Securities Regulation 2005
Table of Contents
Introduction ....................................................................................................................................................1
Regulation ......................................................................................................................................................2
Provincial Regulation .....................................................................................................................................2
National v. Provincial Regulator ....................................................................................................................2
Foundational Concepts: ..................................................................................................................................8
Prospectus Process .......................................................................................................................................10
Exempt Market Transactions .......................................................................................................................14
Continuous Disclosure .................................................................................................................................18
Corporate Governance .................................................................................................................................20
Insider Trading .............................................................................................................................................21
Takeover Bids ..............................................................................................................................................25
Civil Liability ...............................................................................................................................................29
Enforcement .................................................................................................................................................33
Introduction
Prospectus (stages)
1. Preliminary (red herring)
a. Get receipt from regulator
2. Waiting period
a. Register securities
b. Start doing advertising
c. Do “road shows” to get interest in offering
d. Make revisions
e. Haven’t decided on price at this point
3. Final prospectus
4. Distribute
Then becomes a public company:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Reporting issuer
a. Obligation to file reports and documents
Need an auditor, lawyer
Must hold annual meetings
Deal w/ shareholders
May want to issue dividends
Need board of directors
Corporate governance
Management is now an insider  risk b/c must not disclose or sell shares based on info
Civil liability to public/ shareholders
If need more money can do secondary offering (Secondary Market)
- initial offering is Primary Market
- Secondary Market is b/n public
- Want deep secondary market and liquid
Registrants
- “gatekeepers”
-
accountants, lawyers, broker dealers, sales people
Regulation
Pros and Cons of national regulation:
Con to decentralized reg
- if bad actor in one prov can move to another prov
Pro
-
more tuned to specific market in prov (eg. tech, mining)
“multiple laboratories” to run experiments to see what works best
Provincial Regulation
R v. W. McKenzie
 does not matter where you are located, must register where you want to trade
F: securities broker out of Ont, investor from Man – buys securities – Ont charged w/ unlawfully trading in Man b/c not
registered in Man – accused argued Man act didn’t apply b/c fed jurisdiction (interprov trade)
H:
- Man sec Act not designed to regulate interprov trade
- P&S (intent test) is not to regulate outside prov
- Can’t trade in securities in Man unless registered in Man (prov/prov tension)
A:
-
increases power of provs to regulate what goes on in prov
doesn’t matter where business is, must register everywhere want to sell securities
Quebec v. OSC (Asbestos)
 regulator can reach outside its province to enforce a law that affects investors in their jurisdiction
- flip side of McKenzie case
F:
-
const valid Act
has effects outside region
-
can regulator reach outside jurisdiction
-
only law of Ont is the question in Ont
it would be wrong if Ont had to figure out these other effects when enacting law
Ont can enforce Act generally in its own prov
Ontario can regulate Quebec co in Ont jurisdiction if co acting in Ont capital markets
I:
H:
National v. Provincial Regulator
Wise Persons’ Committee Report
- most ambitious proposal
- no longer opt-in
- invites constitutional clash
- components
o new securities legislation at national level
o new CSC (administration) run federally
o find common threads b/n provs regulations
o regulated by single CSC w/ nine representatives from different regions
o amendments to leg done through majority of provs representatives
2
o
o
-
in Ottawa as opposed to Toronto
new policy committee
 designed to address various concerns
 accountability
 more responsive to regional concerns and fed gov’t representation concerns
various offices
o
concerns
o whether it will happen
o passport system
WPC
-
6 reasons why better than passport system (p. 73-74)
o policy development
o fees for jurisdictions centralized
o accountability b/c all regions components of system
o passport system not a significant improvement in regulation
Passport System
- described by Harris to have all advantages of WPC report
o single regulator contact
o local presence
o ease of implementation
- criticism
o doesn’t protect investors in place of trading (eg. case from last day)
Fortier (p. 75)
WPC
- whether Parliament has power to enact
o yes, fed trade and commerce
o must be of national concern
- want provs to agree
- if one or more provs don’t go along, do feds have power to use paramountcy
o Fortier says yes
- Multiple Access v. McCutcheon case is important
- Argument that feds and provs have joint jurisdiction
- McIntosh says will have another fed layer
How Securities Markets Structured
3 levels:
-
-
-
Global
o Global capital markets have generated competition for capital
o Countries compete for global capital
o Canada is currently only 3% global
 Must be protected
 Must have efficient procedures in place
o William Hess
 Technology has provided cheaper access to capital markets
 Erasing boundaries of regional and national capital markets
 Permitted 24/7 trading
National Scope
o P89-91 WPC benefits of national v. prov regulator
 Foreign investment – possibly should be national regulator
 Bond market mostly in cdn gov’t bonds
 Capital in Canada is very concentrated
 Small number of companies contain most capital
Regional Markets
o Poonam Puri
 LICR’s (local infrastructures for capital raising)
3



Alta for oil and gas, BC for micro-cap issuers, Ont for financial services
Localized markets but not good enough reason for prov regulations b/c stocks trade nationally
National v. centralized  84% of entrepreneurs and raising capital reside in same prov 
argument for centralized?
Primary Markets
- primary market transaction, called a distribution , takes effect where the issuer sells its own securities or sells
them through the services of an underwriter
- eg. IPO
- Prospectus – document containing comprehensive disclosure
- Follow-on – raising additional capital
Secondary Markets
- in which shares and other securities are traded after being issued by the issuer for the first time
Marketplace Operation
- an exchange, a quotation and trade reporting system (QTRS), or an alternative trading system (ATS)
- refer back to p19-21 Numbering System for Policy Reformulation Project
o so many  have a numbering system for these national instruments
Marketplace
Exchanges
QTRS
ATS (National Instrument 21-101)
National Instrument 21 – 101 talks about exchanges, QTRS and ATS
Exchanges
-
provides a listing function
must enter into agreement w/ exchange
guarantees a two sided market
“market makers” ensure always a buyer for a seller
make money on the spread (what they buy at and what they sell at)
can impose fines, pull you from market, etc
QTRS (quotation and trade reporting systems)
- provides price quotations and reports
- can set own rules
ATS (alternative trading system)
- can’t provide quotations
- can’t set own rules
SRO (self-regulating organizations)
- required to maintain records
- can make rules and regulations
- eg. exchanges
National instrument 23-101
- sets trading rules
- eg. closing times (hard closes)
- “double jeopardy”
o if being regulated by prov and exchange, must follow exchange
To monitor people following rules (Exchange or QTRS):
- do it yourself
- farm it out to a regulation services provider
- ATS must farm it out to a regulation services provider (the rules set out in 23-101 – ie. not their own rules)
Market regulation services inc.
4
-
regulation service provider
“RS”
Regulation Service Provider (RS)
- regulatory outsourcing
- not independent actors
- enforcing rules exchanges and QTRS’s are giving them
- owned by TSX and IDA
Securities Regulators
- regulating the whole marketplace
- delegate to exchanges, QTRS and ATS
Other SRO’s:
- IDA (investment dealers association)
- MFDA (mutual fund dealers association)
IOSCO (international order of securities commissions)
- like the united nations of securities regulators
CSA (Canadian Securities Administrators)
- forum for different regulators to meet to talk about things like national regulation
- coordinative
- deal w/ securities regulators
- don’t have any powers
TSX (main exchange in Canada)
- senior equities (big companies)
- went public in 2002 (spun off its RS)
TSX Venture
- until 2001 was the Canadian Venture Exchange
- microcap and small cap issuers
- head office in Calgary now (was in Vancouver)
Bourse (Quebec)
- canada’s oldest exchange
- deals in derivatives
- derivatives
o futures, options
o Options
 Deal that you will buy or sell a stock at a particular date and price
o Futures
 Binds person to a price
o Used to hedge investments (balancing risk)
CNQ (canadian trading a quotation system)
- became an exchange in 2004
- aimed at early stage companies
- have market makers
- all automatic based on limit orders
NASDAQ Canada
QTRS
-
there are no QTRS’s now
there was one but now an exchange (CNQ)
ATS
5
-
tons of them in the US
eg. E-trade, Ameritrade
in Canada  Instinet
p. 112-122
Securities Regulators
Pearson v. Boliden
- securities laws like consumer protection laws
- if you are BC resident you can sue under BC law and bring action in BC
- means nothing for harmonization and passport system (MI 11-101)
- prov regulator has ability to protect their own
Chart (p. 117)
Key to note:
- Commission on top and then staff
Commission
-
appointed
make policy decisions
ultimately responsible for all decisions regulators make
does registration for companies, brokers, dealers
can investigate (can supine documents, etc)
strong public interest power (ie. can wade in if public interest concern)
enforcement
rule-making power
Staff
-
lots of sections: enforcement, risk analysis, etc
do the work of the commission
Mutual Reliance Review System (MRRS)
- as of today (sept 19, 2005) augmented by MI 11-101
- different securities regulators have reached agreement to have principal regulator system
- similar to passport system
- biggest problem: multilateral, not national (ie. Ont is not participating b/c don’t want momentum for passport
system)
Distinction b/n regulation and punitive
- public interest power is regulatory and not penal
- protection of investors and efficiency of markets
- preventive in perspective and not punitive  forward looking
Asbestos v. OSC
- prior jurisprudence
- s. 127
o seriousness and severity of the sanction
o effect of that sanction on efficiency and public confidence
o reluctance to use open-ended powers
o powers were preventative and not remedial
- found it was not justified
- if connection to your jurisdiction is not so strong then shouldn’t use broad, sweeping powers
- what does it say about harmonization?
o Anti-harmonization
o If reason to not use sweeping powers is b/c somebody else might say something different
6
-
-
What does it say about investors? For minority shareholders?
o Not a good decision for them b/c they are not being protected by their own Act
o Said they were mislead
OSC – it is an attempt to put the brake on things
Re Cartaway
- insider trading fraud case
- Cartaway was a mining co – announced a huge fined in Boisy Bay – share price soared overnight – insiders
traded Cartaway shares made $5 million – find wasn’t real – share price went down to $1 from in the $20’s –
securities commission hit them w/ the biggest fine
- Reason: general deterrence, protecting securities market (general interest power)
- Issue: can court use general deterrence to impose fine?
