Securities (Lastman) - 2013-14 (1) - 2

Securities Regulation Summary
1.0 1.1 1.2 MAJOR THEMES IN THE COURSE ..........................................................................................1 Three Goals of Securities Regulation...................................................................................................... 1 Three Methods of Achieving these goals ................................................................................................ 2 Registration requirement ................................................................................................................. 2 Disclosure Requirement ................................................................................................................... 2 Remedies for Breach of Registration or Disclosure Requirements .............................................. 3 1.2.1 1.2.2 1.2.3 1.3 2.0 2.1 2.2 2.3
General Policy of the Course ................................................................................................................... 3 INTRODUCTORY CONCEPTS ...................................................................................................4 Purpose of Selling Securities.................................................................................................................... 4 Types of Securities .................................................................................................................................... 4 Securities Trading .................................................................................................................................... 4 Open Market in Capital ................................................................................................................... 4 Private Trades ................................................................................................................................... 5
2.3.1 2.3.2 2.4
Sources, History & Constitutional Division of Powers of Securities Regulation ................................ 6 Division of power .............................................................................................................................. 6 History of securities regulation ....................................................................................................... 6 Sources of Provincial Securities Regulation ................................................................................... 6
2.4.1 2.4.2 2.4.3 3.0 3.1
SEGMENT 1: GOING PUBLIC ....................................................................................................8 Introduction to Going Public ................................................................................................................... 8 General Rule Securities Act, ss. 25 and 33 .................................................................................... 8 How Companies Go About Raising Capital ................................................................................... 8 Why Go Public? ................................................................................................................................ 8 Why do we regulate public offerings (3 objectives) ....................................................................... 9
3.1.1 3.1.2 3.1.3 3.1.4 3.2
The Prospectus Requirement: Does the Securities Act Apply?.......................................................... 10 What is a security? ......................................................................................................................... 10 What is a trade? Statutory Definition...................................................................................... 16 What is a distribution? ................................................................................................................... 17
3.2.1 3.2.2 3.2.3 3.3
Prospectus Preparation .......................................................................................................................... 20 Prospectus General Rule ................................................................................................................ 21
3.3.1 3.4
Prospectus/ Distribution Process (After making decision to go public) ............................................ 25 Summary of Steps ........................................................................................................................... 25 Creating the Preliminary Prospectus: What must be included.................................................. 25 i
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies
3.4.1 3.4.2
3.4.3 3.4.4 3.4.5 3.4.6 3.4.7 3.4.8 3.4.9 3.4.10 3.4.11 4.0 4.1 4.2
The Waiting Period, Vetting/ Comment Letter and Amendments ............................................ 28 Filing the Final and Obtaining a Receipt and Changes Post-Filing ........................................... 34 Closing & Any Post-Final Amendments ....................................................................................... 36 Consequences for Failure to Deliver/ File Prospectus (practically, none) ................................. 39 Failure to File (likely not needed) ................................................................................................. 40 Liability for Misrepresentation in a Prospectus .......................................................................... 40 Registration Requirement.............................................................................................................. 50 UW Agreement ............................................................................................................................... 50 Sample Prospectus .......................................................................................................................... 51
SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE ...........................53 Policy Behind Continuous Disclosure Regime Merger Report (3 objectives) ................................ 53 PART I: Regular Disclosure .................................................................................................................. 53 Application to Reporting Issuers................................................................................................... 54 Obligation to File Financial Statements ....................................................................................... 54 Statutory Provision: OSA, Part XVIII Continuous Disclosure ............................................... 56 Material Change vs Material Fact ................................................................................................ 56 What must be filed with a material change (3 Report Options) ................................................. 58
4.2.1 4.2.2 4.3
PART II: Timely Disclosure (of changes)............................................................................................. 54
4.3.1 4.3.2 4.3.3 4.4
PART III: Early Warning ..................................................................................................................... 60 STEPS: ............................................................................................................................................ 60 STATUTORY PROVISIONS ....................................................................................................... 60
4.4.1 4.4.2 4.5
PART IV: Insider Reporting ................................................................................................................. 61 Analysis: When do insider reporting rules apply? ...................................................................... 62 STATUTORY PROVISIONS ....................................................................................................... 62
4.5.1 4.5.2 4.6
PART V: Insider Trading ...................................................................................................................... 63 Policy Discussion about Insider Trading / Tipping Prohibition ................................................. 63 Steps ................................................................................................................................................. 64 Statutory Provisions (OSA) ........................................................................................................... 65 Meaning of Generally Disclosed (Defence) ................................................................................... 67 Defences to Insider Trading / Tipping .......................................................................................... 68 Actions, Sanctions & Penalties for Insider Trading .................................................................... 71
4.6.1 4.6.2 4.6.3 4.6.4 4.6.5 4.6.6 5.0 5.1
SEGMENT 3: THE CLOSED SYSTEM: ...................................................................................73 Private Placement & Exemptions ......................................................................................................... 73 General Rule ................................................................................................................................... 73 ii
5.1.1
5.1.2 5.1.3 5.1.4 5.1.5 5.2
Advantages & Objectives of Private Placement .......................................................................... 73 The Private Placement Exemptions .............................................................................................. 74 Offering Memorandum (and problems with it) ........................................................................... 77 Registration Requirement for Private Placement Exemptions .................................................. 79
Resale Rules ............................................................................................................................................ 79 General Rule: 2 Components of Resale Rules.............................................................................. 79 Resale Rules for Non-Control Persons ......................................................................................... 81 Resale Rules for Control Persons (Separate Regime) ................................................................. 83
5.2.1 5.2.2 5.2.3 6.0 6.1
SEGMENT 4: CONTROL TRANSACTIONS ...........................................................................87 Reasons for Takeover Bids .................................................................................................................... 87 Socially Useful Reasons for Takeover Bids .................................................................................. 87 Non-Socially Useful Reasons for Takeover Bids .......................................................................... 87 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them .... 87
6.1.1 6.1.2 6.1.3 6.2
Overview of How Takeover Bids Work................................................................................................ 88 What is a takeover bid? ................................................................................................................. 90 Deemed Ownership ........................................................................................................................ 92
6.2.1 6.2.2 6.3
Mechanics of a Vendor Takeover Bid................................................................................................... 94 Takeover Bid Circular (Information) ........................................................................................... 94 Minimum Period of Bid (Time) ..................................................................................................... 95 Pro Rata (Equality) ........................................................................................................................ 96 Withdrawal and Change of Info or Variation in Terms (time and info) ................................... 96 Conditions (just investor protection) ............................................................................................ 97 Payment for Securities (investor protection generally) ............................................................... 98 No collateral agreements ................................................................................................................ 98 Section 95: Offeree Issuers Obligations ...................................................................................... 99 Legislative Goal Met..................................................................................................................... 100
6.3.1 6.3.2 6.3.3 6.3.4 6.3.5 6.3.6 6.3.7 6.4
Post-Bid: Directors Circular (Response)............................................................................................. 99
6.4.1 6.4.2 6.5
Pre & Post-Bid Integration .................................................................................................................. 100 Lock-up Agreements/ Tendering Agreements (Allowed) ......................................................... 100 Pre-Bid Integration ...................................................................................................................... 101 Post-Bid Integration ..................................................................................................................... 102
6.5.1 6.5.2 6.5.3 6.6
Exemption from Pre-Bid and Post-Bid Restrictions EXEMPT Takeover Bids! ......................... 102 Private Agreement Exemption (s.100.1(1) of OSA, most important) ...................................... 103 S.100 Normal Course Exemption Dont Exceed 5% in 12 Months .................................... 103 iii
6.6.1 6.6.2
6.7
Voting & Non-Voting Shares ............................................................................................................... 103
6.8 Directors Duties and Responsibilities in a Takeover Bid Situation Defensive Tactics to Buy Time 104 6.8.1 6.8.2 6.8.3 Fiduciary Duty in the Context of Takeover Bid ........................................................................ 104 Examples of Defensive Tactics..................................................................................................... 105 Defensive Tactic Rules - NP 62-202............................................................................................ 107
iv
1.0 1.1
MAJOR THEMES IN THE COURSE ..........................................................................................1 Three Goals of Securities Regulation...................................................................................................... 1 3 purposes: 1) Protection of investing public; 2) Ensuring the Efficient Operation of Canadian Capital Markets; 3) Increasing and Maintaining Public Confidence in Capital Markets / In the Persons and Institutions Operating Them ................................................................................................................... 1 Found in s.1.1 of the OSA under the purposes of the act! The purposes of the Act are (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets and confidence in capital markets ................................................................... 1 Another theme: NO SMART GUYS and NO CERTAINTY ................................................................. 1
1.2
Three Methods of Achieving these goals ................................................................................................ 2 1) Registration Requirement, 2) Disclosure Requirement, 3) Remedies for Breach of 1 and 2 ............. 2
1.2.1
Registration requirement ................................................................................................................. 2 POLICY: This helps ensure accountability, makes sure you are educated and policed fosters confidence in the market, and the exceptions are to provide efficient markets for securities that are considered to be very low-risk to the public. People will lose confidence if some whackos are selling you securities. ......................................................................................................................................... 2
1.2.2
Disclosure Requirement ................................................................................................................... 2 To protect investing public, must make sure they have full, true and plain disclosure of all material facts related to the company (adv/disadv, risks, contracts etc.) via a prospectus and continuous disclosure ................................................................................................................................................ 2 POLICY: need to protect investors, OSA is consumer protection legislation and in order to do that, we need to give you the information that you need to make an informed investment decision ............. 2
1.2.2.1
Exceptions to the Disclosure Rule .................................................................................................. 2
POLICY: Need to balance the objectives of the efficiency of capital markets (would be inefficient to file a prospectus every time a company needs money) with the need to protect the public. .................. 2 1.2.2.2 Closed System & Resale Restrictions ............................................................................................. 3
When securities are acquired pursuant to one of the private placement exemptions and not pursuant to a prospectus, the resale by the initial investors of these securities to other investors on the secondary market is restricted and certain conditions must be satisfied prior to their resale. ................................. 3 Policy: Transparency is key to the process ............................................................................................. 3 1.2.3 Remedies for Breach of Registration or Disclosure Requirements .............................................. 3 Policy: investor protection and confidence in the market (fix something when it goes wrong) ............ 3 1.3 General Policy of the Course ................................................................................................................... 3 For the exam: 1) Know what the rules are; 2) Look at why they exist (why does the law regulate these activities? What objectives is the rule trying to establish?); 3) THEN Challenge the rules ................... 3 2.0 2.1 2.2 INTRODUCTORY CONCEPTS ...................................................................................................4 Purpose of Selling Securities.................................................................................................................... 4 Types of Securities .................................................................................................................................... 4 v
2.3
Securities Trading .................................................................................................................................... 4 Open Market in Capital ................................................................................................................... 4 Primary market (sale of securities to investors) and secondary market (investors exchange sec in return for payment from another invested) together permits continued marketability / liquidity of shares ...................................................................................................................................................... 4
2.3.1
2.3.2 2.4
Private Trades ................................................................................................................................... 5
Sources, History & Constitutional Division of Powers of Securities Regulation ................................ 6 Division of power .............................................................................................................................. 6 History of securities regulation ....................................................................................................... 6 Sources of Provincial Securities Regulation ................................................................................... 6
2.4.1 2.4.2 2.4.3 3.0 3.1
SEGMENT 1: GOING PUBLIC ....................................................................................................8 Introduction to Going Public ................................................................................................................... 8 General Rule Securities Act, ss. 25 and 33 .................................................................................... 8 RULE: No person shall engage in or hold themselves out as engaging in the business of trading in a security, without being registered, and if a trade constitutes a distribution, without preparing a prospectus (Section 25 and 53, Ontario Securities Act). ........................................................................ 8 s.25 deals with not being able to engage in business of trading securities unless REGISTERED ......... 8 s.53 deals with not being able to issue securities without a prospectus.................................................. 8 3.1.2 How Companies Go About Raising Capital ................................................................................... 8 3 Ways: 1) Borrow, 2) Go Public (IPO segment 1), 3) Private Placement of Securities (segment 3). 8 3.1.3 3.1.3.1 Why Go Public? ................................................................................................................................ 8 Advantages ..................................................................................................................................... 8
3.1.1
Advantages: 1) Raising Capital, 2) Future Growth, 3) Employee Incentives, 4) Enhanced corporate image, 5) Acquisitions, 6) Shareholder Liquidity .................................................................................. 8 3.1.3.2 Potential Disadvantages (and to how to mitigate the risk) ............................................................ 9
Disadv: 1) Loss of confidentiality, 2) Reduced flexibility, 3) Managing share prices, 4) Reduced control, 5) Loss of tax advantages, 6) High costs of going public (initial costs of IPO and ongoing cont disclosure requirements) ................................................................................................................. 9 3.1.4 Why do we regulate public offerings (3 objectives) ....................................................................... 9 1) Protection of Investing Public, 2) Ensuring the Efficient Operation of Canadian Capital Markets, 3) Increasing/ Maintaining Confidence in Public Markets & the People who Operate in Them ............... 9 3.2 The Prospectus Requirement: Does the Securities Act Apply?.......................................................... 10 Prospectus ONLY IF there is a TRADE in a SECURITY which constitutes a DISTRIBUTION. ...... 10 Recall General Rule: ss. 25, 53 of the SA: No person shall engage in or hold themselves out as engaging in the business of trading in a security without being registered and if a trade is a distribution, without preparing a prospectus ........................................................................................ 10 Analysis for Whether You Need to Issue Prospectus: .......................................................................... 10 vi
1) 2)
Does transaction involve a security? If NO, SA does not apply. If so ................................ 10 Is it a trade in a security? If NO, SA does not apply. If so .................................................. 10
3) Does that trade in a security constitute a distribution? If NO, no Prospectus. But if yes then you must prepare a prospectus *unless one of private placement exemptions are available ............... 10 3.2.1 3.2.1.1 What is a security? ......................................................................................................................... 10 Statutory Definitions ..................................................................................................................... 10
LEGISLATION ACT 2006 - Interpretation ............................................................................................. 10 Section 64(1): an act shall be interpreted as being remedial and shall be given such large and liberal interpretation and best ensures the attainment of the object ................................................................. 10 ONTARIO SECURITIES ACT Interpretation & Definitions ............................................................... 10 S.1(1): security includes (NOT EXHAUSTIVE= broad def): (a) any document, instrument or writing commonly known as a security, (b) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company,(n) any investment contract ............................................................................................................................... 10 3.2.1.2 3.2.1.3 3.2.1.4 LESS COMMON SECURITIES .................................................................................................... 10 CATCH ALL PROVISIONS (Pacific Coast) ................................................................................. 11 How Case Law Has Defined a Security........................................................................................ 11
Main Points: Definitions in the OSA are not mutually exclusive, but are catchalls - Securities legislation is remedial legislation; to be construed broadly (SEC v CM Joiner Leasing & Pacific Coast Coin Exchange) - Substance not form governs the interpretation of what is a security it is flexible, not static (Pacific Coast Coin Exchange) -The policy of securities legislation is full and fair disclosure with instruments regarded as securities.............................................................................. 11 SEC v. Glen T. Turner Enterprises Inc. (US, 1973) ................................................................................. 11 Ratio: s.1.1(a) definition that a security includes any document, instrument or writing commonly known as a security means if known as such by the legal/ financial community, not common person. .............................................................................................................................................................. 11 Implications: takes a broad def and makes it even broader! ................................................................. 11 Due to POLICY: most sec are technical in nature, not likely to be understood by anyone other than legal/ financial community ................................................................................................................... 11 Ontario (Securities Commission) v. Brigadoon Scotch Distributors (1970 Ont. H.C.) ........................... 12 Ratio: Provides insight into s.1(1)(b): Securities only includes instruments intended as investments and not instruments bought for other commercial purposes. ................................................................ 12 Test: Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product? .................................... 12 Policy: The reason youre defining this is to figure out if you need to issue a prospectus, so had to narrow definition (otherwise, could be anything youre selling) ......................................................... 12 SEC v. CM Joiner Leasing Corp. (USA).................................................................................................. 12 Ratio: Act will be construed broadly and in whatever way leads to it to promote the policy objective of investor protection (Purposive approach to interpreting the meaning of security). Specifically, vii
interprets s.1(1)(n): an investment contract will be where people are investing in the potential for something to generate profit and are purchasing expertise of someone else. ....................................... 12 Policy: Purposive approach to interpreting the meaning of security required to respond to new, novel, uncommon or irregular devices. ................................................................................................ 12 SEC v. W.J. Howey Co. (USSC, 1946) reasoning used by SCC in Pacific Coin ................................. 13 Ratio: Common enterprise test for identification of an investment contract and therefore, security. Test requires: ........................................................................................................................................ 13 1) A contract, transaction or scheme whereby a person invests; 2) That the investment be in a common enterprise; and 3) That the person is led to expect profits (or capital appreciation: see Forman) solely from the efforts of a promoter or third party (pol obj: since it is them who controls success/failure of enterprise) ................................................................................................................ 13 State of Hawaii v. Hawaii Market Center Inc. ......................................................................................... 14 Ratio: Risk Capital Test for identifying an investment contract (broader than Howey test to comply with policy objectives). Test requires: a) The offeree furnish initial value; b) A portion of the initial value is subjected to the risks of the enterprise; c) The furnishing of initial value is induced by promises or representations leading to a reasonable expectation or understanding that a benefit above initial value will accrue; and d) The offeree does not have the right to exercise practical and actual control over the managerial decision of the enterprise. ........................................................................ 14 However, it is the policy and not the subsequently formed judicial test that is decisive. The primary objective is to protect the investing public. Are investors relying on expertise/management courts have immense discretion. ..................................................................................................................... 14 Pacific Coast Coin Exchange of Canada v OSC (SCC, 1978) ................................................................. 14 Ratio: Broad, purposive approach should be used in interpreting meaning of word security (even broader s.1(1) is not exhaustive) it is legislative policy to replace the harshness of caveat emptor in security related transactions and courts should seek to attain that goal even if tests carefully formulated in prior cases prove ineffective and must continually be broadened in scope. It is the policy and not the subsequently formulated judicial test that is decisive. ............................................ 14 *Accepts US definition for investment contract as a security .......................................................... 14 3.2.2 What is a trade? Statutory Definition...................................................................................... 16 In order for general rule (Section 53(1) and 25 about being registered) to apply for a prospectus, there has to be a trade in a security, so what is a trade? ................................................................................ 16 OSA, section 1(1): A trade includes any sale or disposition (NOT A PURCHASE) of a security for valuable consideration AND includes any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the activities described in the definition. 16 Policy: Overall, trade is broadly interpreted to promote the greater good prevent ppl from contracting/opting-out of securities regulation ..................................................................................... 16 3.2.2.1 3.2.3 TRADES ON BEHALF OF OTHERS ........................................................................................... 17 What is a distribution? ................................................................................................................... 17 Unless exemption is available if trade is a distribution, need to issue prospectus............................ 17
viii
Distribution (per s.1(1) definition: means (EXHAUSTIVE def) (a) trade in sec of an issuer that have not been previously issued, (b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer, (c) a trade in previously issued securities of an issuer from the holdings of any control person, (d +e) a trade by or on behalf of an underwriter in securities (see full def below) .................................................................................. 17 Purpose: def determines whether or not theres a requirement to prep prospectusThus, purpose is to ensure those who are potentially going to invest in the corp have suff info with which to make an informed investment decision ............................................................................................................... 17 3.2.3.1 Lastmans 3 Main Branches of Distributions ............................................................................... 19
1) Securities that have not been previously issued (s.1(1)(a)), 2) Trades by Control persons (s.1(1)(c)), 3) Sales of restricted sec held by exempt purchasers ......................................................... 19 3.2.3.2 Note: 3 Ways Securities can be distributed to the public ............................................................. 19
1) Direct issue and private placement; 2) Offer to Sell (Bought Deal / Offer to Sell/ Marketed Offerings); 3) Best efforts underwriting ............................................................................................... 19 3.3 Prospectus Preparation .......................................................................................................................... 20 Prospectus General Rule ................................................................................................................ 21 *Governed by NI 41-101 general requirements and 44-101 for short-form prospectus. Two principle requirements of a prospectus under OSA: ............................................................................................ 21 1) Prospectus must provide full, true and plain disclosure of all material facts (s. 56(1)) ................... 21 2) Must comply with the requirements of the Securities Act (including 56, 58, 59) -Includes OSA, OSA regulation, OSC rules and the OSC director. ............................................................................... 21 Section 56: (1) Full, true and plain disclosure and complying with all requirements of Ontario securities law; (2) Must also include any financial reports, statements or other docs required by the Act or regulations ................................................................................................................................. 21 Section 58(1) Issuer Certificate (signed by CEO, CFO and two directors that arent CFO/CEO, and any promoter of the issuer) certifies prospectus is true ..................................................................... 21 Section 59(1) Underwriter certificate (signed by any/all UWs in a contractual relationship with the issuer or selling securityholder distributing securities through the prospectus) UW also certifies prospectus is true .................................................................................................................................. 21 3.3.1.1 Misrepresentation ......................................................................................................................... 21
3.3.1
Misrepresentation- s.1(1): means (a) untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. ........................................................................... 21 If there is a misrepresentation, you can sue everyone involved (corp, directors, officers, underwriters). Very high bar very diff to know if youve missed something. .......................................................... 21 Policy: Should tell everyone everything they need to know to make informed investment decisions . 21 3.3.1.2 Dual Functions of a Prospectus: Selling + Liability Document .................................................. 22 1) Selling Document: Sec Act ensures regulators mandate of investor protection by saying only doc you can use to sell sec is the prospectus, cant advertise in any meaningful way, cant have fancy brochures, billboards, etc. ..................................................................................................................... 22 ix
2) Liability Document: Will need a lot of $, so client will want to be successful/shed the company in its most favourable light. Thus, regulator makes sure there is sig liability associated with a misrep (misstatement of a material fact/ omission) .......................................................................................... 22 Tension between 2 purposes (reckless selling v being too careful): You as a lawyer cannot allow client to recklessly sell in light of the prospectus (theyll get sued), but you also cant go so far to protect yourself/your client that you have a document that no one will buy securities with. ............... 22 3.3.1.3 National Instrument 51-102 Policy on future oriented financial statements in the prospectus 22
Per NI 51-102: no prospectus ever has to put future oriented financial info in it. The choice is always the business BUT (1) if you dont put it in, you cannot talk about the future anywhere else; and (2) if you do put it in your prospectus you have to comply with national instrument 51-102 for disclosure 22 Two types of data forming financial forecasts: (1) Forecast (written estimate of most probable result of operations of a company for some pt in the future); (2) Projection (estimate of results that follow any set of reasonable assumptions) ...................................................................................................... 23 Policy: Recognize tension between prospectus as selling document and prospectus as liability document do not err on EITHER side dont be too hard and dont be too soft, just be right ........... 23 3.3.1.4 Full, True and Plain Disclosure of All Material Facts ................................................................ 24
Requirement for Full, true and plain disclosure: Section 56(1): A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law. ...................................................... 24 Definition of Material Fact: Section 1(1): Material Fact: When used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities. ........................................................................................... 24 *note that a Material Fact and Material Change are different!!!!! ....................................................... 24 If a Material Change Occurs, Amendment Required 57(1): If there is a MATERIAL CHANGE after receipt is obtained for preliminary prospectus, and before receipt for final OR after receipt for final is obtained but prior to completion of distribution, amendment must be filed as soon as is practicable, and IN ANY EVENT, within TEN days of the change .................................................... 24 Danier Leather SCC ................................................................................................................................. 24 Implications: Example of how to deal with forward-looking info. A forecast DOES have an implied representation of reasonableness, but thats all just has to be reasonable. ......................................... 24 A change in a material fact does NOT have to be disclosed following the filing of the prospectus (only a material change) ....................................................................................................................... 24 3.3.1.5 Underwriters................................................................................................................................. 24
Have to do due diligence, and can still be found liable under s. 130(1) for misrepresentation (see more on underwriters below), and also have a due diligence defence available to them. .................... 24 3.4 Prospectus/ Distribution Process (After making decision to go public) ............................................ 25 Summary of Steps ........................................................................................................................... 25 1. Complete prelim (certified, signed, red herring) (although requires material facts, does not require price, maturity date, interest rate or dividend amount);........................................................................ 25 x
3.4.1
2. File with Administrator along with supporting docs (e.g. auditors comfort letter, tech reports, consent letters, underwriting agreement, material contracts, resolution of BOD approving prelim, financial statements); ............................................................................................................................ 25 3. Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations (s.54-55) ............................................................................. 25 Waiting period begins: time between receipt for prelim and receipt for final (if anything material changes during this period, make amendments) ................................................................................... 25 4. Print/Deliver the document to those who expressed interest ............................................................ 25 5. Staff vet the prospectus .................................................................................................................... 25 6. Staff provide a comment letter ......................................................................................................... 25 7. Clear up deficiencies, once theyre cleared .................................................................................. 25 8. Final prospectus/supporting docs can be filed and a receipt obtained (at discretion of securities commission whether it is in the public interest to do so even if you met all requirements) .............. 25 It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin ..................................................................................................................................................... 25 3.4.2 Creating the Preliminary Prospectus: What must be included.................................................. 25 See Form 41-101F1 or 44-101F1 for short-form, OSC rule 45-501. Long-Form Prospectus: very open ended including all material facts (fact that sig affects market price/ value). ................................... 26 Preliminary prospectus provides specific items of disclosure and full, true and plain disclosure of all material facts. Need to file it (s. 54(1)), and then you will get a receipt for it (s. 55)......................... 26 Section 54(2): a preliminary prospectus is exactly the same as a final except it can omit the price and what the underwriters get paid and any matters dependent on price .................................................... 26 Policy: Can Exclude Pricing Information because: (1) Its NOT FINAL, youre not selling securities pursuant to it; (2) Gives underwriters an opportunity to assess the market for demand so that they can price it properly .................................................................................................................................... 26 National Instrument 41-101 (Form 41-101F1): General Prospectus Requirements ................................. 26 3.4.2.1 Certification Process .................................................................................................................... 27
FORM 41-101F1 AND OSA.................................................................................................................... 27 3.4.2.2 Filing with Administrator & Obtaining a Receipt for Prelim ...................................................... 28 First receive a preliminary receipt (if comply with all requirements s.54; then per s.55- Director SHALL issue receipt), then delivery the prelim to those who have expressed interest in buying (solicited or not) per s.66 of OSA ......................................................................................................... 28 Section 66 of the OSA Distribution of Preliminary Prospectus ............................................................ 28 3.4.3 The Waiting Period, Vetting/ Comment Letter and Amendments ............................................ 28 s.65(1) Waiting period defined: In this section,waiting period means the period prescribed by regulation or, if no period is prescribed, the period between the Directors issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Directors issuance of a receipt for the prospectus. ................................................................................................................................ 29 xi
Section 65 of the OSA Waiting period .................................................................................................. 29
3.4.3.1
Purpose of the Waiting Period ..................................................................................................... 29
Policy: 3 reasons for waiting period: 1) review for deficiencies; 2) giving investors time to review; 3) allowing for underwriters assessment of the market ........................................................................... 29 3.4.3.2 3.4.3.3 Vetting & Comment Letter............................................................................................................ 29 Constrained selling activities during waiting period ................................................................... 30
Selling activities during the waiting period are constrained: You can only solicit expressions of interest (s. 65) and deliver the preliminary prospectus (s. 66), and have to keep a list of whoever you deliver it to (s. 67) in case you have to amend it. OSC can also stop any of these s. 65 trading activities cease until a revised prelim is filed if the prelim ends up being defective (s. 68) ................ 30 OSA, Part XVI: Distribution Generally ................................................................................................... 30 3.4.3.4 Limitations on advertising during waiting period ........................................................................ 31
PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period .... 31 All you can do in terms of advertising during the waiting period is: IDENTIFY the securities, state the price of the securities, and state the name/address of a person or company who you can buy them from, and where you can get the prospectus......................................................................................... 31 OSC Test for Whether or not Advertising is Okay .................................................................................. 31 FACTUAL TEST in furtherance of a trade: OSC staff said in determining whether ads are prohibited, would apply factual test based on whether advertising could reasonably considered to be in furtherance of a trade no forecasts, no projections, no predictions ............................................ 31 3.4.3.5 Amendments if there are changes during the waiting period ....................................................... 32
If a material ADVERSE change occurs, you have to file an amendment ASAP or in any event within 10 days (s. 57(1)), and then send a notice to all investors under your s. 67 list (s. 57(3)). .................. 32 OSA PART XV Prospectus Distribution Amendments on Material Change .................................. 32 3.4.4 3.4.4.1 Filing the Final and Obtaining a Receipt and Changes Post-Filing ........................................... 34 Final Receipt ................................................................................................................................ 34
OSA Prospectus Distribution Final Receipt (s.61) .............................................................................. 34 s.61: (1) Issuance of receipt PUBLIC INTEREST: Subject to subsection (2) of this section and subsection 63 (4), the Director shall issue a receipt for a prospectus filed under this Part unless it appears to the Director that it is not in the public interest to do so. .................................................... 34 (2) Refusal of receipt: The Director shall not issue a receipt for a prospectus or an amendment to a prospectus under the following conditions ........................................................................................... 34 (3) Hearing: The Director shall not refuse to issue a receipt under subsection (1) or (2) without giving the person or company who filed the prospectus an opportunity to be heard ...................................... 35 Rivalda...................................................................................................................................................... 35 Failed to issue receipt for a junior mining company offering b/c felt directors were too inexperienced, even though they indicated and DISCLOSED that they were inexperienced ...................................... 35 Lake Forest Fund ...................................................................................................................................... 35
xii
Failed to issue receipt because they did not like the disclosed fee structure, thought too much money would go to the promoter. .................................................................................................................... 36 Deprenyl ................................................................................................................................................... 36 Decision: OSC wouldnt issue a receipt for final prospectus because success depended on FDA approval of a drug and thus too risky company made this very clear on the face of the document that drug was not permitted in Canada and needed FDA approval finally OSC approved ended up getting FDA approval (but what would happen if no approval see policy) ........................................ 36 POLICY (keep in mind these are outliers, and overall, he loves the OSC, decisions are typically effective) ............................................................................................................................................... 36 - This is a paternalistic approach: why not just force them to give the information to the public, but then LET THE PUBLIC DECIDE?...................................................................................................... 36 BUT COUNTER-ARGUMENT: Cost to society is that people will not invest markets if we dont protect its integrity and if people lose all their $ on risky investments ................................................ 36 3.4.5 3.4.5.1 Closing & Any Post-Final Amendments ....................................................................................... 36 Delivery of Prospectus & Inclusion of Purchasers Rights .......................................................... 37
OSA- Prospectus Distribution .................................................................................................................. 37 s.60: Statement of Purchaser rights: Every prospectus shall contain a statement of the rights given to a purchaser by sections 71 (withdrawal rights) and 130 (right to sue for misrepresentation). ................ 37 Withdrawal Right Explanation & Examples (from class handout) .......................................................... 37 Effective Delivery NP 11-201 (Delivery of Documents by Electronic Means) .................................... 38 3.4.5.2 Changes Post Filing of Final Prospectus (Any change must be reported in amendment) ........... 38
If there is a material change in affairs of company b/w final receipt and closing, you have to deliver an amendment positive OR Negative changeBut during waiting b/w receipt for prelim and receipt for final, s. 57(1) says you only have to do an amendment for material adverse change (you can for any change, if you want) .......................................................................................................... 38 OSA 57(1) again except this time, Any Change! Not Just Adverse! ....................................................... 38 3.4.5.3 Lapse of Prospectus...................................................................................................................... 39
Distribution can continue for 12 months from date of receipt for the preliminary prospectus. After this period, the prospectus is said to have lapsed (per s.62(1)) and no further distributions of the security can be made without a renewal of the prospectus (per s.62(1.1)) ........................................... 39 Section 62(1) ............................................................................................................................................ 39 3.4.5.4 National Offerings (NI 11-202 Passport System) ......................................................................... 39
With national filings, there is a principal regulator (main rule for choice of PR is jurisdiction in which issuers head office is located). If head office is in a location that isnt in any of the jurisdictions of potential principal regulators, then its the regulator in the jurisdiction with which the issuer has its most substantial connection .................................................................................................................. 39 3.4.6 3.4.6.1 Consequences for Failure to Deliver/ File Prospectus (practically, none) ................................. 39 Failure to Deliver ......................................................................................................................... 39 xiii
Penal, Admin and civil sanctions HOWEVER in reality, there are few penalties according to Lastman .............................................................................................................................................................. 39 3.4.7 3.4.8 3.4.8.1 Failure to File (likely not needed) ................................................................................................. 40 Liability for Misrepresentation in a Prospectus .......................................................................... 40 Liability ........................................................................................................................................ 40
WHO IS LIABLE - Company, directors, selling security holders, officers who signed prospectus, underwriters, and the experts all may be liable for a misrepresentation in the prospectus. Policy- have everyone liable to give incentive to be careful. .................................................................................... 40 s.130: sets out liab, damages and defences for liab .............................................................................. 40 Recall: s.1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to state material fact that is required to be stated or that is necessary to make a statement not misleading in light of circumstances in which it was made. ................................................................................... 40 OSA, s.130: Liability for misrepresentation in prospectus....................................................................... 41 Section 1(1) Misrepresentation................................................................................................................. 43 misrepresentation means, (a) an untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made; (prsentation inexacte des faits) .................... 43 Kerr v. Danier (SCC, 2007), 157 .............................................................................................................. 43 Ratio: Only have to report material CHANGES post-filing, not material facts. A forecast can be the subject of misrepresentation, P does not have to prove reliance, deemed ............................................ 43 3.4.8.2 3.4.8.3 Damages ....................................................................................................................................... 44 Defences ....................................................................................................................................... 45
s.130: Defences......................................................................................................................................... 45 1. Issuer OR security holder: Strict Liability (no Due Diligence Defence, tho, J&S Liability, has options i or v above) ............................................................................................................................. 45 2. Experts (Joint and Several Liability, and only for expertised portions has all defences from above available + 1) ........................................................................................................................................ 46 3. NON-EXPERTS (e.g. Due Dilig defence for everyone except the issuer and selling securityholder e.g. Directors, officers) ...................................................................................................................... 46 Due Diligence: Standard of Reasonableness s. 132 .............................................................................. 48 s.132: In determining what constitutes reasonable investigation or reasonable grounds for belief for the purposes of sections 130 and 131, the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case. ................................................................ 48 Escott v Barchris (USA, 1968), 163 ......................................................................................................... 48 Ratio: Attempts to define level of due diligence required, but really only says what is not acceptable It does not matter whether you can read/ understand the prospectus; if you sign it, you are liable.48 There is an overriding obligation to the public and the capital markets. I need to have a reasonable investigation to avoid a misrepresentation ........................................................................................... 48 xiv
Feit v. Leasco ........................................................................................................................................... 49 Ratio: Underwriters gatekeeper role therefore has obligation to challenge issuers disclosure and go beyond automatic reliance on what issuer presents ......................................................................... 49 Standards for inside vs. outside directors inside directors expected to make more complete investigation and have more extensive knowledge of facts than outside directors .............................. 49 YBM Magnex (OSC) ............................................................................................................................... 49 Standard of due diligenceshould be ongoing, but only to the extent of tying up lose ends. Threshold of materiality must be considered in light of all facts available ..................................... 49 3.4.8.4 Limitation Period & Common Law Rights ................................................................................... 50
Jones v Deacon ......................................................................................................................................... 50 Implications: Why misrepresentations are all so scary, and why you need to take it seriouslyCourt found that sale of securities is so fundamental to our law, that is NEVER statute-barred, and it forever voidable at the instance of the purchaser .............................................................................................. 50 3.4.9 Registration Requirement.............................................................................................................. 50 Section 25 of the OSA so to satisfy, get an underwriter .................................................................. 50 3.4.10 3.4.11 4.0 UW Agreement ............................................................................................................................... 50 Sample Prospectus .......................................................................................................................... 51
SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE ...........................53 Five aspects of continuous disclosure: (1) Regular disclosure (quarterly/annually); (2) timely disclosure (of material changes); (3) Early Warning (if buying up 10%- could signal takeover bid); (4) Insider Reporting (allowed to trade, but we want to know what youre doing); (5) Insider Trading (to keep things fair, cant do)................................................................................................................ 53
4.1
Policy Behind Continuous Disclosure Regime Merger Report (3 objectives) ................................ 53 (1) Investor information; (2) accountability technique to encourage more eff management/ deterrent to fraud; (3) Creates equality of opportunity for all investors in the marketplace (sellers & buyers); (4) discourages transactions that dont meet public scrutiny; (5) allows for disciplining of mgmt. (condemn/ commend) ........................................................................................................................... 53 National Policy 51-201: Disclosure Standards ......................................................................................... 53 Section 1.1 (1): It is fundamental that everyone investing in securities have equal access to information that may affect their investment decisions. ..................................................................... 53
4.2
PART I: Regular Disclosure .................................................................................................................. 53 Reporting Issuers ONLY: Only reporting issuers are subject to continuous disclosure (as defined in s.1(1) of OSA) ...................................................................................................................................... 53
4.2.1
Application to Reporting Issuers................................................................................................... 54
Section 1(1) of the OSA: Reporting Issuer ............................................................................................... 54 4.2.2 4.2.2.1 Obligation to File Financial Statements ....................................................................................... 54 ANNUAL Section 4.1 ................................................................................................................. 54 xv
Every company must prepare annual, audited comparative financial statements within 90 days of the end of the fiscal year............................................................................................................................. 54 4.2.2.2 INTERIM - Section 4.3(1) of NI 51-102 ....................................................................................... 54
An issuer must file cumulative, comparative financial reports for each interim period ending after it became a reporting issuer, and 4.4(a)(i) the filing must be completed on or before the 45th day after the end of the interim period in a non-foreign jurisdiction (must file every 3, 5, and 9 months) (note: not audited) ........................................................................................................................................... 54 4.3 PART II: Timely Disclosure (of changes)............................................................................................. 54 1. You must report material changes in your business, capital or operations (75(1)) .......................... 54 2. Report in one of three ways: 1) Full Reporting; 2) Incomplete Disclosure, 3) Confidential Reporting (must apply to use this, and can only use if you meet conditions) ...................................... 55 To bring action for Failure by an issuer to make timely disclosure, must show: 1) Reporting issuer or any other issuer with a real and substantial connection to the jurisdiction whose securities are publicly traded, failed to make a timely disclosure; 2) The P acquired or disposed of a security of the issuer; 3) Acquisition or disposal occurred between the time when a disclosure was required and before the subsequent disclosure of the material change....................................................................................... 55 POLICY Tension: Investor Information + Protection VS. Efficient capital markets ........................... 55 4.3.1 Statutory Provision: OSA, Part XVIII Continuous Disclosure ............................................... 56 s.75 (1) must report a material change; (2) within 10 days of change; (3) exception for confidentiality; (4) keep reporting every 10 days; (5) requirement to disclose subsequently if someone purchases .... 56 4.3.2 Material Change vs Material Fact ................................................................................................ 56 Remember, 1(1): Material Change = change in business operations or capital of a company that would reasonably be expected to have a significant effect on market price or value of the securities, or a decision to implement a change referred to above by the board or senior management who believe that confirmation by the board is probable .............................................................................. 56 Royal Trust Co v Campbeau .................................................................................................................... 57 Ratio: Difference in material change vs. material fact (example) only have to disclose material changes, not material facts.................................................................................................................... 57 DANIER ................................................................................................................................................... 57 Also difficult to tell whether a change in the weather and a subsequent crappy sales promotion of leather goods is a material fact or a material change (TJ found it to be a material fact) ...................... 57 4.3.2.1 Materiality Standard from National Policy 51-201 ..................................................................... 57
Pezim v. British Columbia (1994, SCC) .................................................................................................. 57 Ratio: National Policy Statements/ Sec Commissions should be given deference wrt to determining what constitutes a material change ....................................................................................................... 57 4.3.3 4.3.3.1 What must be filed with a material change (3 Report Options) ................................................. 58 Complete Public Disclosure ......................................................................................................... 58
1) File a press release per s.75 OSA, NI 51-201 s.2.1; 2) File a material change report (Form 51102F3) .................................................................................................................................................. 58 xvi
4.3.3.2
Incomplete Public Disclosure ....................................................................................................... 58
Still Form 51-102F3. This is the same, except leave out a fact and persuade the commission (via report) that a particular fact should not be disclosed. Here, only part of the material change is not disclosed. Prof has never seen this used. .............................................................................................. 58 4.3.3.3 Confidential Disclosure / Reporting ............................................................................................. 58
s. 7.1(1) and (2) of National Instrument 51-102: Material Change Reports............................................. 58 Do not have to follow usual procedure of disclosing material change (per s.7.1(1)) if, per s.7.1(2) it would be (a) unduly detrimental or (b) as a right, and the reporting issuer immediately files Form 51102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure....................................................................................................................................... 58 4.3.3.4 4.4 Best Practices Re: Disclosure (per NP 51-201) ........................................................................... 60
PART III: Early Warning ..................................................................................................................... 60 Purpose of Early Warning: potential sign of a takeover bid where people will offer premiums to share price. If someone acquires a certain percent of the shares of a company, they have an obligation to say so and what their intention is, so that the market is aware of what is going on. ............................ 60
4.4.1
STEPS: ............................................................................................................................................ 60 1. Have you bought shares that, together with what you already own, put you at an ownership threshold of 10% (you can trade up to 9.9 without disclosure)? If yes (102.1(1)) ............................... 60 2. Do you want to buy more shares? If yes wait one business day before buying more (s.102.1(3)) ........................................................................................................................................... 60
4.4.2 4.4.2.1 4.4.2.2 4.5
STATUTORY PROVISIONS ....................................................................................................... 60 OSA S.102.1 10% Rule and 2% Rule......................................................................................... 60 OSC RULE 62-504: Section 7.1 Early Warning ....................................................................... 61
PART IV: Insider Reporting ................................................................................................................. 61 POLICY: we actually want insiders to have skin in the game (e.g. need escrow arrangements with an IPO so they cant sell right away - (61(2)(g) director can refuse to issue receipt) ............................ 62
4.5.1 4.5.2 4.5.2.1 4.5.2.2
Analysis: When do insider reporting rules apply? ...................................................................... 62 STATUTORY PROVISIONS ....................................................................................................... 62 OSA Section 1(1) Definitions: Insider .......................................................................................... 62 OSA Section 107 Insider Reporting ........................................................................................... 63
4.5.2.3 NI 55-104 Insider Reporting Requirements (s.3.2 & s.3.3) & Exemptions AND Form 55-102F2 Insider Reporting .......................................................................................................................................... 63 4.6 PART V: Insider Trading ...................................................................................................................... 63 TWO PARTS: (1) Trading: You cannot sell with insider information and (2) Tipping: you cannot tell anyone else about that information ....................................................................................................... 63 4.6.1 Policy Discussion about Insider Trading / Tipping Prohibition ................................................. 63 POLICY: maintain integrity of capital markets, provide fullest poss knowledge so that investor confidence is maintained (want everyone to play) ............................................................................... 63 xvii
4.6.2 4.6.2.1 1. 2.
