed the directors had tons of red flags along the way.
Several ‘gatekeepers’ failed such as the removal of a requirement that directors
keep options paid to them for 6 mos. This req had encouraged long term growth
instead of asset management to create short spikes in price. Also, the directors
encouraged aggressive accounting procedures aimed at maximizing their wealth.
The board didn’t fulfill its obligation to effectively monitor the actions of the
CEO/CFO. The independent board was to all appearances an exemplar model of
corporate security, with the interests of management not aligned with the interests
of the board, the board was likely to vote for SH interests.
The independece of directors as monitors has been criticized for years.
Disincentives to acting appropriately outnumber incentives.
o Incentives: Noblesse Oblige  desire to do good stuff as position
demands. Also, concerns about their professional reputation as directors.
o Counter incentives: Nominated by management, close to management,
directors not paid nearly enough for their obligations. Also, no evidence
of existence of market for directors or the level of info shared in that
market.
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Three main features of SOX: 1. switch from reliance on good faith to legislative
regulation for accounting practices. 2. Move to federal law as the new dominant
force in internal governance standards for corporations. 3. Continued reliance on
disclosure as the principal means for monitoring corporate actions.
Public Company Accounting Oversight Board now monitors accountants. You
can’t be an accountant for a public company if you aren’t registered with PCAOB.
Accountants were previously a self regulating group.
Auditors can’t get more than 5% of audit fees for non-audit purposes from the
auditee in a given financial year.
Now disclosure requirements extend to off-sheet entities
Corporate codes of conduct now expected for managers, or an explanation why
there isn’t one, if there isn’t one.
Large, controversial shift to regulation as opposed to free market control
differences between US and Canada
- Canada has far fewer companies so widely held that no one person/small group
has effective control of the company.
- TSX, more than ¾ of listed companies have 3 or fewer who control the corp.
- Canadian problem isn’t wide dispersal of SHs making effective monitoring hard,
a bigger problem is the possible subjugation of smaller SHs/SH groups to the will
of larger voting blocks.
- Canada regulates securities provincially
- Arguable that Canadian market is so different, that SOX just doesn’t apply here.
- Of top 100 Canadian companies, 45% hold significant chunks of another in the
top 100. Lots of sharing of board members too.
- Proponents of SOX-type legislation in Canada use three premises:
o Assuaging SH concerns about regulatory strength
o Maintaining a competitive level of stringency
o To combat inappropriate incentives
- Those opposed say the different structures among other factors offset these
concerns
- National security regulators requested opinions on 3 different NIs. 1 A
requirement for separate director and audit committee membership 2. the duty of
the audit committee to monitor the corporation and 3. Executive officer
certification of all financial statements.\
- OSC commissioned a committee to research these, the committee found that it
would be profitable to implement these changes
- BCSC disagreed, saying directors already liable for misreps in financial
statements. They noted that some big shot NYU prof dissed the OSC study.
- Problem with OSC evaluation is that it measured Extra Value Added (EVA)
instead of added fairness, which is the proper ambition of a securities regulator.
- People should see corporate law not only as a way to enhance efficiency in
contracts etc, but also a vehicle for the advancement of public policy goals.
- How to regulate illegitimate wealth transfers between SHs while retaining
controlling SH right to control?
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Will SOX north make Canada abandon its culture of compliance for a more
loophole-conscious rules based approach?
BC Securities Act
- new act received royal assent 5/13/04. It was supposed to:
- Streamline system without straining businesses
- create new remedies for investors who have been victims of misrepresentation
- Create a new code of conduct for dealers and advisers including dealing in
good faith and with the clients best interests in mind
- Continuous market access system: sometimes publishing stuff in newspapers
is okay, prospectuses aren’t always necessary
s. 15
- Places rules on what can/can’t be done with money received as a result of penalties
under the act
- Anything received under s. 155, 157 must only be spent on education of offenders or
members of the public about securities procedures etc.
- 15.1 When the commission gets $ under 155, 157 it must advertise this to the public.