- S. 162 Securities Act
o Power to impose penalties up to $100,000
o Now it is $250,000
- R: endorse Asbestos case
o Find general deterrence is appropriate and maybe even necessary for prevention
RS (Market Regulation Services Inc)
- owned jointly by TSX and IDA
- rules  UMIR (Universal Market Integrity Rules)
o developed primarily by TSX
o apply to exchanges and ATS’s
- follow insider trading, how the shares are trading, etc
- note: the securities commissions of the provs still look after prospectuses, etc
Clearing houses
- work w/ exchanges
- process trades
- validation – buyer has money in bank, etc
Financial professionals
- IDA, MFDA
CPAB
-
Critiques
-
regulate financial market professionals that make things run smoothly
gatekeepers
4 initiatives
o Uniform legislation
o WPC
o Passport system
o BC Securities Act
Uniform Legislation project
- run by Canadian securities regulators (CSA)
- goal: a model Act or set of rules that provs can implement themselves
- talking about harmonization and not substantial change (not from ground up)
- platform piece of legislation b/c then can change as fast as capital markets change
o also, platform leg’n lets off steam b/n different prov rules
o different provs can then act w/ their own prov rules but still agree w/ platform leg’n
- similar to Uniform Commercial Code (UCC) in the US
- like to see
o ability to delegate to another regulator
o streamline registration system
o civil liability for secondary market participants
7
WPC
-
will talk more about later
Passport System
- Sept 30, 2004 memorandum of understanding b/n provs except Ontario
- Newfoundland dropped out and new Brunswick joined
- MI 11-101
- Territories and PEI are participating but not signed on
- One stop shop for regulators  only file prospectuses w/ one prov regulator
- Still have to pay fees to every prov and follow each prov’s rules
- The host prov regulator is still responsible for enforcement
- Host
o Where may be doing business other than in primary jurisdiction
o Still pay fees to all host regulators (provs)
- Primary
o Use indicators (head office location, where incorporated, where primary business centered) to determine
who is primary regulator
- Requires some harmonization of prov laws
Note: (differ from passport system)
MRRU system worked for exemption for requirements
- could apply for exemptions
- narrower than Passport System (memorandum)
- Passport system is a mandatory reliance system (ie. once agreed, not supposed to opt out)
BC approach to securities law reform
- outcome based approach
- getting rid of detailed rules that have plugged up system
- streamlined  back to first principles
- idea: rolling rules to see what works
- substantive overhaul of securities regulation
- based on same fundamental principles
- reduce cost of compliance and increase investor protection
- five major changes
o continuous market access
 when you issue securities for the first time must file prospectus but then not again
o creating code of conduct for advisors to replace detailed rules of procedure
o firm only registration (brokers, dealers, advisors)
 cost savings for firm
 as of Aug, decided not to do this! (the book is not up to date)
o ???
o increased enforcement powers
 fines are higher – want to be able to fine $1,000,000
 broader powers to ban people from being directors, etc
- people are worried that this may lead to less investor protection and not more
- may create less certainty for investors
o don’t know what you can and can’t do
o this system has a lot of vague wording (eg. “inappropriate”, “inadequate”)
Foundational Concepts:
-
security
trade
distribution
investment K
***Note: refer to “Essentials” notes
8
Subject to disclosure requirements:
- Must be a security, must be a trade, must be a distribution and must be a reporting issuer
SEC v. Howey
- SEC wanted to stop Howey from selling land and marketing product to public
- Howey – owns land
- Howey-Hills – services
- Investor could buy piece of land and can also get second K to service land and sell fruit for profit although did not
have to get service K
- People invested in this in expectation of profit
- Co found customers through resort next door and through the mail
- Get under Fed umbrella by doing cross state activities like using the mail
- Issue: whether this whole sale and service K is considered an “investment K” which falls under securities
regulation, s. 2(1)
- Analysis:
o Use broad “purposive” approach to protect investor
o Look at blue sky laws in the states
o Def’n (p. 193): K, transaction or scheme whereby person invests money in common enterprise and is led
to expect profits solely from efforts of promoter or 3 rd party
o Court: doesn’t matter if shares are evidenced by formal certificates or not
o Court: it is more than just buying fee simple in land
o Court: relative that investors were out of state, not farmers and expecting profit
o Court: does not matter that not everybody bought whole package, co cannot offer the package (security)
- Important: flexible way to interpret regulations to meet the countless and variable schemes devised by those who
seek the use of the money of others on the promise of profits
- If you are going to solicit money from people you have obligations
- test for existence of investment K:
1. a K, transaction or scheme, whereby a person invests his money in a common enterprise and is led to
expect profits solely from the efforts of the promoter or a 3rd party
State of Hawaii v. Hawaii Market Center
- “risk capital” case
- state law case
- not bound by Howey case b/c not interpreting fed law (Howey was a state decision)
- combination b/n co-op and “pyramid” scheme
- retail store catering to members needed to raise money so recruited founder members (distributors and
supervisors)
- distributors must put in $320 for a sewing machine ($70 wholesale value)
- supervisors pay $820 for sewing machine and cookware set
- founder members get commissions and payments when others join
- Issue: is this an investment K?
- Court: Broaden def’n from Howey so that “solely” is not read so narrowly
- Court: Advocate a more purposive approach
- Look at:
o Statute – broad protection to investors
o Remedial purposes of Act – meant to be interpreted broadly b/c meant to fix a problem (if read narrowly
then undermine purposes)
o Economic realities of transactions – more creative people get the more important it is to have broad
def’n to catch them
- “investment K”  the placing of capital or laying out of money in a way intended to secure income or profit from
its employment in an enterprise
- K created whenever:
o Offeree furnishes intial value to offeror
o Portion of initial value is subject to risks of enterprise
o Initial value is induced by offeror’s promises of benefit
9
-
-
o Offeree does not receive right to exercise practical managerial control of enterprise
How much involvement can you have before you fall outside of def’n?
o P. 199 no power to influence the utilization of the accumulated capital nor any authority over decisions
which affect operation of enterprise
Fixed returns on money – doesn’t matter whether fixed
Pacific Coast Coin Exchange v. OSC
- offer bags of silver coins
- buy on margin or not
- pamphlet comes w/ investment saying how risky it is and that it is an “investment” saying price of silver will go
up and good hedge against inflation
- to get out of K must sell to co offering coins and they take a commission on both ends
- 85% decided to resell instead of getting bag of silver
- co did not have enough silver on hand for all investors – used commissions to invest (purchasing silver futures)
- co set base price based on market and had no control of resale price
- co didn’t issue prospectus, register, etc
- Laskin (dissent)
o Comes down to co did not have any control over resale price
o Only real risk customers run into is if co stays solvent  that on its own doesn’t make it an investment
K
o Ie. what is causing you to get money back is price of silver which co has no control over
- Majority
o Goes back to policy of protecting investors
o Policy to kill schemes where investors don’t know what they are buying
o Focuses on common enterprise aspect of def’n (ie. if co is going to be successful it is b/c of managerial
skills of enterprise)
- Differ b/n minority and majority
o How broadly you read statute
o Laskin judgement focusing on level of control
o Majority focusing on info b/n co and investor
o What matters more?
Jurisdictional Issues Relating to Trading (p. 213)
Re: World Stock Exchange (WSE)
- internet stock exchange case
- court: selling shares over the internet brings regulation of jurisdiction
- s. 2.2 says must have a (a) disclaimer and (b) reasonable precautions not to sell
- result: internet has not changed jurisdictional rules
Prospectus Process
***Note: do a flow chart!!!
ss. 61, 63, 64, 68, 69, 71
Prospectuses are still relevant in new BC Act
Rule – cannot sell securities w/o issuing prospectus (s. 61)
Can be civily liable for info in prospectus
- ie. can be sued (s. 131)
- deemed to have relied on info
Prospectus
-
legal document that businesses have to file
describes offer
10
-
gives description of co, whether any litigation going on w/ co, financials
Preliminary Prospectus  Waiting Period  Final Prospectus
p. 229 Purposes of prospectus
- to compel disclosure
- gives regulators a chance to scrutinize issue
- reduces info asymmetries faced by market participants and enhance transparency
MI 11-101
- only have to file one prospectus w/ principle regulator
- everybody that opted into passport system goes along w/ this
- doesn’t apply to Ont
o big disadvantage to smaller issuers in Ont
o
- everybody else still has to file in Ont ( 2 prospectuses must be filed)
National Policy 43-201
- if principal regulator is Ont then still have to file separate prospectuses
IPO
-
time sensitive
if miss “market window” then may just pull the plug on whole thing
s. 61 BCSA (Part 9 – Prospectus)
- must file and get a receipt from executive director
- executive director (s. 1)
o s. 8 the chief administrative officer of the commission
o highest bureaucratic position
o currently Brenda Leong
Part 4 (new Act)
- no distinction b/n preliminary and final prospectuses
5 steps to prospectus process:
- find underwriter
- preliminary prospectus and get receipt
- waiting period (revisions)
- final prospectus
- distribute securities
from course bin – preliminary prospectus (Lakeport IPO)
- near final form
- differ b/n prelim and final
o don’t know how much money going to raise in total
o how much will pay to underwriter
o mandatory warning at top of preliminary (red writing)
o don’t know when they will make first cash distribution to unit holders in prelim
s. 63(2) prelim prospectus must substantially comply w/ requirements of this Act
- rules (196+) tell you what prelim prosp doesn’t have to include
o price
o underwriter fee
o signed auditors report
s. 63 Contents of Prospectus
- must provide full, true and plain disclosure of material facts
- material facts:
o p.234
11
o
o
from Lakeport IPO – business plan, risk, operating plan, use of proceeds, MD&A (management
discussion and analysis)  IMPORTANT!