Steps ................................................................................................................................................. 64 Trading ......................................................................................................................................... 64 Are you a person or company in a special relationship with a reporting issuer? ......................... 64 Are you trading (buying/selling)?................................................................................................. 64
3. Are you doing so with knowledge of a material fact OR change (covers both!) that has not been generally disclosed?.............................................................................................................................. 64 4. If you are in a special relationship and traded with knowledge of a material fact OR change (covers both!) that has not been generally disclosed, do you have a valid defence? (175 of regs) ...... 64 4.6.2.2 1. Tipping.......................................................................................................................................... 65 Are you a person or company in a special relationship with a reporting issuer? If not ............ 65
2. Did you learn information from someone that you knew or ought to have known was in a special relationship? (76(5)(e) puts you in a special relationship) ................................................................ 65 3. Did you share a material fact or change that has not been generally disclosed with anyone else not in the ordinary course of business? ................................................................................................ 65 4.6.3 4.6.3.1 4.6.3.2 Statutory Provisions (OSA) ........................................................................................................... 65 OSA Section 76 Trading Where Undisclosed Change/Tipping .............................................. 65 Insider Trading (OSA): s.76(1) .................................................................................................... 67
76(1): it is an offence for a person or a company in a special relationship with reporting issuer to purchase or sell securities with knowledge of a material fact or material change that has not been generally disclosed ............................................................................................................................... 67 4.6.3.3 Tipping (OSA s.76(2) +(3)) .......................................................................................................... 67
76(2) and (3): offence for reporting issuer or someone in a special relationship with reporting issuer or any person proposing to make takeover bid prohibited from disclosing or giving other people information with respect to a material fact/change that has not been generally disclosed except in the necessary course of business ................................................................................................................ 67 Royal Trust Co v. CampbeauChanges v. facts: tipping covers both .................................................... 67 In this situation, even though they decided that knowing a major SH wouldnt tender their shares was not a material change, it was a material fact, and in that case, the Director told other SHs not to tender, b/c the bid wouldnt go ahead today, hed be dead with these rules (due to tipping regs). Telling people not or that they dont have to tender to protect your job is not in the necessary course of business, and youre guilty of tipping............................................................................................... 67 4.6.4 Meaning of Generally Disclosed (Defence) ................................................................................... 67 Question of fact- onus on D (accused of insider trading) to show you believe it was generally disclosed ............................................................................................................................................... 67 Texas Gulf ................................................................................................................................................ 67 Info must be effectively disclosed: Before insiders may act on material information, must be effectively disclosed in manner to ensure its availability to investing public. So basically, you cannot disclose and trade on the information one minute later. ....................................................................... 68 National Sea ............................................................................................................................................. 68 xviii
Ratio: Two-part test for when you can trade as an insider: 1. Must be disseminated to the trading public; and 2. The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/ complexity of the info (generally, wait one full trading day after release of info)........................................................................................................... 68 4.6.5 4.6.5.1 4.6.5.2 Defences to Insider Trading / Tipping .......................................................................................... 68 Make Use of Defence no longer applicable .......................................................................... 68 Protecting Integrity of the Info (s.175 of Regs) ........................................................................ 69
If you take all reasonable precautions to protect integrity of info and someone else trades, not guilty (only if reckless) ................................................................................................................................... 69 REGULATIONS, s.175............................................................................................................................ 69 4.6.5.3 4.6.5.4 Defence in Practice Law Firms ................................................................................................. 70 Trading as an agent & youve given no advice (s.172((a) of Regs) ............................................. 70
If you trade as AGENT for another person pursuant to unsolicited order, and you gave NO advice, youre not guilty of insider trading ....................................................................................................... 70 4.6.5.5 Automatic Investment Plan (175(2)(b) of Regs) ........................................................................... 70
If automatic dividend reinvestment plan, not guilty of insider trading, even if you knew ................... 70 4.6.5.6 To fulfill legally binding agreement that happened before material info was known (s.175(2)(c) of regs) 71 Defence b/c entered into legally binding contract BEFORE You had knowledge, then you subsequently get knowledge, dont have to breach contract (Policy rationale no uneven playing field \ not making decisions w/ knowledge) ........................................................................................ 71 4.6.5.7 Trades between 2 People Who Both Know the Info (s.175(5) of Regs) ........................................ 71
Fine b/c both have same info, no one has advantage over someone else. Playing field still level. ...... 71 4.6.6 4.6.6.1 Actions, Sanctions & Penalties for Insider Trading .................................................................... 71 Penal sanctions CRIMINAL ...................................................................................................... 71
Under s. 382.1 Criminal Code prohibits trading on basis of material info concerning an issuer that has not been generally disclosed (similar to OSA s.76) ............................................................................. 71 Defenceinformation was given in the necessary course of business of the reporting issuer; a defence where the giving of the information is necessary to effect the takeover, business combination or acquisition; finally where the person reasonably believed the information had been generally disclosed. .............................................................................................................................................. 71 4.6.6.2 Civil Actions ................................................................................................................................. 71
The Act provides for an action for damages against a person trading on inside information by the person with whom the trade was made. ................................................................................................ 71 Tipping: The Act also provides for an action for damages against a person who informed another of the inside information. .......................................................................................................................... 72 4.6.6.3 5.0 Administrative sanctions .............................................................................................................. 72
SEGMENT 3: THE CLOSED SYSTEM: ...................................................................................73 xix

5.1
Private Placement & Exemptions ......................................................................................................... 73 General Rule ................................................................................................................................... 73 General rule: no trading in security, unless you are registered. If its a distribution, without prospectus or proper reliance on private placement exemption ............................................................................. 73 Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor protection)............................................................................................................................................. 73
5.1.1
5.1.2
Advantages & Objectives of Private Placement .......................................................................... 73 *Exemptions found in NI 45-106 OR Rule 45-501 .............................................................................. 73 Adv: (1) Speed (No Prior Regulatory Review, like with prospectus, but still highly regulated!!); (2) Confidentiality (almost always more confidential than prospectus) .................................................... 73 Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor protection and efficient capital markets this is at least what theyre TRYING to do, even if there are inconsistencies ...................................................................................................................................... 73 All exemptions focus on :(1) identity of purchaser; (2) inherently safe securities; (3) Info already available; (4) another superior policy objectives .................................................................................. 73
5.1.3
The Private Placement Exemptions .............................................................................................. 74 4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited investor, min amount); 2) Limited offering exemptions (govt incentive sec, founder/control person/ family); 3) trades in sec of private companies; 4) Isolated trades (isolated distrib by issuer). ............. 74
5.1.3.1 5.1.3.2 5.1.3.3
Exemptions based on wealth/ sophistication of purchaser ........................................................... 74 Limited Offering Exemption ......................................................................................................... 75 Trades in Securities of Private Companies (s.2.4 of NI 45-106) .................................................. 76
R v. Pipegrass (AB CA) Common Bonds Test ..................................................................................... 77 COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused, or persons having common bonds of interest or associations, they are considered to be the public, if they have common bonds, then not the public ............................................................................................. 77 IS A FINDING OF FACT the court must see if the sale transcended sales beyond private concern .............................................................................................................................................................. 77 SEC v. Ralston Purina Need to know test .......................................................................................... 77 Need to know test (Test of whether youre selling to the public -in which case, cant use priv issuer exemption). TEST: Persons b/c of their sophistication or relationship with company who dont need protection of prospectus are not members of the public. Focus of inquiry is NEED of offerees for protection afforded by the act............................................................................................................... 77 5.1.3.4 Isolated Trades (s.2.30 of NI 45-106)........................................................................................... 77
Distribution must be an isolated one that is not made (a) in the course of continued and successive transactions of a like nature or (b) by a person whose usual business is trading in securities. ............ 77 5.1.3.5 Discretionary Ruling (74(1)) not going to happen .................................................................... 77
Exemption order (1) Upon the application of an interested person or company, the Commission may make the following rulings if the Commission is satisfied that to do so would not be prejudicial to the xx
public interest: 1. A ruling that any person or company is not subject to section 25; 2. A ruling that any trade, intended trade, security, person or company is not subject to section 53. (2) can impose conditions ............................................................................................................................................. 77 5.1.4 5.1.4.1 Offering Memorandum (and problems with it) ........................................................................... 77 What is an offering memorandum? .............................................................................................. 78
Rule 14-501 Definitions (s.1.1(2)) & OSA (s. 1(1); same as s.1.1(2)) (also see 5.6(2) of CP 45-501 for what isnt one) .......................................................................................................................................... 78 5.1.4.2 Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.5.3) & Deliver (s.5.4) for rescission ................................................................................................................................................ 78 OSC RULE 45-501, s.5.3: you dont have to deliver any document to AIs in connection with the securities, but if you CHOOSE to issue them an offering memorandum, must contain a contractual right of action saying you can sue us if theres a misrepresentation (not only misstatement of material fact, but also omission of MF) .............................................................................................................. 78 OSC RULE 45-501, s.5.4: Delivery of OMIf you do deliver it have to send copy of doc to securities commission w/In 10 days of date of trade ............................................................................ 78 5.1.4.3 Liability under Offering Memorandum (s.130.1 of OSA) ............................................................. 78
s.130.1 (1) Liability for misrepresentation in offering memorandum where a misrep, the purchaser has the following rights: 1) right of actions for damages against issuer and selling securityholder; 2) right of rescission against person/ company; (2) Defence: not liable if purchaser knew of misrep ..... 78 5.1.5 Registration Requirement for Private Placement Exemptions .................................................. 79 5.1.5.1 NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (Also section 25 of the OSA) .................................................................................................................................. 79 Business Trigger Test: if you are a market participant in the business of trading in securities, you must be registered. If in business of trading securities, have to be registered ...................................... 79 5.2 Resale Rules ............................................................................................................................................ 79 General Rule: 2 Components of Resale Rules.............................................................................. 79 1) Resale rule for non-control persons: (a) all exemptions other than private issuer and (b) resale rules for those acquiring sec through private issuer exemption; 2) Resale rules for control persons (not connected to above rules) ..................................................................................................................... 79 Goals achieved by resale rules: Preventing back-door underwriting ................................................... 79 5.2.1.1 Ways of Reselling (Generally) ...................................................................................................... 80
5.2.1
1) If you can get the company to issue a prospectus and offer to sell YOUR securities pursuant to that prospectus (secondary offering) .................................................................................................... 80 2) Rely on another private placement exemption: Sell to Another Purchaser Pursuant to Another Exemption............................................................................................................................................. 80 3) 4) 5.2.1.2 5.2.2 Exemption order from OSC .......................................................................................................... 80 Satisfy Resale Rules NI 45-102 ................................................................................................. 80 Def of Distribution is Important Here .......................................................................................... 80 Resale Rules for Non-Control Persons ......................................................................................... 81 xxi
5.2.2.1 Resale rules for non-control person who acquired sec through a private placement exemption other than the private issuer exemption ....................................................................................................... 81 NI 45-102: First Trades, Restricted Period and Seasoning Period ........................................................... 81 2.5 and 2.6 of NI 45-102: if you bought securities pursuant to a PPE, can sell them based on these rules (will be deemed a distribution, UNLESS You satisfy the rules) ................................................. 81 Lastmans Summary of Applicable Rules (Non-Control Persons, Exemptions Except Private Issuer Exemption) ............................................................................................................................................... 81 1) Firstly, can sell shares that you bought pursuant to prospectus (as opposed to an exemption), as long as you are NOT a control person .................................................................................................. 81 2) SECONDLY, if NOT purchased by prospectus, but an exemption Resale Rules for All Exemptions EXCEPT the Private Issuer Exemption ........................................................................ 81 3) Resale Rules for All Exemptions Except the Private Issuer Exemption .......................................... 82 5.2.2.2 Resale Rules for a Non-Control Person who Acquired Sec through the Private Issuer Exemption 82
Lastmans Summary of Rules: ................................................................................................................. 83 (a) The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade; (the re-sell) (b) The trade is not a control distribution; (c) No market manipulation; (d) No extraordinary commission or consideration is paid in respect of the trade; and (e) No grounds to believe issuer is in default. .......................................... 83 5.2.3 5.2.3.1 Resale Rules for Control Persons (Separate Regime) ................................................................. 83 Section 1(1) of the OSA Control Person Definition rebuttable, pure ? of fact ....................... 83
Definition of Control Person: S. 1(1) of OSA: Person who alone or in combination with others holds a sufficient # of securities to MATERIALLY AFFECT CONTROL of the company (rebuttable presumption & pure Q of fact bright-line rule) ................................................................................. 83 5.2.3.2 Five Ways a Control Person Can Sell Stock (Lastman Summary) ............................................... 84
(a) The control person qualifies a prospectus for the sale of the subject securities .............................. 84 (b) An exemption order is obtained from the OSC (very rare!); .......................................................... 84 (c) The control person sells pursuant to another private placement exemption; .................................. 84 (d) The control person sells to another control person (also giving rise to resale rules, not freely tradeable and will have to give a discount for that reason); or ............................................................. 84 (e) The control person sells pursuant to the advance notice route ........................................................ 84 5.2.3.3 5.2.3.4 5.2.3.5 6.0 6.1 Advance Notice Route................................................................................................................... 85 No tacking with control persons ................................................................................................... 85 Resale Rules Class Examples (Handout)...................................................................................... 85
SEGMENT 4: CONTROL TRANSACTIONS ...........................................................................87 Reasons for Takeover Bids .................................................................................................................... 87 xxii
PUBLIC POLICY: on the balance of things, legislators and regulators have decided that takeover bids are a good thing for society If youre not a reporting issuer in province of Ontario, not subject to takeover bid rules ............................................................................................................................. 87 6.1.1 Socially Useful Reasons for Takeover Bids .................................................................................. 87 1) Move assets to their most desired uses; 2) Create synergies, 3) Force mgmt. to be efficient .......... 87 6.1.2 Non-Socially Useful Reasons for Takeover Bids .......................................................................... 87 1) Premium for acquirer; 2) empire building; 3) creating monopolies; 4) tax advantages ................... 87 6.1.3 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them .... 87 Kimber Report Rationale: To protect investors of offeree company.................................................... 87 Objective of protecting shareholders of offeree company is manifested in 3 ways in carrying out t/o bid rules: 1) Information (inform investment decisions); 2) Time (i- for SHs to think about it, ii- to get opinion from mgmt., iii- to allow for an auction); 3) Equality ....................................................... 88 6.2 Overview of How Takeover Bids Work................................................................................................ 88 Dealt with in Sections 89-105.1 of Securities Act. If youre not a reporting issuer in province of Ontario, not subject to takeover bid rules ............................................................................................. 88 2 Kinds of bids: 1) Exempt takeover bids; 2) vendor takeover bids .................................................... 88 Takover Bid: Generally speaking, a takeover bid is the acquisition of shares of a company (the target) which, together with the shares already owned by the purchaser, will put the purchasers shareholdings in the target over a certain threshold, generally 20%. ................................................... 89 Takeover bid circular: communicates details to shareholders will describe the offer (the price, numner of shares and any conditions) and is sent to all SHs................................................................ 89 Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular, review it and decide whether they want to sell (tender), a bid must be open for acceptance for at least 35 days. ...................................................................................................................................................... 89 SH right of withdrawal: The offeror cant take-up the tendered shares for 35 days and the shareholder can withdraw the shares at any time before the securities are taken up. .............................................. 89 Directors Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons, which are sent by target to all SHs ....................................................................................................... 89 Change in Terms of Offer Extension of Tendering: If a term of the offer is changed (i.e., the offer price increased), this must be communicated to all shareholders who are given an extra 10 days to tender their shares. ................................................................................................................................ 89 Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking them up, a shareholder can withdraw their shares if not paid for within 3 business days after having been taken up. ....................................................................................................................................... 89 Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than this number is tendered, the shares are taken-up pro-rata and not first come, first serve. .................... 89 SHs offered same consideration + no collateral agreements: All shareholders must be offered the same consideration and no collateral agreements may be entered into. ............................................... 89
xxiii
Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days from the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid integration). .......................................................................................................................................... 90 Post-Bid Integration Rules: An offeror cant purchase shares of the target for 20 business days after the termination of a bid, except pursuant to another circular bid or the exceptions ............................. 90 Exceptions to having to issue t/o bid circular: 1) 100.1 of OSA: can buy whatever as long as its from 5 people or less, and you dont pay more than 115% of market price (realistically, can probably only use this once, but dont know); 2) 100 of OSA: can buy 5% on the open market every 12 months, at market price. ......................................................................................................................................... 90 6.2.1 6.2.1.1 6.2.1.2 6.2.1.3 What is a takeover bid? ................................................................................................................. 90 OSA: Part XX: Takeover Bids and Issuer Bids, s.89(1) ............................................................... 90 OSA, s.102.2 - Acquisitions During a Bid By an Acquiror........................................................... 91 Indirect Acquisition s. 92 ........................................................................................................... 92
Russell Holdings (Treats) ......................................................................................................................... 92 Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one ......... 92 EXAMPLE OF NO SMART GUYS WITH TAKEOVERS if youre going to buy a public company/gain control of it through a private company, you have to issue a takeover bid circular ..... 92 6.2.2 Deemed Ownership ........................................................................................................................ 92 You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover bid (i.e. options) .................................................................................................................................... 92 6.2.2.1 6.2.2.2 6.3 Sections 89(5) and 90(1) .............................................................................................................. 92 Sample problems Sunlor ....................................................................................................... 93
Mechanics of a Vendor Takeover Bid................................................................................................... 94 Takeover Bid Circular (Information) ........................................................................................... 94 General Rule: If I what I own + what I buy is over 20, cant do it without a takeover bid. If you want to own or control 20% or more of the securities of a reporting issuer, you can only do so by takeover bid circular (unless an exemption is available).................................................................................... 94 6.3.1.1 6.3.1.2 Section 94.1(1) and Form 62-504F1: Making a Formal Bid ....................................................... 94 Legislative goal met ...................................................................................................................... 95 Minimum Period of Bid (Time) ..................................................................................................... 95 The takeover bid circular must be open for at least 35 clear calendar days in order to give people time to assess, give management an opportunity to give their opinion, and give other bidders the chance/right to mount a competing bid (auction) ................................................................................. 95 6.3.2.1 6.3.2.2 s.98: Bid Mechanics ..................................................................................................................... 95 Legislative Goal Met .................................................................................................................... 95 Pro Rata (Equality) ........................................................................................................................ 96 Section 97.2: Consideration ......................................................................................................... 96 xxiv
6.3.1
6.3.2
6.3.3 6.3.3.1
s.97.2(1) If a formal bid is made, all holders of the same class of securities shall be offered identical consideration. ....................................................................................................................................... 96 6.3.3.2 6.3.4 6.3.4.1 6.3.4.2 6.3.4.3 6.3.4.4 6.3.5 6.3.5.1 6.3.5.2 6.3.6 Legislative Goal Met .................................................................................................................... 96 Withdrawal and Change of Info or Variation in Terms (time and info) ................................... 96 Section 98.1: Withdrawal of securities ......................................................................................... 96 Section 94.3: Change in Information ........................................................................................... 96 Section 94.4: Variation of Terms.................................................................................................. 97 Legislative Goal Met .................................................................................................................... 97 Conditions (just investor protection) ............................................................................................ 97 Section 97.3: Financing Arrangements ........................................................................................ 97 Legislative Goal Met .................................................................................................................... 98 Payment for Securities (investor protection generally) ............................................................... 98 Earliest of: a) You have to take up and pay for them within 10 days after expiry of the bid; OR b) Once youve taken them up, you have 3 days; OR c) For securities deposited AFTER the date on which the offeror first takes them up have to be paid for by the offeror within 10 days after deposit . 98 6.3.6.1 6.3.6.2 6.3.7 6.3.7.1 6.3.7.2 Section 98.3: Obligation to Take Up and Pay for Deposited Securities ...................................... 98 Legislative Goal Met .................................................................................................................... 98 No collateral agreements ................................................................................................................ 98 Section 97.1 .................................................................................................................................. 98 Legislative Goal Met .................................................................................................................... 98
Test for whether or not collateral agreements are ok ............................................................................... 99 May apply to the OSC to ask them if a certain agreement is okay (s.104(2)) (Why do you need it? *diff of INTENTION): (a) are you inducing that person to sell you their stock? (not okay) OR (b) do you need them and their expertise or are doing it for a legitimate business purpose that had nothing to do with whether or not that person owned shares? (okay) ................................................................... 99 6.4 Post-Bid: Directors Circular (Response)............................................................................................. 99 Section 95: Offeree Issuers Obligations ...................................................................................... 99 Legislative Goal Met..................................................................................................................... 100
6.4.1 6.4.2 6.5
Pre & Post-Bid Integration .................................................................................................................. 100 Lock-up Agreements/ Tendering Agreements (Allowed) ......................................................... 100 93.1(1) of the OSA says you cant enter into any agreement to enter shares while bid is outstanding (in a private agreement) ...................................................................................................................... 100 6.5.1.1 Section 2.1(2) of Rule 62-504 ..................................................................................................... 100
6.5.1
However, Section 2.1(2) of Rule 62-504 (Take Over Bids and Issuer Bids) says I can enter into a lock-up agreement with you whereby the shareholder and offeror making bid will contract to effect that shareholder will tender his shares to a formal TOB made by the offeror made in accordance with proper terms/conditions of her bid........................................................................... 100 xxv
6.5.1.2 6.5.1.3
Section 93.1: Restrictions on acquisitions during formal take-over bid .................................... 101 OSC RULE 62-504: TAKE OVER BIDS AND ISSUER BIDS .................................................... 101
Per s.2.1(2): Subsection 93.1(1) of the Act does not apply to an agreement between a security holder and the offeror to the effect that the security holder will, in accordance with the terms and conditions of a formal take-over bid, deposit the security holders securities under the bid. .............................. 101 6.5.1.4 6.5.2 6.5.2.1 6.5.2.2 6.5.3 6.5.3.1 6.6 Legislative goal is STILL met ..................................................................................................... 101 Pre-Bid Integration ...................................................................................................................... 101 Section 93.2(1): Restrictions on Acquisitions Before Formal Take-Over Bid ........................... 102 Legislative Goal Met .................................................................................................................. 102 Post-Bid Integration ..................................................................................................................... 102 Section 93.3 ................................................................................................................................ 102
Exemption from Pre-Bid and Post-Bid Restrictions EXEMPT Takeover Bids! ......................... 102 Private Agreement Exemption (s.100.1(1) of OSA, most important) ...................................... 103 S.100 Normal Course Exemption Dont Exceed 5% in 12 Months .................................... 103
6.6.1 6.6.2 6.7
Voting & Non-Voting Shares ............................................................................................................... 103 Canadian Tire (1986, OSC) .................................................................................................................... 103 Ratio: Coattail provision, despite not countering statute or case law, was not allowed to go through as it would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public interest). Found that collateral agreement rule only applies in the context of a t/o bid (since this was not a takeover bid, collateral agreements did not apply) .................................................................... 104
6.8 Directors Duties and Responsibilities in a Takeover Bid Situation Defensive Tactics to Buy Time 104 Policy for defensive: you can do w/e you want to fight bid, but if you deprive SH of choice, youre dead (prob b/c conflict of interest between directors interests and SHs interests). Its good to have them, because you maximize value of the enterprise. ........................................................................ 104 6.8.1 6.8.1.1 6.8.1.2 6.8.2 Fiduciary Duty in the Context of Takeover Bid ........................................................................ 104 NP 62-202: Tactics that will come under scrutiny ..................................................................... 105 Duty to Maximize SH Value........................................................................................................ 105 Examples of Defensive Tactics..................................................................................................... 105 Example of defensive tactics bought a pig farm to make company unattractive to bidder (too extreme, but case was before sec law) ................................................................................................ 105 Labatts (just an example)........................................................................................................................ 105 Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab); after this case brought in law re: defensive tactics (however, board did its job to buy time and eventual had a preferable bidder) ...................................................................................................................... 106 Max Milk and Beckers ........................................................................................................................... 106 xxvi
Union Enterprise (Unicorp Tender) (Example) ...................................................................................... 105
Example of attempt by Max Milk to find a white knight ................................................................... 106 6.8.2.1 Due Diligence can restrict access ........................................................................................... 106
Sun Media and TorStar ........................................................................................................................... 106 Example where info was not made available to bidder. Also in this case, complained to competition bureau. Worked out since delay led to higher bid. ............................................................................. 106 Second Cup............................................................................................................................................. 106 Example of poison pill- not actually used, just threatened to give opp to talk ................................... 106 6.8.2.2 6.8.2.3 6.8.3 6.8.3.1 Golden Parachutes all legal. ................................................................................................... 107 Poison Pills................................................................................................................................. 107 Defensive Tactic Rules - NP 62-202............................................................................................ 107 NP 62-202................................................................................................................................... 107
Main Principles:1) takeover bids are a good thing; 2) primary objective of t/o bid legislation is protection of bona fide interests of SHs of target company; 3) second purpose/ objective: create a reg framework where bids can happen in an open and even-handed manner; 4) Regulators believe it is inappropriate to specify a code of conduct for directors b/c that code runs risk of being insuff in some cases and excessive in others; 5) SH approval desirable (BUT this is unrealistic); 6) administrators believe that unrestricted options produce most desirable results in t/o bids and are reluctant to intervene in contested bids; 9) although auctions are best and dont want to intervene, administrator will punish you if your action is to deprive SHs of opp/ rt to respond to a bid; 10) cannot come to administrator to get prior approval for defensive tactic...................................................................... 107 6.8.3.2 Case Law .................................................................................................................................... 108 Teck Corp v Miller (BC SC) Best Interests Test ................................................................................. 108 Ratio: Best interests test: need to act in best interests of SHThe directors must act in good faith. Then there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the companys interests, then there must be reasonable grounds for that believe. If there are not, that will justify a finding that the directors were actuated by an improper purpose. ............................................................................................................................................................ 108 Producers Pipelines (Sask CA) Proportionality Test ........................................................................... 108 Ratio: Canadian law does not conflict with the business judgment rule. ........................................... 108 In takeover situations, directors will often be in a conflict. In implementing a poison pill, the directors must be able to establish that (a) in good faith they perceived a threat to the corporation, (b) they acted after proper investigation, and (c) the means adopted to oppose the takeover were reasonable in relationship to the threat posed ......................................................................................................... 108
xxvii
1.0 MAJOR THEMES IN THE COURSE 1.1 Three Goals of Securities Regulation 3 purposes: 1) Protection of investing public; 2) Ensuring the Efficient Operation of Canadian Capital Markets; 3) Increasing and Maintaining Public Confidence in Capital Markets / In the Persons and Institutions Operating Them Found in s.1.1 of the OSA under the purposes of the act! The purposes of the Act are (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets and confidence in capital markets Recall Danier case: The securities act is remedial legislation and is to be given a broad interpretation (Pezim). It protects investors from risks of an unregulated market, and by it assurance of fair dealing and by the promotion of the integrity and efficiency of the capital markets it enhances the pool of capital available to entrepreneurs. The act supplants the buyer beware mindset of the common law with compelled disclosure of relevant information at the same time, recognizes burden it places on issuers and Part XV sets limits on what is required to be disclosed(para 32) Binnie J 1. Protection of investing public a. Should not protect public against loss, but ensure that public has knowledge needed to make a decision about the company assurance that its losses are genuine economic losses (correct pricing via prospectus) b. Very high level consumer protection legislation 2. Ensuring the Efficient Operation of Canadian Capital Markets a. Ensure capital markets facilitate mobility and transferability of financial resources and provide facilities for continuing valuation of financial assets b. Achieved through a free and open securities market with regulator correcting for market failure i. More info prevents problem of adverse selection in the market (drive out high quality securities, leaving only low quality securities which would be a misallocation of financial resources) 3. Increasing and Maintaining Public Confidence in Capital Markets/In the Persons and Institutions Operating in Them a. Investors will be WTP more for new issues of securities in primary market if confident they will be able to sell securities fairly on secondary market (want to know its fair, you can make money!) b. With investors paying more for new issues, more savings would be channelled into investment, thereby improving allocation of financial resources (see goal #2) c. Creating confidence in market, adverse selection is overcome of assured of accuracy of info, investors WTP more, therefore, higher qual securities more likely to survive *However, reg must not be at excessive cost (therefore, tension between protecting investing public and eff capital markets) Another theme: NO SMART GUYS and NO CERTAINTY Certainty in almost every circumstance is a bad thing, takes away judgment judgment is what we need to make the right decisions The Securities Act dont care what act actually says, care what it ought to say or intended to say. Dont care about geniuses that spend lives devising schemes to get around SA. Securities regulators or courts say youre 1
smart, but who cares if youve done something you think outsmarts securities act, theyll shut the door on you = no smart guys. 1.2 Three Methods of Achieving these goals 1) Registration Requirement, 2) Disclosure Requirement, 3) Remedies for Breach of 1 and 2 1.2.1 Registration requirement Licence people in the business you cannot trade in securities unless youre licensed (underwriters) There are exceptions, e.g. can sell Canada Savings Bonds without registering (b/c it wouldnt make sense in the context to register; b/c they are so safe unlikely Govt of Can will default)
POLICY: This helps ensure accountability, makes sure you are educated and policed fosters confidence in the market, and the exceptions are to provide efficient markets for securities that are considered to be very low-risk to the public. People will lose confidence if some whackos are selling you securities. 1.2.2 Disclosure Requirement To protect investing public, must make sure they have full, true and plain disclosure of all material facts related to the company (adv/disadv, risks, contracts etc.) via a prospectus and continuous disclosure Note: there is an adv to being an investor in a public company the asset is easily liquidated, but must have info to do so To provide info: o 1) Prospectus: comprehensive disclosure document - tells investor what they need to know to make an informed decision Also creates a cause of action for misrepresentations and omissions in a prospectus o 2) Continuous disclosure: once a company goes public, the company has continuing disclosure/ reporting obligations which requires the company must keep information current. Continuous disclosure has 4 parts: 1) Regular Financial Reporting 2) Timely Disclosure (for material issues must file press release and amendment to prospectus) 3) Insider Reporting (insiders must disclose when they buy/ sell shares to prevent insider trading) 4) Early Warning (at a certain level of ownership in shares, need to tell the world how many you own and your intentions) POLICY: need to protect investors, OSA is consumer protection legislation and in order to do that, we need to give you the information that you need to make an informed investment decision 1.2.2.1 Exceptions to the Disclosure Rule (i) the purchaser is sufficiently sophisticated (wealthy/ well resourced); (Private Placement) (ii) the information is otherwise readily available; or (iii) the securities are "safe" (Canada Savings Bonds) POLICY: Need to balance the objectives of the efficiency of capital markets (would be inefficient to file a prospectus every time a company needs money) with the need to protect the public.