The public then has 3 years to make a claim to this money.
s. 22-3
- Exchanges must be recognized by the commission. Director has the power to review
self regulatory organizations.
s. 63, 83
- Prospectus must include a statement that the waiting period purchaser can rescind
purchase during cooling off period or because of misrepresentations.
s. 66-7
- Must disclose an adverse material change during waiting period by amending your
prospectus
s. 68
- Prospectus must include “certificate of issuer” that states "The foregoing constitutes
full, true and plain disclosure of all material facts relating to the securities offered by this
prospectus as required by the Securities Act and its regulations." signed by the CEO and
CFO and two other directors authorized to do so and every promoter of the issuer.
s. 76 You can apply for an exemption to the requirment for a prospectus, which the
commission will grant if they don’t feel its contrary to public interest to do so.
s. 85 A reporting issuer must, in accordance with the regulations,
(a) provide prescribed periodic disclosure about its business and affairs,
(b) provide disclosure of a material change, and
(c) provide other prescribed disclosure.
s. 120 – 130
- Mutual funds not allowed to pay any fee to someone they invest in unless that fee is as
per initial documents defining the Mutual fund’s rights etc. (124)
- Good fiath required of manager (125)
- managers can’t be interested in persons invested in unless disclosed (127)
- Can’t use info gleaned as manager of MF to trade on (IT type definitions) (128)
- Exceptions available if in public interest (130)
s. 131
- Rescision only available against people who misrepresented facts if you bought the
securities from them. This is based on the idea that if you don’t have a contract with a
person, its hard to get rescission.
- Defences available to an issuer: 1. The purchaser knew of the misrep and bought
anyway, 2. The misrep didn’t induce the purchase
- (9) says you’re not liable for more than your own portion of the issue.
s 132
- liable for misreps in bid circulars or standard disclosure documents
s. 133
- standard of reasonableness (defined as a defence in 131, 2) is that of a prudent person.
s. 135
- People have civil claims against directors who don’t deliver documents as required by
this act
s 138
- If s. 51(2) is not complied with, a person is entitled to rescission of contract as a result.
s. 141
- Director can order production of records pertaining to an order
s. 142
- Commission can order investigations pertinent to the act
s. 143
- Investigators under s 142, 147 can investigate the affairs, business relationships, assets,
conduct etc of the subject of the investigation.
- The commission can order an investigation of the business premises of the investigatee
- Supreme Court can order investigation of business premises etc pursuant to this
section. These orders can be made without notice and heard without public audience.
s. 144
- Investigators under s. 142,147 have the same power to compel testimony etc as the
supreme court. Failure of witnesses to comply with investigation, can therefore be
treated as contempt of court.
s. 151
- Commission can order an asset freeze on an investigatee
s. 152
- Commission can appoint a receiver for investigatee’s assets.
s. 153
- Commission can order an investigation into the financial affairs of a person/institution if
it considers that order to be in the public interest.
s. 155
- people not complying with measures of this act are liable to fine of up to $3m or 3yrs in
jail or both
- Investment funds guilty of an offence = fund managers also guilty.
s. 157
- If the commission feels a person is not complying/has not complied/ is contravening/
will contravene orders made under this act, the commission may apply to the supreme
court for
(a) an order that
(i) the person comply with or cease contravening the provision or decision, and
(ii) the directors and senior officers of the person cause the person to comply with or to
cease contravening the provision or decision;
(b) an order that the person pay to the commission one or both of the following:
(i) any money obtained by the person directly or indirectly as a result of the failure to
comply or the contravention;
(ii) the amount of any payments or losses avoided by the person directly or indirectly as
a result of the failure to comply or the contravention;
(c) an order setting aside a transaction relating to trading in securities or exchange
contracts;
(d) an order that a security or exchange contract be issued or cancelled;
(e) an order that a security or exchange contract be purchased, disposed of or exchanged;
(f) an order prohibiting the voting of a security or the exercise of a right attaching to a
security or exchange contract;
(g) an order appointing a director of the person that is the subject of the application;
(h) an order that the person repay a holder of a security or an exchange contract money
paid by the holder for the security or exchange contract;
(i) an order that the person compensate or make restitution to any other person;
(j) an order that the person pay general or punitive damages to any other person.
(2) On an application under subsection (1), the Supreme Court may make the order
applied for and any other order the court considers appropriate.
(3) An order may be made under this section even though a penalty has already been
imposed on that person in respect of the same non-compliance or contravention.