Certificates of underwriter and issuer (promoter)
s. 64 Executive director’s discretion
- executive director may impose additional filing requirements
- remember Cardaway and ???
- section that allows passport system
s. 68 Certificate of Issuer
- signed by CEO, CFO, 2 directors and promoter
- C-1 in Lakeport IPO
s. 69 Certificate of underwriter
- underwriter  p. 235 usually investment banks
o determine terms and price of offering
o offer credibility
o governance advice
o link b/n issuers and investors
o referred to as “gatekeepers” of securities law system
o private actors w/ public obligations
 eg. YBM Magnex International Inc (2003) p. 236
 must challenge the disclosure the issuer proposes to make to investing public
 underwriter has less info than issuer  must investigate
 underwriter must be adversarial, conduct “due diligence”
o
- C-2 of Lakeport IPO
Underwriters
- different types of agreements
o agency
o firm commitment
 “bought deal” for short form prospectuses
 underwriter makes firm commitment for a large block
 expedited process
 Kerr v. Danier Leather (2001)
 Investor has right of rescission against person bought from  in “bought deal” can’t
sue the company
 Can still sue for damages, just can’t get rescission
s. 131 Liability for misrepresentation in prospectus
s. 131(3) only right of recission against person who sold you securities
Market-Out and Disaster-Out Clauses
Market-Out
- underwriter can terminate agreement if it determines that securities cannot be marketed profitability
- Retrieve Resources v. Canaccord Capital (1994) p. 239
o Interpreted to refer specifically to market in specific shares to be placed
Disaster-out
- allows underwriter to terminate agreement if a significant event affects the issuer’s business or capital markets
NI 33-105 Conflicts of Interest
Issuer hires subsidiary of Bank that it owes money to
- if have non-independent underwriter must disclose and include an independent underwriter
- independent underwriter should not have less than 20% involvement and not less than conflicted underwriter
12
***Examples (p. 241): READ THIS!!!
Underwriter is the issuer
- eg. bank selling securities
- must have independent underwriter involved
Issuer is related
- eg. underwriter is influential security holder (has direct interest)
- must have independent underwriter involved
Connected issuer
- eg. purpose of IPO is to help pay back the bank and bank is the underwriter
- don’t need independent underwriter, just need to disclose
s. 71 Distribution of securities may be continued
- (1) if you have distributed before, can continue to distribute by filing new prospectus
- (2) if (1) is you, then don’t have to file preliminary prospectus (go straight to final)
- (3) prospectus can be in short form
Notice Re Cambior (1986) p. 250
- during waiting period they advertised security
- lawyers did not inform that they could not advertise
- wanted to issue cease trade order
- “advertisement”
o advertisements that specifically identify security
o advertising extolling the prospects of the company
Material Fact (p. 265)
- def’n s. 1
o a fact that significantly affects, or could reasonably be expected to significantly affect, the market price
or value of those securities
Material Change
- def’n s. 1
o a change in the business, operations, assets or ownership of the issuer that would reasonably be expected
to have a significant effect on the market price or value of any of the securities of the issuer
- Ont – means business, operations, assets of issuer (ie. no ownership)
- Ont – change or decision to implement the change (BC it is change and the decision to implement the change)
- S. 66 preliminary prospectus
o If adverse material change happens must file amendment, get receipt and send revision to everybody that
received first one
o (2) if material change can send to everyone that received first one
- S. 67 final prospectus
o Material change (ie. not just adverse) must send amendment around
o Can’t proceed w/ distribution until get receipt of amendment
o Obligation to amend lasts until the end of the distribution period
- Can use the “probability magnitude” test to determine if something is material
Note: New BC Act eliminates distinction b/n material fact and material change
- now called “material information”
- info relating to the business, operations or securities of an issuer that would reasonably be expected to
significantly affect the value or market price of the issuer or a security of the issuer
- continuous obligation
- material fact may not include “external” facts that could affect security but material info would include those
types of things
Materiality
- something that affects revenue by 10% or more
- something like “fraud” b/c it is fraud
13
YBM Magnex International (2003) p. 271
- YBM Magnex was being investigated for money laundering in US at same time they were doing an IPO in Ont
- Materiality – objective test of market impact
o Must look at context (ie. the whole picture)
- Normally BOD can rely on special committee b/c there was a conflict of interest
- Obligation to expose all material facts but there is a due diligence defence (ie. did what you could and took
reasonable steps)
- Here, no due diligence defence b/c didn’t follow-up on things they should have
Kerr v. Danier Leather
- May 6 final prospectus issued – May 20 end of IPO distribution – June 4 revised FOFI downward blaming
unseasonably warm weather – share price tumbled
- Suspicious: did info in revision just come about after IPO distribution finished
- Civil liability case (class action lawsuit by investors)
- Claiming misrepresentation (ie. must be a fact)
- Is a forecast a fact? Yes, it can also be a material fact
- P. 278 (para 65) tells what a forecast is
o Best judgement, have to reasonably believe in it, must be sound and reliable
- Forecast will be untrue if doesn’t reflect management’s best judgement, either (p. 280):
o If not prepared using reasonable care and skill
o Management doesn’t generally believe forecast
o Management’s belief in forecast is not reasonable
o Management is aware of facts that would seriously undermine forecast
Control person
- if hold more than 20% of voting rights
- when control person goes to sell shares that is a distribution (s. 61 kicks in)  must be a prospectus
Refusal to issue a receipt for a prospectus (p. 285)
- s. 64 executive director’s discretion
- s. 65 receipt for prospectus - director can refuse to issue receipt at all if prejudicial to public
Loki
-
no receipt b/c not in public interest
no resources, no…
Tricor Holdings
- no receipt b/c controller was a convicted felon
YBM Magnex
- OSC got anonymous tip about money laundering
o Said need accounting firm to sign-off on statements
- Stands for idea that public interest power doesn’t allow you to just rely on tips, hearsay, etc
- Must give reasonable opportunity to be heard
o Must balance off interest of company w/ public
Misrepresentation (right of recission)
- s. 131(3)
- can only get damages against issuer
New BC Act
- no general right to recission (rational: nobody was using it)
Exempt Market Transactions
Exemption from Prospectus Requirements
Primary Market
- issuer itself issuing securities
14
-
NI 45-106
Secondary Market
- somebody who has bought securities originally under exempt market tries to sell them
- problem: investors don’t know anything about issue
o want to prevent backdoor underwriting (ie. selling a big block and having them flipped w/o any
disclosure)
- NI 45-103
National instruments (NI)
- no binding effect
- like “international treaties”
o indicative of overall agreement but don’t have binding force
- to become binding must get into the rules
- cannot overrule any Securities Rules
Note: several of the rules have been repealed but they are still policy in BC b/c Nis
NI 45-106 (primary market)
NI 45-103 (secondary market)
Note: whenever trying to figure out a problem must look at NIs, rules and BCSA
SEC v. Ralston Purina
- made shares to “key employees” which were sold to any employee interested
- found that sales constituted a distribution to the public
- key question: whether the persons who are offered the security need to know the kind of the info that the
prospectus would provide
- “need to know” test
R v. Piepgrass
- farmers solicited capital which constituted a distribution to the public
- people sold to “were not in any sense friends or associates of the accused, or persons having common bonds of
interest or association”
- assumption: one is not likely to take advantage of friends, associates or persons who have common bonds of
interest or association
- “common bonds” test
Closed system
3 ways to resell exempt securities
1. use another exemption
2. create a prospectus
3. resale rules
Note: if you buy exempt shares they are harder to sell
“Need to know”
Sophisticated investors
- Exempt institutions
o Sophisticated investors such as banks, trust co’s, insurance co’s
o Prospectus would not really tell them anything they don’t know
o Rule from article (repealed) now covered in NI 45-106
o Must be purchasing as principal
 Can’t purchase for 3rd party b/c may not be sophisticated
- Exempt purchasers
o Sophisticated investors
o Must apply for exemption depending on factors
 Size of investment funds managed
15
-
-
-
-
-
 Expertise of staff
o Must be purchasing as principal
Large purchasers
o Available where the purchaser makes a large purchaser
o Policy: It is worthwhile for purchaser to incur cost and gather info/research
o Greater incentive to seek investment advice
o More likely to be sophisticated
o Issuer can give securities for assets
o Rule 129(2) was $100k but now $150k
Registered dealers
o Trade from one registered dealer to another registered dealer
o Must be acting as principal
o Reasoning is that dealers are sophisticated
Sale to underwriters
o Underwriters investigate issuer
o Sophisticated parties
o Bought deal
 Underwriter agrees to take chunk of shares
o Standby deal
 Underwriter agrees to purchase after issue
o Resale of securities by underwriters are considered a distribution and must follow “resale rules”
Consideration to dealers or underwriters
o Exemption for trade by issuer to registered dealer or underwriter as consideration for services performed
 Ie. can pay underwriter in shares instead of money
Other sophisticated investors
o Test of sophistication
 Based on person’s net worth and investment experience
o Rule has been repealed but now under NI 45-106
 Now have def’n “accredited investors”
 Covers exempt institutions
 Applies to sophisticated investors generally
 Pension funds, charities (as long as get investment advice), co’s w/ net assets over $5
million, high net worth individuals (assets greater than $1 million or make more than
$200k over last two years)
 Large purchaser was over $150k but now must be in cash
Common Bonds
- Incorporators and Promoters
o Have intimate knowledge of issuer
o Relationship w/ issuer which reduces need for protection
o Makes it possible for small businesses to get started w/o too much cost (ie. cost of prospectus)
- Control persons
o Person w/ large chunk of shares (>20% of voting rights of all outstanding shares)
o Exempt if trading b/n one another
o Rational: have access to info (“insiders”)
- Issuer’s Purchase or redemption of its own securities
o They have all the info
o ***discuss under resale!