2
1.2.2.2 Closed System & Resale Restrictions When securities are acquired pursuant to one of the private placement exemptions and not pursuant to a prospectus, the resale by the initial investors of these securities to other investors on the secondary market is restricted and certain conditions must be satisfied prior to their resale. Conditions that must be satisfied prior to resale: 1. 2. 3. 4. You issue a prospectus; You sell pursuant to another private placement exemption; You comply with the resale rules; or You receive an exempting order from the Ontario Securities Commission
Policy: Transparency is key to the process 1.2.3 Remedies for Breach of Registration or Disclosure Requirements If you dont satisfy the requirements, there are remedies for the investor against you for breaches of these obligations Remedies can be civil, criminal, or administrative (more detail below) Policy: investor protection and confidence in the market (fix something when it goes wrong) Now just a bunch of rules that play into one of these three objectives. Note: will also look at take-over bids Overall protect shareholders of target company and make sure there is a level playing field o Make sure they have enough info to make an investment decision o Give them suff time to make that decision o Protect against company doing bad things 1.3 General Policy of the Course For the exam: 1) Know what the rules are; 2) Look at why they exist (why does the law regulate these activities? What objectives is the rule trying to establish?); 3) THEN Challenge the rules Always keep in mind that he wants you to answer WHY it is that youre doing what youre doing WHY does the law regulate this particular activity? (will mostly have to do with achieving the three above goals/dealing with tensions among those goals) Securities reg is nothing more than sophisticated consumer protection legislation with the consumer being investors. o The Securities Act is really a policy document where intention is the most important thing. o The rules that the SA sets out are intended to be appropriate in the circumstances in which they are employed. 3 types of policy statements o OSC Policy info about how the Ontario Securities Commission will decide o Uniform Act provinces of BC, Alberta, Saskatchewan, Manitioba and ON o National all of the SCs get together and say how theyre going to use their discretion
3
2.0 INTRODUCTORY CONCEPTS 2.1 Purpose of Selling Securities Securities are primarily sold to raise funds for investment, e.g. the launching of a business venture/ expanding existing venture (private company goes public becomes a reporting issuer) o To purchase assets that will be used to produce goods/services for which there is a demand sufficient to generate profits comparable to that of other investment opportunities of similar risk.
2.2 Types of Securities Two main types of securities Debt: Funds can be borrowed, offering interest payments and principal repayment o Includes trade credit (e.g. ST accounts payable), short-term bank loan (e.g. line of credit), longterm bank loan (e.g. with security interest property and/or adherence to ratio tests that may indicate risk of bankruptcy), commercial paper (obligation to pay specified amount at specified date), bonds (evidence of indebtedness secured by an asset of borrower), debenture (unsecured evidence of indebtedness) o Other characteristics of bonds/ debentures: Call feature: allows borrower to repurchase bond after specified date for specified price (usually prem to face amount/ par value) Sinking fund: indenture may provide for a fund built up each year to redeem some portion of bonds before maturity or to meet the obligations to pay at maturity Convertible: right to convert bonds into shares Warrant: right to buy securities from issuer for exercise/striking price during a specified period Equity: rights to share in the distribution of the profits and the proceeds remaining after the sale of the assets of the business and payment of amounts borrowed. o Common Shares: most frequent bundle of rights in a company that includes the following rights i. Right to vote (on important matters - e.g. election of directors, how company will be managed etc.) ii. Right to dividends (not obligation corp can decide to declare dividends to which each common share has a right a share in $ or in stocks where there is a stock dividend) iii. Liquidation right: entitled to share pro rata in any proceeds of liquidation (to the extent proceeds remain after satisfaction of other claims) o Preferred Shares: given preference wrt distrib of dividends and proceeds of liquidation (usually non-voting). May carry the following special features: i. Cumulative: if div are not declared or are not suff to pay full amount of annual preferred div on preferred shares, amount unpaid carries over to the next year (usually preferred shares are cumulative) ii. Participating: participate in div beyond the specified preferred amount (preferred amount + included in common share amount left over) iii. Redemption/Call provision: if shares are redeemable by the company (to facilitate financing of company at specified price) iv. Retraction rights: permits shareholder to tender share to co and co has to buy it back at specified price
2.3 Securities Trading 2.3.1 Open Market in Capital Primary market (sale of securities to investors) and secondary market (investors exchange sec in return for payment from another invested) together permits continued marketability / liquidity of shares Crucial term, two parts together constituting open market in capital 4
o o
Primary market: sale of securities to investors. The money flows through from investors to the company (have benefit of liquidity) Secondary market: investors exchange securities in return for payment from another invested (issuer not generally involved) Permits continued marketability/ liquidity of shares: For investors to realize on their investment, they must be able to sell among themselves on various exchanges (e.g. TSX)
Simplifications for trading o Brokers: Takes orders from buyers/sellers, locates buyers/sellers for clients and executes trades on behalf of clients. o Stock exchange: Trading involves 1) communication between buyer and seller; 2) exchange upon agreement. A stock exchange facilitates both elements, saving the client time/money and increasing the likelihood that security will be sold (for sellers). Issuers want securities to be traded on exchange b/c it increases their securities value and therefore, the amount of capital they can raise i. Buyers can find sellers and sellers can find buyers (brokers meet in a specified place either real or online) ii. When asking and bid price correspond, there would be an offer, acceptance and consideration (money to be paid in return for shares). Payment would occur and the ownership would change hands (bearer form less used to prevent theft; or registered form with name of owner on certificate and on books of company with endorsements) o o o o o Clearing agency: created to simplify transfers between brokers by tracking obligations and notifying brokers of their net obligation Broker inventories: reduce amount of issuances and re-issuances (instead of performing full transfer for every transaction, brokers would record in their books who the beneficial owners of securities were) Nominee owners: as brokers began to hold too many securities, nominee owners name and securities registered to them bookkeeping entries keep track of who the beneficial owners are Securities Depository corporations: represent a single nominee owner (and sometimes performe clearing role (e.g. Canadian Depository for Securities Ltd CDS) Computerized stock exchanges and trading: Increases transaction speed AND further facilitates communications.
2.3.2 Private Trades Private trade: Trades without using brokers or a stock exchange take place directly between the buyer and the seller Upstairs market: involves trades by large, institutional investors buying or selling in large volumes Over-the-Counter Trades: when issuers are unable to meeting listing requirements of a formal stock exchange they may trade over-the-counter, with the assistance of a broker o used for bonds/debentures too b/c 1) large denominations, 2) nature of investment longer time horizons, 3) held in large Q by institutional investors Other trades: o Alternative trading systems: less restrictive listing requirements, and largely automated o Margin trading: Broker loans funds to clients to purchase securities Restrictions exist regarding 1) the % that the client must pay and 2) to maintain a particular % if the value of the security changes. o Short selling: Investor sells securities that he/she doesnt own and takes on a contractual obligation to supply the shares in return for payment by the person purchasing the securities. Broker can facilitate this trade by loaning the investor the securities.
5
NOTE: Major investors in Canadian Securities Market include banks, trust companies, credit unions/caisses populaire, life insurance companies, pension funds, investment funds (mutual funds/investment companies), and individuals (to a lesser extent).
2.4 Sources, History & Constitutional Division of Powers of Securities Regulation 2.4.1 Division of power Provinces have enacted securities acts under their power to legislate wrt property and civil rightsincludes dealings in prop, contracts, and reg of business, trades and professions o Provincial laws upheld even where there is some overlapping, but not conflicting, federal law o sometimes prov securities laws do not apply to federal companies Federal government could justify regulating securities under the trade and commerce power (may be necessary due to globalization)
2.4.2 History of securities regulation Securities reg (regulating brokers, requiring prospectus disclosures, etc.) is a rel recent phenomenon, beginning in mid 19th century (ON first jurisdiction to adopt English Directors Liability Act in 1891; 1920 fraud protection acts, prospectus disclosures in 1947) o Modern Can securities reg = derived from Kimber Report, 1965 (addressed insider trading, takeover bids and ongoing disclosure requirements) and Merger Report, 1970 (led to closed system statute with emphasis on ongoing disclosure for the purposes of secondary market trading) o Interprovincial cooperation has also been an important part of securities reg, although there is no national regulator yet
2.4.3 Sources of Provincial Securities Regulation 1) Securities Law & Related Sources a. Provincial and Territorial Securities Acts b. Provincial regulations and rules: originally security acts give extensive powers to Lieutenant Governor in Council to make regs. Now, securities commissions also have power to make rules and regs, subject to procedural requirements i. Procedural requirements include: commission must publicize proposed rule and accept comments for 90 days; if commission makes material changes to rule must publish amended rule and give further period for comment; when finalized, rule goes to Minister who can accept/ reject/ return rule to commission for further consideration c. National and multi-lateral instruments: developed cooperatively and agreed to by all securities administrators across country (no binding legal effect, but can be adopted in each jurisdiction). i. when some but not all of Can Securities Administrators is sue an instrument, it is a multilaterial instrument d. Policy statements: issued by securities administrators in Can and indicate how they interpret the legislation, regs or rules and provide guidance to market participants in complying with legislation, regs and rules i. National policy statements: issued jointly by Can Securities Administrators e. Notices and Accounting Communiqus: released by securities commission and contain info of interest to those who deal with regs on a regular basis f. Memoranda of Understanding: between diff securities administrators in Can or abroad g. Decisions & rulings h. Blanket orders: securities commissions can issue orders (usually sought and provided on a caseby-case basis)- in ON this is no longer allowed (must instead pass a rule) i. Bulletins, Websites and Canadian Securities Administrators Communiqus 6
International Organization of Securities Commissions: review major reg issues, promote development and improvement of efficiency of emerging securities markets by establishing principles and min standards, prepare training and facilitate exchange of info/ expertise 2) Self-regulatory bodies a. Stock exchanges: pass by-laws and rules to govern qualifications and continued fitness of members for membership in exchange, set out requirements for listing of securities of issuers and conditions to be met by listed issuers to maintain their listing, and govern manner in which trading is conducted i. Will also issue policy statements b. Other self-regulatory orgs: Investment Dealers Association of Canada, Canadian Securities Institute, Institute of Chartered Financial Analysts (have tests etc.) c. Securities Commission Review: have power to review and make decisions wrt a by-law, rule or other reg instrument made by a self-regulatory org or stock exchange 3) Commission and Administrators: Commissions are 2 tiered structures a. Panel of commissioners: makes orders and rulings and acts as an appeal tribunal from decisions of administrator; also formulates policies and makes recommendations to govt for changes in legislation/regs b. Admin agency headed by chief admin officer: exercises admin functions assigned to administrator under applicable act and implements decisions/directives of commission
j.
7
3.0 SEGMENT 1: GOING PUBLIC 3.1 Introduction to Going Public 3.1.1 General Rule Securities Act, ss. 25 and 33 RULE: No person shall engage in or hold themselves out as engaging in the business of trading in a security, without being registered, and if a trade constitutes a distribution, without preparing a prospectus (Section 25 and 53, Ontario Securities Act). s.25 deals with not being able to engage in business of trading securities unless REGISTERED s.53 deals with not being able to issue securities without a prospectus 3.1.2 How Companies Go About Raising Capital 3 Ways: 1) Borrow, 2) Go Public (IPO segment 1), 3) Private Placement of Securities (segment 3) 1) Borrow: Can go to an FI and borrow it, but might be expensive, might not be able to get it 2) Go Public (IPO): first segment of course 3) Private Placement of Securities: third segment 3.1.3 Why Go Public? If a client wants to take a private company public, if youre worth anything as a lawyer, then you wont just take instructions, but provide advice and guidance. Lots of advantages/disadvantages of going public, have to address those with your client.
Ex. Four Seasons Hotels Used to be a private company, decided it wanted to be a public one for very bad reasons Went public and was a miserable public company. So miserable that it ultimately decided it had to go private again A few years later, went public again for the right reasons, then it became what it is today one of the finest hotel companies in the world (then went private again but only b/c paid lots of $) 3.1.3.1 Advantages Advantages: 1) Raising Capital, 2) Future Growth, 3) Employee Incentives, 4) Enhanced corporate image, 5) Acquisitions, 6) Shareholder Liquidity 1. Raising Capital: In the primary offering the principle reason to go public is to raise capital to meet the companys growth and operating objectives 2. Future Growth: An equity offering allows the company to: a. Borrow additional capital on more favorable terms b. Issue additional equity on the market c. Raise future capital from current shareholders via rights offerings 3. Employee Incentives: Can use stock options as compensation when your public (more attractive to employees b/c stocks become more liquid and provides independent valuation mechanism) 4. Enhanced Corporate Image: Increased public profile (become better known to customers, suppliers and other stakeholders) 5. Acquisitions: Cash generated by going public may enable a company to undertake successful M&A. Can expand using stock as a form of currency without depleting cash or taking on debt. 6. Shareholder Liquidity: Instead of holding shares subject to the escrow requirements and control block sale restrictions, public investors enjoy increased liquidity allowing for easy diversification by selling parts of the company (constant indication of value due to share price)
8
3.1.3.2 Potential Disadvantages (and to how to mitigate the risk) Disadv: 1) Loss of confidentiality, 2) Reduced flexibility, 3) Managing share prices, 4) Reduced control, 5) Loss of tax advantages, 6) High costs of going public (initial costs of IPO and ongoing cont disclosure requirements) 1. Loss of Confidentiality: Significant disclosure (prospectus) and continuing disclosure requirements may prejudice the companies position as the information is available to all competitors 2. Reduced Flexibility: Owner-manager undertakes a responsibility to the public, which imposes fiduciary duties. There is lost flexibility as approval from outside directors is needed to make certain decisions a. Ex. Need a shareholder meeting in order to approve a large acquisition which takes 60 days, thus, the opportunity may be lost to a faster moving private company. 3. Managing Share Prices: Public companies are scrutinized on a quarter by quarter basis, this creates an incentive to manage share prices in a way that can compromises long term profitability. 4. Reduced Control: A public offering may dilute the owners control to the point that they lose controlling power of the company which may open the company to unfriendly takeover bids. 5. Loss of Tax Advantages: Public companies are not entitled to small business deduction and other tax advantages 6. High Cost of Going Public a. Initial costs: underwriters commission (5-7% of gross offering proceeds), non-commission costs (1-3% of gross offering, which includes: prof fees of lawyers, accountants etc., listing fees, promotional expense, printing, translation in QC) i. Green Shoe (over-allot the issue by granting the right to buy more of the issue for a set period. ii. Broker warrants (right to buy at a set price for a year): This rights provide the underwriters with a continued stake, but also have a dampening effect on the market. b. Ongoing costs: continuing disclosure requirements, manage the board, accounting and lawyers fees that make up governance, filings of material changes 3.1.4 Why do we regulate public offerings (3 objectives) 1) Protection of Investing Public, 2) Ensuring the Efficient Operation of Canadian Capital Markets, 3) Increasing/ Maintaining Confidence in Public Markets & the People who Operate in Them Why do we think its so important to regulate public offerings vs. letting the market take care of itself? Objectives of regulation: Everything in the Securities Act (SA) is designed to deal with one of three objectives (can be conflicting, have to balance) 1) Protection of Investing Public: Impose a lot of rules to make sure these people are protected 2) Make sure Markets Work efficient operation: rules to ensure the system works a. There is no point having a market if nobody plays. b. Cant just protect the investing public b/c there is nothing to protect if not investing (need to balance these goals) 3) Increasing/Maintaining Confidence in Public Capital markets and People who Operate in Them: Neither of the above two points matter if theres no confidence in it. Everything we talk about will come down to one of those three objectives*exam **and remember methods used to achieve the objectives (Securities Act is just a bunch of rules that play into one or more of these three objectives).
9
3.2 The Prospectus Requirement: Does the Securities Act Apply? Prospectus ONLY IF there is a TRADE in a SECURITY which constitutes a DISTRIBUTION. Recall General Rule: ss. 25, 53 of the SA: No person shall engage in or hold themselves out as engaging in the business of trading in a security without being registered and if a trade is a distribution, without preparing a prospectus
Analysis for Whether You Need to Issue Prospectus: 1) Does transaction involve a security? If NO, SA does not apply. If so 2) Is it a trade in a security? If NO, SA does not apply. If so 3) Does that trade in a security constitute a distribution? If NO, no Prospectus. But if yes then you must prepare a prospectus *unless one of private placement exemptions are available The definitions are key to this analysis! Remember why you care: b/c fundamental question is I want to do something, do I need to prep a prospectus to do that? (to engage in activity Im proposing) 3.2.1 What is a security? 3.2.1.1 Statutory Definitions LEGISLATION ACT 2006 - Interpretation Section 64(1): an act shall be interpreted as being remedial and shall be given such large and liberal interpretation and best ensures the attainment of the object POLICY: To understand a statute, have to understand what its trying to do because were going to give it a broad enough interpretation to have it achieve what we wanted it to do The courts have gone to incredible lengths to make sure that happens. ONTARIO SECURITIES ACT Interpretation & Definitions S.1(1): security includes (NOT EXHAUSTIVE= broad def): (a) any document, instrument or writing commonly known as a security, (b) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company,(n) any investment contract Very broad definition Covers common types of securities, as well as other less common items thus, contains items capable on taking a broad meaning and is non-exclusive. s.1(1): security includes (NOT EXHAUSTIVE) (a) any document, COMMON TYPES OF SECURITIES instrument or A security includes any bond, debenture, note or other evidence of writing commonly indebtedness, share, stock, unit, unit certificate, participation certificate, known as a certificate of share or interest, preorganization certificate or subscription security, (OSA s. 1(1) security (e)). Also, any document constituting evidence of an option, subscription, or other interest in or to a security. Also includes any instrument or writing commonly known as a security. Both US and Canadian case law have made it clear that commonly known refers to known in the legal/financial community a sophisticated legal expert (not common to lay person) (b) any document constituting evidence of title to or interest in the capital, assets, 3.2.1.2 LESS COMMON SECURITIES Definition sets out a number of specific items all of which would normally involve an initial payment that would be used to produce some future returns (e.g. investment contract) 10
property, profits, earnings or royalties of any person or company,
Too broad a definition (so a receipt for the purchase of a hockey stick could theoretically constitute a security, because it is evidence of an interest in property) Courts have had to narrow this definition, so only instruments intended as investments are securities and not instruments bought and sold for other commercial purposes (ex: title to a car is property, not security) (test: is the ind investing in the piece of paper OR are they investing through the piece of paper in a product) Look to see whether the person is expecting an increase in value if yes, security 3.2.1.3 CATCH ALL PROVISIONS (Pacific Coast) Definition is case in open-ended terms o Included items listedthus non-exhaustive. o Includes a document evidencing title to or an interest in the capital, assets, property profits, earnings or royalties of a person. o a profit sharing agreement or certificate and o an investment contract. These are sufficiently broad/vague that interpretations have not gone outside the listed items.
(n) any investment contract,
Hotly litigated because it is ambiguous We determine if a particular instrument is a security by asking whether or not the person invested on the premise that the other persons expertise would create profit (in these situations, need full disclosure of relevant info) 3.2.1.4 How Case Law Has Defined a Security Main Points: Definitions in the OSA are not mutually exclusive, but are catchalls - Securities legislation is remedial legislation; to be construed broadly (SEC v CM Joiner Leasing & Pacific Coast Coin Exchange) - Substance not form governs the interpretation of what is a security it is flexible, not static (Pacific Coast Coin Exchange) -The policy of securities legislation is full and fair disclosure with instruments regarded as securities Something will be considered a security if: 1. It falls clearly under one of the definitions of the OSA 2. If can fit under one of the broad definitions and policy considerations demand coverage SEC v. Glen T. Turner Enterprises Inc. (US, 1973) Ratio: s.1.1(a) definition that a security includes any document, instrument or writing commonly known as a security means if known as such by the legal/ financial community, not common person. Implications: takes a broad def and makes it even broader! Due to POLICY: most sec are technical in nature, not likely to be understood by anyone other than legal/ financial community Reasons: interprets US law similar to OSA s.1(1)(a) that provides a security includes: (a) Any document, instrument or writing commonly known as a security. Commonly Known As does not mean commonly known as security to ordinary people on the street. If commonly known as a security to most sophisticated security lawyer in the country, its commonly known as a security
11
The court doubts that Congress intended that in order to qualify under these general categories, a transaction must be commonly known to the man in the street as a security. Most securities are rather technical in nature and not likely to be understood except by the legal or financial community. It is sufficient that an offering be considered as a legal matter to be a security, regardless of the popular perception of it Supported by Can courts o
Ontario (Securities Commission) v. Brigadoon Scotch Distributors (1970 Ont. H.C.) Ratio: Provides insight into s.1(1)(b): Securities only includes instruments intended as investments and not instruments bought for other commercial purposes. Test: Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product? Policy: The reason youre defining this is to figure out if you need to issue a prospectus, so had to narrow definition (otherwise, could be anything youre selling) Reasons: Recall: s.1(1)(b) Any document constituting evidence of, title to, or interest in the capital, assets, property, profits, earnings or royalties of any person or company o Case interprets section: def of security doesnt include documents of title bought/ sold for purposes other than investment o Basically if youre buying something and you get a receipt for it, that receipt does not constitute a security unless youre planning on selling it in order to make an investment off of it Test for whether or not a title document is a security: o Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product? E.g. go to store that ages scotch. Buy a bottle, age for 5 yrs, give you doc evidencing you own it. If my intention is to buy the bottle of scotch, that piece of paper is not a security. If my intention is to sell that piece of paper evidencing that I own that bottle at a higher price in the future, then that piece of paper is a security.
Policy: Theres no incentive of investor protection by covering something like the receipt for the shampoo I bought at the store as securities. (c) If you enter into an investment contract, thats a security No one has any idea what an investment contract means, but some American cases, and then SCC case adopting American reasoning SEC v. CM Joiner Leasing Corp. (USA) Ratio: Act will be construed broadly and in whatever way leads to it to promote the policy objective of investor protection (Purposive approach to interpreting the meaning of security). Specifically, interprets s.1(1)(n): an investment contract will be where people are investing in the potential for something to generate profit and are purchasing expertise of someone else. Policy: Purposive approach to interpreting the meaning of security required to respond to new, novel, uncommon or irregular devices. 12
Facts: SEC sought injunction against CM with respect to assignment of leases. Anthony acquires leases in Texas, transferred a substantial portion to Joiner Corp., and engaged in sales campaign where they tried to assign leases in land in parcels of 5-20 acres with the promise the Joiner would drill a test well to test the oil producing potential of the land. Transaction was set up so that it was arguably only a sale in land. Decision: the court found that it was not just a sale of an interest in property, but the sale of the prospect of gaining from the exploration exercise. The transaction had all the evils inherent in the securities transactions which it was the aim of the Securities Act to end Reasoning: Although set-up to be a lease in land, the definition of a security uses very general terms and can encompass this transaction. o Decision based on POLICY: The Act must be able to respond to new, novel, uncommon or irregular devices. Interpret the definition broadly to meet the purpose of the Act it should not be subverted by new instruments designed to avoid the application of the Act or frustrate its purpose. Ultimately, investors likely needed more info on scheme administration etc. through a prospectus If investors are investing in the potential for the item/ doc to generate profit, and are purchasing the EXPERTISE of someone else, tends to be read like an investment contract means that looking at OSA objectives, the investors could have BENEFITED from OR NEEDED info that would be in a prospectus o In this case, investors would have needed information on oil/gas potential of the land, structure of C.M. Joiner Corp., background on the individuals, their interests in the plan, how the plan would be administered, etc. For such small investments, a prospectus made sense.
**note: next two cases are only important b/c reasoning is later adopted by SCC in Pacific Coin Exchange SEC v. W.J. Howey Co. (USSC, 1946) reasoning used by SCC in Pacific Coin Ratio: Common enterprise test for identification of an investment contract and therefore, security. Test requires: 1) A contract, transaction or scheme whereby a person invests; 2) That the investment be in a common enterprise; and 3) That the person is led to expect profits (or capital appreciation: see Forman) solely from the efforts of a promoter or third party (pol obj: since it is them who controls success/failure of enterprise) Facts: Howey Co. and Howey-in-the-Hills Service Inc. were under common ownership. Howey Co. owned orange groves in Florida and a hotel. Groves were for sale and sold in plots of 1 acre each. Buyers advised that land needed to be serviced, recommended Howey-in-the-Hills Service Inc. Buyers would derive profit from orange groves manages by HHS Service Inc. Buyers told that 20% returns had occurred but that they could expect 10%. Decision: Investment contract this was more than just a sale of fee simple interests in land. The transfer of land was merely a convenient way of allocating the profits of the enterprise. Again, these investors would have benefitted from some information regarding their decision to buy and put the land under management. Reasons: Common enterprise test: contract or transaction where a person invests in something that is a common enterprise that is expected to lead to a profit for the investor, and this profit will be derived solely from the efforts of a promoter or third party key is that someone else controls success/failure of the enterprise and thats why you would want that information 13
State of Hawaii v. Hawaii Market Center Inc. Ratio: Risk Capital Test for identifying an investment contract (broader than Howey test to comply with policy objectives). Test requires: a) The offeree furnish initial value; b) A portion of the initial value is subjected to the risks of the enterprise; c) The furnishing of initial value is induced by promises or representations leading to a reasonable expectation or understanding that a benefit above initial value will accrue; and d) The offeree does not have the right to exercise practical and actual control over the managerial decision of the enterprise. However, it is the policy and not the subsequently formed judicial test that is decisive. The primary objective is to protect the investing public. Are investors relying on expertise/managementcourts have immense discretion. Facts: A store where only members can shop. The capital for the store was raised by the sale of founding memberships. Costs was $320-$820. Earn returns by selling other memberships and by commissions. Securities Commission of Hawaii sought an injunction against the sale of these memberships on the basis that they constituted investment contracts and thus constituted securities. Hawaii Market Center argued that members had some control over their potential return, and did not rely solely on others as required by Howey. Held: The court said the problem with the Howey test was its narrow focus on the mechanical test of solely. This results in losing sight of the need to interpret investment contract broadly. Reasons: The RISK CAPITAL TEST for identifying an investment contract should be used as it is broader than Howey test (thereby, meeting broad securities def) to comply with policy objectives Here, the premium paid for sewing machine was initial value. Ability to recoup investment depended on the success of the store. Fixed fees and commissions were expected benefits. Investor did not have practical and actual control over the investment of the capital or the management of the store, and thus no way to his/her investment.
in the end, we dont care so much about the judicial test, more about the policy of protecting the investing public who is relying on someones expertise/management (with both cases). Pacific Coast Coin Exchange of Canada v OSC (SCC, 1978) Ratio: Broad, purposive approach should be used in interpreting meaning of word security (even broader s.1(1) is not exhaustive) it is legislative policy to replace the harshness of caveat emptor in security related transactions and courts should seek to attain that goal even if tests carefully formulated in prior cases prove ineffective and must continually be broadened in scope. It is the policy and not the subsequently formulated judicial test that is decisive. *Accepts US definition for investment contract as a security Facts: PCCE was in business of selling bags of silver coins. Two ways to buy from PC: (a) pay 100% $ in cash and receive bag of silver coins, or (b) you could buy bags of coins on margin through current account commodity agreement Margin: you buy it, own it, but you dont get it until you pay the rest of the balance you owe (e.g. if bag is $100 on Day 1, Give $35 on Day 1, and in 5 yrs, give $65, get back an investment contract on Day 1, and get the bag of silver when you pay off balance) Almost everyone bought silver on margin. PC after receiving $35 did not keep silver in reserve for the person b/c they wouldnt make $ doing that. Instead, hedged: have an obligation in 5 yrs to deliver 500 bags of silver enter in futures contract w/ $35 payments, make $ b/c going to decide when the right 14
time to buy bags in silver is 5 yrs from now e.g. if worth $100 today, when its worth $90, buy 500 bags and make a profit on $10 Crucial to solvency of PC was ability to properly hedge. They didnt. All customers come forward with $65 asking for their silver thats increased dramatically, and they obviously dont have it. Customers sue saying that they should have had a prospectus. D said they werent securities, they were selling silver.