s. 161
- commission can order
(a) that a person comply with or cease contravening, and that the directors and senior
officers of the person cause the person to comply with or cease contravening,
(i) a provision of this Act or the regulations,
(ii) a decision, whether or not the decision has been filed under section 163, or
(iii) a bylaw, rule, or other regulatory instrument or policy or a direction, decision, order
or ruling made under a bylaw, rule or other regulatory instrument or policy of a self
regulatory body, exchange or quotation and trade reporting system, as the case may be,
that has been recognized by the commission under section 24;
(b) that
(i) all persons,
(ii) the person or persons named in the order, or
(iii) one or more classes of persons
cease trading in, or be prohibited from purchasing, any securities or exchange contracts, a
specified security or exchange contract or a specified class of securities or class of
exchange contracts;
(c) that any or all of the exemptions described in any of sections 44 to 47, 74, 75, 98
or 99 do not apply to a person;
(d) that a person
(i) resign any position that the person holds as a director or officer of an issuer,
(ii) is prohibited from becoming or acting as a director or officer of any issuer, or
(iii) is prohibited from engaging in investor relations activities;
(e) that a registrant, issuer or person engaged in investor relations activities
(i) is prohibited from disseminating to the public, or authorizing the dissemination to the
public, of any information or record of any kind that is described in the order,
(ii) is required to disseminate to the public, by the method described in the order, any
information or record relating to the affairs of the registrant or issuer that the
commission or the superintendent considers must be disseminated, or
(iii) is required to amend, in the manner specified in the order, any information or record
of any kind described in the order before disseminating the information or record to the
public or authorizing its dissemination to the public;
(f) that a registrant be reprimanded, that a person's registration be suspended, cancelled or
restricted or that conditions be imposed on a registrant.
(2) If the commission or the executive director considers that the length of time required
to hold a hearing under subsection (1), other than under subsection (1) (e) (ii) or (iii),
could be prejudicial to the public interest, the commission or the executive director may
make a temporary order, without a hearing, to have effect for not longer than 15 days
after the date the temporary order is made.
(3) If the commission or the executive director considers it necessary and in the public
interest, the commission or the executive director may, without a hearing, make an order
extending a temporary order until a hearing is held and a decision is rendered.
(4) The commission or the executive director, as the case may be, must send written
notice of every order made under this section to any person that is directly affected by
the order.
(5) If notice of a temporary order is sent under subsection (4), the notice must be
accompanied by a notice of hearing.
(6) The commission or the executive director may, after providing an opportunity to be
heard, make an order under subsection (1) in respect of a person if the person
(a) has been convicted of a criminal offence arising from a transaction, business or course
of conduct related to securities or exchange contracts,
(b) has been found by a court to have contravened a requirement of this Act or the
regulations, or
(c) has been found by a securities regulatory authority or court in another jurisdiction to
have contravened the laws of the jurisdiction respecting trading in securities or exchange
contracts.
s. 162
- Commission can order people to pay administrative penalties for contraventions of the
act
162.1
- Commission can order a debtor of a person who owes the commission to pay the debt
back to the commission directly instead of the person.
s. 163
- After making a decision, the commission can file the decision with the supreme court.
At that time, it becomes essentially the same as a judgment of the supreme court.
s. 169.1
- Commission has some pretty liberal rights to collection of information etc under this
act.
s. 184-6
- Gives the Securities Commission the power to make rules
INSTRUMENTS
Instruments are numbered thus: XX-YZZ
XX – area of law (ie 58 = corporate governance)
Y – Scope: Canada-wide, multilateral or provincial
ZZ – Number in the series.
Multilateral Instruments
MI 11-101
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creates passport system
In Ontario NP 43-201 allows you to choose whether or not to accept
endorsements of regulators from other provinces
MI 52-109
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CEO/CFO must say there are no misreps in financial forms of company
Criticized for vagueness lots of personal liability
MI 52-110
MI 52-509
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BC thing, saying it would require an independent person to conclude there was
independence on the board
Mainly adopted as a policy choice
52-110
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Audit committee not allowed compensation s. 1.5
- Global Exchange: A TSX-V company trying to launch a new Canadian Exchange
National Instruments
NI 23-101
- Deals largely with fraud
- Companion policy gives examples of fraud
- Your broker is obliged to find you the best possible price
NI 33-101
- Attempts to protect integrity of underwriting process where the underwriter has an
interest in the IPO. The instrument defines a hierarchy of situations from worst to
best:
o underwriter is the owner
o is related to the owner
o A connected issuer (a conflict other than share ownership)
- In the case of a. and b. you must get an independent underwriter in addition to the
person with the conflict
NI 45-102 (Resale Rules)
- Prospectus required unless some conditions are met:
o Seasoning period: Issuer is a reporting issuer and has been for four months
o Restricted/hold period
o Resale subject to similar restrictions (to prevent backdoor underwriting)
o Not a control distribution (distribution by a control person)
o No special effort to prepare market for purchase (because if only your info
is out there, it makes people hear your side)
o No special commission paid
o Disclosure obligations are met
NI 45-106
- Primary source of exemptions from disclosure requirements. Exempt things:
o No need to know the info
o No new info
o Safe investments (ie govt bonds etc)
o Small # of investors
- Capital raising exemptions:
o rights offerings  buying more of the same security. Securiities
regulators must be notified of such offerings and may object within 10
days of notification
o Reinvestment plans  Where the new shares are the same as the ones that
yielded the dividends
o Accredited investors  Exempt under s 2.3 of this Instrument. These
sales are subject to seasoning/hold periods. Four categories of accredited
investors:
1. Exempt institution Banks, trust companies, governments etc.
2. Registered dealers and advisers  certifications/experience
3. Designated acc. Invstrs  by application to regulators, who look at
size of investments, experience etc.