- Friends and relatives
o Exemptions for family of senior officer or director
o Rational: close person will not be taken advantage of
o Important: No commissions or finders fees may be paid b/c that would encourage selling and possibly
taking advantage of people
o Limited number of people that can get exemption
o Rule 128 repealed but under NI 45-106
 Reintroduces provision for friends and relatives (except Ont and Sask)
 Must be purchasing as principal
 Trades to employees, senior officers, directors and consultants as long as trades are voluntary
 Can’t be “induced” by promises for further work
 BCSA s. 74(9)
16
No New Information
- stock dividend
o instead of giving out cash they give you more stock
- dividends/interest used to purchase publicly traded securities
o dividends get put back into co
o automatic deal of reinvesting
o rational: info already out there, nothing new, very small amounts (not much risk)
- Rights Offering
o Existing securities holder has right to purchase more stock
o Offering “more of the same”
o Subject to approval by regulator
 Reason: co trying to raise more cash, what is going on? Are there new developments, etc
 Issuer must give notice and tell them what they are going to do w/ money
- Exercise of Conversion – Exchange – Purchase rights
o About convertible securities (ie. convertible bond to a share)
o Rational: info already out there and easy way to raise cash
Info provided by documents other than prospectus
- amalgamations and reorganizations
o must file a circular
o don’t need a prospectus as well
- takeover bid
o must file takeover bid circular  don’t need to file prospectus as well
- stock exchange exemptions
o if already registered w/ exchange and doing all their filing requirements don’t need to file prospectus
o NI 45-106
 TSX-V exchange counts for this purpose (ie. exemption)
Facilitate financing by Small Issuers
- Private issuer (4 criteria to be):
o small issuer
o securities held by no more than 50 persons
o not distributed to public
o restrictions on transfer
- NI 45-106
o Offering memorandum exemption
o Means it applies to private placements (ie. not distributions to public)
o 2 conditions
 if making private placement to eligible investors (wealthy people)
 if somebody is investing for less than $10k
Regulated Under Another Regulatory Scheme (eg. mortgages under Mortgage Brokers Act)
Safe Investments
- eg. bonds, debentures, guaranteed investments by gov’ts, etc
- does NOT apply if bond, debenture, etc is subordinate to right of payment to deposits held by issuer
Promotion of Specific Investments, Social Activities
- Policy: cost of raising funds could deter socially desirable activities
- Important: no commissions can be paid
Protection Provided by Active Markets
Other Exemptions
Resale Rules (NOT ON EXAM)
-
the rules have all been repealed but now covered in NI 45-103
Conditions
o
Reporting issuer not in default of reporting obligations

Rational: info already available
17
o
o
-
Hold period

Rational: to give enough time to absorb particular security
No unusual sales practices

Rational: to discourage pressure tactics
NI 45-103
o
Hold period is 4 months
o
Now called “restricted period”
o
Added 4 month period for reporting issuer (ie. must be reporting issuer for 4 mos)

Called a “seasoning period”
o
Does not include a control person
o
An insider must have no reason to believe that issuer is on default

Eg. if you know documents are wrong or are going to be modified
Continuous Disclosure
Periodic Disclosure
- deals w/ regular intervals of statements, etc
- from SEDAR
- still worry that periodic disclosure is not enough to discourage unscrupulous co’s
- there is room to “massage” financial statements  should be able to exceed analysts expectations + one penny
o if can’t exceed expectations then there is a general worry that something is wrong
- Financial statements
o Interim
 Must include notice if no auditor report
 Ie. does not have to include auditors report but if not, then need notice saying that
 45 days to file afer quarter end (venture co’s get 60 days)
o Annual
 Must include a report from the auditor
 90 days to file after year end (venture co’s get 120 days)
o Must include income statement, balance sheet, statement of retained earnings, cash flow statement, notes
to financial statement
o Statements must be in keeping w/ GAAP (generally accepted accounting principles)
o Send request form to SHs in case they want documents (they could just look them up on SEDAR)
o Certifications (CEO, CFO), managers report, auditors report, etc
o Must be approved by BOD
- MD&A
o Management discussion and analysis
o Done in plain language w/ a little bit of salesmanship
o Important for retail investors
o Important for co’s that don’t have much of a track record
o Provides prospective and retrospective forecasts
o Talk about what kind of factors are influencing co
o Must mention “material” factors
 If there has been a change in co performance must explain change
 Management changes
 Lawsuits against co, regulatory actions
 Seeking regulatory approval
 Capital structure (how many shares outstanding, etc)
 Share prices
 Venture issuers have to include more detail
 How much spending on R&D, etc
o Annual MD&A board must approve whereas interim MD&A can be approved by auditors
- AIF
o Must be filed
o Have 90 days after year end (same as w/ financial statements)
o Info on corp governance including how there audit committee works
o Glossary of terms (meant to be very comprehensive)
o Covers financial statements, MD&A
o Discloses any oversight issues relating to audit committee (important!)
 Eg. co wanted to hire particular auditor but BOD did not – must disclose this type of stuff
o Must disclose fees paid to tax professionals
o NI 51-102
18
o
 Must disclose social, environmental, political risks
 Social and environmental policies co has adopted
 These things are material facts
Annual report (filed along w/ the AIF)  “Bonus” that may be included w/ AIF
 For retail investors (glossy)
 Not required to be filed
Timely Disclosure
- deals w/ material changes
- def’n of “material change” from last day
o change in business, capital, management
o NI 51-102 adopted Ont def’n and BC signed on to it
- “material changes” are important as opposed to “material facts”
o “material facts” are important in periodic disclosure
- “material fact” and “material change” have been collapsed into “material information” (in NEW BC Act)
- shouldn’t change to “material info”
o new civil liability provisions
o issue of when to disclose becomes problematic
o disclosure of material info could impose more burdens
o if there were gaps in disclosure, specific gaps could be filled w/ rules
- NI 51-102
o if there is going to be a material change, must file news release
o if they want to keep it confidential, then they have to request confidentiality every ten days
o if issuer has reason to believe there has been leakage, then co must file report (ie. can’t keep it
confidential)
BAR (Business Acquisition Report)
- used to disclose a material change
- materiality test
o 20% rule
o if you are the acquiring co and you are investing 20% of your worth into it then it is material
Pezim v. BC (Superintendent of Brokers)
- material fact
o any change that will reasonably affect market price
- material change
o similar but goes to business, operations, assets, ownership
- admin law point: courts don’t go in and interfere
- initially they thought they had gold, then found they hadn’t
o issued material change report when they found out they didn’t
- ALC withdrawal
o Involved in K dispute w/ ALC
o ALC owed co $4 million
o ALC said they didn’t
o Overnight, it looked like what was $4 million was now nothing more than just a K dispute
- Timing
o When does material change have to be disclosed
o As soon as practicable, or in any event w/in ten days
o When it comes to core results (ie. gold) then must be quick and before engage in securities transaction
YBM
- Probability/magnitude test
o determine probability of event happening
o if it does happen, what is the magnitude on the market
- Deloitte and Touche were getting freaked out b/c YBM was involved w/ organized crime
o It was looking like a huge fraud
- B/c deadline for financial statements was coming up and needed auditors to sign off on it was a huge problem
- If YBM missed deadline it would have a cease trade order
o It would be a big problem
o It was found to be probable  should have filed a material change report
19