Issue: whether the current account commodity agreements constituted an investment contract as defined in s.1(1)(n) of the Securities Act, i.e. whether they were a security Held: SCC held 8-1 that the contracts were investment contracts, and since it was a trade that amounted to a distribution with no prospectus, the investors were entitled to their money back. Must fulfill the statutory purpose of compelling full and fair disclosure relative to the issuance of instruments that fall within the concept of a security Analysis/ Implications: Majority examined tests from two US cases (Howey and Hawaii), concludes that a broader approach is required than even these tests, and goes on to adopt a more realistic test in light of underlying objectives of the Act. It also determined the following: 1. Appropriate for Canadian courts to consider US jurisprudence b/c i) def of security is similar, ii) both defs refer to an investment contract, ii) purpose of legislation was the same and iv) dearth of Can authority 2. Expanded the concept behind the Howey test so that it would not be constrained by narrow interpretations of the words common enterprise or solely. Under Howey test, the third part requires that the person is led to expect profitsSOLEY from the from the efforts of a promoter/third-party: following this rationale would have caused case to fail. HOWEVER, SCC reasoned that the Q is whether the efforts of the third party are undeniably significant for the success/ failure of the enterprise Under the 2nd requirement in Howey, require the investment to be a COMMON ENTERPRISE: Court found significant managerial efforts were made by D (promoter) and that the actions of this promoter lies in the commonality between investor and promoter; there is no need for enterprise to be common to the investors between themselves 3. Broad purposive approach should be used in interpreting the meaning of the word security: This case is a blank cheque to call anything a security as long as it satisfies the underlying policy of the Legislation. Case indicates that courts will go to great lengths to ensure that the investor has the information he needs to make an informed investment. Must appreciate economic realities, o Such remedial legislation must be construed broadly, read in context of economic realities to which it is addressed, substance not form is the focus. Any definition must permit fulfillment of statutory purpose of compelling full and fair disclosure. What will fall within the definition of a security is flexible rather than static capable of adaptation to meet countless and variable schemes to those that seek use of $ of others on promise of profits Dissent: Laskin reasoned that the source of the buyers risk was not the quality of the management brought to the project by PCCE, but the market risk inherent in the price of silver. The only difference between buying silver from PCCE and buying on the open market was concern over the solvency of PCCE. As such, there is no 15
difference between this and commercial contracts where bankruptcy can lead to non-performance. This is extending the definition of security too far. Policy Notes: IF PURCHASING EXPERTISE, PURCHASING A SECURITY: Every time you invest in something where your expectation of profit is based on the expertise of someone else, the courts will go to whatever length they need to go to find that thats a security o Remember what youre trying to do: if youre investing in something to make a profit from it, and youre relying on someone elses expertise, youre buying that expertise and therefore someone is required to give me a prospectus telling me everything that I need to know. o The key difference between buying a product vs. buying something to profit from that someone else is managing is that in the latter cases the profit is not only risky, but the risk is largely determined by the management of others. Because of this reliance on expertise, to earn a profit there are 100 questions that need to be asked about the skill and risk before you give them the money. o In order to protect the public and to foster confidence in capital markets these people need to have the protection of a prospectus Here, PC was not selling bags of silver, were selling expertise in knowing how to hedge it for a profit. Buying MANAGEMENT EXPERTISE, which is a security. This is the only way they can force prospectus/disclosure and to ensure that protection of investing public happens. Policy: Basically, the court will find anything to be a security, so long as it fits into the definition the reason for this relates back to the three objectives, but mainly investor protection o Joiner, Howey, Hawaii, and Pacific Coast suggest courts will take a purposive approach if it is the type of transaction to which securities regulation was intended to be directed. o We care about the investing public because we need confidence in capital markets and efficient capital markets (companies will not survive without the publics $)
3.2.2 What is a trade? Statutory Definition In order for general rule (Section 53(1) and 25 about being registered) to apply for a prospectus, there has to be a trade in a security, so what is a trade? OSA, section 1(1): A trade includes any sale or disposition (NOT A PURCHASE) of a security for valuable consideration AND includes any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the activities described in the definition. Policy: Overall, trade is broadly interpreted to promote the greater good prevent ppl from contracting/opting-out of securities regulation trade or trading includes (NOT EXHAUSTIVE): (a) any sale or disposition of a VALUABLE CONSIDERATION security for valuable A trade is a sale of a security for a consideration consideration, whether the terms o E.g. orange tracts sold security for money, its a trade. PC of payment be on margin, silver - Sold investment contracts for money. instalment or otherwise, but does Incl margin trading & covers primary and secondary markets. (Note not include a purchase of a that gifts would probably not be trades, because there is no valuable security or, except as provided in consideration) clause (d) a transfer, pledge or EXCLUDED is the PURCHASE of a security. 16
encumbrance of securities for the purpose of giving collateral for a debt made in good faith,
Why? Again, doing all this to see if you have to issue prospectus. Not doing it so that purchaser files prospectus before giving you the cash. So of course purchase cant be a trade, only determining if its a trade is to find out if seller has to prep prospectus, purchaser is being protected/giving cash. At least with respect to the distributions of securities, it is the vendor that is the object of regulation and it is the purchaser that the legislation is intended to protect. Using securities as collateral is excluded because the SA was never meant to restrict the ability of security holders to use their equity as loan collateral
(b) any participation as a trader in any transaction in a security through the facilities of any exchange or quotation and trade reporting system
3.2.2.1 TRADES ON BEHALF OF OTHERS Such persons are required to register. A trade is defined to include participation as a trader in a transaction in a securitieson the floor or through the facilities of an exchange *Exam Example: X offers to sell to Y and Z, but only Z buys. There are 3 trades! The offer to Y, the offer to Z, and the sale to Z Trade is a key term in determining the application of the securities act. Remember: prospectus requirement is activated when there is a trade in a security which constitutes a distribution. PRE-SALE ACTIVITIES: TRADE INCLUDES ANY ACT, ADVERTISEMENT OR SOLICITATION IN FURTHERANCE OF THE FOREGOING (OF A TRADE) Isnt only when you sell it, but when you TRY to sell securities May involve pre-sale activities, which can involve pressure tactics/subtle misrepresentations. Risk that this will influence buyers who rely on pre-sale activities/pressure. POLICY: Securities Act Is PROACTIVE legislation, NOT REACTIVE o SA is proactive, is saying we want to stop bad things from happening before they happen b/c protection of investing public/maintaining confidence in the markets is so fundamental to our system that we want to avoid it happening at all costs o If you try to sell securities you must create a prospectus, you cant wait until you actually sell them. This is consistent with the purposive approach of the courts.
(e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing; (operation)
3.2.3 What is a distribution? Unless exemption is available if trade is a distribution, need to issue prospectus Distribution (per s.1(1) definition: means (EXHAUSTIVE def) (a) trade in sec of an issuer that have not been previously issued, (b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer, (c) a trade in previously issued securities of an issuer from the holdings of any control person, (d +e) a trade by or on behalf of an underwriter in securities (see full def below) Purpose: def determines whether or not theres a requirement to prep prospectusThus, purpose is to ensure those who are potentially going to invest in the corp have suff info with which to make an informed investment decision 17
If a trade in a security constitutes a distribution, the issuer is required to assemble, publicly file and distribute to all buyers and informational document known as a prospectus (both a preliminary and final prospectus), unless the transaction complies with one of the 4 valid Private Placement Exemptions for a sale of securities without a prospectus.
s.1(1) of the Securities Act: distribution, where used in relation to trading in securities, means (EXHAUSTIVE def):
(a) a trade in securities of an issuer that have not been previously issued, A prospectus is required where the security is issued for the first time by the company Covers Treasury Shares owned by the company that have not been issued to the public Does not cover secondary trades, b/c when those securities were issued initially they were subject to the prospectus requirement. POLICY: issuers have greater access to information than buyers, so this is a distribution to which a prospectus is attached Prospectus is required for the primary market, and the secondary market is protected by the continuous disclosure obligations and previous prospectus on record This covers treasury shares (shares that are not outstanding = held onto by the board to be issued at a future time if the Directors decide to) that are owned by the company that have not yet been issued to the public. In Canada, these distributions are rare because other corporate statutes prohibit corporations from reselling these types of securities. TRADES BY CONTROL PERSON Any person, company or combination of persons or companies holding a sufficient number of any securities of that issuer to affect materially the control of that issuer Trade by a control person will often require a prospectus regarding 1) the amount of securities sold and 2) the effect of the sale on the control of the issuer. A person or combination of persons holding more than 20 percent of the issuers outstanding voting securities is deemed to materially affect the control of that issuer
(b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer,
(c) a trade in previously issued securities of an issuer from the holdings of any control person,
(d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, prior to the 15th day of September, 1979 if those securities continued on that date to be owned by or for that underwriter, so acting, (e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, within eighteen months after the 15th day of September, 1979, if the trade took place during that eighteen months, and (f) any trade that is a distribution under the regulations, and on and after the 15th day of March, 1981, includes a distribution as referred to in subsections 72 (4), (5), (6) and (7), and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution and distribute, distributed and distributing have a corresponding meaning; (placement, placer, plac)
18
POLICY: The meaning of distribution follows from the policy of the OSA: protecting members of the investing public by ensuring that buyers receive full disclosure of all material facts relating to a given security before purchasing that security. The definition is exhaustive, but includes protection for where there are trades in securities in which the asymmetry between the buyer and the seller is likely to be at its greatest, with the buyers having the greatest risk of being taken advantage of. 3.2.3.1 Lastmans 3 Main Branches of Distributions 1) Securities that have not been previously issued (s.1(1)(a)), 2) Trades by Control persons (s.1(1)(c)), 3) Sales of restricted sec held by exempt purchasers (1) Securities that have not been previously issued Section 1(1) of OSA, under Distribution subsection (a). Prospectus needed for the primary market. Policy: Focus on primary market (i.e. corporate issuer and not investors) because issuer will always have better info than the purchasers thus, should have to issue a prospectus. o Dont want you to file prospectus when youre selling amongst yourselves.
(2) Trades by control persons Section 1(1) of OSA, under Distribution subsection (c). A control person is defined as a person or group who has sufficient control over voting rights to materially affect the control of the issuer. A holding of 20% is deemed, in the absence of evidence to the contrary, to be sufficient to materially affect the control of an issuer. (A Q of Law) Policy: Sales by persons in a position of control are considered to be distributions because it means the person may have better knowledge of the issuer and an ability to alter the value of the issuer/securities o Anyone who holds a sufficient number of securities to affect materially the control of that issuer is assumed potentially to have privileged access to information concerning the issuer of the securities) o People who fall within this part of the definition of distribution are control persons. A sale by a control person is deemed to be a distribution to which the prospectus requirement attaches (usually require control person to produce a prospectus in order to provide information about the amount of securities sold and the effect of the sale on the control of the issuer).
(3) Sales of Restricted Securities Held by Exempt Purchasers Deemed distribution on resale: when someone has purchased securities by way of an exemption and then wants to resell them, have to do so with a prospectus Policy: This prevents backdoor underwriting o The subsequent sales of securities that were previously exempt from the prospectus requirement are considered to be distributions and thus trigger the prospectus requirement.
3.2.3.2 Note: 3 Ways Securities can be distributed to the public 1) Direct issue and private placement; 2) Offer to Sell (Bought Deal / Offer to Sell/ Marketed Offerings); 3) Best efforts underwriting 1) Direct issue (And Private Placement) a. Direct Issue: Issuer sells the securities itself, without the service of an investment banker or dealer (direct contact b/w investor and company).
19
i. This only works with a small number of investors, and the issuer will usually know the purchaser intimately (often through a rights offering to existing shareholders) b. Private Placement: Another form of direct issue. Securities are sold to institutional investors (e.g. bond issues) i. Often arranged through a broker who is NOT an agent of the issuer, usually. Once broker has put issuer in touch with Institutional investor buyers, issuer deals directly with/issues securities to the institutional investors. 2) Offer to sell (Bought Deal/Offer to Sell/Marketed Offerings) * most common way to sell to public a. Bought Deal/Offer to Sell: the issuer sells the securities to an underwriter. The underwriter then resells the securities to investors. The underwriter thus finds buyers. i. Risk allocation 1. In a bought deal: underwriter makes the commitment to purchase in advance, before the prospectus. A bought deal (firm underwriting) thus avoids the risk for issuer of significant market fluctuations during the period in which the prospectus is being prepared. (Issuers tend to lack expertise re: price fluctuations) this underwriting/insurance aspect is good for the issuer, because of their lack of expertise, the price might be much lower than expected, so good if the underwriter buys in advance however 2. Market risk can be shared through a market out clause. This says that if certain events occur, such as a material change in the affairs of the issuer, cease trade order, then the underwriter may not be obliged to buy at the specified price. 3. Note: Standby underwriting: underwriter provides a partial insurance by agreeing to stand ready to take up all or some portion of an issue that cannot be sold at a certain price b. Marketed Offering: underwriter will not commit to buy the securities until price is set after marketing the offering to prospective buyers. Commitment to buy is made after prospectus is cleared with securities regulators. 3) Best Efforts Underwriting a. Same as above, except I-banker doesnt agree to buy securities unconditionally for re-sale. i. UW agrees to act as an agent in selling the shares for the best price it can get. Agree to use best efforts to sell securities on companys behalf less risky, but lower commission. ii. Agrees to pass proceeds to issuer, net of commission. UW is not an UW in strict sense of the word, by agreeing to give its best efforts, UW is not providing any insurance wrt risk of fluctuations in market price 3.3 Prospectus Preparation In general, prospectus gives investors full and plain disclosure of all material facts what the investors want to know. This may include: What does your company DO? How does it make its money? (e.g. Cineplex makes it money on popcorn, not movies) Who is the CEO/ BOD? What are your financial statements assets, liabilities, any lawsuits? What interest in the company am I buying? - # of shares, rights (to vote, to receive dividends, etc.) What is the capital structure? 20
What will the investment be used for? What is the underwriter agreement? How much are you paying senior executives? What are the material contracts? Intellectual property? Future projections?
*see that all of this is included in NI 41-101 3.3.1 Prospectus General Rule *Governed by NI 41-101 general requirements and 44-101 for short-form prospectus. Two principle requirements of a prospectus under OSA: 1) Prospectus must provide full, true and plain disclosure of all material facts (s. 56(1)) Not just a question of covering what is on a list, securities lawyers must decide what else needs to be included in order to meet this requirement, technical fulfillment of the statue is not sufficient must not be misleading 2) Must comply with the requirements of the Securities Act (including 56, 58, 59) -Includes OSA, OSA regulation, OSC rules and the OSC director. Section 56: (1) Full, true and plain disclosure and complying with all requirements of Ontario securities law; (2) Must also include any financial reports, statements or other docs required by the Act or regulations Section 58(1) Issuer Certificate (signed by CEO, CFO and two directors that arent CFO/CEO, and any promoter of the issuer) certifies prospectus is true Section 59(1) Underwriter certificate (signed by any/all UWs in a contractual relationship with the issuer or selling securityholder distributing securities through the prospectus) UW also certifies prospectus is true A prospectus is a document that must be given to persons to whom securities are distributed. It is the document that is intended to provide information relevant to assessing the value of the securities. Note: can have 2 days to change your mind in securities law 3.3.1.1 Misrepresentation Misrepresentation- s.1(1): means (a) untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. If there is a misrepresentation, you can sue everyone involved (corp, directors, officers, underwriters). Very high bar very diff to know if youve missed something. Policy: Should tell everyone everything they need to know to make informed investment decisions Recall when a prospectus is required i. Does the transaction involve a security? ii. Does the transaction involve a trade? iii. Does the trade in the security constitute a distribution?
21
Rule (s. 53 of the OSA): No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company where such a trade would be a distribution of such security, unless a preliminary prospectus and a prospectus have been filed and receipts therefore obtained from the Director. 3.3.1.2 Dual Functions of a Prospectus: Selling + Liability Document 1) Selling Document: Sec Act ensures regulators mandate of investor protection by saying only doc you can use to sell sec is the prospectus, cant advertise in any meaningful way, cant have fancy brochures, billboards, etc. 2) Liability Document: Will need a lot of $, so client will want to be successful/shed the company in its most favourable light. Thus, regulator makes sure there is sig liability associated with a misrep (misstatement of a material fact/ omission)
Tension between 2 purposes (reckless selling v being too careful): You as a lawyer cannot allow client to recklessly sell in light of the prospectus (theyll get sued), but you also cant go so far to protect yourself/your client that you have a document that no one will buy securities with. Obviously natural tension b/w the prospectus as a selling doc and prospectus as a liability document o *Practice Note: Lawyers often spend too much time protecting themselves: You cant legislate every eventuality, if you try, you wont have a deal or youll have an unworkable document, or both o What makes it challenging is not rules/what has to go in it, but how you properly strike that balance b/w assisting your client in prepping a document that is sufficiently comfortable to sell the securities and sufficiently comfortable to protect your client against liability (Judgment call) Biggest ex of this tension (and of liability for both sides) is financial forecasts (see below) 3.3.1.3 National Instrument 51-102 Policy on future oriented financial statements in the prospectus Per NI 51-102: no prospectus ever has to put future oriented financial info in it. The choice is always the business BUT (1) if you dont put it in, you cannot talk about the future anywhere else; and (2) if you do put it in your prospectus you have to comply with national instrument 51-102 for disclosure Steps per NI 51-102: 1. Company should not be disclosing forward-looking information unless it has a reasonable basis for that information 2. A company must disclose in its prospectus that the information is forward-looking (this is a forecast), must caution users that actual results may vary, and identify material risks that could cause it to vary 3. Forecast in prospectus has to state material facts/assumptions that were used in making the forecast 4. Has to identify the method the company will use to update that forward looking information a. As time passes, that forward looking info comes to be, if its off, has to be updated must review it regularly for changes. 5. A prospectus forecast must be updated between preliminary prospectus and final prospectus History: Prior to 1982, OSC said none of us can predict the future and its too dangerous to let companies try, and investors will be hurt (outlawed) Example of regulator being a bad lawyer (overly cautious) Investors were unhappy Protecting so much that youre making us vulnerable, we want to know what the company thinks about the future since thats the purpose of us buying the securities (taking away an important fact that we need to make an educated investment decision, so let us at least see what company thinks) Come out with provisions in National Instrument 51-102 for financial forecasts 22
Financial Forecasts: Two types of data forming financial forecasts: (1) Forecast (written estimate of most probable result of operations of a company for some pt in the future); (2) Projection (estimate of results that follow any set of reasonable assumptions) (1) Forecast: Written estimate of the most probable result of operations of a company for some point in the future e.g. four seasons hotel how its going to do in 2013 (making assumptions) if you assume that interest rates next year could be anywhere between 2 and 4%, but most probably, theyll be 3%, use 3. (2) Projection: Estimate of results that follow any set of reasonable assumptions the assumptions always have to be reasonable but unlike a forecast they have to be the most probable, they just have to be reasonable. Reasonableness is left up to reader. (e.g. int rates could be b/w 1-3%, I use 3) The only time you can use a projection vs. forecast is if its unreasonable to require you to do a forecast Only where issuer is engaged in business w/ less than 24 months relevant operating history and must be accompanied by cautionary note about potential variance. Difference is in assumptions: In a forecast, company is bound to use what it believes to be the MOST PROBABLE assumptions With Projection, always has to be REASONABLE, but the reasonableness of those assumptions are left to the reader (in projection, shifted to reader, they can assess reasonableness/probability) Policy Notes: Policy: Recognize tension between prospectus as selling document and prospectus as liability document do not err on EITHER side dont be too hard and dont be too soft, just be right Tension: Need to include some information about future (make it attractive to investors), but not share too much to reduce likelihood of liab for misrepresentation (including omissions) o The Form does not tell you that you need to put in financial forecasts, its optional. But if you put in forecasts, you have to comply with the law (National Policy 48). (and will probably want one, makes it more likely to sell if you can forecast good results) Practice note: Just have to be right , but hard to do this hard to harness your client because client can legitimately believe that the future for the business is great but you need to educate client that the marketplace understands the liability attached and understands that people are going to be more cautious in their predictions of the future then they would be if wasnt projection process. They also understand what this is, and that there ought to be some discipline on the sale process. Credibility: Companies shouldnt spend their whole lives worried about being sued, but even so, credibility in the market place is extremely important o You dont get a second chance to make a first impression so dont be cavalier (even if youre bullet proofed against being sued) people are investing, they remember what it says, if its accurate = increases your credibility. If its wrong, hurts you. You wont recover if you miss every quarter and keep updating your forecast BE CAUTIOUS ABOUT PREPARATION Find a happy medium: Its better to under-reach future financial performance then to oversell and perform short of the future numbers. o But also dont want to be too negative, or no one will buy securities.
Note on FOFI (from text) The information in a prospectus generally consists of verifiable existing facts. Although future-oriented information may be quite valuable to investors attempting to assess potential future cash flows from a security, predictions about the future may be prone to abuse (and therefore, this is regulated protecting investors) 23
Might include information about prospective results of operations, financial position, or changes in financial position based on assumptions about future economic conditions and courses of action taken by the issuer Note on proving unreasonableness: hard to prove that the information constituted misrepresentation later, since it would require showing that assumptions on which it was based were unreasonable at the time they were made there is scope for overly optimistic projections)
3.3.1.4 Full, True and Plain Disclosure of All Material Facts Requirement for Full, true and plain disclosure: Section 56(1): A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law. Definition of Material Fact: Section 1(1): Material Fact: When used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities. *note that a Material Fact and Material Change are different!!!!! If a Material Change Occurs, Amendment Required 57(1): If there is a MATERIAL CHANGE after receipt is obtained for preliminary prospectus, and before receipt for final OR after receipt for final is obtained but prior to completion of distribution, amendment must be filed as soon as is practicable, and IN ANY EVENT, within TEN days of the change
Danier Leather SCC Implications: Example of how to deal with forward-looking info. A forecast DOES have an implied representation of reasonableness, but thats all just has to be reasonable. A change in a material fact does NOT have to be disclosed following the filing of the prospectus (only a material change) Facts: lawsuit to SCC as to reasonableness of a forecast in a prospectus, but does not happen very often under prospectuses b/c (a) class action lawsuits are new here, (b) were less litigious than US, and (c) in order to sue under prospectus, have to know that you have one, find misrep, find lawyer, etc. Reasons: If a material FACT occurs following the filing of the final prospectus that is NOT a material CHANGE, there is no obligation to update purchasers (only have to update if theres a MATERIAL CHA NGE in business, operations or capital of the issuer.
3.3.1.5 Underwriters Have to do due diligence, and can still be found liable under s. 130(1) for misrepresentation (see more on underwriters below), and also have a due diligence defence available to them. Case: BarChris (US) Will often have distributions assisted by underwriters: 1. Underwriting Agreement: issuer enters into an agreement with the underwriter, which sets out the terms of their arrangement (obligations of underwriter, various covenants/representations of the issuer, conditions pertaining to the underwriters obligations/rights, and rights of termination (including a market out clause) 2. Syndicated Underwriting: for larger issues, because there may be substantial risk associated with the issue, underwriters may choose to reduce risk by syndicating it with other underwriters wiling to join the underwriting of the issue (other firms might become obligated to buy some portion of the issue, for example) 24
3.4 Prospectus/ Distribution Process (After making decision to go public) 1. Have to create the prospectus hire a lawyer, accountant, and registrant underwriter to sell securities on your behalf (underwriter also hires lawyer), management team, and start the process Is not just up to the client what goes in the prospectus, its for public/investor to decide what needs to be in there you as the UW cant just say you followed clients instructions if they dont allow you to read a k, do due diligence, etc. Integrity of capital markets dictates that this must be highly regulated. 2. Put all of the correct things in the prospectus (NI 41-101 and Rule 45-501) 3. Ensure it contains full, true and plain disclosure of all material facts related to the securities issued or proposed to be distributed, and comply with requirements of Ontario Securities Law (Section 56(1)) (FTPD is a judgment call) 4. Vet the Preliminary Prospectus (forward looking information, underwriter does due diligence, etc.) 5. Certify the prospectus (issuer certificate under Section 58 and underwriter certificate under Section 59) 6. File Preliminary Prospectus and get a receipt, then deliver it. 7. Waiting Period 8. Comment Letter and Clearing Period 9. Respond to deficiencies/file final prospectus (administrator can refuse receipt on broader grounds than for the prelim) 10. Distribution 11. If there is a misrepresentation in the prospectus, there is liability for it 3.4.1 Summary of Steps 1. Complete prelim (certified, signed, red herring) (although requires material facts, does not require price, maturity date, interest rate or dividend amount); 2. File with Administrator along with supporting docs (e.g. auditors comfort letter, tech reports, consent letters, underwriting agreement, material contracts, resolution of BOD approving prelim, financial statements); 3. Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations (s.54-55) Section 54: prelim must be in compliance with all requirements of ON Securities law, respecting form/content, and Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little discretion with giving receipt for prelim as long as it appears to have all the things required) Waiting period begins: time between receipt for prelim and receipt for final (if anything material changes during this period, make amendments) Limits on advertising during this time (policy to protect public) 4. Print/Deliver the document to those who expressed interest 5. Staff vet the prospectus Vetting is not a passing on the merits of the securities offered, nor is it a representation that it contains full disclosure it is a determination of: o (a) whether the required items of disclosure have been provided and o (b) whether there are any gaps in the information that are apparent from the material filed (can take several weeks) 6. Staff provide a comment letter 7. Clear up deficiencies, once theyre cleared 8. Final prospectus/supporting docs can be filed and a receipt obtained (at discretion of securities commission whether it is in the public interest to do so even if you met all requirements) It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin 3.4.2 Creating the Preliminary Prospectus: What must be included 25
See Form 41-101F1 or 44-101F1 for short-form, OSC rule 45-501. Long-Form Prospectus: very open ended including all material facts (fact that sig affects market price/ value). List of factors that it must include are on p. 112 of the text or look at ToC for 41-101F1. Includes 1) # and types of securities offered under prospectus, 2) method of distrib, 3) use of proceeds of issuance, 4) name and structure of corp, 5) description of issuers business, 5) financial statements of issuer Preliminary prospectus provides specific items of disclosure and full, true and plain disclosure of all material facts. Need to file it (s. 54(1)), and then you will get a receipt for it (s. 55) Section 54 of the OSA Preliminary Prospectus Requirements (And Excluded Info) (1) Preliminary prospectus: A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting the form and content of a prospectus, except that the report or reports of the auditor or accountant required by the regulations need not be included. (2) Idem: A preliminary prospectus may exclude information with respect to the price to the underwriter and offering price of any securities and other matters dependent upon or relating to such prices. o **Also note s.60: Statement of rights every prospectus shall contain a statement of rights given to a purchaser by s.71 and 130
Section 55: Receipt for Preliminary Prospectus: The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof. Section 54(2): a preliminary prospectus is exactly the same as a final except it can omit the price and what the underwriters get paid and any matters dependent on price It need not contain information about the offering price or anything else relating to or dependent on the price (things like price, maturity date, interest rate, dividend amt, etc. are often not included things affected by market conditions that may change b/w filing of prelim and filing of final prospectus) Policy: Can Exclude Pricing Information because: (1) Its NOT FINAL, youre not selling securities pursuant to it; (2) Gives underwriters an opportunity to assess the market for demand so that they can price it properly
National Instrument 41-101 (Form 41-101F1): General Prospectus Requirements
Section Item 1.1: Required Statement (Lies)
Description Both prelim and final prospectus (in SA is the phrase prelim, not final, is just prospectus) must contain on the outside front cover a statement that says, no securities commission or regulatory authority has in any way passed upon the merits of this offer. Is actually kind of a lie (b/c sec comm will have looked at it), but POLICY: Letting public know that no securities commission has blessed this (but not completely true, but want to make sure that no ones buying this based on comfort that a securities commission has reviewed it). Every preliminary prospectus must have a statement printed in red ink and in italics at the top, front cover, saying that this is a PRELIMINARY prospectus, Information is incomplete, and no one can buy securities from this doc until a final receipt is obtained
Page 1185
1.2: Prelim prospectus disclosure (Red This is removed in final prospectus Herring) *Remember that preliminary is NOT a draft document! Liability + credibility
1185
26
Can be held liable for it (even though you cant sell sec under it) If its wrong have to make amendments to it (when you say it was wrong, people lose faith in you, you lose credibility (dont get a 2nd chance to make a 1st impression) Therefore, do not treat the document causally
3.4.2.1 Certification Process When all parties are done preparing this prelim prospectus, identified all risk/explained business, put in red herring, hasnt passed upon merits, financial forecast, complied with law, certification process begins FORM 41-101F1 AND OSA Section 37.2 AND 58(1) of OSA: Issuer Certificate Description **ALSO NOTE CORRESPONDING 58(1) OF OSA Every preliminary prospectus shall contain a statement signed by the CFO, CEO, and two other directors, certifying that the prelim prospectus constitutes full, plain and true disclosure of all material facts. (the instrument says except in Ontario but have OSA to cover it) Issuer has an obligation to be RIGHT (they have more access to information) Notes: At the end of EVERY prelim and final prospectus, statement that certifies by these people that foregoing in document constitutes full disclosure, and they sign it (have to do so via securities act regulations) Item 37.3 AND 59(1) of OSA: Underwrite r Certificate **ALSO NOTE CORRESPONDING 59(1) OF OSA Underwriter certifies: To the best of their knowledge, information and belief, the document constitutes full, true and plain disclosure of all material facts relating to the securities being offered. They have an obligation to be careful/ responsible, but NOT an obligation to be right!! POLICY: Additional protection for investor, that the underwriter feels comfortable saying that (directors, officers, lawyers, underwriters all have to be comfortable signing this) should show that theyve done their due diligence Notes: Why different requirement for UWs? b/c company ought to know everything about itself feeds perfectly into investor protection but also need capital markets that work if underwriters are liable for ANY misrep for prospectus for any co theyre involved in they are not going to play wouldnt have efficient capital market Have to put some bumper guard on the underwriters liability (to the best of their knowledge/belief, not that it IS true) Defences: have obligation to be responsible/careful, but not an obligation to be right (company has an obligation to be RIGHT (directors are personally liable) Difference is b/c its practical, balances is the best regulators can achieve b/w investor protection and efficient capital markets 27
Page 1123
1124
Why certify? b/c of liability for misrepresentation Under s. 130(1) of the OSA: if there is a misrepresentation in that prospectus (omission or misstatement) the company has STRICT liability For Issuer: Only defence is that purchaser purchased with knowledge of the misrep. Doesnt matter if they intended to make a mistake, were careful, if theres a misrep in that doc you didnt know about and onus is on company to show that you know about it (almost impossible), then theyre liable. Underwriter has a due diligence defence o Huge obligation. But just $. If Innocent misrep and one of them has to lose money, it ought to be the company over you. More culpable than you are.
3.4.2.2 Filing with Administrator & Obtaining a Receipt for Prelim First receive a preliminary receipt (if comply with all requirements s.54; then per s.55- Director SHALL issue receipt), then delivery the prelim to those who have expressed interest in buying (solicited or not) per s.66 of OSA A. Preliminary Receipt: 1) Complete prelim (certified, signed, red herring) 2) File with Administrator along with supporting docs 3) Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations a. Section 54: prelim must be in compliance with all requirements of ON Securities law, respecting form/content, and b. Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little discretion with giving receipt for prelim as long as it appears to have all the things required) 4) waiting period begins + delivery a. It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin B. Delivery of Prelim to those who have expressed interest in buying (solicited or not) You must deliver the preliminary prospectus to all those who have expressed an interest in purchasing (whether youve solicited their interest or not so even if unsolicited) Section 66 of the OSA Distribution of Preliminary Prospectus S.66: Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus. 3.4.3 The Waiting Period, Vetting/ Comment Letter and Amendments At this point, theres a trade in a security that constitutes a distribution, filed a preliminary prospectus, obtained a receipt, then waiting period begins. The preliminary prospectus is the sole document containing representations about the security during the waiting period. It gives potential investors time to consider the features of an investment. Interval of time b/w when you get receipt for PPr when you get started gathering interest Securities cannot be sold until the final prospectus is filed and a receipt is obtained. Can be 3-4 weeks or longer 28
Section 65 of the OSA Waiting period s.65(1) Waiting period defined: In this section,waiting period means the period prescribed by regulation or, if no period is prescribed, the period between the Directors issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Directors issuance of a receipt for the prospectus. (2) Distribution of material during waiting period: Despite section 53, but subject to Part XIII, it is permissible during the waiting period, o (a) communicate re: price and such, IF it has name of place where they can get prelim: to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained; o (b) distribute prelim: to distribute a preliminary prospectus; and o (c) soicit expressions of interest, IF a copy is then forwarded: to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it. 3.4.3.1 Purpose of the Waiting Period Policy: 3 reasons for waiting period: 1) review for deficiencies; 2) giving investors time to review; 3) allowing for underwriters assessment of the market 1) Deficiencies a. When you deliver that PPr to the Securities Commission, they assign some accountant/lawyer to your prospectus and they review that document to list deficiencies you have to fix before you get a receipt for the final Prospectus (this is the lie by saying they havent passed on merits, the OSC, lawyers, etc. go through and give a list of deficiencies) 1) Investors have time to Review a. No point giving investors information if you dont give them time to digest it. b. No fast sales-person tactics, impulse buying, instead, lots of time to read it. 2) Underwriters Assessment of the Market a. underwriter thats going to sell them and be responsible for the sale has to assess the market, need time for company to deliver copies of Ppr to the investors, then communicate to underwriter to determine demand and therefore price 3.4.3.2 Vetting & Comment Letter When vetting is complete, a comment letter or deficiency letter will be provided. Conflicts Between Issuer and Securities Commission Accountant/lawyer at SC will issue the comment letter issuer may not agree with deficiencies, can cause tensions. You can challenge the deficiencies. Example: Pictures: OSC freaks out about pictures b/c dont want it to be too flashy/salesman -ish. (e.g. pictures of chef in the prospectus for Four Seasons not selling chefs are you selling hockey, or Stanley cups?) POLICY: Youre going to lose if you challenge the comments theyre protecting the investing public. 29
3.4.3.3 Constrained selling activities during waiting period Selling activities during the waiting period are constrained: You can only solicit expressions of interest (s. 65) and deliver the preliminary prospectus (s. 66), and have to keep a list of whoever you deliver it to (s. 67) in case you have to amend it. OSC can also stop any of these s. 65 trading activities cease until a revised prelim is filed if the prelim ends up being defective (s. 68) All you CAN DO is: advertise that there IS a security, the price, and where you can get a copy of the prospectus (NI 41-101) POLICY: Selling during the waiting period is constrained. The reason is that it would defeat the purpose of a prospectus with statutory liability for misrepresentation if selling were allowed. If representations were allowed prior to a final prospectus, the investor would not be protected by statutory liability for false representations. OSA, Part XVI: Distribution Generally Sections 65, 66 and 67 Section Description 65(2)(a)-(c): (2) Distribution of material during waiting period Despite section 53, but subject to Part XIII, it is permissible during the waiting Waiting period, Period (a) to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained; (b) to distribute a preliminary prospectus; and (c) to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it. Notes: Can have some advertising, identifying security, price, where it can be bought, and can give out prelim prospectus (41-101) Distribution of preliminary prospectus Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus. Any dealer distributing a security to which section 65 applies shall maintain a record of the names and addresses of all persons and companies to whom the preliminary prospectus has been forwarded. Why? In case there is a material change, so everyone who got a copy of the prelim can get a copy of the amendment 30
Page .
66: Distribution of Prelim Prospectus 67: Distribution List
68: Defective Prelim Prospectus
Defective preliminary prospectus Where it appears to the Director that a preliminary prospectus is defective in that it does not substantially comply with the requirements of Ontario securities law as to form and content, the Director may, without giving notice, order that the trading permitted by subsection 65 (2) in the security to which the preliminary prospectus relates shall cease until a revised preliminary prospectus satisfactory to the Director is filed and forwarded to each recipient of the defective preliminary prospectus according to the record maintained under section 67.