4. Portfolio managers/trust companies  same as #1, sophisticated.
5. Charities who receive investment advice from a registered adviser.
6. Rich people  $5m in assets/ $1m in liquid assets/ $200k net
income in each of last two years (300 if a couple). These people
are expected to be sophisticated/have adivisers.
7. If the owners of a ‘person’ are all accredited investors, then that
‘person’ is also deemed to be one.
o Private issuer, defined as one who:
1. isn’t a reporting issuer
2. Securities are subject to restrictions on transfer
3. Securities are beneficially owned by 50 or fewer people and,
4. it has distributed only to exempt purchasers as described in the
private issuer exemption provision. This includes directors,
spouses, grandma, close friend, close business associate, security
holder, majority voting shareholder, not the public
o Family, friends, business associates: No commission can be paid in this
type of transaction.
o Affiliates, ie one of the two is subsidiary of the other or both are
controlled by the same person.
o Offering memorandum: The purchaser can sign a risk acknowledgement
form and receive an OM and thus waive the right to a prospectus. This is
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only in some provinces, and usually requires the purchaser to be an
eligible investor. The OM still states it does not contain any misreps. No
vetting process for the OM
o Minimum amount investor. If $150k+ is paid in cash at the time of
purchase by a principal, the purchaser is assumed to have obtained all info
necessary to them.
There are also transaction exemptions for the following:
o Business combination and reorganization  circulars and similar
documents provide a lot of disclosure similar to a prospectus
o Asset acquisition  If assets traded for securities exceed $150k
o When securities are exchanged in order to settle debt
o Issuer acquisition or redemption  buying securities you have issued
o Takeover bids  If buyer issues its own securities in order to pay for the
target, no prospectus is required. This is because the takeover bid circular
is adequate
NI 52-108
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Created the Canadian Public Accountability Board, which oversees auditors
NI 52-109
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Certification rule, CEO/CFO now obliged to sign certification on statements etc.
This was OSC’s attempt to make something like SOX
NI 54-101
- Reports may just be sent to depositories (nominal, not beneficial owners). This
NI deals with that.
- Before votes, 30-60 days before, companies must send notice
- Must then request beneficial holders’ info, get it 20 days before the meeting
NI 58-101
NI 71-101
- Canada and America can choose to accept the securities regulators’ endorsements
from the other jurisdiction
National Policies
NP 41-201
- Deals with indirect offerings such as securities trusts
- Must disclose material debt in income trusts
- Arm’s length makes CEO/CFO not liable, this must be specified in prospectus
NP 43-201
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One regulator deals with handling prospectus, usually the regulator from home
province of company in question.
NP 51-201
- Timely diclosure is key, must be equally fast for good and bad news
- Can keep it under wraps for a reasonable period when instant disclosure would be
unduly bad for business
- Tip offs and insider info are prohibited. This applies to material facts and
material changes, whereas obligations usually only apply to material changes
- Tipping prohibitions extend to those in a special relationship with the issuer.
Definition of this relationship is very broad.
- Tips are allowed if they occur within the necessary course of business
- Credit rating agencies are usually okay to tell stuff that would otherwise be
tipping
- Most common and generally acceptable way of general disclosure: news release
- Posting on website alone doesn’t qualify as general disclosure
- If someone accidentally spills the beans, you must take all measures necessary to
rectify the situation, including a news release and a call to the stock exchange to
demand an immediate halt of trading pending a news release.
- materiality of changes is subjective. Companies are encouraged to monitor
reaction to news releases such that they may judge the market impact of private
info. Forecasted market impact determines materiality.
- Recommended to all companies to come up with a disclosure policy that ensures
consistency in disclosure
- Limit the people who are allowed to talk to media etc. Spokespeople should be
senior managers with awareness of disclosure rules
- You should adopt a no comment policy re rumors; you should not host a chat
room; keep the website up to date and accurate.
NP 62-202
- defines the primary objective of TOB rules as protection of SH rights in the target
company. Secondary objective: allowing open, even market for TOBs.