Statutory was ten days so eighteen days is over
P. 388-390 good summary of harmonization and investor protection!
NI 51-102 w/ companion policy (CP) 51-201Continuous Disclosure Obligations
- to enhance transparency so investors have a good idea of what is going on
- enhances uniformity b/n provs
- co should have written disclosure policy, etc
Corporate Governance
Pacifica Papers case
- facts: merger transaction – PP was up for sale – Norske proposed to acquire – said: PP must get 60% of SHs to
support plan – PP had to solicit SHs to see if okay w/ Norske takeover – PP talked to 10 of its largest SH and got
support but didn’t get support from its largest SH – only after they got “lockups” from these SHs they did proxy
solicitation – had meeting – acquisition plan – largest SH opposed plan and process saying illegal to do lockups
first and solicitation second
- BCSC: SH must be given solicitation before lockup – didn’t negate transaction
- BCSC: can’t do lockup first  illegal – looks at CBCA and says about SH protection and not doing if send proxy
circular second – although, SHs could vote however they wanted at meeting so decision was valid
- CA: dismissed appeal – agreed that section was contravened but did not agree that have to send circular before –
proxies are always revocable
Certification of Disclosure
- people have different ideas about what is the best way
o about the insiders, outsiders (eg. lawyers, accountants, etc)
- “tone at the top”
o buzzword at SEC
o comes down to who your CEO and CFO is
 by conduct and what they say it affects the co all the way down
 if have CEO about corp governance then that is the best thing you can do to make sure co stays
w/in the lines
o make it known that CEO’s and CFO’s are responsible by having them sign
- MI 52-109
o Adopted by BC in 2005
o May soon be a National Instrument (instead of just Multinational Instrument)
o Requires CEO and CFO to certify that to the best of their knowledge the financial statements (annual
and interim) don’t contain any mistakes, untrue statements of material facts, fairly represent financial
position of co (prevents avoiding certain things that may mislead)
 Filed w/in 90 days
o Reinforces rule from Krips that fair representation is more than GAAP
 Must account for revenue in an appropriate way
 Must reasonably represent transaction
 In MD&A must include info to give complete picture of transaction
o Requires CEO and CFO to take proactive position
 Heavier onus on CEO and CFO to be involved in process as opposed to passing it off
 Two areas that they must have control over
 Disclosure
 Financial reporting
o Apply to income trusts as well (41-101???)
o Does not describe specific control procedures – just have to be “adequate”
Note:
MI instruments are instruments that all provs haven’t all signed on to – NI have all provs signed on
- although, some provs can opt out of certain sections
Krips v. Toucherosse (p. 413)
20
-
issue was whether D in signing report had actually complied w/ fairly representing financial statement in
accordance w/ GAAP (s. 212 of old BC Co Act) but were in accordance w/ GAAP (fairly represented?)
found: GAAP is a tool to make sure fairly representing but goal is to represent fairly  GAAP is not an end
to itself  ie. must fairly represent
people rely on what auditor says so “fancy footwork” is not okay
Audit Committees
- new rules are part of post-Enron
- audit committee is subsidiary of board (subsidiary of directors)
- responsible for oversight of financial reporting
- supposed to be independent and objective of management
o problem: have conflicts b/c supposed to be responsible to SHs but are friends and get paid as directors
o to fix: supposed to be “outside” directors
- approval all audit services by auditor
- establish procedures for dealing w/ complaints about accounting irregularities
o audit committee must deal w/ complaints
o allows people to come forward on financial issues and not be worried about losing job  “whistleblower” provision b/c audit committee is independent
- must have own budget to pay independent auditors, etc
o important: no conflict of interest b/c co may not want to hire to expose problems whereas audit
committee is independent  they will hire independent auditors
- to be on committee
o people must be financially literate
 must be a “financial expert” or have one on the committee
 don’t have to deeply understand GAAP rules or be a CA but must be able to make your way
through financial statement of co
 52-110 says issuer has to disclose experience people on audit committee have
 idea: pressure to have experts on committee b/c if nobody on committee is qualified it
will look funny
MI 52-110
o
o
o
o
o
Audit committee must be directly responsible to oversee auditor
Auditor must report to audit committee
Def’n of independent
 Somebody who is not in a “material” relationship w/ issuer
Audit committee must be independent directors and cannot be related to issuers auditor
Can’t accept fee from issuer (besides for being a director) such as contingent fee, etc
BC Approach
- not on board yet, have own rules 52-109?  BC now on board!!!
- Idea: Penalties that exist are enough to deter bad audit committees
- BC recognizes 52-110 as being okay
- S. 2 “independent”
o Director is independent if a reasonable person w/ all the knowledge of circumstances would conclude
they are independent
- People will probably default to multinational instrument
- S. 5 Requirements of Audit committee
o No requirement for financial literacy
o (c) and (f) a lot of language like “reasonable” (ie. flexible language)
 means if on audit committee you may be more careful b/c don’t know what court will find as
“reasonable”
Insider Trading
Insider Trading (p.433)
21
Differ b/n legal and illegal insider trading
- legal has been disclosed
- illegal is on basis of undisclosed material info
Insider Trading
Legal
Illegal
Tipping
Legal s. 87(5)
- beneficial for insiders to hold co’s shares
- BCSA s.87
o Requirements for insider trading reports
o (2) compared to (5)
 (2) when become insider must file report
 set out what kind of shares or interest in transaction
 (5) anytime holding change as insider must disclose
 includes equity monetizations
o get rid of shares by entering future K
o (6) if involved in merger, acquisition, etc you become insider and must file
Illegal
-
just b/c insider, should not be able to run roughshod
public confidence idea
“Insider” (defined s. 1)
- director or officer of issuer
- director or officer of subsidiary
- person who owns >10% of voting rights of all outstanding shares
o not quite the same as control person (20%)
- issuer itself is an insider
Disclosure periods
- must file reports w/in 10 days
- file w/ SEDI (insider reports – differ from SEDAR)
Rockwell and Johnston
- say 10 days is too long
Exemptions
- executives that do not have insider info b/c title merely due to marketing
- Commission can grant exemptions or individual can apply for one
- Comes down to:
o Whether you are actually likely to have insider info
Insider trading (s. 86)
- 3 key things to establish:
o have “special relationship”
o knowledge of material fact or change
o not been generally disclosed
- comes from s.86 (special relationship) and s.3 (def’n of “special relationship”)
- s.3 def’n of special rel’n
o insider is by def’n in special relationship
o if involved w/ co doing business w/ issuer
o covers any insider of other party involved in transactions w/ issuer
o lawyers, accountants, etc of issuer
o retroactive if are in special relationship now but were not before
o if know of material fact or change and acquire knowledge from somebody you know or ought to have
known that person is in special relationship then you are in SR
22
o
very broad def’n
Material fact and material change (def’ns s. 1)
- material fact is broader than change
o can be a material fact w/o being a material change
o material change can only apply to business, assets, ownership and capital of co
Re Donnini
- D was head trader at Yorkton Securities – boss and him had conversations about tech co – co had already done
one round of financing and was going to do a second –
- D started trading in co stock through an intermediary (ie. anonymously)
- D’s argument
o Had no memory of conversation
o He was trying to hedge on prior transactions
o Did it anonymously b/c shorting stock and co would be unhappy w/ their finance co shorting stock
- Issues:
o Whether a contingent event was material fact (ie. hadn’t happened yet)
o Whether D had knowledge of it
- Whether it was a fact
o Didn’t know if it would happen for sure
o Not a material change b/c hadn’t happened
o Talked about probability and magnitude test:
 Probability of it happening
 Test
o Extent of interest at high levels
o Senior people talking about second round financing so it probably would
happen
 Magnitude on market
 Was huge b/c it would have diluted shares
 So big that probability almost didn’t matter
- what if event never happened?
o Would still have to find D guilty b/c he did the same thing
- D’s knowledge of these facts
o Two minute hallway conversation
o Court: b/c talking to 4th largest SH of co (ie. more than common employee)
 Had access to Patterson and Patterson’s opinion mattered
 Started trading huge amounts of stock must have known something
o Prof: using retroactive argument is not justified (ie. b/c he started trading large volumes doesn’t mean
that he “knew” something, may just have “thought”)
Not generally disclosed
- Re Connor
o Must be generally disclosed and public must be given sufficient amt of time
- 2 things:
o disclosed to public
o public given sufficient time to digest info
- look at medium adopted for dissemination, whether closely held or widely held co, etc
- prof: skip Pezim case
Tipping (s. 86(2))
- compare to illegal trading
- same elements (SR, material fact, not disclosed)
- tipper and tippee can both be in trouble
o tipper definitely is
o tippee is if knew tipper was in special relationship
Defences
-
special relationship
o no defence except to say not in SR (special relationship)
material fact or material change
23
-
o could argue reasonable belief that it was generally disclosed
prof: skip Green v. Charterhouse
Re Harold Connor
o Two part test for whether info has been disclosed
 Info must be disseminated
 Public needs time
o Issue: info went over wire and then traded immediately
o Believed he was acting reasonably
o Court: can’t trade “with” the announcement
 Must wait a minimum of one trading day
Methods to contain info:
“Grey list”
-
certain securities can’t trade in for a certain period of time
“Chinese wall”
- wall of procedures in place to keep investment bankers from talking to traders
- eg. Donnini case – trader came “over the wall”
employee education
- no talking in elevator
strict internal compliance department
- inform department about your trades
other possible defence is Reasonable Mistake of Fact
How
-
info you had you thought was not material
eg. Lewis v. Fingold (related to Lucent Tech case)
Lewis v. Fingold
- disappointing results – F sold shares beforehand knowing results were going to be disappointing
- court:
o info was reasonably expected to be significant
o believed F didn’t think info was material  F had defence
o standard of proof
 civil standard: balance of probabilities
R v. Harper
- H was insider of co – traded w/o disclosing negative results
- Argued
o Negative results were not material
o Took longer to analyze negative results that is why delay
o He relied on geologist that negative results were not material
- Court
o Had not talked to co
o It was not reasonable for him to believe results were not material
o His experience and expertise were enough to show that he should not have relied on geologist advice
o He found positive results reliable but negative results unreliable
 Not reasonable beliefs
Necessary Course of Business (s. 86(2))
- defence for tipping
- talking about business to operate business
- cannot talk to analysts, investors, etc
- can’t give advance info to people
24
Royal Trust v. Ont
- takeover bid – RT was subject to takeover bid – RT tried to defeat takeover bid by talking to SH – RT went and
spoke w/ TD to not sell shares – in the process, gave TD info (ie. bid was going to fail)
- argument
o had to disclose info b/c necessary course of business
- court
o no, it is not in necessary course of business
Enforcement
- very hard to detect insider trading
- limited resources given to enforcement
- McNally and Smith
o Even cases of insider trading that would be easy to prove are not being followed up on
- Insiders tend to buy stock immediately before positive info is announced and the reverse when negative info is
going to be announced
Takeover Bids
***note: Make a timeline
-
def’n: constitute in aggregate 20% or more of the outstanding shares
-
good for economy
o a co that is not well run, its share price is depressed and
it is the SHs shares that takeover bidder wants
law interested in protecting target’s SHs b/c…
o does it make sense?