3.4.3.4 Limitations on advertising during waiting period POLICY: If you allow advertising, it circumvents the role of the prospectus if you can advertise with glossy brochures with high lights and no low lights, youve circumvented the whole process because investors never get to read the risks via final prospectus PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period All you can do in terms of advertising during the waiting period is: IDENTIFY the securities, state the price of the securities, and state the name/address of a person or company who you can buy them from, and where you can get the prospectus. OSC Test for Whether or not Advertising is Okay FACTUAL TEST in furtherance of a trade: OSC staff said in determining whether ads are prohibited, would apply factual test based on whether advertising could reasonably considered to be in furtherance of a trade no forecasts, no projections, no predictions OSC will look at why youre advertising: normal corporate image advertising is acceptable, but acting in furtherance of a sale in securities will result in penalties (because its a TRADE without a prospectus) This creates bizarre results EXAMPLES Eg. Sharon, Lois and Bram goes public interviewed the elephant (No - Advertising during waiting period, cant sell securities pursuant to the elephant) E.g. Canwest Global goes public in waiting period, 6:00 news, put their leading story to say guess what, were going public. SC says you cant do that, advertising during waiting period (CTVs gonna play it at the same time, SC too bad) E.g. The Brick goes public, does that mean during 6 weeks of waiting period, cant put ads on TV of no payment until 2078 corporate image advertising is okay, but cant use that to promote sale of securities. Does this make sense? E.g. in UK, no restrictions on advertising during waiting period BP for instance. OSC Argument: o b/c capital markets are so fundamental to our operation as a country cant allow system to be governed by slick advertising, has to be governed by real integrity (need a legitimate, credible capital markets system that ppl can rely on) o We cant police the advertising, impossible, so have to make these rules to ensure that integrity of capital markets is paramount Other Side:
31
POLICY: All were doing is excluding the 99% of people benefitting from these transactions. The 1% that has a broker and has access and knowledge and gets prospectuses/isnt normal, gets the profit from the stuff and the entire public doesnt. People make lots of $ off public offerings were going to protect you so much that we deny you access to the capital markets, b/c as a normal person, wont even know it exists (protecting you from big profit dont advertise so people dont know about them) Legal Fiction how can you advertise a preliminary prospectus is available if you cant advertise? you dont, and you dont get to play/participate! Theyre saying if youre not rich, youre not smart enough to figure out the risks of the market o Countering the huge risk argument once its on the TSX, you can go buy them. Dont have to be sophisticated, just have to be sophisticated when it first goes public for $6 *good question should you be able to advertise them in a flashy way? *Exam o Can just advertise the prospectus, maybe not the actual sale of it, say were gonna sell it, heres where you can get a prospectus, and you should o I think its elitist to assume people wont understand it. Would need some protections, but none of us understood this until we heard it in this course o Dumb b/c whole reason for prospectus fiction is to protect the investors (the big investors dont need the protection, will hire lawyers/accountants to do protect themselves) o Note: Perhaps this will change with social media/ internet ppl will engage in uncontrolled advertising o
3.4.3.5 Amendments if there are changes during the waiting period Because theres a period of time b/w receipt for prelim and final prospectus, obviously theres a risk that there will be a change in the business (e.g. fire, new k) If a material ADVERSE change occurs, you have to file an amendment ASAP or in any event within 10 days (s. 57(1)), and then send a notice to all investors under your s. 67 list (s. 57(3)). OSA PART XV Prospectus Distribution Amendments on Material Change Sections 1(1), 57(1) and (3) Section Description 1(1): material change, (a) when used in relation to an issuer other than an investment fund, means, Material Change (i) a change in the business, operations or capital 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, or (ii) a decision to implement a change referred to in sub-clause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, and [ investment blabla] (1) Where a material adverse change occurs after a receipt is obtained for a 57(1): Amendment preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the to Preliminary receipt for the prospectus is obtained but prior to the completion of the distribution on Material under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days Change after the change occurs. [] (3) Notice of amendment 32
Page .
An amendment to a preliminary prospectus referred to in subsection (1) shall, forthwith after it has been filed, be forwarded to each recipient of the preliminary prospectus according to the record maintained under section 67. ***NOTE: B/w prelim and final, only ADVERSE changes must be reported. B/w filing final and end of distribution, ANY CHANGE must be reported (adverse/not) Reason for difference: more important for investors to know about neg than pos things. HOWEVER, in the time btwn final prospectus and closing there is no other time to correct (must send amendment)
33
3.4.4 Filing the Final and Obtaining a Receipt and Changes Post-Filing 3.4.4.1 Final Receipt This is when the OSC moves away from regulating disclosure and the quality of it, and ACTUALLY goes on to regulate the MERITS of the offering This section gives them a mandate to review the offering. The Commission (lawyers and accountants) has the authority to say no to the public offering, even if youve disclosed everything. Even if investors are fully informed, the Commission has the authority to say no. POLICY: May not be a good thing for them to be refusing a receipt for the reasons typically used (e.g. because the company is too new, venture is too risky, etc.) HOWEVER.. overall: Lastman is comforted by this provision, in that an objective third party is looking after the efficiency/integrity of the capital markets (someone with a greater interest than individual investors who think they know better) See after case examples below: OSA Prospectus Distribution Final Receipt (s.61) s.61: (1) Issuance of receipt PUBLIC INTEREST: Subject to subsection (2) of this section and subsection 63 (4), the Director shall issue a receipt for a prospectus filed under this Part unless it appears to the Director that it is not in the public interest to do so. (2) Refusal of receipt: The Director shall not issue a receipt for a prospectus or an amendment to a prospectus under the following conditions (a) the prospectus or any document required to be filed with it, (i) does not comply in any substantial respect with any of the requirements of this Act or the regulations, (ii) contains any statement, promise, estimate or forward-looking information that is misleading, false or deceptive, or (iii) contains a misrepresentation;
(b) an unconscionable consideration has been paid or given or is intended to be paid or given for any services or promotional purposes or for the acquisition of property; Note: Clear statutory authority to eval prospectus on its merits (discretion of commission at play)
(c) the aggregate of, (i) the proceeds from the sale of the securities under the prospectus that are to be paid into the treasury of the issuer, and (ii) the other resources of the issuer, is insufficient to accomplish the purpose of the issue stated in the prospectus; Have to include use of proceeds in prospectus, what youre doing with $ and where its going, basically have to show that you have financing so that theres less risk to the investors $ and they can make an appropriately informed decision
(d) the issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of the financial condition of, (i) the issuer, 34
(ii) any of the issuers officers, directors, promoters, or control persons, or (iii) the investment fund manager of the issuer or any of the investment fund managers officers, directors or control persons;
(e) the business of the issuer may not be conducted with integrity and in the best interests of the security holders of the issuer because of the past conduct of, (i) the issuer, (ii) any of the issuers officers, directors, promoters, or control persons, or (iii) the investment fund manager of the issuer or any of the investment fund managers officers, directors or control persons; o Notes: *so on that past exam, could mention that they may not ISSUE a receipt if theyre concerned about this (even if its just a rumour) o *POLICY: is WAY beyond disclosure, is about regulating the merits of the offering, are not going to allow you access to the public markets if unhappy with your director or whoevers conduct. Balance b/w investor protection/ confidence in the market and efficiency of the market (want to have IPOs, but not if it sacrifices investor protection and confidence)
(f) unacceptable professional discretion: a person or company that has prepared or certified any part of the prospectus, or that is named as having prepared or certified a report or valuation used in connection with the prospectus, is not acceptable; (same kind of deal, if theyre unhappy with an expert) (g) an escrow or pooling agreement in the form that the Director considers necessary or advisable with respect to the securities has not been entered into; or Note NP 46-201: Escrow for Initial Public Offerings: o Remember IPO is first time that company is going public with shares (doesnt apply to more mature companies returning to the market). Therefore, worried that all the investors will give the company their money, then the company will bail, sell all their shares in the secondary market and peace out. That doesnt sound good. o Therefore, have to enter into satisfactory escrow arrangement that provides that you are not entitled to sell more than 1/3rd of your shares every year for the first 3 years (termed escrow agreement). Balance of risk b/w new owners/old owners to ensure that youre not buying into something where the founders dont have any skin in the game
(h) adequate arrangements have not been made for the holding in trust of the proceeds payable to the issuer from the sale of the securities pending the distribution of the securities. (3) Hearing: The Director shall not refuse to issue a receipt under subsection (1) or (2) without giving the person or company who filed the prospectus an opportunity to be heard CASE EXAMPLES OF OSC REFUSAL Rivalda Failed to issue receipt for a junior mining company offering b/c felt directors were too inexperienced, even though they indicated and DISCLOSED that they were inexperienced
Lake Forest Fund 35

Failed to issue receipt because they did not like the disclosed fee structure, thought too much money would go to the promoter.
Deprenyl Facts: Parkinsons sufferer goes to US and finds a drug that helps the symptoms - therapy for late stage Parkinsons. He took it and felt better. Decided to come back to Canada and form a private company (Deprenyl). Files Prelim prospectus to raise $ to get FDA approval. Was obvious in doc that they might never get approval, and then your $ is lost. Decision: OSC wouldnt issue a receipt for final prospectus because success depended on FDA approval of a drug and thus too risky company made this very clear on the face of the document that drug was not permitted in Canada and needed FDA approval finally OSC approved ended up getting FDA approval (but what would happen if no approval see policy)
POLICY NOTES POLICY (keep in mind these are outliers, and overall, he loves the OSC, decisions are typically effective) - This is a paternalistic approach: why not just force them to give the information to the public, but then LET THE PUBLIC DECIDE? Seems hard/sketchy in a situation where you have lawyers/accountants at the OSC telling people suffering from late stage Parkinsons that they cant get access to this great drug because the OSC thinks its too risky (even though disclosure is all there) BUT COUNTER-ARGUMENT: Cost to society is that people will not invest markets if we dont protect its integrity and if people lose all their $ on risky investments need to take steps to protect the economy, even against people who think they know better. We need to protect our capital markets b/c if they suck, investors will go elsewhere and then were bankrupt. His take on OSC: Confident to have fate held in reasonable hands of reasonable people making decisions in the interest of the public good o As long as theyre acting in the best interests of the public (which they do), then decisions are almost always right o Decisions made by people that are thoughtful/caring, which comforts him as opposed to arbitrary code. At the end of the day, not trying to protect one investor (not that myopic), but protect integrity of capital markets (sometimes means companies cant go public, or cant bring beneficial drugs to market, then thats a price worth paying to protect integrity of capital markets b/c without that, we dont have anything, no company can go public, no drug can come to market, etc. if we dont have confidence in those markets) (cost-benefit analysis to keep markets efficient) 3.4.5 Closing & Any Post-Final Amendments Assuming youve made all the changes, finally deliver prospectus to anyone who asked/anyone we want to sell it to, no section 61 problems, take out red herring, put in price/matters dependent on price, sign underwriting agreement, get receipt for final prospectus which finally gives you right to sell securities, now get ready to close
36
Closing is really nothing more than collection of cheques. Want to issue share certificates in these denominations to these people, sign a bunch of doc, deliver cheques, certificates distributed, something occurs, then the company is a reporting issuer under laws of Ontario
3.4.5.1 Delivery of Prospectus & Inclusion of Purchasers Rights Final prospectus must be delivered to everyone (except to those whose 2 day cooling off period has expired) o A dealer upon receiving an order or subscription for a security offered in a distribution must send the purchaser a copy of the prospectus before or within two business days of entering into a written confirmation of sale of the security o Further, the purchaser has a two-day cooling off period to change their mind
OSA- Prospectus Distribution s.60: Statement of Purchaser rights: Every prospectus shall contain a statement of the rights given to a purchaser by sections 71 (withdrawal rights) and 130 (right to sue for misrepresentation). Section 71 (1) Obligation to deliver prospectus: A dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection 53 (1) or section 62 is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after entering into such agreement. R.S.O. 1990, c. S.5, s. 71 (1). (2) Withdrawal from purchase (2 day cooling off period): An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser, if the dealer from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any amendment to the prospectus. o NOTE:You want to deliver the prospectus as quickly as possible after entering into the agmt of purchase and sale b/c they have this two day period to change their minds o POLICY: The cooling off period gives purchasers an opportunity to have time with the final prospectus (for every offering, not just IPOs Withdrawal Right Explanation & Examples (from class handout) When does the cooling off period? Scenario A: if you agreed to buy 6 days ago and received the prospectus todayDay 3 Scenario B: if there was a fire 6 days ago, then you agreed to buy 4 days ago, received prospectus today and amendment delivered on 2nd dayDay 4 (b/c thats when you received info) Scenario C: if you agreed to buy 4 days ago, you received prospectus today, but a fire occurs on day two and amendment delivered on day 12 Day 14 since buyer has not had 48 hour with all info until Day 12 Scenario D: if you agree to buy 4 days ago, receive prospectus today, a fire occurs on day 2, amendment delivered on Day 6, a strike occurs on day 12 and amendment delivered on day 16 Day 8 b/c it is 48 hours after the provision of the latest information recall cant give you more than 48 hours so strike is just tough luck Scenario E: o Day 1: Prospectus Delivery; o Day 2: I say Ill buy and do; o Day 6: fire occurs; o Day 8: Amendment filed; o ANSWER: On Day 4: I am bound. 37
As long as youve had 48 hours with all the information, you are bound. Whereas if the fire occurred on day 3, and the amendment comes out on day 6, Im not bound until Day 8 because I didnt have all the information until Day 6. it matters WHEN the CHANGE happened, and WHEN I became AWARE of the change
Effective Delivery NP 11-201 (Delivery of Documents by Electronic Means ) NP 11-201: allows the prospectus to be delivered electronically if four components are met for satisfactory delivery: o I) Notice: recipient of document should receive notice that the doc has been or will be sent electronically o II) Easy Access: recipient should have easy access to the document o III) Evidence that doc has been delivered: deliverer has to have evidence that doc was delivered or otherwise made available to the recipient o IV) Must not be different: the doc received by the recipient must not be different than the doc delivered First 3 can be satisfied if informed consent of recipient is obtained, and fourth deliverers are supposed to take proper steps to ensure that the docs arrive at their destination in an unaltered form See liability under s.130 (below) = second statutory right 3.4.5.2 Changes Post Filing of Final Prospectus (Any change must be reported in amendment) Closing: If you have to raise $200m, havent been able to enter into binding agreements of purchase and sale. Send prospectus, get printed, send copies, collect cheques, then go to company, sign papers, exchange cheques for certificates and close, but that takes a long time (lets say 3 weeks) But company doesnt stand still for those 3 weeks sign contracts, strike, fire, etc. things can change
If there is a material change in affairs of company b/w final receipt and closing, you have to deliver an amendment positive OR Negative changeBut during waiting b/w receipt for prelim and receipt for final, s. 57(1) says you only have to do an amendment for material adverse change (you can for any change, if you want) OSA 57(1) again except this time, Any Change! Not Just Adverse! (1) Where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs. POLICY BEHIND DIFFERENCE:Why would you have to do amendment for MAE during waiting, but positive or negative has to be disclosed? During waiting period o If negative We dont know if people will read the whole thing again at the final stages, so if something negative happens, want to bring it to your attention o But if its positive, dont mind b/c itll be picked up in the final prospectus o Were more worried about negative things than positive things, b/c they can disclose positive if they wish (and probably would to induce sales) After receipt for final prospectus o There is no document IN BETWEEN the final prospectus and the continuous disclosure regime that kicks in AFTER they become a reporting issuer (nothing to keep the file complete during closing) need something to make sure information is always picked up 38
B/w receipt and closing, only thing to make sure its entirely complete, demand theres an amendment for positive or negative change Otherwise, there could be a gap.
3.4.5.3 Lapse of Prospectus Distribution can continue for 12 months from date of receipt for the preliminary prospectus. After this period, the prospectus is said to have lapsed (per s.62(1)) and no further distributions of the security can be made without a renewal of the prospectus (per s.62(1.1)) Section 62(1) s.62(1) Refiling of prospectus: lapse date means, with reference to a security that is being distributed under subsection 53 (1) or this section, the date that is 12 months after the date of the most recent prospectus relating to the security. (1.1) Same: No distribution of a security to which subsection 53 (1) applies shall continue after the lapse date, unless a new prospectus that complies with this Part is filed and a receipt for the new prospectus is obtained from the Director. 3.4.5.4 National Offerings (NI 11-202 Passport System) With national filings, there is a principal regulator (main rule for choice of PR is jurisdiction in which issuers head office is located). If head office is in a location that isnt in any of the jurisdictions of potential principal regulators, then its the regulator in the jurisdiction with which the issuer has its most substantial connection Procedure: o Issuer files prelim prospectus and supporting material with regulator in each province where securities are to be distributed. Issues a decision document if satisfied (the PR), which serves as a receipt for the prelim. o The non-principal regulators have to use best efforts to advise PR within 5 days if they have any material concerns that would cause them to opt out o If they have no material concerns, indicate on SEDAR filing status screen that theyre ready to receive final prospectus. When comments have been dealt with, principal jdiction can issue MRRS decision document that operates as a receipt for the final prospectus on behalf of PR and NPRs that have not opted out 3.4.6 Consequences for Failure to Deliver/ File Prospectus (practically, none) 3.4.6.1 Failure to Deliver Penal, Admin and civil sanctions HOWEVER in reality, there are few penalties according to Lastman 1. Penal Sanctions Failure to deliver a prospectus may expose the dealer (who would act as principal or agent) to a penal sanction of fine or imprisonment. 2. Administrative Sanctions Imposed by securities commission or administrator Can include cease trade orders, reprimand or sanction, denial of exemptions, an order directing compliance, restriction on registration. 3. Civil Sanctions Where the prospectus is not delivered as required, the purchaser has a right of action for (1) rescission (undoing the contract from the beginning) or (2) damages against the dealer who failed to deliver the prospectus. 39
This is subject to a limitation periods o OSA 138(a): 180 days after the date of the transaction that gave rise to the cause of action o In any action other than rescission: 138(b): the earlier of (i) 180 days after P first had knowledge of the facts giving rise to the cause of action or (ii) three years after the date of the transaction that gave rise to the cause of action
3.4.7 Failure to File (likely not needed) Penal, administrative, and civil sanctions. 1. Penal Sanctions Failure to file a prospectus where required, or distributing a security without having obtained a receipt for a prospectus as required can lead to penal sanction of a fine or imprisonment. 2. Administrative Sanctions Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 88.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrants registration 3. Civil Sanctions Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 88.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrants registration 3.4.8 Liability for Misrepresentation in a Prospectus 3.4.8.1 Liability WHO IS LIABLE - Company, directors, selling security holders, officers who signed prospectus, underwriters, and the experts all may be liable for a misrepresentation in the prospectus. Policy- have everyone liable to give incentive to be careful. Selling Securityholders: o (a) have to get company to agree to sell your shares under prospectus o (b) understand that youre liable for misrepresentation under that prospectus POLICY: Why have everyone liable? To give incentive to be careful. Underwriters/Directors/Selling Secholders will be more careful if theyre going to be liable, Directors will actually read it. o Prob may have made it harder for high quality directors to serve on boards of public companies as they are worried about liability therefore, less competitive companies s.130: sets out liab, damages and defences for liab Recall: s.1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to state material fact that is required to be stated or that is necessary to make a statement not misleading in light of circumstances in which it was made. Can be liable for not amending the prospectus to reflect a material change, but not for failing to report material FACT (Danier) Option of Claims for Purchaser Upon Misrepresentation: 40
o o
(i) CONTRACTUAL CLAIMS: Rescission (get money back) (ii) DAMAGES: statutory rights under 130 of OSA 130(10): these statutory rights are in addition to and not in derogation of any rights at common law Plaintiff must show: (a) purchase of the security offered under the prospectus, (b) that the purchase was made during the period of the distribution and (c) that there was a misrepresentation in the prospectus. If they establish this, subject to some defences: plaintiff is entitled to rescission or damages (iii) TORT: (a) fraudulent misrepresentation (b) negligent misrepresentation (Hedley Byrne, Queen v. Cognos p. 153) Fraudulent misrep: D made false statement knowingly or without belief in its truth or was recklessly careless whether it be true or false & P relied on the statement to his detriment Negligent misrepresentation: Duty of Care based on a special relationship between representor and representee; rep was untrue, inaccurate or misleading; representor acted negligently in making misrep; representee relied, in a reasonable manner, on the misrep; AND reliance was detrimental (damages resulted)
Establishing a Claim for Damages for Misrepresentation: In a document: i. Issuer is either A. Reporting issuer B. Any other issuer with a real and substantial connection to the jurisdiction any securities of which are publicly traded. ii. Disclosure document contains a misrepresentation (which includes both misstatements and omissions) and iii. The P acquired or disposed of a security during the period in which the document was released and before the time the misrepresentation was corrected. OSA, s.130: Liability for misrepresentation in prospectus (1) Liability for misrepresentation in prospectus: Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against, (a) the issuer or a selling security holder on whose behalf the distribution is made; (b) each underwriter of the securities who is required to sign the certificate required by section 59; (c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed; (d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and (e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d), or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter.
(2) Defence ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER STRICT LIABILITY (+ under (7) showing that the diminution in value wasnt from misrep) 41
No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation.
(3) Idem: No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves, (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed; (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor; (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert; (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert, (i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or (e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true.
(4) Idem DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it, (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or (b) believed there had been a misrepresentation.
42
(5) Idem DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it, (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or (b) believed there had been a misrepresentation. o Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that
(6) Limitation re underwriters: No underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter. (7) Limitation in action for damages that depreciation wasnt b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. (8) Joint and several liability: All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be just and equitable. (9) Limitation re amount recoverable: In no case shall the amount recoverable under this section exceed the price at which the securities were offered to the public. (10) No derogation of rights: The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. Section 1(1) Misrepresentation misrepresentation means, (a) an untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made; (prsentation inexacte des faits)
Kerr v. Danier (SCC, 2007), 157 Ratio: Only have to report material CHANGES post-filing, not material facts. A forecast can be the subject of misrepresentation, P does not have to prove reliance, deemed Facts: Danier began distributing shares under a final prospectus in 1998. Sold for $11.25/share. Forecast of sales (FOFI) contained a warning that there is no guarantee that such Forecast will be achieved in whole or in part. After prelim, but before final, had a sale that didnt go great. Did an internal (not required) review of the numbers, and realized they were lagging behind. Chose not to issue press release, because they believed target would be met by the end of the quarter. Then had a Victoria Day sales promotion, and it did not go well. After final, but before end of distribution, Q4 revenues were lower than forecast. Issued a revised forecast to the OSC. They then issued a press release/material change report and the stock price went down on the date of the announcement. Actual revenues were not that far off of estimate by the end of the year. Daniers shareholders that lost $ sued to 43
get back $ they lost, and said that it was a misrepresentation for Danier not to include the initial information about lagging behind (saying it was necessary to make the forecast not misleading under (b) of the misrep definition Decision: In December 2005: ON CA: reversed trial decision. Dont have to do an amendment for material fact (trial judge didnt give suff deference to business judgment rule fact that directors were wrong wasnt the issue). Leave given to SCC. In 2007: SCC: dismissed the appeal, upheld ON CAs decision. In May 2004, ON TJ held that Danier and its officers were liable for statutory misrep in prospectus relating to an earnings forecastpoor revenue was a material FACT that Danier was required to disclose.
Implications: Issuers do not have an obligation to update prospectus to reflect material facts, only material changes: Issuers do not have an obligation to update a prospectus to reflect material facts after filing and do not have civil liability for failing to do so. To impose civil liability where an issuer has complied with the Act would be contrary to the securities legislative framework. Need only to report material changes, not material facts. Purchasers do not have to prove reliance, reliance is deemed if it was misrep at time of purchase: The plaintiff does not have to prove reliance. Instead, the plaintiff is deemed to have relied on the misrepresentation if it was a misrepresentation at the time of the purchase. It also may apply to secondary market purchases as well, since securities are offered under the prospectus during the period of distribution. o **HE SAYS SCC APPLIES BJR, and says they wont interfere with business judgment, but they actually dont they disagree that the BJR applies (only part of ON CA judgment they dont uphold) (they actually say that business judgment has nothing to do with disclosure youre obligated to provide certain disclosure and you cannot business judgment your way out of that. The business judgment rule does NOT apply to limit statutory disclosure obligations if an obligation to make disclosure otherwise exists. o Also note: and include an omission to make a statement not misleading is meant to capture half-truths.
3.4.8.2 Damages UNDER STATUTORY ACTION: Purchaser would claim diminution of security as a result of misleading nature Section 130(7): Defence of showing that SH loss was not from misrepresentation: defendant is not liable for all or portions of damage if diminution is not the result of the misrepresentation, but onus is on D to prove (almost impossible) Section 130(2): also not liable if you show they knew about the misrep Section 130(9): Can only recover what was spent: the most you can recover is what you spent (what securities were offered to public for), no opportunity costs Section 130(6): Proportionate for Underwriters: if more than one, underwriter only responsible for portion underwritten by them (total public offering price of their part) Section 130(1)(d): Experts only liable for Expertised Portion: experts only responsible for expertised portion (so if giving tax opinion, then only liable for that) o Would have to show under 130(4) that you did your due diligence o Joint and Several Liability if you ARE liable under expert portion 44
Section 130(8): J&S Liability: all defendants jointly and severally liable for the whole, but they can seek contribution from each other unless the court denies that right to contribution (if not just & equitable)
POLICY: (1) Investor protection: : will be more careful if youre fully liable (also with J&S liability youre liable so shouldnt put the burden on the plaintiff to sue different people to get the $) Between two innocent people (expert and buyer, one has to lose money, going to be expert, you can get it back from them) (2) but also need efficient capital markets which is why we have defences Absent defences, who is going to play? How are we going to get underwriters to sell securities if theyll be liable for any misrep in any prospectus for hundreds of millions of dollars when they only make 2 million? (if they dont play, we dont need investor protection b/c no ones selling securities) 3.4.8.3 Defences POLICY Why do we have defences? Defences are rooted in the concept of efficient capital markets you cannot be leaning so hard toward investor protection that it doesnt work. Cant hold them to absolute standard, b/c wont play but if you say you have an obligation to be CAREFUL that sounds reasonable (due diligence is so that someone will be CAREFUL) *Its hard to get good directors when we over-regulate everything to death, hard to balance Defences Defendants can avoid liability by showing that: i. The person purchasing the securities had knowledge of the misrepresentation. ii. He or she did not consent to the filing of the prospectus or that consent was withdrawn, with reasonable general notice of the withdrawal and the reason for it, prior to the purchase of the securities by the purchaser. iii. The statement was not made by him or her and her or she had no reason to believe, and did not believe, that it was a misrepresentation. iv. He or she conducted a reasonable investigation to produce reasonable grounds for a belief that there was no misrepresentation and he or she did not believe there had been a misrepresentation: due diligence defence. v. the depreciation in the value of the security was not caused by the misrepresentation. s.130: Defences 1. Issuer OR security holder: Strict Liability (no Due Diligence Defence, tho, J&S Liability, has options i or v above) Even if innocent mistake in misrep, who should suffer b/c of it? Issuer, not investor, you should have known everything, investor has cleaner hands than you, unless they knew, you had all info Thus, the issuer/selling securityholder only has two defences (both extremely hard to prove) and NO due diligence: o Section 130(2) and (7) (2) Defence ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER STRICT LIABILITY (+ under (7) showing that the diminution in value wasnt from misrep) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 45
(7) Limitation in action for damages that depreciation wasnt b/c of misrep (hard to prove) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.
2. Experts (Joint and Several Liability, and only for expertised portions has all defences from above available + 1) Experts are only liable for expertised portions, have a defence for DD, diminution in value, the they knew, did not consent, and statement not made by them (failure to fairly rep opinion) o s. 130 (2) Again showing they knew. o (3) Idem LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) reasonable grounds see below or above. (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed; (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert; o (4) Idem DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it, (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or (b) believed there had been a misrepresentation. Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that o (7) Limitation in action for damages that depreciation wasnt b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 3. NON-EXPERTS (e.g. Due Dilig defence for everyone except the issuer and selling securityholder e.g. Directors, officers) Have defences that purchaser knew, due diligence, and depreciation not from misrep and also have separate defences for their liability of the EXPERTISED portions S.130 (2) that the purchaser knew 46
(3) Idem LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) reasonable grounds: No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves, o (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed; o (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor; o (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert; o (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert, (i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or o (e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true. (5) Idem DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it, o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or o (b) believed there had been a misrepresentation. Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that (7) depreciation wasnt b/c of misrep
DUE DILIGENCE DEFENCE 47

Due Diligence: Standard of Reasonableness s. 132 s.132: In determining what constitutes reasonable investigation or reasonable grounds for belief for the purposes of sections 130 and 131, the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case. POLICY and Client Info: due diligence is a judgment call: Difficult to tell your client what a reasonable investigation actually means, and there is little guidance in the OSA Difficult to balance efficient markets and investor protection, this is the best we have. Just tell client theres an obligation to be careful (not necessary to be right) and youll be judged in hindsight, so keep that in mind. Escott v Barchris (USA, 1968), 163 Ratio: Attempts to define level of due diligence required, but really only says what is not acceptable It does not matter whether you can read/ understand the prospectus; if you sign it, you are liable. There is an overriding obligation to the public and the capital markets. I need to have a reasonable investigation to avoid a misrepresentation Facts: BarChris was a construction company building bowling alleys. Alleys forced to shut, industry overbuilt. In the middle of financial troubles, BarChris sold debentures containing several misrepresentations in the registration statement and prospectus. Customer failures in payments were understated, company failed to state it was operating bowling alleys. Decision: Company liable, strict liability. Can only evade liability if they prove purchaser purchased with knowledge of misrepresentation. They could not, so liable. Treasurer, CFO: liable. No evidence of due diligence. You cannot simply rely on experts, you need to do your level of due diligence. President and Vice president found liable. Irrelevant whether they knew what they were signing; ought to know the facts, if not, liable. Lead underwriter found liablerelied on its legal counsel to do the investigation. Lead underwriter not excused on the basis that it relied on its legal counsel. Underwriters need to make reasonable efforts to verify the data submitted to them. Auditors also liable. Should have known BarChris was operating a bowling alley. Outside director (lawyer): liable. Knew about some of the contracts that were not enforceable, and did not investigate others. Cannot simply ask management if prospectus is accurateyou cannot simply rely on management, founders, or anyone else to found a due diligence defence. Need a reasonable investigation of your own. Counsel: young lawyer, liable. Seniority does not matter. Know your obligations and investigate.
Implications: What is not acceptable for due diligence: This case doesnt actually define due diligence. It simply establishes what is not acceptable (only a guideline). o No better way to say be careful than to be careful, and no way to define it other than be careful in that particular set of facts with that particular company. o POLICY: Integrity of capital markets needs you to be careful
48
It does not matter whether you can read/ understand the prospectus. If you sign it, you are liable: In this case, applied to President/VP. Even if you have limited education and cannot read or understand the prospectus, but you sign it, you will be liable if there is a misrepresentation o McLean J. noted that a check of matters easily verifiable [would not be] unreasonable. Appears to have imposed a higher standard on directors who are also company counsel. o Underwriters argued they were entitled to rely on statements of officers of company. McLean noted that the purpose of making underwriters liable was investor protection. If they were allowed to escape liability on the basis of officers statements, then the inclusion of underwriters among those liableaffords the investors no additional protection.
Feit v. Leasco Ratio: Underwriters gatekeeper role therefore has obligation to challenge issuers disclosure and go beyond automatic reliance on what issuer presents Standards for inside vs. outside directors inside directors expected to make more complete investigation and have more extensive knowledge of facts than outside directors Facts: Takeover of Reliance Insurance by Leaseco. Leasco offered shares and warrants in exchange for shares of Reliance. Registration statement failed to disclose amount of Reliances surplus surplus which consisted of liquid assets of an insurance company which were available for use in non-regulated enterprises. An action was brought against Leaseco and its directors. Decision: Court, reiterated the views of McLean J. in BarChris, noting that a completely independent and duplicate investigation is not required[but] the defendants were expected to examine those documents which were readily available. Implications: Different directors may be held to different standards for due diligence: o Inside Directors vs. Outside: Inside directors with intimate knowledge of corporate affairswill be expected to make a more complete investigation and have more extensive knowledge of facts supporting or contradicting inclusions in the registration statements than outside directors. o Underwriter Gatekeeper: The underwriter is a gatekeeper of the public interest and therefore also has an obligation to challenge the issuers disclosure and go beyond automatically reliance on what the issuer presents
YBM Magnex (OSC) Standard of due diligenceshould be ongoing, but only to the extent of tying up lose ends. Threshold of materiality must be considered in light of all facts available Facts: YBM issued a prospectus noting, in its discussion of risk factors, the risk of doing business in Eastern Europe, but did not mention specific investigations against its directors for criminal behaviour over there. Decision: Commission held that YBM failed to disclose that it was subject to unique risks. Implications: Threshold for materiality in light of all facts available: Materiality must also be considered in light of all the facts available to the persons responsible for the assessment, exercise of judgment and reasonable diligence.
49
Due diligence should not be ongoing , only tying up loose ends: Due diligence should be ongoing following the filing of a preliminary prospectus, but only to the extent that the remaining work only consists of tying up loose ends When further significant investigations are required, this is not the proper process. A course of conduct must be completed before an underwriter can affirm that to the best of its knowledge, information and belief, the document contains full, true and plain disclosure.
3.4.8.4 Limitation Period & Common Law Rights Statutory civil right is in addition to and not in derogation of any other right. This preserves the common law rights of action which may be of value given limitation periods. For example, rescission is limited to 180 days from the date of the transaction, BUT LIABILITY FOR MISREP UNDER STATUTE HAS NO BAR!!!!!!
Jones v Deacon Implications: Why misrepresentations are all so scary, and why you need to take it seriouslyCourt found that sale of securities is so fundamental to our law, that is NEVER statute-barred, and it forever voidable at the instance of the purchaser Facts: Deacon Hodgson was an investment dealer. In 1980, created private company called Bachova investments to invest in oil business. Offered or sale shares of Bachova without a prospectus, without properly relying on a private placement exemption. Hodgson Bought the shares in 1982, and in 1986 Jones was charged with fraud in Australia (the buyer). As part of that fraud case, which has nothing to do with bachova investment, Cam Deacon was ordered to fly down to Australia to testify against Jones (completely unrelated). As part of Cams testimony, Jones was put in prison in Australia, 4 yrs after he bought securities. Jones in Australia, pissed, nothing to do. Buys securities act. Looks at investment 4 years ago, realizes that investment in Bachova was against the rules. Cam never gave me prospectus, and never properly relied on exemption, I want my $ back. From prison, brought action against Hodgson in Ontario. Three year limitation: Was no prospectus, no proper compliance on exemption but 3 year statute of limitations period. Deacon said ha ha, too bad, statute barred. Jones I dont think this is ever statute barred
Decision: court found that the sale of securities (our general rule that no person shall trade w/o being registered, distrib w/o prospectus, etc.) is so fundamental to our law, that it is never statute-barred, and it is forever voidable at the instance of the purchaser right now this is the law! (never been appealed) Implications: Sale of securities is never statute barred!!!: When you combine fact that there is no statute bar and these exemptions are so flaky, want to cry b/c its real money. Whether youre liable or not b/c you told them I dont know, doesnt help client relations if you lose.
3.4.9 Registration Requirement Section 25 of the OSA so to satisfy, get an underwriter 3.4.10 UW Agreement UW purchase from corp in exchange for a fee (for resale to public). Contemplated that itll be executed with final prospectus. o Prior to signing, no binding agreement. o Filing in different jurisdictions, dates in which final needs to be filed so they can get securities into hands of buyers (and out clauses for underwriters) 50
Certificates of accuracy of prospectus, but this is not a substitute for due diligence, must independently verify if youre the UWs o When copies of prospectus are to be delievered and how many copies (quickly b/c of cooling off, otherwise UWs are exposed to contingencies of market, want to be exposed for as little time as possible) o Underwriter only distrib sec where there is a receipt for a final prospectus Other: Notify of material change, reps and warranties, indemnification (obligation to file amendment asap and at most w/in 10 days of material change) o Re: indemnification: if there is a misrep in prospectus, company will indemnify the directors, employees and agents against liab (likely will not uphold as would not ensure ppl to take; Never tested in Can, but US cts consistently said indemnity provisions not enforceable contrary to public policy BUT if acting for underwriters incl anyways cant hurt) Problem with company indemnification (Policy): The underwriter has no incentive to properly do their due diligence if they know the company is good for it. Youve contracted out of the obligation to do proper due diligence o Hasnt been challenged in Canada, in the US, theyre not enforceable. o Although never tested in Canada, he thinks Canadian courts would say the same thing o Legal fiction in mature companies doing IPOs (not start ups, though) Contribution: Interesting, says if the UW gets sued for misrep and they go after them for the whole thing, the UW has a right to go back to the company for its share of that misrep o Have a right to seek contribution of company for what youre not responsible for (UWs responsible for part underwritten by them) o s. 130(8): of securities act you can get contribution unless court denies you that right (contractually providing for right to contribution) o Policy: Protect investors by holding as many people responsible as possible contribution makes sure everyone has to be worried about it, not just the person with the deepest pocket encourages more people to be more careful, which is what the legislation is meant to do Termination: Market Out: UW can terminate agreement, means people are scared (unclear when it can be relied upon not if market simply having a bad wk OR blip)
3.4.11 Sample Prospectus o See 44-101F1. o Warning at the top: No securities commission has passed upon the merits (have to o Tells you whether it is a new issue OR secondary offering (Note: if this was a prelim prospectus would have a red herring at top) o How much $ to UWs/company o Risk factors o Summary (b/c every prospectus must have a summary) o Everything about company that is material, including: business of company, use of proceeds (must disclose what you will do with money), financial forecast and warnings, financial statements (capital, principal shareholders, directors/officers), UW agreement details (market out clause: obligations of UW can be terminated), escrow arrangements (to balance risks between new and old shareholders), Material contracts (and risks), AND legal proceedings, certificate of company (strict liab), certificate of underwriters (gives rise to due diligence defence) o Obligations of UW may be terminated at their discretion based on their assessment of state of financial markets (market out clause), purchasers stat rights, remedy for rescission/damage, certificates
51
52
4.0 SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE Five aspects of continuous disclosure: (1) Regular disclosure (quarterly/annually); (2) timely disclosure (of material changes); (3) Early Warning (if buying up 10%- could signal takeover bid); (4) Insider Reporting (allowed to trade, but we want to know what youre doing); (5) Insider Trading (to keep things fair, cant do) Want to make sure investors are protected and a fundamental tenet of that Is disclosure Companies change, and people are still trading on secondary market, the info from prospectus goes stale (to ensure ppl buy on primary market, must maintain efficiency of secondary market) 4.1 Policy Behind Continuous Disclosure Regime Merger Report (3 objectives) (1) Investor information; (2) accountability technique to encourage more eff management/ deterrent to fraud; (3) Creates equality of opportunity for all investors in the marketplace (sellers & buyers); (4) discourages transactions that dont meet public scrutiny; (5) allows for disciplining of mgmt. (condemn/ commend) (1) Investor Information: Give investors ability to determine whether they want to buy/sell or not, what price ought to be AND ensure this info remains current (2) Accountability technique to encourage more eff management /deterrent to fraud: a) Should have to let investors know info so they can make educated decisions; (b) Creation of free, open securities markets, requires that there be free/open publicity, competing judgments of buyer/seller reflects just price, establishes true market value (3) Creates equality of opportunity for all investors in the marketplace (sellers and buyers): According to OSC, if you have to disclose everything this leads to an Efficient Market - confidence necessary to run efficient capital markets (object is to make avail at all times, info investor needs) (4) Discourages transactions that dont meet public scrutiny: sunlight is the best disinfectant (5) Allows for disciplining of management (condemn or commend) National Policy 51-201: Disclosure Standards Section 1.1 (1): It is fundamental that everyone investing in securities have equal access to information that may affect their investment decisions. Competing concerns Cost of disclosure can be high. Too much information can lead to overload. Excessive disclosure can raise the cost of obtaining significant information. In some instances, disclosure may deter productive activity. 4.2 PART I: Regular Disclosure Reporting Issuers ONLY: Only reporting issuers are subject to continuous disclosure (as defined in s.1(1) of OSA) Reasoning: the securities of reporting issuers are traded in markets in which some potential investors will need to know the information that must be disclosed. o Thus, reporting v. non-reporting distinguishes between issuers whose securities are sold to those presumed to need to know and those who do not. 53
Key feature of a reporting issuer is that it is an issuer that has issued securities under a prospectus in the province.
4.2.1 Application to Reporting Issuers Section 1(1) of the OSA: Reporting Issue r reporting issuer means an issuer, (a) that has issued voting securities on or after the 1st day of May, 1967 in respect of which a prospectus was filed and a receipt therefor obtained under a predecessor of this Act or in respect of which a securities exchange take-over bid circular was filed under a predecessor of this Act, (b) that has filed a prospectus and for which the Director has issued a receipt under this Act, (b.1) that has filed a securities exchange take-over bid circular under this Act before December 14, 1999, (c) any of whose securities have been at any time since the 15th day of September, 1979 listed and posted for trading on any exchange in Ontario recognized by the Commission, regardless of when such listing and posting for trading commenced, (d) to which the Business Corporations Act applies and which, for the purposes of that Act, is offering its securities to the public, (e) that is the company whose existence continues following the exchange of securities of a company by or for the account of such company with another company or the holders of the securities of that other company in connection with, o (i) a statutory amalgamation or arrangement, or o (ii) a statutory procedure under which one company takes title to the assets of the other company that in turn loses its existence by operation of law, or under which the existing companies merge into a new company, where one of the amalgamating or merged companies or the continuing company has been a reporting issuer for at least twelve months, or (f) that is designated as a reporting issuer in an order made under subsection 1 (11); (metteur assujetti)
4.2.2 Obligation to File Financial Statements 4.2.2.1 ANNUAL Section 4.1 Every company must prepare annual, audited comparative financial statements within 90 days of the end of the fiscal year 4.2.2.2 INTERIM - Section 4.3(1) of NI 51-102 An issuer must file cumulative, comparative financial reports for each interim period ending after it became a reporting issuer, and 4.4(a)(i) the filing must be completed on or before the 45th day after the end of the interim period in a non-foreign jurisdiction (must file every 3, 5, and 9 months) (note: not audited) Section 80 of the OSA: exemptions in particular circumstances from financial requirements (we dont need to know them)
4.3 PART II: Timely Disclosure (of changes) Section 75 of the SA in conjunction with NP 51-201 Irregular and unpredictable intervals. A fire, a flood, a strike, a new product, a contract. That information has to get into the market place.
Steps: 1. You must report material changes in your business, capital or operations (75(1)) 54
Timing: You must report them at the right time (not too early, not too late) o Difficult to determine b/c hard to determine on the margin o Dont want to disclose b/c it can be really harmful (e.g. Financial Post would have to disclose its losses which could reduce its advertising revenues). HOWEVER, if it is a material change, you have no choice. o Also NP 51-201 indicates that disclosure must be factual and balanced (must disclose unfavourable news just as quickly as favourable news) Internal Changes or External if Impacting Differently: Material and internal, unless the external change (e.g. war in another country) affects your business, capital, operations in a way that it does not affect others (per NP 51-201) CHANGES not FACTS and should be MATERIAL: o Definition in 1(1): Affects business, capital or operations o Examples in NP 51-201, 4.3NP 51-201 recommends: Erring on the side of materiality and disclose (although keeping in mind risk of premature disclosure) Actual AND Proposed Changes: Definition of Material Change in 1(1) and NP 51-201 o Actual: things that have occurred (e.g. judgment against you, fire) o Proposed: (a) when board decides to do something (BEFORE theyve actually done it) (why: fact decision is made is the info they want to get into the marketplace so that market is efficient, works, and is trading with best possible information) (b) when management decides to do something and they believe BoD approval is probable. 2. Report in one of three ways: 1) Full Reporting; 2) Incomplete Disclosure, 3) Confidential Reporting (must apply to use this, and can only use if you meet conditions) Conditions for confidential reporting: o (a) unduly detrimental to disclose; or o (b) as of right if mgmt makes a decision that is likely to be approved by board and no one is trading with the info, and then must disclose once its approved/or if it leaks To bring action for Failure by an issuer to make timely disclosure, must show: 1) Reporting issuer or any other issuer with a real and substantial connection to the jurisdiction whose securities are publicly traded, failed to make a timely disclosure; 2) The P acquired or disposed of a security of the issuer; 3) Acquisition or disposal occurred between the time when a disclosure was required and before the subsequent disclosure of the material change. POLICY: Equal Access to Information and proper valuation: Intended to provide investors with up-to-date information which is equal to the access enjoyed by insiders and proper valuation results. Tension: BUT HARD TO DECIDE WHEN YOU SHOULD DISCLOSE POLICY Tension: Investor Information + Protection VS. Efficient capital markets Efficient Capital Markets (dont want premature or late disclosure, both are bad) (a) Confidentiality/ Privacy issues: You cannot have a proper negotiation if public companies need to disclose that theyre in talks (lets the person buying negotiate a lower price b/c you look stupid if you dont end up selling) - you cannot disclose every time you get a sense something material might happen (no one will sell or buy ever) o e.g. Steve Jobs being ill hard to draw line and decide when appropriate to disclose (it is relevant and material to company HOWEVER we are talking about someone who deserves privacy) (b) Regulators Afraid of premature disclosure: do not want you to manipulate the market (e.g. say youre buying at a premium just so price will go up). o also rumours: if premature disclosue happens, you are in trouble disappointed investor expectations 55
They just want you reporting MATERIAL CHANGE UPON ITS OCCURRENCE, no sooner, no later and theyll decide in hindsight.
Spectrum at what point in these discussions is disclosure required? 4.3.1 Statutory Provision: OSA, Part XVIII Continuous Disclosure s.75 (1) must report a material change; (2) within 10 days of change; (3) exception for confidentiality; (4) keep reporting every 10 days; (5) requirement to disclose subsequently if someone purchases S.75(1): What you must report - material change: Subject to subsection (3), where a material change occurs in the affairs of a reporting issuer, it shall forthwith issue and file a news release authorized by a senior officer disclosing the nature and substance of the change. (2) Report of material change: Subject to subsection (3), the reporting issuer shall file a report of such material change in accordance with the regulations as soon as practicable and in any event within ten days of the date on which the change occurs. (3) Exception Confidentiality: A reporting issuer may, instead of complying with subsection (1), promptly file with the Commission the report required under subsection (2), marked as confidential, and its written reasons for doing so if, o (a) the reporting issuer reasonably believes that a disclosure required under subsections (1) and (2) would be unduly detrimental to its interests; or o (b) the material change consists of a decision made by the senior management of the reporting issuer to implement a change and the senior management, (i) believes that confirmation by the board of directors of the decision to implement the change is probable, and (ii) has no reason to believe that any person or company with knowledge of the material change has purchased or sold the reporting issuers securities or traded a related derivative. (4) Idem keep reporting every 10 days: Where a report has been filed with the Commission under subsection (3), the reporting issuer shall advise the Commission in writing where it believes the report should continue to remain confidential within ten days of the date of filing of the initial report and every ten days thereafter until the material change is generally disclosed in the manner referred to in subsection (1) or, if the material change consists of a decision of the type referred to in clause (3) (b), until that decision has been rejected by the board of directors of the issuer. (5) Requirement to disclose subsequently - if someone purchases, have to disclose: A reporting issuer that has filed a report under subsection (3) shall promptly disclose the material change in the manner referred to in subsection (1) if the reporting issuer becomes aware or has reasonable grounds to believe that a person or company having knowledge of the material change is purchasing or selling securities of the reporting issuer or trading a related derivative. 4.3.2 Material Change vs Material Fact Remember, 1(1): Material Change = change in business operations or capital of a company that would reasonably be expected to have a significant effect on market price or value of the securities, or a decision to implement a change referred to above by the board or senior management who believe that confirmation by the board is probable This definition distinguishes the following: o a) Internal vs external changes: Limited to internal changes (business operations or capital of company), unless that external change impacts your business in a way that is more fundamental than rest of the world (then you have an obligation to disclose) 56
E.g. fact that government passes law such that cigarettes can no longer be sold at drugstores is material for Shoppers Drug Mart. b) Actual vs proposed: Definition in 1(1) of Material Change covers both actual, and proposed by directors OR proposed by managers who believe that approval of directors is probable Proposed: decision to make change, triggers the disclosure makes sense since you are trying to get info to marketplace in time for it to be useful to marketplace. Note: it is likely that when mgmt. has decided, you can likely see that on a balance of probabilities it will be accepted by the board c) Material change vs fact: Obligation to disclose material CHANGES, not facts Lines get blurred b/w material facts/changes all the time difficult to determine
Royal Trust Co v Campbeau Ratio: Difference in material change vs. material fact (example) only have to disclose material changes, not material facts Facts: Campbeau going to make bid for Royal Trust Co based on getting 2/3 SH approval, stock was going to go way up in price. Standard Trust Co realized that those holding lots of votes were not going to tender to bid, and Campbell bid was going to fail. When it failed, Campbeau complained, saying directors told people that they knew 40% of shares would not tender to the bid, had obligation to disclose that had they done that, I wouldnt have spent all this $ on this bid Decision: No, the fact that shareholders wont tender to the bid, that is a MATERIAL FACT, not a material CHANGE (doesnt affect operations/business of the company) no obligation under s. 75 to disclose material fact DANIER Also difficult to tell whether a change in the weather and a subsequent crappy sales promotion of leather goods is a material fact or a material change (TJ found it to be a material fact) 4.3.2.1 Materiality Standard from National Policy 51-201 Pezim v. British Columbia (1994, SCC) Ratio: National Policy Statements/ Sec Commissions should be given deference wrt to determining what constitutes a material change Per Iacobucci: the Commissions policy-making role is limited. By that I mean that their policies cannot be elevated to the status of law. However, Iacobucci J: also noted that considerable deference should be accorded to the securities commission in determining what constitutes a material change because this is within the expertise of the commission What Must be Reported? Material change in issuers business. NP 51-201, 4.3 o Changes in corp structure (changes in controlling share ownership, major reorgs/ M&A; take-over bids) o Changes in capital structure (sale of additional sec; planned repurchases of sec; planned stock splits/ consolidation/ share exchange/ stock dividend; changes in dividend payments/ policies; poss initiation of proxy fight; material modification in rights of sec holders) o Changes in financial results (sig increase/ decrease in earnings; unexpected changes in financial results; shifts in financial circumstances cash flow red; changes in value/ composition of corps assets)
57
Changes in business and operations (development that affects corps resources, tech, products or markets; sig change in capital investment plans; major labour disputes; sig new/ losses of contracts; changes to BOD; developments in material legal proceedings; de-listing of corps sec) o Acquisitions and dispositions o Changes in credit arrangements 4.2(2) of Policy encourages issuers to err on the side of disclosing the information if there is any doubt. o
4.3.3 What must be filed with a material change (3 Report Options) 4.3.3.1 Complete Public Disclosure 1) File a press release per s.75 OSA, NI 51-201 s.2.1; 2) File a material change report (Form 51-102F3) 1) File a press release immediately disclosing the nature and substance of the change o NP 51-201, 2.1: A company's press release should contain enough detail to enable the media and investors to understand the substance and importance of the change it is disclosing. Avoid including unnecessary details, exaggerated reports or promotional commentary. o Obligation: to be factual and balanced (BUT no more said by Securities Commission) 2) File a material change report (Form 51-102F3) disclosing in greater detail the nature and substance of the change, within 10 days of the change. o Example: a fire occurs. It is material. File press release immediately. File material change report within 10 days. 4.3.3.2 Incomplete Public Disclosure Still Form 51-102F3. This is the same, except leave out a fact and persuade the commission (via report) that a particular fact should not be disclosed. Here, only part of the material change is not disclosed. Prof has never seen this used. 4.3.3.3 Confidential Disclosure / Reporting s. 7.1(1) and (2) of National Instrument 51 -102: Material Change Reports Do not have to follow usual procedure of disclosing material change (per s.7.1(1)) if, per s.7.1(2) it would be (a) unduly detrimental or (b) as a right, and the reporting issuer immediately files Form 51-102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure
Statute (OSA s.7.1(1)) S.7.1(1) Publication of Material Change: Subject to subsection (2), if a material change occurs in the affairs of a reporting issuer, the reporting issuer must (a) immediately issue and file a news release authorized by an executive officer disclosing the nature and substance of the change; and (b) as soon as practicable, and in any event within 10 days of the date on which the change occurs, file a Form 51-102F3 Material Change Report with respect to the material change.
Description
58
Statute (OSA s.7.1(1)) (2) Subsection (1) does not apply if, (a) Unduly Detrimental: in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure required by subsection (1) would be unduly detrimental to the interests of the reporting issuer; or
Description
2.2 of NP 51-201: Comparative: Detriment outweighing benefits of disclosure (undue economic detriment). Might happen where disclosure would interfere with a companys pursuit of a specific objective or strategy, with ongoing negotiations, or ability to complete a transaction. If that harm outweighs the general benefits to the market of immediate disclosure, then withholding disclosure is justified. WHY THIS IS A PROBLEM: You are admitting that its material and discloseable, and youre obligated to disclose: so if your request is denied, youre screwed and you have to disclose. Youve removed any judgment from you or your client. This hardly ever applies, so may as well stay away from it. POLICY Tensions: o Investor protection: should be able to assume all material changes have been published and can be pissed about making inv decision w/o that info vs o Efficient Markets/Having People Play: There are circumstances where disclosure may be unduly detrimental, doing long-term harm to all investors potentially, making commission surrogate for investors Basically, just keep in mind that application of this is difficult (of whether its a material material change) e.g. the Harold Ballard heart condition disclosable or not? Where senior management has decided to do something, will give you confidential disclosure as of right until board has approved it and when they have, youre into regular disclosure Why do they allow a material change not to be reported to the world yet? Preserve right of directors to make decisions: Forces directors to do it, if youve announced it, taking decision away from the directors o BUT HAVE TO DISCLOSE WHEN: (a) board has approved decision or as punishment when: (b) if you let it leak and people are trading with it No sympathy b/c should have protected info, b/w innocent parties, have to protect investors in marketplace. Have to let them know that no one is trading with that knowledge. The point of this confidential disclosure request to the commission (vs just not disclosing if you decide it is confidential): o So that commission knows insiders arent trading, they can monitor the stock, make sure people arent trading with the information o If regulator sees trading, corp has to disclose fact seems to have looked Tension b/w investor protection and efficient capital markets: dont want people using info to exploit, but dont want to create situation where management can pre-empt board and this is the compromise. Once approved by board, under obligation to disclose issue press release and file material change report Must advise commission every 10 days until disclosed If board says no therefore, nothing to release o and the reporting issuer immediately files the report required under paragraph (1)(b) marked so as to indicate that it is confidential, together with written reasons for non-disclosure. Material change in affairs of company but you do not file a press release or a report, and you seek a confidential ruling from the securities commission
(b) As of right: the material change consists of a decision to implement a change made by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors is probable, and senior management of the reporting issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the reporting issuer,
and the reporting issuer immediately files Form 51-102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure
59
Statute (OSA s.7.1(1))
Description saying this has happened, but I cant disclose it for this reason
4.3.3.4 Best Practices Re: Disclosure (per NP 51-201) 1) 2) 3) 4) Establish a corp disclosure policy and oversee its implementation Have board/ audit committee review disclosure Authorize limited # of company spokespersons Adopt a no comment policy to rumours otherwise inconsistent response may be interpreted as tipping
4.4 PART III: Early Warning Purpose of Early Warning: potential sign of a takeover bid where people will offer premiums to share price. If someone acquires a certain percent of the shares of a company, they have an obligation to say so and what their intention is, so that the market is aware of what is going on. Give advance notice to the world that someone is accumulating stock because it might be relevant to your investment decision The most important thing: increases potential for competing bids, and allows management time to engage in defensive tactics, if necessary 4.4.1 STEPS: 1. Have you bought shares that, together with what you already own, put you at an ownership threshold of 10% (you can trade up to 9.9 without disclosure)? If yes (102.1(1)) a. PRESS RELEASE: Disclose that you bought them, how much you have, and your intentions by issuing and filing a press release, identifying the person/extent of their control over the voting securities (7.1 of Rule 62-504) i. even if there are 4 ppl with different amounts (under 10%), sec act holds the entire group as one - no wise guys! b. FILE A REPORT: giving the details as soon as is practicable (also 7.1) c. **ALSO REMEMBER (and see below): HAVE TO FULFILL INSIDER REPORTING TOO!!! 2. Do you want to buy more shares? If yes wait one business day before buying more (s.102.1(3)) a. Freeze: you must WAIT ONE BUSINESS DAY before buying more (102.1(3)) (give market time to digest and incentive to get info out faster efficient markets) b. If 2% more in proportion of securities of that class of voting securities, have to do it again (102.1(2)) i. Every additional 2% up to 20: triggers same obligation to file press release, file report ASAP, 1 business day freeze after youve filed report, continues to 20%, then TOB rules ii. If you want control: if you own 9%, you should buy whatever the next biggest block is if you want to acquire control so you get as much as possible w/o reporting again 1. Cant go to prepare your sellers (e.g. get someone to sell to one seller) so that you can buy the max amount in one trade 2. If you have 2 who own separate securities agree to vote together (and dont buy additional shares), this doesnt trigger any obligation 4.4.2 STATUTORY PROVISIONS 4.4.2.1 OSA S.102.1 10% Rule and 2% Rule 60
S.102.1(1): 10 per cent rule: Every acquiror (someone buying securities w/o making formal bid) who acquires beneficial ownership of, or the power to exercise control or direction over, voting or equity securities of any class of a reporting issuer or securities convertible into voting or equity securities of any class of a reporting issuer that, when added to the acquirors securities of that class, would constitute 10 per cent or more of the outstanding securities of that class, shall disclose the acquisition in the manner and form required by regulation. (2) Same, further 2 per cent rule: An acquiror who is required to make disclosure under subsection (1) shall make further disclosure in the manner and form required by regulation each time any of the following events occur: o 1. The acquiror or any person or company acting jointly or in concert with the acquiror acquires beneficial ownership of, or the power to exercise control or direction over, i. an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates, or ii. securities convertible into an additional 2 per cent or more of the outstanding securities referred to in subparagraph i. o 2. There is a change in any material fact in the disclosure required under paragraph 1 or under subsection (1). (3) Period when acquisitions prohibited ONE BUSINESS DAY FREEZE: During the period beginning on the occurrence of an event in respect of which disclosure is required to be made under this section and ending on the expiry of one business day after the date that the disclosure is made, the acquiror required to make the disclosure or any person or company acting jointly or in concert with the acquiror shall not acquire or offer to acquire beneficial ownership of any securities of the class in respect of which the disclosure is made or any securities convertible into securities of that class. o POLICY: to allow market to digest information (4) Exemption FREEZE does not apply to person with 20% (because they have different rules): Subsection (3) does not apply to an acquiror who has beneficial ownership of, or the power to exercise control or direction over, securities that, together with the acquirors securities of that class, constitute 20 per cent or more of the outstanding securities of that class. Note: Section 102.2: if someone announces a takeover bid, there is a second obligation under early warning. If someone else acquires 5% or more, that person has to (1) put out a press release (before opening of trading next day) and (2) disclose every 2% thereafter. o Applies until 20% acquired
4.4.2.2 OSC RULE 62-504: Section 7.1 Early Warning s. 7.1 Early warning: An acquiror under subsections 102.1(1) or (2) of the Act shall, (a) promptly issue and file a news release containing the information required by section 3.1 of National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues; and (b) within 2 business days from the day of the acquisition, file a report containing the information required by section 3.1 of National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.
4.5 PART IV: Insider Reporting 61

Insider: big shareholders, managers, directors people that have information POLICY: we actually want insiders to have skin in the game (e.g. need escrow arrangements with an IPO so they cant sell right away - (61(2)(g) director can refuse to issue receipt) They should be able to buy and sell, but not when its based on information not available to the public. Therefore, if youre an insider and youre buying or selling, thats fine if you tell everyone. Why do insiders have to disclose? Because investors want to know if insiders are trading (if they dont believe in company, why should you?); ultimately increases confidence in sec market
4.5.1 Analysis: When do insider reporting rules apply? Are you an insider of a reporting issuer? If yes, o Insider: 1(1): Director or officer of reporting issuer, (b) director or officer of a person or company that is an insider or a subsidiary of the RI, (c) someone who (i) owns 10% of the voting shares (excluding underwriters), (d) a RI that has purchased, redeemed or otherwise acquired a security of its own issue for as long as it holds it, (e) designated as an insider under ss 11 Comply with proper disclosure: o File a report within 5 days of becoming one: to disclose any ownership and any interest in, or right or obligation associated with, a related financial instrument, and make any other disclosure required by the regulations (price you bought/sold them at) (107(1) and 3.2 of NI 55-104) Have to say (a) im an insider, (b) how youre an insider, (c) file a report within 10 days of becoming one indicating that you bought/sold, the price, quantity and date o If you already are one, have to file report within 10 (5? In NI 55-104 and Lastman) days of change in your holdings: Also have to disclose if there is any change in your ownership (107(2)) Have to say (a) im an insider, (b) how youre an insider, (c) file a report within 10 days of becoming one indicating that you bought/sold, the price, quantity and date
4.5.2 STATUTORY PROVISIONS 4.5.2.1 OSA Section 1(1) Definitions: Insider insider means, (a) a director or officer of a reporting issuer, (b) a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer, (c) a person or company that has, o (i) beneficial ownership of, or control or direction over, directly or indirectly, securities of a reporting issuer carrying 10 per cent or more of the voting rights attached to all the reporting issuers outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, or o (ii) a combination of beneficial ownership of, and control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuers outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, (d) a reporting issuer that has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security, (e) a person or company designated as an insider in an order made under subsection (11), 62
(f) a person or company that is in a class of persons or companies designated under subparagraph 40 v of subsection 143 (1); (initi)
4.5.2.2 OSA Section 107 Insider Reporting (1) Insider reporting Within 10 days of becoming an insider or within such other time period as may be prescribed, a person or company who becomes an insider of a reporting issuer, other than a mutual fund, shall file a report disclosing, in the prescribed manner and form, any direct or indirect beneficial ownership of or control or direction over securities of the reporting issuer and any interest in, or right or obligation associated with, a related financial instrument and the insider shall make such other disclosure as may be required by the regulations.
(2) Same Within 10 days, or within such other time period as may be prescribed, of any change in the direct or indirect beneficial ownership of, or control or direction over, securities of the reporting issuer or any interest in, or right or obligation associated with, a related financial instrument, an insider of a reporting issuer, other than a mutual fund, shall file a report disclosing, in the prescribed manner and form, such change and the insider shall make such other disclosure as may be required by the regulations.
4.5.2.3 NI 55-104 Insider Reporting Requirements (s.3.2 & s.3.3) & Exemptions AND Form 55-102F2 Insider Reporting Sections 3.2 and 3.3: 3.2: have to fill out a report within 10 days of becoming an insider disclosing (a) beneficial ownership of, control or direction over securities and (b) interest in or blabla same as sec act above. 3.3: same as 107(2) above except its FIVE days after a change in ownership you have to file report
Form 55-102F2: Form to fill out for insider reporting 4.6 PART V: Insider Trading TWO PARTS: (1) Trading: You cannot sell with insider information and (2) Tipping: you cannot tell anyone else about that information 4.6.1 Policy Discussion about Insider Trading / Tipping Prohibition Why do we have the rules? (why cant you trade with info not generally disclosed?) Kimber Report POLICY: maintain integrity of capital markets, provide fullest poss knowledge so that investor confidence is maintained (want everyone to play) Not improper for insider to buy/sell securities in their own companygenerally accepted that its beneficial to have officers/directors purchase, as they thereby acquire direct financial interest in welfare of co. Impossible to justify proposition that investment so made cant be realized or liquidated merely bc investor is insider. BUT improper for insider to use confidential info acquired by virtue of his position as insider to make profits by trading in securities of company. Should be free/open market with prices thereon based on fullest possible knowledge of all material facts among traders. Anything that puts that into question reduces confidence in the market place and is therefore a matter of public concern Why doesnt this work? Not many successful prosecutions out of millions of trades, hard to monitor. 63
Regulators should just be honest: there is no way to stop insider trading. 6 people at OSC. Millions of people trading. You as an investor should not rely on the fact that there is a level playing field false sense of confidence.
Options? Abolish Insider Trading laws, Let the industry/market regulate itself. o Opposite argument: these rules still serve a massive deterrent effect (just b/c people do bad things doesnt mean you shouldnt regulate that activity) o Maybe: give liability to CEOs who dont monitor it, giving DD defence o Or have both. Manager or directors will police execs better than securities regulators, or else people wont want to buy your stuff, bad reputation o NBA Example commissioner cares b/c if people dont have confidence in integrity of the market, they arent going to play (did a lot more than the police to prevent fixing games). If true, Apple has a better chance of stopping insider trading than the securities commission These people have better chance of controlling b/c their career depends on integrity of their company or game 4.6.2 Steps 4.6.2.1 Trading 1. Are you a person or company in a special relationship with a reporting issuer? a. Special relationship: (a) insider, affiliate or associate of: the reporting issuer, a person proposing to make a takeover bid, person proposing to become part of a reorganization, amalg, etc.; (b) a person (or co) engaging in or proposing to engage in business on behalf of reporting issuer or a person described in abc, (c) director, officer, employee of reporting issuer or of person making takeover bid, reorganizing, or engaged in business, (d) person or co who learned of mat fact or change while they were person in abc, or (e) person or co who learns info from any other person described in the section (in a special rel/ship) and knows or reasonably ought to have known that the person they learned it from was in a special relationship 2. Are you trading (buying/selling)? 3. Are you doing so with knowledge of a material fact OR change (covers both!) that has not been generally disclosed? a. Generally disclosed: question of fact i. Reverse Onus: Onus on defendant to show that they believed it was generally disclosed (76(4)) ii. Cannot disclose and then trade right away, must be effective disclosure (Texas Gulf) iii. When market knows and has had time to digest (reasonableness) (National Sea) iv. Safe rule is one trading day (National Sea) 4. If you are in a special relationship and traded with knowledge of a material fact OR change (covers both!) that has not been generally disclosed, do you have a valid defence? (175 of regs) a. That it was generally disclosed (or that you reasonably believed it was) (76(4)) b. *if youre deemed to have knowledge b/c youre an employee, partner, directors, etc. in a company that had the information, can show that you protected integrity of the information (REGS 175) c. If youre trading as an agent (broker) for someone else (and you DID NOT give the info out to that principal) (175(2)(a)) d. If they were purchased as part of an automatic reinvestment plan (175(2)(b)) e. If they were traded b/w two people who both knew the information (175(2)(c))
64
4.6.2.2 Tipping 1. Are you a person or company in a special relationship with a reporting issuer? If not a. See def of special relationship above 2. Did you learn information from someone that you knew or ought to have known was in a special relationship? (76(5)(e) puts you in a special relationship) 3. Did you share a material fact or change that has not been generally disclosed with anyone else not in the ordinary course of business? a. Material fact or change b. Generally disclosed c. Not in the ordinary course of business 4.6.3 Statutory Provisions (OSA) 4.6.3.1 OSA Section 76 Trading Where Undisclosed Change/Tipping (1) Trading where undisclosed change: No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed. (2) Tipping: No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed. (3) Idem: No person or company that proposes, o (a) to make a take-over bid, as defined in Part XX, for the securities of a reporting issuer; o (b) to become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with a reporting issuer; or o (c) to acquire a substantial portion of the property of a reporting issuer, shall inform another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed except where the information is given in the necessary course of business to effect the take-over bid, business combination or acquisition. (4) Defence- reasonably believing it was generally disclosed: No person or company shall be found to have contravened subsection (1), (2) or (3) if the person or company proves that the person or company reasonably believed that the material fact or material change had been generally disclosed. (5) Definition: For the purposes of this section,person or company in a special relationship with a reporting issuer means, o (a) a person or company that is an insider, affiliate or associate of, (i) the reporting issuer, (ii) a person or company that is proposing to make a take-over bid, as defined in Part XX, for the securities of the reporting issuer, or (iii) a person or company that is proposing to become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its property, Notes: Takeover Bids: Insiders of the company making the takeover bid are in a special relationship (like directors/officers), but the company itself can still trade shares why? o Policy objective saying its a good thing to allow people to make takeover bids (balancing of investor protection and efficient capital 65
markets), and the only realistic way to do that is to buy shares to complete the transaction, to defray their costs. ought not be insider trading b/c something else we want to protect dont want the insider directors (or from other company) to prosper from it, theres no policy justification for that. So want to allow take-over-bids, but not enrich directors/officers. If you are the bidding company and you go to the company you want to sell must agree nothing will be told in mtg that is not public info (otherwise would put in a special relationship) o (b) a person or company that is engaging in or proposes to engage in any business or professional activity with or on behalf of the reporting issuer or with or on behalf of a person or company described in sub-clause (a) (ii) or (iii), Note: catches lawyers here o (c) a person who is a director, officer or employee of the reporting issuer or of a person or company described in subclause (a) (ii) or (iii) or clause (b), o (d) a person or company that learned of the material fact or material change with respect to the reporting issuer while the person or company was a person or company described in clause (a), (b) or (c), Note: e.g. if I WAS a lawyer, learned something theyre going to do, then they fire you, cant trade. o (e) a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship; (personne ou compagnie ayant des rapports particuliers avec un metteur assujetti) Note: Deliberately vague, b/c a code is either insuff or excessive Recall: reporting issuer includes an issuer that has a real and substantial connection to Ontario and whose securities are listed and posted for trading on the TSX Venture Exchange. (metteur assujetti) (6) Idem: For the purpose of subsection (1), a security of the reporting issuer shall be deemed to include, o (a) a put, call, option or other right or obligation to purchase or sell securities of the reporting issuer; o (b) a security, the market price of which varies materially with the market price of the securities of the issuer; or o (c) a related derivative. **note definitions of associate, affiliate, and insider in 1(1)
MISSING A CATEGORY: Tippees who dont know or ought to know that the person they got the info from was in a special relationship!! persons who learn of information from a person in a special relationship and knows or ought to know that the person was in a special relationship are people in a special relationship, but misses those people who dont know or ought to know *on an exam: look for hints that the person knows or ought to have known: (e.g. if taxi driver tells you to buy RIM, fine, you dont know or ought to know. If his last name is same of CEO of RIM, more of an issue)
66
4.6.3.2 Insider Trading (OSA): s.76(1) 76(1): it is an offence for a person or a company in a special relationship with reporting issuer to purchase or sell securities with knowledge of a material fact or material change that has not been generally disclosed See 76(4) for Definition of Special Relationship THE ONLY ONES WHO CAN BE CHARGED are those in a special relationship with reporting issuer 4.6.3.3 Tipping (OSA s.76(2) +(3)) 76(2) and (3): offence for reporting issuer or someone in a special relationship with reporting issuer or any person proposing to make takeover bid prohibited from disclosing or giving other people information with respect to a material fact/change that has not been generally disclosed except in the necessary course of business Relevant that this applies to both an undisclosed material FACT and CHANGE o If youre in a special relationship with RI and you have info not in public domain, you cant tell anyone that, except in regular course of business until its generally disclosed Note: the Phrase is actually a Misnomer: Tipping is not trading dont even have to trade. What is definition of trade? SALE OF SECURITY doesnt include a purchase POLICY: Level Playing Field: Were trying to avoid people with knowledge from using that knowledge to detriment of market b/c not a level playing field! NECESSARY COURSE OF BUSINESS: o Is a question of FACT (depends on the circumstances) Easy example: If Im a company and I want to make a takeover bid for RIM, I have to call a lawyer to help me make a takeover bid for RIM, Im TIPPING, but in the necessary course of business b/c I cant do it without a lawyer. Have to hire a banker, I need $100m, tell them why Other cases of necessary course of business mentioned by NP 51-201, dealings with vendors/ suppliers; employees and officers, legal counsel, parties to negotiation, labour unions and industry assoc, govt agencies and credit rating agencies However, would not incl analysts. Also must make sure the receiver of info does not given info to anyone else Royal Trust Co v. Campbeau Changes v. facts: tipping covers both In this situation, even though they decided that knowing a major SH wouldnt tender their shares was not a material change, it was a material fact, and in that case, the Director told other SHs not to tender, b/c the bid wouldnt go ahead today, hed be dead with these rules (due to tipping regs). Telling people not or that they dont have to tender to protect your job is not in the necessary course of business, and youre guilty of tipping Whenever you give an informational adv that is considered tipping 4.6.4 Meaning of Generally Disclosed (Defence) Question of fact- onus on D (accused of insider trading) to show you believe it was generally disclosed When is it satisfactory general disclosure? When is it generally disclosed? Question of fact. o Onus on the defendant being accused of insider trading to show that you believe it was generally disclosed (reverse onus) o Market knows, and has had time to digest it. How long is that? Whatevers Reasonable. o NP 51-201 indicates that corp can meet generally disclosed defence by (a) news release, (b) announcement through press conference (although it is good to disclose on company website, this is not enough) Texas Gulf 67
Facts: TG puts out press release, and immediately, insiders bought up huge quantities of shares. Releasing a news release and then trading right away is not appropriate. Investors reading the news release is only one step in the process for complying with regulatory objective of allowing all investors to make an informed investment decision. Even assuming the contents of the release could be instantaneously acted upon, still should have waited until it could reasonably have been expected to appear in broad circulation. Info must be effectively disclosed: Before insiders may act on material information, must be effectively disclosed in manner to ensure its availability to investing public. So basically, you cannot disclose and trade on the information one minute later.