There is a time element, …
If send TB circular
o Send to SHs
o Send circular, etc
o BCSA 108, 110
o Rule 180 (time limits)
If vary terms, bid must stay open for at least 10 more days
-
-
BCSA s.111 Early Warning Report
- sometimes there is a “creeping takeover”
- once you have acquired a threshold of 10% you must file a press release w/ early warning
- then, once you acquire another 2% must file early warning report and a press release
Conflicting interests
- on one hand, Ds obligated to act in best interest of co
- on the other, they are worried about their jobs
TB open for 35 days BCSA s.105(b)(c) and Rule 180
- bidder cannot purchase tendered securities
- withdraw s.105(d)
o anytime before securities taken up or if not paid for by prescribed time
Target Board
- sends Ds circular which must contain recommendation in favour, against or no statement of no recommendation
- BCSA s.109 and rule 180
- 15 days after circular bid issued to issue their own
- individual Ds can send out their own report if they want
o eg. maybe minority Ds that don’t agree
- must produce this circular no less than 7 days before end of offer period
- must issue something w/in 10 days but it could just be saying don’t do anything b/c we have a circular coming out
General rule
25
-
bidder must offer same consideration to all
BCSA s.107
If paying cash or partly cash must have arrangement in place before bid
BCSA s.106
-
if making a partial bid then all SHs tendering get equal treatment
o ie. not first come, first served
o BCSA 105(g)
Pro Rata
Canfor v. Slocan
- takeup has 10 days for takeup
- consideration was shares
- Slocan would exchange their shares for Canfor
- Done in two step process
o First get deposit receipts
o Then exchange for Canfor shares
- Canfor got receipts to be tradeable as securities (from TSX)
- Forestry Act
o Said need gov’t approval before merge
- Problem w/ deposit receipt
o Canfor could back out at any time
o Canfor did not fully disclose approval process in TB circular
 Did not adequately warn SHs of difficulty w/ deposit receipts
o Slocan couldn’t use its assets while deal was going on but Canfor was not bound to deal  ie. not real
binding deal
o Takeup not more than 10 days after bid but here, only getting receipts
o Court said it was okay
Exemptions
- BCSA ss.98, 99
- Distinction b/n issuer bid and TB
- IB
o Buying back your own shares
o Most rules apply
- can be exempt from ss.105 – 110, but not 111
- s.111 early warning report obligation
- ss.105 – 110
o TB circulars, etc
- How do you get exempt (6 ways)
- Note: if these events put you over 20% threshold – but do not have to have 20% to start
o Stock exchange bid
 Similar rules of disclosure
 Must comply w/ stock exchange rules which are basically the same
o can purchase 5% more w/in 12 months as long as purchase price is market (ie. not at a premium)
o Control block purchase
 At any time, purchase from 5 or fewer persons as long as price is less than 15% over market
price
o Not a reporting issuer
 Closely-held co’s  no need for circular
o Limited relevance to jurisdiction
 Like substantial connection test
 Eg. if BC not best place to deal w/ it, then BC will step out
 Less than 50 SHs in BC, less than 2% in BC, bid in compliance w/ other jurisdiction
o Can apply for exemption w/ commission
 When not prejudicial to public interest
Defensive Tactics
- White Knight
o Target board receives bid and solicit a “friendly” bid
o Could make a positive arrangement to induce
26
-
-
Poison Pills (Shareholder Rights Plan)
o Provision allowing BOD to issue more shares to SHs except bidder
Sale of crown jewel
o Attempt to discourage bidder by selling main asset
Litigation
o Creates more time and may discourage bid
o Difficult to know if defense tactic b/c cloaked as something else
Issuer Bid
o Make bid for your own shares
Break Fee
o Incentive to get white knight to offer a bid
o If target does not go through w/ deal then white knight gets compensated
o Anita Anand
 3 – 5% of value of co
 break fee is a private K  SHs may have derivative action but not about securities
CW Shareholdings v. WIC
WIC owned by Griffiths – sold shares to Shaw and Cathton so each owned 49% of voting Class A shares – CW owned 36% of
Class B non-voting shares (had coattail provision) – CW not happy b/c Shaw was competitor and so now CW is minority SH in
co that competitor controls – CW made bid for Class A shares at $39/share – WIC contacted Shaw b/c wanted another bidder –
cut a deal w/ Shaw – Shaw makes bid at $43.50/share – WIC had to agree to two things: break fee (ie. if deal doesn’t go
through, WIC must pay Shaw $30million) and crown jewel (asset option – radio biz at $160 million) – CW make two
applications (one at Commission for cease trade order and one in court for injunction)
- CW wants cease trade
o Go to BCSC
- CW wants injunction
o court
- CW says
o Will withdraw b/c of break fee
 Bad for co
 Kills the bid
- Should order be heard by BCSC or court (BCSC ss.114, 115)
o Serve differ fxns:
 Commission regulates market as a whole, court resolves disputes b/n parties
o Commission
 Can’t order injunction
 Can’t award damages
 Can order cease trade
 Has capital market expertise whereas court doesn’t
 Advantage of procedural and evidentiary flexibility
o P.484 decision of where to go
 Regulators think court is better place to go to decide fid duty
 Rule: if fid duty then doesn’t mean commission can’t get involved but the court might be the
better place to resolve issue
- p.513 issue: whether break fee and crown jewel (asset agreement) are okay
o NP 62-202 Guidelines
 Target boards can institute these defence tactics but they are going to be scrutinized by
regulators
 Objective of reg law: make sure target SHs are protected
 Must not deny SHs ability to make their own decisions and they must not frustrate an
open bidding process
 Obj: Provide regulatory framework which allows TBs to proceed in an open and even handed
environment
- say break fees are not impermissible
o comes down to quantum of fee
 if too big it could be improper b/c will kill the bid
 here, CW says they are going to withdraw their bid if break fee not removed
 if smaller then it will induce a bid creating competition
- says asset options are not impermissible
o was it necessary to get competing bid
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 again, CW says they are going to pull the bid
Commission allows both the break fee and the asset agreement
P. 515 sets out condition when break fees are appropriate
o Necessary to induce competing bid
o Bid represents better value for SHs
o Fee represents a reasonable balance b/n its potential negative effect as an auction inhibitor and its
potential positive effect as an auction stimulator
Asset option factors:
o Whether Ds complied w/ duties as target-corp Ds
o Overall balance and proportion b/n inhibiting and stimulating
o Whether price for asset is w/in reasonable value attributed to asset
o Whether competing bid induced by asset agreement provides enough add’n value to SHs to justify
granting option
Court: says both are legal and together they are legal
o Must decide whether the tactic is appropriate or inappropriate will depend on the circumstances of the
case
Alberta v. Produces Pipelines
- when can an SRA stand and when to cease trade
- Saskoil trying to take over PPI – PPI put in SRA w/o SH approval (tactical SRA) – every SH can purchase extra
shares at 50% off for limited time – trigger is non-permitted TB
- Permitted TB
o Deal for all cash for all outstanding shares for 25% premium that got unanimous D approval
- Ds kept extending SRA and never had SHs vote on it
- PPI then tender its own bid (issuer bid)
- Saskoil brought action
o Prejudicial to SHs, no SH approval, permitted TB was too onerous so that would never happen, Ds not
acting in best interest of co, Ds just trying to entrench themselves which is an improper purpose
- Court
o Ds were probably correct that original bid was too low
o Ds were not reasonable to not get SH vote
o Conditions for permitted TB were too onerous resulting in no bids
o Purpose: to force issuer bid on SHs
o B/c closely-held co and quite illiquid, this amounted to SH coercion
o Result: board acted for improper purpose
o Other factors (p. 522)
 Ds made no effort to show TB by Saskoil would be harmful
 Made no effort to negotiate w/ Saskoil to increase bid
 Did not seek other bids
o finds onus is on BOD to show acting in best interest of co and SHs
 note: subsequent cases will disagree w/ this!!!