National Sea Ratio: Two-part test for when you can trade as an insider: 1. Must be disseminated to the trading public; and 2. The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/ complexity of the info (generally, wait one full trading day after release of info) Facts: Insiders bought a bunch of shares once it was on the wire. Said you still have to wait. Reasons: Two part test for when you can trade as an insider and one day general rule: o 1. Must be disseminated to the trading public; and o 2. The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/complexity of the information Thus, insiders are NOT free to trade as soon as press release is on Dow Jones News Wire need to give it enough time to be effectively disclosed No Firm rule re: interval, BUT a safe working rule: should wait a minimum of one full trading day after release of information Factors to consider in length of time: o a. nature/complexity of information o b. nature of market for stock o c. place of companys operations vs. place of disseminating info thru news release
Policy Notes: Reverse Policy issue: *my argument: doesnt really create equal playing field, b/c now the public gets to buy it before you do, whoever has their ear to the ground and is monitoring the Dow Jones, for instance. Bright line tests dont work you cannot legislate integrity
4.6.5 Defences to Insider Trading / Tipping 4.6.5.1 Make Use of Defence no longer applicable Used to be a defence in Canada saying that you had info, but didnt MAKE USE OF IT (I would have bought it anyways) o E.g. Martha Stewart knew it, but made decision to trade before I knew this (found guilty of lying about insider trading, not guilty OF Insider trading) Made it impossible to convict anyone or find them liable for insider trading (to prove that they USED that knowledge to buy the securities, not just that they bought it) o People in securities market not happy cant have an efficient market if you have such severe consequences and a broad rule 68
In response to that: created another defence under OSA- now only requires that person has knowledge of a material fact that has not been disclosed (although Crim Code insider trading provision, s.182.1, requires that accused sold sec knowingly using insider info therefore, may hamper effectiveness of provision)
4.6.5.2 Protecting Integrity of the Info (s.175 of Regs) If you take all reasonable precautions to protect integrity of info and someone else trades, not guilty (only if reckless) Under agency law: partner is deemed to know what partners now (when in reality, you dont) o Thus, if you take all reasonable precautions to protect integrity of that information and someone else trades, not guilty, but if youre reckless and theyre still not sure, rather take $ from you than investor o Policy considerations to protect shareholders Rule: If youre a person in a special relationship, you buy/sell securities with knowledge of material change/fact that hasnt been generally disclosed, youre NOT guilty of insider trading if ALL of the following conditions are met: o (a) only reason youre deemed to have knowledge is bc info was known to one of your officers, directors, partners or employees o (b) decision to buy/sell was made by someone who did not have ACTUAL knowledge of the information o (c) no advice was given by person who had actual knowledge to person who made decision to trade o (d) appropriate mechanism (wall) was in place to prevent flow of information from person who had actual knowledge to person who made decision to trade o firm or business took reasonable precautions to protect the integrity of that information REGULATIONS, s.175 s. 175(1) A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act, where the person or company proves that, o (a) no director, officer, partner, employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities of the reporting issuer had actual knowledge of the material fact or material change; and o (b) no advice was given with respect to the purchase or sale of the securities to the director, officer, partner, employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities by a director, partner, officer, employee or agent of the person or company who had actual knowledge of the material fact or the material change, o but this exemption is not available to an individual who had actual knowledge of the material fact or change. (2) AGENTS/INVESTMENT PLANS/FULFILLING CONTRACTS: A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act, where the person or company proves that, o (a) the purchase or sale was entered into as agent of another person or company pursuant to a specific unsolicited order from that other person or company to purchase or sell; 69
(b) the purchase or sale was made pursuant to participation in an automatic dividend reinvestment plan, share purchase plan or other similar automatic plan that was entered into by the person or company prior to the acquisition of knowledge of the material fact or material change; or o (c) the purchase or sale was made to fulfil a legally binding obligation entered into by the person or company prior to the acquisition of knowledge of the material fact or material change. (3) In determining whether a person or company has sustained the burden of proof under subsection (1), it shall be relevant whether and to what extent the person or company has implemented and maintained reasonable policies and procedures to prevent contraventions of subsection 76 (1) of the Act by persons making or influencing investment decisions on its behalf and to prevent transmission of information concerning a material fact or material change contrary to subsection 76 (2) or (3) of the Act. (4) A person or company who purchases or sells a security of a reporting issuer as agent or trustee for a person or company who is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act by reason of clause (2) (b) or (c), is also exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act. (5) A person or company is exempt from subsections 76 (1), (2) and (3) of the Act where the person or company proves that such person or company reasonably believed that, o (a) the other party to a purchase or sale of securities; or o (b) the person or company informed of the material fact or material change, o as the case may be, had knowledge of the material fact or material change.
4.6.5.3 Defence in Practice Law Firms Protect themselves against inadvertent trade they all have rules on insider trading. o Restricted List: Some say, every time you have transaction involving public company that is material, you have an obligation to phone a designated person and put that company on a restricted list so that someone in the law firm knows that people in that law firm cannot buy/sell shares b/c we have knowledge of o Either way, trying to stop inadvertent/unintended insider trading claim. Integrity of information is protected (so you can use the defence) o In investment banks: Geographic separation b/w traders/investment bankers doing the deal, so bankers cant get access to brokers information (doesnt work in law firm)
4.6.5.4 Trading as an agent & youve given no advice (s.172((a) of Regs) If you trade as AGENT for another person pursuant to unsolicited order, and you gave NO advice, youre not guilty of insider trading I phone my broker, say buy apple. My broker knows that apple is about to make a massive announcement. What should my broker do? o Not say anything. If broker tells me I cant do that trade, Ive learned something. In absence of defence, if my broker executes that trade, hes guilty of insider trading. He shouldnt be. So theres a defence. 4.6.5.5 Automatic Investment Plan (175(2)(b) of Regs) If automatic dividend reinvestment plan, not guilty of insider trading, even if you knew Example: Disney: automatic dividend reinvestment plan: dont want to send you cheques every quarter for .05 if you own 1 share accumulate dividends for you, when it reaches price of a share, we buy you one
70
If you know someone is going to bid for Disney and they automatically buy you a share pursuant to Automatic Dividend Reinvestment Plan, youre not guilty of insider trading, even if you knew. Theyre doing it for you w/o you asking
4.6.5.6 To fulfill legally binding agreement that happened before material info was known (s.175(2)(c) of regs) Defence b/c entered into legally binding contract BEFORE You had knowledge, then you subsequently get knowledge, dont have to breach contract (Policy rationale no uneven playing field \ not making decisions w/ knowledge) E.g. Enter into legally binding agreement that on Halloween, youll buy 100 shares of apple from me, we both know nothing. Then I get insider info that stock is going down. Halloween comes, what should law be? OKAY What if I have an option, then I learn information? No, b/c option not a legally binding contract. 4.6.5.7 Trades between 2 People Who Both Know the Info (s.175(5) of Regs) Fine b/c both have same info, no one has advantage over someone else. Playing field still level. NOTE: insider trading isnt designed to create equal opportunities or be fair in every circumstance cant do everything 4.6.6 Actions, Sanctions & Penalties for Insider Trading 4.6.6.1 Penal sanctions CRIMINAL Under s. 382.1 Criminal Code prohibits trading on basis of material info concerning an issuer that has not been generally disclosed (similar to OSA s.76) Conviction for insider trading: Prosecution must prove: i. Accused was in a special relationship ii. Accused purchased or sold securities of the reporting issuer iii. Accused made the purchase or sale with knowledge of a material fact or material change concerning the affairs of the reporting issuer; AND iv. That the material fact or material change had not been generally disclosed. Conviction for tipping/informing: i. Accused person was in a special relationship with reporting issuer ii. Accused informed another person of a material fact or material change with respect to the reporting issuer. iii. Accused informed another person of the material fact or material change before it was generally disclosed. *also note: that unlike OSA, Crim Code does not cover tippees of tippees *also makes no distinction between reporting issuers and non-reporting issuers (who would not have to disclose insider trading under OSA) Defenceinformation was given in the necessary course of business of the reporting issuer; a defence where the giving of the information is necessary to effect the takeover, business combination or acquisition; finally where the person reasonably believed the information had been generally disclosed. 4.6.6.2 Civil Actions The Act provides for an action for damages against a person trading on inside information by the person with whom the trade was made. P must show: i. D was in special relationship with RI 71
ii. iii. iv.
D purchased or sold securities of RI D made purchase or sale with knowledge of a material fact or change Material fact or change had not been generally disclosed.
Tipping: The Act also provides for an action for damages against a person who informed another of the inside information. P must prove: i. D is RI was in special relationship with issuer ii. D informed another person of material information iii. Information was given before material information generally disclosed. Actions by or on Behalf of the Reporting Issuer Issuer can bring action against insider. Issuer must show that the person was an insider, affiliate or associate of the issuer, that the person bought or sold with knowledge of material information, or informed, and that they did so before the information was generally disclosed. The Securities Commission can bring an application for leave to bring an action in the name of and on behalf of the issuer to enforce the duty to account if the issuer does not. 4.6.6.3 Administrative sanctions i. ii. iii. iv. v. Cease trade orders Removal of exemptions Prohibitions from acting as a director or officer Administrative penalty Insider reporting.
*subject to defences above
72
5.0 SEGMENT 3: THE CLOSED SYSTEM: 5.1 Private Placement & Exemptions 5.1.1 General Rule General rule: no trading in security, unless you are registered. If its a distribution, without prospectus or proper reliance on private placement exemption Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor protection) Two Requirements Disclosure requirement satisfied by prospectus, comprehensive disclosure document Registration requirement satisfied by underwriter selling securities Tension b/w Investor Protection vs. Efficient Capital Markets In third segment, see tension b/w investor protection (do a prospectus) and efficient capital markets (not every company can feasibly do a prospectus) Allows sale of securities to public without time, trouble and expense of using a prospectus through private placement exemptions The Concept of the Closed System Securities will only be allowed to trade outside of this closed system if that trading is supported by adequate continuous disclosure. o Trading within the closed market: Secondary market trading within closed market can only occur in reliance on an exemption. Exemption available only where purchasers do not need to know prospectus information o Trading outside the closed market: (i) Prospectus Disclosure Followed by Continuous Disclosure. Need to provide adequate information to the investing public. Provide a prospectus, continuous disclosure. (ii) Resale Restrictions: allow a person who purchased under an exemption to sell to members of the investing public as long as certain conditions concerning adequate disclosure are met. Purpose to protect investors by (1) access to information to those who care to gather it; (2) information for professional investment advice; (3) base of information to sophisticated investors whose trading causes market price to reflect underlying value. This requires a seasoning period: the period of time to allow a build-up of information. 5.1.2 Advantages & Objectives of Private Placement *Exemptions found in NI 45-106 OR Rule 45-501 Adv: (1) Speed (No Prior Regulatory Review, like with prospectus, but still highly regulated!!); (2) Confidentiality (almost always more confidential than prospectus) Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor protection and efficient capital markets this is at least what theyre TRYING to do, even if there are inconsistencies No flexibility on these exemptions so be very careful All exemptions focus on :(1) identity of purchaser; (2) inherently safe securities; (3) Info already available; (4) another superior policy objectives (1) Identity of Purchaser: Purchaser is so sufficiently sophisticated or wealthy that they do not need the protections of the securities act. E.g. Bank youll protect yourself, hiring lawyers, accountants, advisors 73
(2) Inherently Safe Securities: Securities are so inherently safe that to need OSA to get involved is stupid (e.g. Canada Savings Bonds not worried that if you buy these, govnt will default on obligation to pay) (3) Information already Available: Information already available in a different form, so to require it again is stupid (4) Another Superior Policy Objective: Some other policy objective trumping investor protection to some extent. E.g. Trying to promote investment in oil/gas, gold, electric cars, etc. trying to do something that, from a policy perspective, is important enough to give exemption even if it detracts a bit from investor protection 5.1.3 The Private Placement Exemptions 4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited investor, min amount); 2) Limited offering exemptions (govt incentive sec, founder/control person/ family); 3) trades in sec of private companies; 4) Isolated trades (isolated distrib by issuer). *also random: discretionary ruling under 74(1) of OSA never going to happen! 5.1.3.1 Exemptions based on wealth/ sophistication of purchaser POLICY: sophisticated investors can take care of themselves, dont need protection of securities act Includes: o A) Accredited investor exemption (s.2.3 of NI 45-106) Can use it as many times as you want, to as many purchasers, as long as youre selling to Accreditor Investors no disclosure required s 1.1 of Definitions: banks, pension funds, insurance companies, someone recognized as OSC as AI, and rich people (see definition on p. 1476) Rich people: Those individually or with a spouse own financial assets of aggregate realizable value before taxes of $1m, or those whose net income reaches $200,000, or combined w/ spouse exceeded $300,000, reasonable expectation of exceeding that in current year, or those who individually or spouse have net assets of at least $5m *Note problem with offering memorandum (dont have to, but if you do): What you have delivered is then deemed to be an offering memorandum and if so, it will have a contractual right of action if there is a misstatement / omission. o B) Minimum Amount Exemption (Section 2.10 of NI 45-106): (1) You can sell securities without a prospectus, as long as a (a) purchaser purchases as principal, (b) has an aggregate acquisition cost of not less than $150,000 paid in cash at the time of the trade, and (c) its from only one issuer (at $150,000 incentive to be careful) Note: (2): corporation could buy like this, but NOT if you only set it up just to use the exemption, (NSGs) They want to know that you have enough $ that youll protect yourself (if you could drop this much money at one time, then will take precautions themselves) *SAME ISSUE WITH OFFERING MEMORANDUM and practical reality that no one will invest $150,000 a pop with you without getting information, then must have contractual right of action o If you got 30 people to raise the $150,000 (even if you created a corp to do so) would NOT allow- no wise guys! This circumvents the rationale that you have the money and will protect yourself 74
If another (legitimate) corp bought $150K of securities, thats ok. B/C it was created for a legitimate purpose and not to circumvent the spirit of the legislation NOTE: securities is an area of law that doesnt allow for certainty, only trying to promote right vs wrong o
5.1.3.2 Limited Offering Exemption (A) Government-incentive security exemption (s.2.1 of OSC Rule 45-501, p. 1561): o Policy behind the exemption is different: government has said that they want to promote activity in the oil/gas industry, gold business w/e, in order to create activity thats good for the country, going to make it easier for companies to sell securities by designating them as government incentive securities so they can sell them easier (has to do with nature of company/business the govnt is trying to promote) o Unlike other exemptions where regulators feel good b/c nature of investor made investor protection more likely/unnecessary, here, dealing with naked purchaser (not differentiating purchasers, differentiating activity) Therefore are more severe on the preconditions to use b/c have to protect purchase o STEPS: First, need to have government-incentive security (designated by regulators as being 1, from time to time) Preconditions to use: (a) Can only solicit 75 people, can only sell to 50, each of whom must purchase as principal o Have to be smart, cant solicit more than 75, so be careful who you solicit (# OMs from 1-75) must be careful b/c if you get caught soliciting 76, its over, you cant fix that. (b) Must give an offering memorandum with certain info (see p. 1561), but things like officers/directors, identifying promoters, giving particulars of qualifications, etc. (c) Before you can enter into agreement with someone, must provide them with substantially same information that a prospectus would provide o Theyre scared, need to dress the naked purchaser and do that by wrapping them in something that sounds/looks/feels like a prospectus (although doesnt have to be reviewed by the regulator it is very similar) o AND (ii) Purchaser has to be executive officer or director, spouse or child of those, or (i) person by virtue of net worth/investment experience is able to properly evaluate investment. These are the only people you can solicit/send info to. o Have to Put rep in document: you are a person who by virtue of net worth/investment experience is able to properly evaluate the investment (might not be enough) o Losing sight of policy for exemptions, moving more toward investor protection: Need to raise $ for businesses, if you make them prep document like a prospectus, then its basically the same (d) Cannot advertise in connection with this exemption o if you did, you would be soliciting to more than 75 people o Regulators freaked out by advertising if you do that, no one will read prospectus/OM, whatever, should show low lights if highlights, etc. (e) Cannot use this exemption more than once in any calendar year! 75
NOTE: *There is nothing wrong with combining exemptions i.e. raising some money with $150k exemption and $500k with govt incentive-exemption. Need to be smart about this though- first ask ppl if they are an accredited investor before govt-exemption (b/c govt exemption one is ltd to 75 ppl and once per yr while other is unltd)
(B) Founder, Control Person and Family Exception o Prospectus requirement doesnt apply if you Purchase as principal and you are: a founder of company (who alone or with others, started business) an affiliate of the founder of the issuer a spouse, parent, brother, sister, grandparent, grandchild or child of an executive officer, director or founder of the issuer, or a person that is a control person of the issuer
5.1.3.3 Trades in Securities of Private Companies (s.2.4 of NI 45-106) To help companies in their early stages, its how they get going Have to satisfy two things to rely on exemption: (1) Private Company Look at articles of incorp to see if there are these 3 things: o (i) Restriction on transfer of shares: no one can buy/sell shares of company unless they get authorization from board transferring shares from A-B; o (ii) Number of shareholders in company (exclusive of employees/former employees) cannot exceed 50 o (iii) Restriction has to say that only a certain IDENTITY of person can buy your shares (cant distribute shares to public) (2) Specific identity as a purchaser In third part of the articles. Who you can sell to: (see p. 1482 s.2.4(2)) o (a) a director, officer, employee, founder or control person of the issuer o (b) a director, officer or employee of an affiliate of the issuer o (c) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person of the issuer o (e) a close personal friend of the director, exec officer, founder or CP (knows someone well enough that they trust them; must be direct) o (f) a close business associate of director, exec officer, founder or CP (ind who has had suff prior bus dealings; direct) o (g) a spouse.etc.of selling security holder or selling security holders spouse o (h) securityholder of the issuer o (i) an accredited investor [] o (L) *A person who is not the public Policy: Stupid for good intentions- worried about protecting purchaser. Want efficient capital market to allow private companies to raise money from people that arent members of public, but you dont know members of public are o These categories are very diff to qualify/ define if it is found that you are not one of the permitted purchasers, it has a large econ impact (cant be used again)
WHO IS THE PUBLIC? A Question of Fact Case Law Two Tests: 1) common bonds AND 2) need to know 76
R v. Pipegrass (AB CA) Common Bonds Test COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused, or persons having common bonds of interest or associations, they are considered to be the public, if they have common bonds, then not the public IS A FINDING OF FACT the court must see if the sale transcended sales beyond private concern Facts: Promoter sought 50k by soliciting farmers with whom there was a previous business dealing. Issue: Were these 5 people the public? YES. Decision: Constitutes a distrib to the public Reasons: Private corp cant seek to sell securities it is clear that it is imposs to define what is meant by the term, offer for sale to the public; differs in each instance.
SEC v. Ralston Purina Need to know test Need to know test (Test of whether youre selling to the public -in which case, cant use priv issuer exemption). TEST: Persons b/c of their sophistication or relationship with company who dont need protection of prospectus are not members of the public. Focus of inquiry is NEED of offerees for protection afforded by the act. Facts: Company did NOT SOLICIT ANYONE, but offered shares to employees. Among those who bought were several production employees, a clerk, bakeshop foreman, electrician, secretary. Etc. US Ct Decision: common bonds test is dumb, its need to know test. Employees arent necessarily going to qualify as not being the public and therefore being able to sell to them under the exemption. Some will (e.g. exec officers), and some will not. Employees here did not have access to the info that a prospectus would provide. Implications: The exemption is for those for whom there is no practical need for application of the prospectus. So should turn on whether the class of persons affected needs protection of the act. Those who are able to fend for themselves = not a public offering. **BOTTOM LINE: Not sure which test applies, but its like what a security is if they think that the act ought to apply, it will. If the court or regulators think that they need the protection, or they dont, theyll act accordingly.
5.1.3.4 Isolated Trades (s.2.30 of NI 45-106) Distribution must be an isolated one that is not made (a) in the course of continued and successive transactions of a like nature or (b) by a person whose usual business is trading in securities. Very rarely used (prob not on exam) 5.1.3.5 Discretionary Ruling (74(1)) not going to happen Exemption order (1) Upon the application of an interested person or company, the Commission may make the following rulings if the Commission is satisfied that to do so would not be prejudicial to the public interest: 1. A ruling that any person or company is not subject to section 25; 2. A ruling that any trade, intended trade, security, person or company is not subject to section 53. (2) can impose conditions 5.1.4 Offering Memorandum (and problems with it)
77
Some and at least one of the exemptions gives legal obligation on company to deliver document that meets definition of offering memorandum (looks/acts like a prospectus) 5.1.4.1 What is an offering memorandum? Rule 14-501 Definitions (s.1.1(2)) & OSA (s. 1(1); same as s.1.1(2)) (also see 5.6(2) of CP 45501 for what isnt one) Offering memorandum: a document prepared by a seller of securities which describes the business and affairs of the company in order to provide the prospective purchasers (investors) with sufficient information as to whether they want to make an investment Not sure what it is, and no statutory authority to clarify, just know you need truth and no omissions, sounds like full, true and plain disclosure Thus offering memo is no less complicated than a prospectus All the guidance we have: o (a) as long and short as necessary, o (b) cant be ambiguous, o (c) needs statutory right of action Not every doc is an offering memorandum: per s.5.6(2) of CP 45-501 if you provide a term sheet JUST setting out the deal, thats not an OM o Again, practical import of that is zero no one lets you sell securities just by laying out deal
5.1.4.2 Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.5.3) & Deliver (s.5.4) for rescission OSC RULE 45-501, s.5.3: you dont have to deliver any document to AIs in connection with the securities, but if you CHOOSE to issue them an offering memorandum, must contain a contractual right of action saying you can sue us if theres a misrepresentation (not only misstatement of material fact, but also omission of MF) Exemptions Should technically be fast, but problem: (Inv prot v. eff cap mark): If you give an OM, have an obligation to be accurate and include everything OSC RULE 45-501, s.5.4: Delivery of OMIf you do deliver it have to send copy of doc to securities commission w/In 10 days of date of trade Tension and Critique: if you give NO information, thats cool, but if you do, well call it an OM and it has to give all info you need to know o Problem in Practice: Try to make it easy, but now weve made it very difficult. Not likely anyone will give you $ without information, so you end up being in prospectus territory (looks/costs like one) o Actually a huge burden: have to (a) tell the truth and (b) not omit anything (which forces you to think about what you dont know)
5.1.4.3 Liability under Offering Memorandum (s.130.1 of OSA) s.130.1 (1) Liability for misrepresentation in offering memorandum where a misrep, the purchaser has the following rights: 1) right of actions for damages against issuer and selling securityholder; 2) right of rescission against person/ company; (2) Defence: not liable if purchaser knew of misrep (1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights: o 1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made. 78
2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company. (2) Defence: No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. (3) Limitation in action for damages: In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.
*if including a forecast, must still comply with NI 51-102, or else takes you out of the exemption 5.1.5 Registration Requirement for Private Placement Exemptions 5.1.5.1 NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (Also section 25 of the OSA) Business Trigger Test: if you are a market participant in the business of trading in securities, you must be registered. If in business of trading securities, have to be registered Used to be exemptions from registration, but then people behaved badly. Thus b/c it was putting integrity of marketplace into question: now have universal registration system If youre in business of trading in securities, have to be registered Always need to use a registrant!! o And instead of entering in UW agreement, enter into agency agreement looks like UW agreement, except almost always using best efforts to sell securities on your behalf 5.2 Resale Rules 5.2.1 General Rule: 2 Components of Resale Rules 1) Resale rule for non-control persons: (a) all exemptions other than private issuer and (b) resale rules for those acquiring sec through private issuer exemption; 2) Resale rules for control persons (not connected to above rules) Resale Rules for Control Persons: Buying pursuant to an exemption vs. Prospectus: Advantage of having a prospectus freely tradeable shares, the reporting issuer would be subject to a continuous disclosure regime, so investors presumably have all of the information they need Key Question: How do we sell securities that we bought pursuant to a private placement exemption?****Remember this is what were doing/trying to figure out POLICY: Tension b/w efficient capital market + investor protection, you do have to be able to sell them at some point or no one will want them, but you cant go out and do it right away because that would be back-door Goals achieved by resale rules: Preventing back-door underwriting Whereby you can sell pursuant to an exemption with no prospectus, and then that person can go sell straight away to secondary market purchasers bad b/c the secondary purchaser may not have the information it needs to make an informed decision (cant circumvent purpose of the statute)
79
5.2.1.1 Ways of Reselling (Generally) 1) If you can get the company to issue a prospectus and offer to sell YOUR securities pursuant to that prospectus (secondary offering) e.g. prospectus offering and secondary offering. If you can get company to do a secondary offering of YOUR securities, you can immediately sell them pursuant to that prospectus Problems: o 1. Unless youre a significant person in company, co wont do that for you o 2. Have to pay proportionate share of expenses of public offering; and o 3. Liability for selling securityholder is basically the same as issuer (unless you can prove that person purchased with knowledge of misrep, youre liable for misrep) 2) Rely on another private placement exemption: Sell to Another Purchaser Pursuant to Another Exemption If theres a policy saying I can sell them to you for $150,000 that same policy would say that I should also be able to sell them to someone else for $150,000 (underlying policy obj is still met) o e.g. if you bought pursuant to the AI exemption, can sell it to another AI, or pursuant to group of 25, can sell among that group, or with government incentive, can sell among the 50 Problems: *Hard to find people that fit these exemptions: o 1. Hard to re-sell b/c of restrictions: The purchaser youre selling to will probably have problems re-selling (restrictions), so you may not find a willing buyer e.g. offering a security the purchaser cant sell for a while vs. offering one they can sell tomorrow the one that has less risk is more attractive and thats the one you can sell immediately o 2. Discount: If youre the re-purchaser and you cant sell it, but youre still inclined to buy the sec, will want a discount. You as the re-seller have to sell securities at a discount, so theyre not worth as much. Two securities exactly the same arent worth as much if you cant re-sell immediately. o 3. Commitment to file prospectus during a certain period of time so I can re-sell eventually: essentially have to contract that you WILL file a prospectus eventually so that shares can be resold huge penalty if you dont do it o 4. Might want an offering memorandum to have information anyway: huge time/expense, similar to a prospectus 3) Exemption order from OSC Lastman: forget about it, zero for life. 4) Satisfy Resale Rules NI 45-102 Talking about regulation of second trades of securities sold under an exemption 5.2.1.2 Def of Distribution is Important Here RECALL Definition of distribution: Section 1(1) of OSA if its a trade In a security that amts to distribution you have to issue prospectus UNLESS an exemption applies 3 branches: o 1) Trade in sec that havent been previously issued (need prospectus) o 2) Sec you obtained pursuant to a private placement exemption unless another PPE is avail b/c trying to sell sec you acquired through PPE, thats a distribution requiring prospectus unless another PPE is available Recall this was noted previously in def of distribution o 3) How control person sells Why does this matter? *POLICY: for second and third branch: The only way to stop people from selling securities without prospectus is to call it a distribution. So sales by a control person OR sales by someone who 80
acquired the securities pursuant to a PPE are DEEMED TO BE A DISTRIBUTION unless certain rules are satisfied! 5.2.2 Resale Rules for Non-Control Persons 5.2.2.1 Resale rules for non-control person who acquired sec through a private placement exemption other than the private issuer exemption *Exam resale rules question: analysis: Ask two questions: o (a) who are you? if not a control person, throw that away and just use (b) o (b) how did you acquire securities? If by prospectus, go sell. If PPE, which exemption? If Private issuer: have to wait until they become a reporting issuer, then you can sell right away. Otherwise, you can never sell again, OR have to sell pursuant to another PPE If any other exemption: hold it for 4 months, then sell. If control person: also have to know answer to first question meet both sets of resale rules. NI 45-102: First Trades, Restricted Period and Seasoning Period 2.5 and 2.6 of NI 45-102: if you bought securities pursuant to a PPE, can sell them based on these rules (will be deemed a distribution, UNLESS You satisfy the rules) if youre not a control person, and you bought securities pursuant to a PPE OTHER THAN THE PRIVATE ISSUER EXEMPTION, you can ONLY re-sell them in these circumstances (or issue a prospectus, as per 2.7 below) Lastmans Summary of Applicable Rules (Non-Control Persons, Exemptions Except Private Issuer Exemption) 1) Firstly, can sell shares that you bought pursuant to prospectus (as opposed to an exemption), as long as you are NOT a control person RULE: Securities Acquired pursuant to a prospectus are freely tradeable unless the seller is a control person RATIONALE: Information is available in the marketplace to allow investors to make an informed investment decision and ongoing continuous disclosure obligations ensure that the information remains current. Other policy considerations prevent control persons from selling securities, even if acquired pursuant to a prospectus. 2) SECONDLY, if NOT purchased by prospectus, but an exemption Resale Rules for All Exemptions EXCEPT the Private Issuer Exemption Rule for sales of sec acquired pursuant to PPE: If securities are acquired pursuant to a private placement exemption, the seller cannot resell them unless: o (a) a prospectus is filed wrt trade of subject securities, o (b) seller relies on another PPE, or in government incentive securities exemption, the sale is to a member of the, original 50 purchasers, o (c) an exemption order is obtained from OSC (very rare), or o (d) resale rules referred to below are satisfied (set out in instrument 45-102) RATIONALE FOR THIS: The private placement exemptions permit the issuance of securities without the concomitant/related obligation to provide complete disclosure to investors and without the continuous disclosure obligations. The Act permits these transactions because either: (i) The sophistication of the purchaser or his or her knowledge of the business and affairs of the issuer reduces the need for prospectus-like disclosure; or 81
(ii) The legislators are trying to address some more important policy objective. However, in order to ensure that there are not subsequent sales of securities to persons who need the protection offered by a prospectus, the Act has to regulate the second trade following a PPE in such securities until such a time as the protections afforded by a prospectus are available.