Re Royal Host Real Estate Investment Trust
- real estate investment trust – unit holders instead of shareholders
- Royal makes bid for CHIP – CHIP then adopted SRP w/o approval (ie. tactical – meaning no approval) – terms
not as onerus as PPI case
- SRP (SH remedy proposal – ie. poison pill option)
o Bid must be open for 60 days (as opposed to 35 days)
- Royal makes bid but doesn’t hold open for 60 days and wants SRP removed
- CHIP sets up special committee to get other bids – got some other interest but nothing firm
- CHIP recommends to SHs that they reject bid
- Important: timing
o When does SRP outlive its usefulness
- why does board have SRP in place?
o To have time to find other bids
o CHIP saying need more time
o Royal saying more time is unnecessary b/c potential bids have already come out – now it is time to let
SHs decide
- Court:
o Royal has to extend TB by 10 days
o CHIP can keep its plan for 10 days and Royal must extend bid beyond that
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o Note: CHIP found white knight and sold to somebody else
Primary concern:
o When to use the public interest powers
o To allow SHs to exercise their rights when they see fit w/o undue influence from target board
2 principles:
o if keep SRP any longer, is it likely that any other bids will come forward
o if don’t get rid of SRP, will bidder not extend period for acceptance  lose bid
also, no point extending SRP if no evidence that SHs wanted it in the first place
o if tactical (no SH approval) then possibly no evidence
o if tactical must show it was necessary to do so b/c of coercive nature of the bid or some other very
substantial unfairness or impropriety
court comes out w/ 11 relevent factors (p. 528):
o whether SH approval of SRP
o when plan adopted
o whether SH support
o size and complexity of target co
o if other defensive tactics
o number of potential, viable offers
o steps taken by target co to find alternative bids
o length of time since bid announced
o likelihood that bid will not be extended if SRP not terminated
CW Shareholding v. WIC
- duties of Ds
o to act honestly and in good faith w/ a view to best interests of co
o to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances
- Ds have conflict of interest:
o Best interest of co
o Not lose their jobs
- BOD can set up special committee but do not have to
o Still need to get separate counsel
Business Judgment rule (p. 533)
- court shouldn’t substitute its judgment for co’s
- Pipeline case
o Onus on Ds to show acts were reasonable
o Court says that goes too far to put onus on Ds
- WIC
o Court says the actions taken were okay
Maple Leaf Foods v. Schneider
- Schneider run by the Family (controlling SH) – ML makes bid to buy S – F says not going to sell to anybody
except Smithfield – SF wants lockup deal – F agrees – ML ups bid – F already entered lockup deal w/ SF – ML
needed to go to court to get rid of lockup deal
- Ques: whether S unfairly disregarded interests of other SHs when engaged in lockup deal b/c higher offer coming
- Court
o Upheld business judgment rule
o Agree w/ CW case and disagree w/ PPI
 Onus not on Ds
o Looked at special committee to decide whether acted in good faith
 Process of special committee was to ascertain views of F instead of going to other SHs – is this
okay
 Court said yes b/c didn’t seek approval from F (majority SH)
o In order for BOD to fulfill duties it doesn’t always have to get a full fledge auction going as long as they
canvass the market
Civil Liability
Miller Thomson Update (handout)
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Bill 198 Part 10 Civil Liability Provision
o In effect in Ont end of 2005
o Dealers w/ secondary market investors
Gives SHs in the so-called “secondary market” the right to sue for losses stemming from the improper disclosure
Goes farther than US provisions by expanding the net of people that can sue
Broad scope of defendants:
o Ds, officers, in-house experts, investment dealers, accountants, lawyers, issuer, influential persons (Ds
and officers involved in co, control persons – ie. significant SHs), professional experts (accountants,
lawyers, investment bankers, analysts, engineers, etc – anyone who’s profession gives authority to
statement made), person who made misrep
Don’t have to prove reliance
Prof: new legislation will increase number of class actions
US
o Private attorney general
o Co’s worried about civil liability as they are about regulation
 Prof: seen as good
o Fraud on the market theory
o “Sciantor”: Must prove people making misrep intended to deceive (whereas in Canada you don’t have to
prove)
o No liability for people who aid and abet a fraud (in Canada these people could be liable)
o
who can sue:
o investors in secondary market
 sue for public statements, oral statements where statement may become public (eg. conference
calls, press conferences), publicly released written doc that could affect market price of
securities, failure to make timely disclosure
 ie. not limited to regulatory filings
 could be from website, emails, etc
to be able to sue:
o investor must have bought securities b/n time before misrep made and sold after
o ie. must show suffered
o no need to prove reliance
o if knew there was a misrep, then you don’t have a cause of action
core documents (eg. prospectus, tob circulars, AIFs, etc)
o strict liability
o don’t have to know there is a misrep
o Ds and officers face this liability
Defences
o If conducted reasonable investigation – “due diligence”
 From the investigation must determine it reasonable to believe no misrep
 If no reasonable basis to believe
o If plaintiff had knowledge of material info or misrep
o If forecast (forward looking info)
 must be cautionary language
 don’t have to issue forecast, but if do then must be accurate
 in US this is called Safe Harbour Provision
o Expert reliance
o Derivative info – merely reapeating a misrep will not result in liability
o Inadvertent release – ie. did not know and had no reasonable grounds to believe info would be released
o Independent intervening cause – not liable for damages if loss unrelated to the misrep
2 ways tries to avoid
o proportionate liability caps
 joint and several
 reduces incentive of plaintiffs to sue b/c if 10% liable then only pay 10% of award
 experts
 amount of compensation for year

o anti-strike suit measures
 must get leave from court before can sue
 must determine suit has reasonable possibility of success
 costs
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
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in US, costs are not awarded
o ie. don’t have to pay if bring action and lose
 in Canada, if lose case then may have to pay lawyers, etc
BC provisions same as above almost
3 differences:
o new BC Act doesn’t make distinguish b/n primary and secondary markets
 b/c continuous disclosure
o agent
 actual agent (hired by co)
 apparent authority (isn’t hired by co)
 in BC, oral statement made by somebody w/ apparent authority, can’t sue
 in Ont, don’t care what kind of authority, can sue
o due diligence defense
 in Ont, 2 parts
 reasonable investigation
 then, reason to believe it is correct
 in BC
 demonstrate had in place reasonable system to comply w/ regulations will have
defence
lawyers need to educate clients
lawyers need to remember they are “experts” and can be found liable
BCSA
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civil liability for misreps
ss. 131, 132
TB circulars (Ds and issuer bid circulars), offering memoranda, prospectus
S.131
o deemed to have relied and have a right of action for damages
o (3) if from underwriter, may have right of recission
o (4) not liable if bought w/ knowledge of misrep
o (5) escape clause for people who signed prospectus
o (6) not liable unless person failed to conduct reasonable investigation
o (10) if defendant can prove share price went down for other reasons besides misrep then not liable
o (11) liability is joint and several
o (12) can get contribution
s.132  sections all similar to s. 131
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must show reliance, duty of care, std of care
Torts
BarChris
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illuminates differ b/n objective and subjective test
president and VP signed docs  liable (objective std)
YBM Magnex
- refer to handout for facts
- talked about this case before: Oct 3, Oct 5, Oct 17 probability/magnitude test
- b/c US attorney was not clear, co used this to decide didn’t have to disclose
- standard of materiality
o key ques: whether what was not disclosed would be expected to have an effect of market
- probability/magnitude
o must look at broader factual context
o eg. US allegations were vague – could not rely on this alone
 also knew many other things:
 other allegations
 visits by FBI
- not homogenous group so must look at each actor
- reasonableness must be analysed from perspective of prudent person in circumstances
- must look at both objective and subjective test
- objective and subjective considerations for due diligence defence (ss. 131(6)(7)):
o degree of participation
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o access to info
o skill
Mitchell
o Had skill and access to info
o Underwriter – lots of participation
o Get him on an objective basis
Davies
o Visited by FBI agents – ie. had info that there was an investigation
o Had skill and experience
o Objective standard
o D has positive duty to act when obtain info (ie. visit by FBI)
o Std of care for Ds is to encourage responsibility not passivity
Schmidt
o Least knowledgeable of all Ds
o No knowledge of facts (subjective element)
o Little expertise
o Relied on other professionals
o Objective test w/ a twist of subjective
Peterson
o Experienced
o Not substantially involved (ie. low participation)
o Not much access to info
o Recent addition to board
o Fairly subjective test
o Prof: maybe not liable b/c don’t want these types of people (ie. influential) to be scared to be on board
Antes and Greenwald
o Not much experience
o No material role in financing
o Relied on counsel
o Did not participate in meetings w/ staff
o Objective test
Gatti
o No experience
o Subordinate to CEO
o Had a reasonable belief that the prospectus disclosure was true and that no material facts were omitted
o objective
First Marathon
o Assess reasonableness of their belief
o Shortcomings in their due diligence process
 Ie. hadn’t finished process when signed off on prospectus
o No due diligence defence
o objective
GMP
o Less knowledgeable than First Marathon
o Relied on FM but they were co-lead so may be liable
o No due diligence
o “where a co-lead underwriter falls down in the conduct of its due diligence, the other co-lead may have
to bear the risk of its reliance”
Danier Leather
- signed prospectus that was optimistic
- thought they would pull out numbers in the end so didn’t change 4 th quarter results
- court
o although mgmt believed were going to make numbers in end, still had material bad news in the
meantime
o hindsight looking at misrep just b/c it comes true doesn’t make it any less of misrep??? Look this quote
up
o no reasonable belief that forecasts were attainable
o didn’t talk to lawyers or bankers before not disclosing
o as insider D and senior officer, had access to all info and it was reasonable to believe prudent person in
their position would have done more
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Enforcement
Today,
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cover Investigatory powers (part 17), criminal provisions (CC and C-13), quasi-criminal (155), civil enforcement
(157), admin powers (161, 162, 163)
Investigatory Powers (not on exam)
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Part 17 (ss.141-154)
S.141Provision of info to executive director
o
Executive director is the head of staff (there is a commission and staff branch)
o
Staff can prosecute on own w/o commission
o
Powers apply to people under (2) clearing agency, registrants, control persons, promoters, etc
o
s.142 Investigation order by commission
o
commission may appoint a person to make an investigation
o
doesn’t have to be reasonable belief that person is contravening Act
o
must specify the scope of your investigation (ie. limit investigation)
o
s.143 Power of investigator
o
may investigate the affairs of person, any records, negotiations, transactions, etc
o
can enter ppty’s, cease docs, etc
o
limits to kinds of pptys they can enter

(2) registrant, SRO, exchange
o
can remove docs
o
(3) on application can apply to SCC to enter other places
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eg. businesses, building, co, etc
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need SCC order
o
(4) may be made w/o notice (ie. ex parte)
s.144 Investigator’s power at hearing
o
have same subpoena power as court
o
(2) if don’t comply, the commission makes an application to the SCC
the powers here are very wide!
o
This is necessary b/c of the importance of the markets in economy, people have subjected themselves to it knowingly
Criminal
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IMET (integrated markets enforcement team)
Ss.380 CC about fraud
o Must prove sianter? (person willfully trying to do fraud)
Bill C-13
o Increased max term of convicted from 10 to 14 years
o Contains aggrevated circumstances
o Perception that white collar offenders get off easy
o Increases threshold over prov provisions
o Adds new CC offences for insider trading and tipping
 Insider trading max penalty 10 years
 To be convicted accused must have “knowingly” used info
 MR of criminal offence  “knowingly”
 Whistle blowing provision
 Employer can be found criminally liable (max 5 years jail) if act against whistle
blower
 Production orders against 3rd parties
 Seek info from 3rd party not actually investigating
o Final bit of Bill was going to grant the feds ability to prosecute quasi-criminal
Differ b/n criminal and quasi-criminal
o Burden of proof is Beyond a reasonable doubt
o The crown prosecutes both offences
o Only differ is criminal is in CC (federal) and quasi is provincial
o Does it make sense criminal is “knowingly” and quasi is not “knowingly”
 Prof: doesn’t make sense
Quasi-Criminal
- s.155 BCSA
o if does not comply w/ Act
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o
o
o
max penalty $1 million or imprisonment for not more than 3 years
(1)(b) contravenes sections… (not everything in Act but most of it)
 failing to register
 trading improperly
 general stuff dealing w/ disclosure
(5) and (6) differ b/c fines are differ for washing, tipping, insider trading, pump and dump schemes, etc
 still liable for (2) (ie. jail)
R v. Harper
- don’t have to prove that your contravention had an effect on stock price
Civil enforcement
- rarely used
o b/c commission is a regulator and not a punitive body
o already have powerful administrative powers
o procedural problems going to court
s.157 Order for compliance
- court
o can make person pay fine into consolidated revenue
o can cancel security
o mess w/ voting rights
o order restitution to parties harmed
o can still use this section if used another one (ie. double up)
o can cancel Ks, etc
- one case on BCSC website using this provision to compel person to follow decision
Administrative powers (s. 161 Orders, s. 162 Admin penalty, s. 163 Enforcement of order by SCC)
- commission considered to have more expertise than courts in securities field
- must be considered “in the public interest”
- must hold a hearing
- s.161 Enforcement orders
o cease trade
o person resign being a D or officer
o reprimand
o do not have to have contravened the Act as long as considered in “public interest”
o can order a temporary order (like an injunction) w/o having a hearing either by commission or by staff
- s.162 Administrative penalty
o person $250,000 and a co $500,000
o in order to rely on this section must hold a hearing, establish a violation of Act or rules,
o under new BCSA the penalties would be doubled
- s.163 Enforcement of commission orders
o if 3rd party owes money to person they are trying to get it is like a garnishment
from handout (2005 BCSECCOM 575)
- para 9
o Re Enron Mortgage Corp (2000)
o Ss.161, 162
o Considered in “public interest”
- shows new trend in transparency in regulation
- makes it more clear how Commission makes its decisions
- para 10, 11, 12
o talk about sections of heightened penalties
o insider trading, fraud on the market
o fundamental to investor protection – especially serious
- para 29 orders
o can’t rely on exemptions
o pays admin penalty
o pays costs of hearing
o prohibited from engaging in investor relations activities for 6 years
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WH Stuart Mutuals
- she was a compliance officer (position of trust)
- what she did was deliberate
Nortel
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case against issuer
cease trade order until received financials
Mary Condon (p.606)
- unevenness across provs
o failure to file prospectus is huge deal in BC but not as big in other provs
o exemption problems big deal in other provs but maybe not BC
- solution
o more coordination among provs
o important to keep local input
Wilder case
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s.161, 162
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s.161
(f) “registrant” in BC so does not apply to a lawyer
could impose a fine under s.162
ongoing battle over who regulates lawyers
o in US (Sarbanes-Oxley) can impose regulations over lawyers, accountants, etc
administrative enforcement sections
commission may do a series of things if finds in public interest
s.162 requires a violation
s.161 doesn’t require a violation
In BC, requires contravention of law
- this is only for proposed BCSA
- the old (existing) Act is same as Ont
Transaction can be stopped if abusive or in public interest
Canadian Tire
- Billes family majority shareholder – entered into agreement to buy controlling interest – voting shares comprised
4% of total shares – non-voting had coattail provision stating if takeover of voting shares everybody would get to
vote – Dealers want to buy from Billes 49% (ie. less than majority) – Dealers already owned 17% - OSC says this is artificial transaction that is trying to circumvent coattail provision
o Not in public interest and abusive
o S.127 OSC (s.161 BCSA) to use when flagrant abuse
o Note: Staff is fussed so goes to Commission
o
- under public interest power have wide discretion
- need to be able to move quickly b/c of market and actors
- evidence is irrefutable that deal was structured to circumvent coattail provision
- this is not a private deal so would have effect on capital markets
- argue
o overstepping their boundaries
o need to be able to read Act and rely on words
- answer
o showing abuse and violating public interest
o not interfering randomly but only in very specific circumstances of abuse
o compare their public interest powers w/ courts equitable powers
OSC staff notice
- attempt to structure discretion of regulatory officials
- to conserve regulatory resources
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Asbestos case
- Party Quebecois wanted to take over Asbestos – affected minority SHs in Ont – OSC was trying to decide
whether they should interfere
- Ques:
o What is nature and scope of public interest power
o What is appropriate standard of review
o Did OSC make a reviewable error
- What is nature and scope
o Broad but not unlimited
o Has to consider purposes of Act to protect investors and foster fair and efficient capital markets
o Actions should be regulatory (foreward looking) and not punitive (retrospective)
o
- What is appropriate standard of review
o reasonableness
- Did they make a reviewable error
o Considered relevant factors
o Didn’t fail to consider anything they should have considered
o Found Commission was reasonable b/c findings of fact were reasonable and applied previous case law
o Shareholders were not misled or abused
 Aware of grave consequences to Quebec
 Limited transactional connection to Ont
Cartaway case
- whether in creating an order under public interest, whether Commission could consider general deterrence
- insider trading case – BCSC intervened under public interest – considered “general deterrence”
- found: yes, you can
- the other side:
o is it justice based on facts of this specific case
o “public interest” is trumping individual case
Fatir Hussain Siddiqi
F: in business of assisting co’s in raising capital – contravened s. 86(1) Insider Trading – contravened s. 57(a) Prohibited
transactions – contravened s. 56(1) Selling short – contravened s. 61(1) Distributing securities w/o prospectus – contravened s.
111(1) Filing a report when aquiring >10%
R: in making orders under ss. 161 and 162, the following are usually relevant (Re Eron Mortgage Corporation):
o seriousness of conduct
o harm suffered by investors
o damage done to capital markets
o extent to which person enriched
o factors done to mitigate
o past conduct
o risk to investors and capital markets by continued participation
o fitness to bear responsibilities of being a D or officer
o deterrent factor
o past orders made in similar circumstances
- ss. 86(1) and 57(a) are both fundamental to investor protection b/c strike at heart of market integrity
- Siddiqi had no previous disciplinary history, cooperated w/ investigation, did not attempt to cover his tracks and
no longer lives in BC so difficult to say much risk for our capital markets
- In making orders  general deterrence is a factor
o S. 161(1)(c) Exemptions won’t apply for him for 6 years
o S. 161(1)(d)(ii) Prohibited from being D or officer for six years
o S. 161(1)(d)(iii) Prohibited from investor relations for 6 years
o S. 162 Administrative penalty of $60,000
- Siddiqi asked Executive D to review costs, s. 179
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