3) Resale Rules for All Exemptions Except the Private Issuer Exemption Rule: THIS IS 2.5 OF NI 45-102: If securities are acquired pursuant to a private placement exemption, the seller cannot re-sell them unless: o A) The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately preceding the trade (i.e., the date of the resale of the security) 2.7: unless the issuer became a reporting issuer after the distribution date (i.e. the date of the original private placement) by filing a prospectus in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction at the time of the trade (the time that the original purchaser is reselling), in which case the 4 month seasoning period does NOT apply; Can sell day after IF co NEVER becomes a reporting issuer and you cannot find another exemption, you can never re-sell those securities also reason why you would put conditions on purchase of PPE (would want them to become a reporting issuer) o B) At least 4 months have elapsed from the distribution date (the Restricted Period); distribution date = date of the original private placement (PPE) Rationale is to give people time to digest the info before dumping the securities into the market o C) Legend: The share certificate of the resale securities must include the prescribed legend setting out the restriction on transfer; (or if there is no certificate, a written notice containing such restriction must be provided) Share certificate received on the PPE will have a legend that says there is a hold on the stock o D) The trade is not a control distribution; Person reselling the security cannot be a control person o E) No market manipulation; Nobody prepared the market for this event by artificially inflating or decreasing the value (or advertising) o F) No extraordinary commission or consideration is paid in respect of the trade; and o G) The seller has no grounds to believe the issuer is in default of any securities law
***ALL RULES MUST BE SATISFIED Side notes: just b/c you file prospectus, doesnt mean you can issue new sec all the time. Any time you issue new securities, have to do PPE or file prospectus so reasons why youd do PPE: dont want to file prospectus, OR the company is private 5.2.2.2 Resale Rules for a Non-Control Person who Acquired Sec through the Private Issuer Exemption Only difference b/w this and the other exemptions: there is no 4 month hold under private issuer exemption (he cant tell us why) **only a seasoning period, no restricted (rules from 2.6 apply seasoning period) Rationale: not really a concern that theyll be selling to people who need prospectus-information b/c if the issuer remains a private issuer, it will not be a reporting issuer and will not meet the requirement to be a 82
reporting issuer (seasoning) of the resale rule. A subsequent trade by a person who purchased under the exemption will be a distribution unless the person sells to another person who qualifies under the private issuer exemption (so were not concerned), or the company becomes a reporting issuer, then purchaser can re-sell right away (b/c issuer is one at the time of that trade 2.7 of 45-102 and that information is out in the public domain now) (this is what cant really be explained) Lastmans Summary of Rules : (a) The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade; (the re-sell) (b) The trade is not a control distribution; (c) No market manipulation; (d) No extraordinary commission or consideration is paid in respect of the trade; and (e) No grounds to believe issuer is in default. 5.2.3 Resale Rules for Control Persons (Separate Regime) Analysis: Is this a control person selling shares that they acquired IN ANY WAY (e.g. by prospectus or PPE)? so basically, is it a control person? Different set of resale rules if person selling securities is a control person Ask: 1. Who are you? If control person (if not control person, go back to rules above) 2. How did you acquire them (exemption or otherwise)? o DOES NOT MATTER!! STILL HAVE TO SELL ACCORDING TO THESE RULES (and follow the insider reporting rules probably) Prospectus, OSC Exemption, another PPE, another control person PROBABLY will go advance notice route Shares freely tradeable, to as many people as you want, any denomination 5.2.3.1 Section 1(1) of the OSA Control Person Definition rebuttable, pure ? of fact Definition of Control Person: S. 1(1) of OSA: Person who alone or in combination with others holds a sufficient # of securities to MATERIALLY AFFECT CONTROL of the company (rebuttable presumption & pure Q of fact bright-line rule) Per s.1(1) of OSA, control person means, o (a) a person or company who holds a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a person or company holds more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer, the person or company is deemed, in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer, or o (b) each person or company in a combination of persons or companies, acting in concert by virtue of an agreement, arrangement, commitment or understanding, which holds in total a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a combination of persons or companies holds 83
more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer, the combination of persons or companies is deemed, in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer; (personne qui a le contrle) Main determinantif you materially affect control! In absence of evidence to the contrary, you are deemed to be a control person if you hold more than 20% of outstanding voting shares of company, so you can hold more than 20% and not be control person maybe, less than 20% and be a control person, this is a rebuttable presumption And this is a pure question of fact Doesnt always make sense, but this is the bright-line rule 5.2.3.2 Five Ways a Control Person Can Sell Stock (Lastman Summary) No matter how a control person acquires securities (even if by prospectus and would otherwise by freely tradeable if they werent a control person or by PPE and if they werent a control person, would have to follow the PPE resale rules), they cannot be resold unless: (a) The control person qualifies a prospectus for the sale of the subject securities (get the company to qualify wrt your securities) same issues, have to get the company to do it, very expensive, and potentially serious liability consequences (b) An exemption order is obtained from the OSC (very rare!); (c) The control person sells pursuant to another private placement exemption; Which gives rise to resale rules and same issues as before discount, forces secondary buyer to have a hold period not attractive to seller (b/c you have to sell at a discount & might not find a buyer) (d) The control person sells to another control person (also giving rise to resale rules, not freely tradeable and will have to give a discount for that reason); or (e) The control person sells pursuant to the advance notice route By relying on this, control persons can sell in any denominations to anyone they want, and shares are freely tradeable in the buyers hands Want world to know that its a control person selling their shares (and # of shares) Before you can sell them, have to tell world youre selling your shares Says as long as you (a) give advance notice to OSC and stock exchange and make public statement that youre a control person and want to sell shares for next 30 days (and can be extended), you can sell them in any denom, to anyone you want in the mkt (and stock in the purchasers hands is freely tradeable) o BUT can only do this if (1) Company must be reporting issuer (2) You must have held for 4 months (cant get better treatment than anyone else) (3) No market manipulation RATIONALE: o Reason for protecting against resale of control persons has nothing to do with policy obj behind reselling those acquired pursuant to PPE o Here, Securities Act believes you have an unfair advantage: you have more information about the company. If I control the company, I might have access to information that you dont have. o The policy behind regulating trading by control persons is to prevent abuses by such persons of their access to material information concerning the affairs of an issuer where that information has not generally been disclosed Critique/Rationale: o double protection: might seem kind of dumb b/c already have insider trading rules but its safer if control people cant SELL STOCK without meeting certain conditions this is why we 84
have these rules IN ADDITION to how they ACQUIRE STOCK (controlling it from both ends, selling/purchasing) Again, REMEMBER*** Distribution: ***Only way to stop people from selling securities without prospectus is to call it a distribution (to stop, PPE resale is a distribution and sales by control person is distribution if certain conditions are not met in definition of distribution, third branch) If youre a control person and you dont want to issue a prospectus, you dont want to be subject to resale rules, and you cant get an order from OSC Go advance notice route 5.2.3.3 Advance Notice Route Issuer would Do this because: Can issue freely tradeable shares instead of having the person whos purchasing them from you be stuck with the resale rules (hold periods and other bad things about it), and avoid having to discount your shares b/c theyre subject to those rules Rationale behind reg of trading by control persons: The policy behind regulating trading by control persons is to prevent abuses by such persons of their access to material information concerning the affairs of an issuer where that information has not been generally disclosed Conditions for Advance Notice Rule: (a) The issuer is and has been a reporting issuer in Alberta, British Columbia, Nova Scotia, Ontario, Quebec or Saskatchewan for the 4 months immediately preceding the trade (i.e., the date of the resale of the security) unless the issuer became a reporting issuer after the distribution date (i.e., the date of the original private placement) by filing a prospectus in Alberta, British Columbia, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade, in which case the 4 month seasoning period does NOT apply; (b) The control person has held the securities for at least 4 months; (c) No market manipulation; (d) No extraordinary commission or consideration is paid in respect of the trade; and (e) No grounds to believe issuer is in default. 5.2.3.4 No tacking with control persons **Also note with tacking: If I buy pursuant to AI exemption and hold for 2 months, then I sell them to a control person, when can control person sell them? If control person wasnt a control person, could sell two months later b/c of tacking. But control person have to hold for 4 months, no tacking for control persons b/c no relationship b/w two resale rules 5.2.3.5 Resale Rules Class Examples (Handout) 1) Private placement of securities of a reporting issuer pursuant to the accredited investor exemption on Jan 1, 2010. When can purchaser resell? 4 months a. company is a reporting issuer, so they need a hold period 4 months from the date of the trade 2) Private placement of sec of a private issuer pursuant to the private issuer exemption on Jan 1, 2010 private issuer becomes a reporting issuer on Feb 1, 2010 by filing a prospectus in ON. When can purchaser resell? 1 day a. only exemption that doesnt have a hold period is when you become a reporting issuer 85
3) Private placement of security of a private issuer pursuant to the accredited investor exemption on Jan 1, 2010- private issuer becomes a reporting issuer on Feb 1, 2010 by filing a prospectus in ON. When can the purchaser resell? May 1 a. Since can only sell the later of: i) 4 months from the date of the private placement, or ii) date the company becomes a reporting issuer 4) Private placement of sec of a reporting issuer pursuant to the accredited investor exemption on Jan 1, 2010 to Bob Bob sells sec to Melissa pursuant to the accredited investor exemption on April 1, 2010. When can Melissa resell? May 1 a. tacking is permitted it doesnt matter that the sec since changed hands, May 1 would still be 4 months after the AI exemption was used b. Melissa acquired sec that had a 4-month hold period originally. HOWEVER, by the time, she bought them 3 months had already gone by. Since the 4-month hold period is attached to the security, and not the holder, there is still only 1-month hold period left. c. Note: Bob would have never been able to sell to Melissa if she was not accredited investor OR paid $150k
86
6.0 SEGMENT 4: CONTROL TRANSACTIONS Takeover: change in control over mgmt. of the issuer/ firm can be friendly (approach target mgmt.) OR hostile (more frequent, by force) Battle for control and to manage assets Takeover bid: general offer to shareholders to purchase shares of a part issuer, which results in offeror obtaining suff shares to control the target 6.1 Reasons for Takeover Bids PUBLIC POLICY: on the balance of things, legislators and regulators have decided that takeover bids are a good thing for society If youre not a reporting issuer in province of Ontario, not subject to takeover bid rules 6.1.1 Socially Useful Reasons for Takeover Bids 1) Move assets to their most desired uses; 2) Create synergies, 3) Force mgmt. to be efficient (1) Moves assets to their most desired uses: Move assets together, become more valuable than they are apart (2) Creates synergies: B/c ACC owns leafs + raptors is a way more efficient building than if it only owned one of them (3) Forces management to be efficient: Threat of being taken over forces management to behave properly 6.1.2 Non-Socially Useful Reasons for Takeover Bids 1) Premium for acquirer; 2) empire building; 3) creating monopolies; 4) tax advantages (1) Premium for themselves: IF buying companies under-value, taking premium for themselves which doesnt help anyone (2) Empire building: Combine assets with no synergies (at one time, Labatt owned TSN, beer, food, etc. didnt make bus sense) (3) Creates Monopolies: If no price pressure, just keep charging more w/ takeover bids: people often argue its a monopoly and that we should stop it (e.g. Star trying to take over Sun Media showed that advertisement in Toronto was cheaper than in SK so much competition for advertising in Toronto, keeps prices down, if TorStar bought Sun Media, prices would go up) (4) Tax Advantages: Not helpful for anyone if this is the reason youre doing it 6.1.3 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them Kimber Report Rationale: To protect investors of offeree company Traditional reason given for why we legislate/regulate takeover bids, is they want to protect interests of target SHs (the SHs of the company being taken over) Make an informed decision on whether they want to sell you their shares or not o Per Kimber Report: Primary objective of any recommendations for legislation wrt takeover bid transactions would be protection of the interests of the SHs of the offeree company (the company being acquired) SHs should have made available to them sufficient updated information to allow them to come to a reasonable decision about the desirability of a bid for their shares but also balance: ensure recommendations would not unduly impede potential bidders or put them at commercially disadvantageous position or in a hostile situation with offeree company 87
Objective of protecting shareholders of offeree company is manifested in 3 ways in carrying out t/o bid rules: 1) Information (inform investment decisions); 2) Time (i- for SHs to think about it, ii- to get opinion from mgmt., iii- to allow for an auction); 3) Equality **on exam, whenever talking about the regulation of takeover bids, always mention what objective is being carried out with that rule (info, time or equality) *Exam: are rules here to provide time, information, or equality? If you cant find somewhere to put it, you dont understand d the rule (from here to end of course) How objective of protecting SHs is manifested in t/o bid rules: 1) Information (Inform Investment Decisions): Designed to give target SHs sufficient information to make an informed decision to whether they want to tender their shares 2) Time a. Time for SHs to think about it i. There is no point in giving people information if we dont give people time to digest it ii. IF you want them to tender shares to a takeover bid, give them time to think about it b. Time to get an opinion from management: Also gives management time to inform SHs of what they think (good or bad idea, good or bad price) c. Time also allows for an auction: Best thing it could happen for regulators (and SH), come in and push it to highest price available, means market is efficient and someone doesnt get deal at a bargain (so more people will play) i. Time to give another bidder to come forward ii. When company is in play, this is their chance to get it, so need time for bidders 3) Equality: All SHs of target company/offeree must be treated the same. Manifested in regs as follows: a. Have to take shares from everyone who tenders, pro rata*** i. I can buy 50% or 100% of company. Not first come first serve or choose which ones you want to buy, you have to take 50% of everyones shares! b. All SHs whose shares youre buying have to get identical consideration i. Cant enter into agreements giving some people higher premiums than others (or have diff types of consideration e.g. cash v shares) 6.2 Overview of How Takeover Bids Work Dealt with in Sections 89-105.1 of Securities Act. If youre not a reporting issuer in province of Ontario, not subject to takeover bid rules 2 Kinds of bids: 1) Exempt takeover bids; 2) vendor takeover bids Two Kinds of Bids: (1) Exempt Takeover Bids (Next section.) (2) Vendor Takeover bids If I own no shares of a public company, I can buy as many as I want from wherever, whoever, I dont have to tell anyone anything. When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20. When I hit 20%, in takeover bid regime. Overview of Process: A. Definition 88
Takover Bid: Generally speaking, a takeover bid is the acquisition of shares of a company (the target) which, together with the shares already owned by the purchaser, will put the purchasers shareholdings in the target over a certain threshold, generally 20%. B. Policy/Object of Legislation The object of takeover bid legislation is to ensure that shareholders and the investing public receive sufficient information about the terms of the bid and that all shareholders are treated alike. C. Takeover Bid Circular Takeover bid circular: communicates details to shareholders will describe the offer (the price, numner of shares and any conditions) and is sent to all SHs D. Bid Open for 35 Days Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular, review it and decide whether they want to sell (tender), a bid must be open for acceptance for at least 35 days. E. Shareholder Right of Withdrawal SH right of withdrawal: The offeror cant take-up the tendered shares for 35 days and the shareholder can withdraw the shares at any time before the securities are taken up. This allows shares which have been tendered to be withdrawn if the shareholder changes his/her mind (which generally occurs when a higher offer is made). F. Directors Circular of Recommendations Directors Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons, which are sent by target to all SHs Shareholders in deciding whether to tender would generally consider the advice of directors of the target. For this reason, a Directors Circular must be sent out G. Change in Terms of Offer Extension of Tendering Change in Terms of Offer Extension of Tendering: If a term of the offer is changed (i.e., the offer price increased), this must be communicated to all shareholders who are given an extra 10 days to tender their shares. Most changes (other than an increase in price or the waiver of a condition) allow a shareholder to withdraw tendered shares for 10 days. H. Withdrawal if no Payment Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking them up, a shareholder can withdraw their shares if not paid for within 3 business days after having been taken up. I. Shares are Taken up Pro Rata Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than this number is tendered, the shares are taken-up pro-rata and not first come, first serve. This ensures shareholders are not pressured to tender early (and can therefore review all pertinent information) and are treated equally. J. SHs offered Same Consideration and No Collateral Agmts SHs offered same consideration + no collateral agreements: All shareholders must be offered the same consideration and no collateral agreements may be entered into.
89
This ensures that a higher price per share is not paid for larger blocks or for shares tendered early. If, after shares have been taken up, the offer price is increased, all shareholders, including those whose shares have already been taken up, are entitled to the higher price.
K. Pre-Bid Integration Rules Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days from the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid integration). An offeror must offer to buy from the public the highest percentage of shares at the highest price acquired in that 90 day period L. Post-Bid Integration Rules Post-Bid Integration Rules: An offeror cant purchase shares of the target for 20 business days after the termination of a bid, except pursuant to another circular bid or the exceptions M. Exceptions to having to issue a takeover bid circular Exceptions to having to issue t/o bid circular: 1) 100.1 of OSA: can buy whatever as long as its from 5 people or less, and you dont pay more than 115% of market price (realistically, can probably only use this once, but dont know); 2) 100 of OSA: can buy 5% on the open market every 12 months, at market price. 6.2.1 What is a takeover bid? 6.2.1.1 OSA: Part XX: Takeover Bids and Issuer Bids, s.89(1) s.89(1) Takeover Bid: Means an offer to acquire outstanding voting or equity securities of a class made to one or more persons or companies, any of whom is in Ontario or whose last address on the books is in Ontario, where the securities subject to the offer to acquire, together with the offerors securities, constitute in the aggregate 20% or more of the outstanding securities of that class (this is the important part.. but continues) (of securities at the date of the offer to acquire but does not include an offer to acquire if the offer to acquire is a step in an amalgamation, merger, reorganization or arrangement that requires approval in a vote of security holders). o Interpretation of Rules: If what you own, together with what youre about to by, is 20% or more - that is a takeover bid! You cant do that unless you make the same offer to all SHs pursuant to a takeover bid circular E.g. if I own 14%, and I want to buy 7%, what I own w/ what I want to buy is over 20, have to do takeover bid and give same consideration to everyone Offer to Acquire: means an offer to purchase, or a solicitation of an offer to sell, or an acceptance of an offer to sell Indirect Acquisition: defined in s. 92: includes a direct or indirect offer to acquire or the direct/indirect acquisition of securities, e.g. treats (see below) Offerors Securities: includes securities controlled, beneficially owned, or deemed by s. 90(1) to be beneficially owned by an offeror or persons acting jointly or in concert with the Offeror therefore includes securities you own and anyone youre acting jointly or in concert with So A cant buy 10, B buy 10, and C buy 10 without issuing a circular and then say hah! We have 30% and we now control you *note: for options, deemed owned if exercisable in the next 60 days** see exam Q handout
90
6.2.1.2 OSA, s.102.2 - Acquisitions During a Bid By an Acquiror s.102.2(1): Acquisitions during a bid by an acquiror, 5 per cent rule: If, after a formal bid has been made for voting or equity securities of a reporting issuer and before the expiry of the bid, an acquiror acquires beneficial ownership of, or the power to exercise control or direction over, securities of the class subject to the bid which, when added to the acquirors securities of that class, constitute 5 per cent or more of the outstanding securities of that class, the acquiror shall disclose the acquisition in the manner and form required by regulation. (2) Same, further 2 per cent rule: An acquiror who is required to make disclosure under subsection (1) shall make further disclosure in the manner and form required by regulation each time the acquiror or any person or company acting jointly or in concert with the acquiror acquires beneficial ownership of, or the power to exercise control or direction over, an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates.
**ALSO SEE 7.2 of RULE 62-504: this person has to follow the format for disclosure POLICY: Why do you need to do this? Because there will have to be a PREMIUM on the shares youre purchasing that put you into a control position o E.g. If I own 51% of shares of public company, or any company, and you own 49%... I decide I want to pay a dividend, you decide we shouldnt. Lets vote, you vote no, I vote yes, I win. I will always win vote (ignoring special resolution), even though I only own 2% more than you. o If I say Ill sell you 2% of company, if you thought about it, youd pay me a lot more for that 2% than what its actually worth, with that 2% comes control and control is valuable b/c then you set direction of company o If shares worth $100, company worth that, if every share is worth $1 and there are 100 outstanding, youll pay me more than $2 for those shares Premium youre prepared to pay to get control of this company So trick: (Achieving Equality Goal) Securities act says as long as you own control, you can exercise it. But b/c youre public company and youve invited everyone else into the game, the price you pay for doing that is that when you go to sell control to someone else, that premium youre going to get for control does not belong to YOU, it belongs to the whole company and you have to share that evenly with the rest of the company You can get that $1 for your shares, but if youre getting $1.50, the extra .50 is the premium for control and has to be shared with all SHs. Only way you can sell it is if person buying it agrees to buy it at same price/same percentage from all other SHs (they dont all have to tender to it, but those that do will get a share in the premium) o Note: this is very diff than other aspects of society, where owner gets all of premium o Instead of 51-49, they say 20 20% is stupid bright line test (effective control at 20%, BUT this doesnt work in all fact scenarios) Have to make offers to all SHs on same terms o
*Problem with 20% Bright Line Test: Someone might already own 70% of the company, but then they want to buy another 20%. They ALREADY HAVE CONTROL, so there wont be a PREMIUM PAID for those extra shares, but they still have to take part in the takeover bid regime. This is where bright line test breaks down.
91
6.2.1.3 Indirect Acquisition s. 92 Section 92: Application to direct and indirect offers: For the purposes of this Part, a reference to an offer to acquire or to the acquisition or ownership of securities or to control or direction over securities includes a direct or indirect offer to acquire or the direct or indirect acquisition or ownership of securities, or the direct or indirect control or direction over securities, as the case may be.
Russell Holdings (Treats) Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one EXAMPLE OF NO SMART GUYS WITH TAKEOVERS if youre going to buy a public company/gain control of it through a private company, you have to issue a takeover bid circular Facts: Russell Holdings, private company, holds 60% of treats, a public company. 5 SGs own Russell holdings. Smart Guy came and said, treats is trading at 10/share, I dont want to buy all shares at $20 a share to gain control because thats a lot. Takeover bids dont apply to private companies (they dont have to share premium with anyone else who might own piece of it). Dont want to pay SHs $, therefore, offered the owners of the private company that OWNS Treats $25 a share for their ownership in Russell Holdings. Then Smart Guy controlled Treats through that private company. SGs got a huge premium, treats SH got nothing and control changed hands Two things happen: (1) OSC said damn, no law stopping it (t/o bids dont apply to private companies), but stopped it anyway. (2) s. 92 introduced by OSCno one in universe knows what this means. Other than know that you cant do that above situation. Note: Sec commission knew about this, b/c of need to report after ownership of more than 10% of shares (insider rules) Why did he go after the Russell holding shares? strategic Smart Guy could have bought shares from all shareholders of Treats pro rata (maybe for same price) BUT b/c it would be pro rata, Russell would only be able to sell a fractional amount of its shares (wouldnt want to do that)
Policy Notes: Cannot indirectly acquire a company without issuing a t/o bid circular: So if they were going to take over the private company, buy public through private, have to make a takeover bid Bad Facts make Bad Law: Thats what happens when entire sec act is 92stupid people do stupid things, end up with stupid legislation; Dumbest section in.
6.2.2 Deemed Ownership You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover bid (i.e. options) 6.2.2.1 Sections 89(5) and 90(1) 89(5) Deemed convertible securities: For the purposes of this Part, o (a) a security shall be deemed to be convertible into a security of another class if, whether or not on conditions, it is or may be convertible into or exchangeable for, or if it carries the right or obligation to acquire, a security of the other class, whether of the same or another issuer; and
92
(b) a security that is convertible into a security of another class shall be deemed to be convertible into a security or securities of each class into which the second-mentioned security may be converted, either directly or through securities of one or more other classes of securities that are themselves convertible. 90(1): Deemed beneficial ownership*** o For the purposes of this Part, in determining the beneficial ownership of securities of an offeror or of any person or company acting jointly or in concert with the offeror, at any given date, the offeror or the person or company shall be deemed to have acquired and to be the beneficial owner of a security, including an unissued security, if the offeror or the person or company is the beneficial owner of a security convertible into the security within 60 days following that date or has a right or obligation permitting or requiring the offeror or the person or company, whether or not on conditions, to acquire beneficial ownership of the security within 60 days, by a single transaction or a series of linked transactions.
6.2.2.2 Sample problems Sunlor What matters: Order of Purchase Who Purchasing From Question 1: If on Day 1, I own 10%, on Day 4, I have an option from the company to purchase 9% of shares exercisable at any time, and on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a takeover bid? Yes Own 10%, deemed to own 9% that I can exercise from company (will be outstanding if I buy them), and then I buy 2% = puts me over 20. I bought the portion that put me over 20% and the portion that gives me control (so paying a premium for these) on the open market (I bought 2% of OUTSTANDING shares, which puts me over 20% total ownership) I have to issue a takeover bid circular to all SHs to treat them equally and not give a premium to the SH from whom bought that last 2 on the open market Question 2: On Day 1, I own 10%, on Day 4, I have option to purchase 9% from an individual, exercisable at any time, and then on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a takeover bid? Yes still exercisable at any time, deemed 19%, and the 2% puts me over. Question 3: Day 1, I own 10%. Day 4, I have option from an individual to purchase 9% of common shares exercisable in 6 months. Then on day 6, I consider buying 2% on open market. (a) Is the acquisition of 2% a takeover bid? o No because I only own 12% and thats all Im deemed to own (I cant exercise option in the next 60 days) b) When I exercise the option for 9%, is it a takeover bid? o Yes I own 12% after buying on market, and the 9% of outstanding shares from the person puts me over. Question 4: Own 10% on day 1, option from company to purchase 9% in six months, on day 6 I consider buying 2% on open market. (a) Is acquisition of 2% a takeover bid? o No, again, I only own 12% with the option to take the 9 in six months. (b) When I exercise option for 9% is it a takeover bid? o No because if Ive bought 2% on open market, I now own 12%. Im then purchasing shares from the COMPANY, meaning that Im not buying outstanding shares that put me over the 20% 93
o o
(so not being unfair to SHs by offering a premium to some SHs over others for control, its going to the company, which really means its going to the SHs) The whole purpose for takeover bid legislation is that when you buy control at a premium it belongs to ALL shareholders because, in theory, they helped to create value POLICY: premiums are to be shared by all shareholders equally; therefore, if there are not premiums resulting from the proposed transaction (i.e. option being exercised from the company) there is no problem Thus, control can be sold by the company and its not a problem b/c the value of that control goes to the company and indirectly to all shareholders Only when youre buying outstanding (already issued) shares from other SHs would you be giving a bigger premium to those SHs this does exactly what the takeover bid legislation is designed to do
ALSO, ORDER: you bought the part that put you over 20 on the open market, order matters what you pay for first 49 shares isnt what you pay for 50 and 51 and 20 is new 50 6.3 Mechanics of a Vendor Takeover Bid **remember each of these is achieving one of three things in order to achieve the overall objective of protecting SHs of the target company: (a) time, (b) information to SHs and (c) equality *Two types: (1) Vendor Takeover Bid and o If I own no shares of a public company, I can buy as many as I want from wherever, whoever, I dont have to tell anyone anything. o When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20. o When I hit 20%, in takeover bid regime. (2) Exempt Takeover Bid (see rules below, 100 and 100.1 of OSA) The following mechanics are for a vendor takeover bid. 6.3.1 Takeover Bid Circular (Information) General Rule: If I what I own + what I buy is over 20, cant do it without a takeover bid. If you want to own or control 20% or more of the securities of a reporting issuer, you can only do so by takeover bid circular (unless an exemption is available) 6.3.1.1 Section 94.1(1) and Form 62-504F1: Making a Formal Bid Section 94.1(1): Deliver doc to all securityholders, publish advertisement in a newspaper, then immediately file takeover bid circular with everybody 94.1 (1) Commencement of formal t/o bid: An offeror shall commence a formal take-over bid, o (a) by publishing an advertisement containing a brief summary of the bid in at least one major daily newspaper of general and regular paid circulation in Ontario; or o (b) by sending the bid to the security holders described in section 94 (all securityholders, all holders of class of securities subject to the bid who are in Ontario) Form 62-504F1: The Circular: Must contain information set out in Form 62-504F1 tells you what has to go in t/o bid circular, mandates information like a prospectus: objective is to give people sufficient information to make an informed decision 94
Information in takeover bid circular includes: name of offeror and issuer; ownership and trading by offeror; method/time of pmt for shares; source of funds to be used for pmt; whether offeror intends to purchase shares subject to the bid in the mkt; info indicating a material change in the offeree issuer since last interim/ annual financial statements; material facts rel to offeree issuer; appropriate prospectus info if offer is a share exchange offer
6.3.1.2 Legislative goal met *Protect SHs by providing Information and Time (1) Information Provides information to assist the offeree SH in deciding whether of offer share or hold shares in hopes of (i) sharing in gain accruing post-takeover or (ii) getting a subsequent competing offer. Takeover Bid Circular provides information similar to a prospectus and provides information relating to the bid. (2) Time: Allows them time to review whats in the circular 6.3.2 Minimum Period of Bid (Time) The takeover bid circular must be open for at least 35 clear calendar days in order to give people time to assess, give management an opportunity to give their opinion, and give other bidders the chance/right to mount a competing bid (auction) 6.3.2.1 s.98: Bid Mechanics (1) Minimum deposit period: An offeror shall allow securities to be deposited under a formal bid for at least 35 days from the date of the bid. Interpretation:May be open longer than 35 days
(2) Prohibition on Take Up: An offeror shall not take up securities deposited under a formal bid until the expiration of 35 days from the date of the bid. 6.3.2.2 Legislative Goal Met Protect SHs by providing Time Note: Bidders have interest in doing transaction as quickly as poss; and company and shareholders want more time (for reasons below)
Provides time for: (a) Shareholders: to assess the merits of the bid and decide whether or not to tender shares (and can take them back w/in 35 days) (b) Management: to make recommendations and try to maybe attract others (c) Other Potential Bidders: To create an auction and entice a White Knight To create auctions (by allowing other people to make competing bids), To make sure that the company is purchased for the best price (makes market efficient, dont want anyone to get it at a large discount, should reflect actual value as much as possible) Need to find a white knight (the person you actually want to buy it) 95
In practice: company wants it to be as long as possible (so they can find higher bidders), purchaser wants it shorter to buy it at cheapest price (tensions in practice happen here)
6.3.3 Pro Rata (Equality) First-come, first-serve offers are NOT ALLOWED IF more shares are tendered than requested, they MUST be taken up on a PRO RATA basis (e.g. buy 75% of each SHs tendered holdings to get to your desired amount)
6.3.3.1 Section 97.2: Consideration s.97.2(1) If a formal bid is made, all holders of the same class of securities shall be offered identical consideration. 6.3.3.2 Legislative Goal Met Protect SHs by ensuring equality among them and providing time Provides: (1) Equality: treated equally, no SH is benefitting more from a premium than another (2) Time to review/no pressure: Gives the SH time to review the transaction and all of the pertinent information to ensure an informed decision because they are NOT PRESSURED TO BID EARLY (since its not first come, first serve) 6.3.4 Withdrawal and Change of Info or Variation in Terms (time and info) Shares cannot be taken up for 35 days and shares deposited within the 35 day period can be withdrawn at any time prior to the end of the 35 day period. If there is a variation in the bid, the withdrawal right is extended by 10 days unless the shares have already been taken up (35 days has passed) or the variation is simply an increase in the consideration offered or a waiver of a condition.
6.3.4.1 Section 98.1: Withdrawal of securities (1) A security holder may withdraw securities deposited under a formal bid, o (a) at any time before the securities have been taken up by the offeror; o (b) at any time before the expiration of 10 days from the date of a notice of change under section 94.3 or a notice of variation under section 94.4; or o (c) if the securities have not been paid for by the offeror within three business days after the securities have been taken up.
6.3.4.2 Section 94.3: Change in Information (1) If, before the expiry of a formal bid or after the expiry of a bid but before the expiry of all rights to withdraw the securities deposited under the bid, a change has occurred in the information contained in the bid circular or any notice of change or notice of variation that would reasonably be expected to affect the decision of the security holders of the offeree issuer to accept or reject the bid, the offeror shall promptly o (a) issue and file a news release; and o (b) send a notice of the change to every person or company to whom the bid was required to be sent and whose securities were not taken up before the date of the change. 96
6.3.4.3 Section 94.4: Variation of Terms (1) If there is a variation in the terms of a formal bid, including any extension of the period during which securities may be deposited under the bid, and whether or not that variation results from the exercise of any right contained in the bid, the offeror shall promptly issue and file a news release and send a notice of variation to every person or company to whom the bid was required to be sent and whose securities were not taken up before the date of the variation.
6.3.4.4 Legislative Goal Met Protect SHs by providing time and information (and payment) (1) Gives Time for SHs to Wait and See if there is a Higher Bid: Everyone tenders on last day anyway, bc theyre waiting to see if there is a higher one (2) After Amendment, gives time to assess information: 10 day w/d right, as long as shares havent already been taken up (3) Encourages Company to Pay 6.3.5 Conditions (just investor protection) You can attach any condition you want to your bid, except financing Best to have AS FEW CONDITIONS as possible on the offerors bid: sounds good to attach conditions to a bid and protect themselves (e.g. being able to get out of it), but at end of the day, you want to win. Best way to win is to have as clean a bid as possible. If you have conditions attached, makes it less attractive, opportunities for others to beat you (although sometimes you need conditions e.g. conditional upon me getting 2/3rds of shares, Competition Act approval, CRTC approval, etc. (e.g. Astral BCE BCE made bid to buy Astral, conditional on CRTC approval, CRTC turned it down)
Biggest difference b/w Canada and US One condition you CANNOT do in Canada is making your bid subj to financing o In US: I can say I want to make bid for 100% of apple, and hope I find the $ o In Canada: cant make takeover bid unless you can reasonably show that you can come up with $ POLICY: Cant put company into chaos and then not be able to complete it $$ Problem: Very expensive, when you need standby loan from bank for $1b, charge you a shit ton of interest to have it there for you (to give you right to be able to call It if you need it) why there are fewer takeover bids in Canada 6.3.5.1 Section 97.3: Financing Arrangements (1) If a formal bid provides that the consideration for the securities deposited under the bid is to be paid in cash or partly in cash, the offeror shall make adequate arrangements before the bid to ensure that the required funds are available to make full payment for the securities that the offeror has offered to acquire.
97
6.3.5.2 Legislative Goal Met Investor protection: Doesnt really reach one of 3 obj, but does protect investors, you have to be able to complete the bid, cant put everything in complete chaos and then not go through with it b/c you couldnt get financing 6.3.6 Payment for Securities (investor protection generally) Earliest of: a) You have to take up and pay for them within 10 days after expiry of the bid; OR b) Once youve taken them up, you have 3 days; OR c) For securities deposited AFTER the date on which the offeror first takes them up have to be paid for by the offeror within 10 days after deposit 6.3.6.1 Section 98.3: Obligation to Take Up and Pay for Deposited Securities (1) If all the terms and conditions of a formal bid have been complied with or waived, the offeror shall take up and pay for securities deposited under the bid not later than 10 days after the expiry of the bid or at the time required by subsection (2) or (3), whichever is earliest. (2) Same: An offeror shall pay for any securities taken up under a formal bid as soon as possible, and in any event not later than three business days after the securities deposited under the bid are taken up. (3) Same: Securities deposited under a formal bid subsequent to the date on which the offeror first takes up securities deposited under the bid shall be taken up and paid for by the offeror not later than 10 days after the deposit of the securities.
6.3.6.2 Legislative Goal Met investor protection: Doesnt really reach one of 3 obj, but does protect investors, have to make sure they get paid within a reasonable time after tendering their shares (protecting their reasonable expectations) 6.3.7 No collateral agreements You cannot enter into a collateral agmt with anyone 6.3.7.1 Section 97.1 Prohibition against collateral agreements: If a person or company makes or intends to make a formal bid, the person or company or any person or company acting jointly or in concert with that person or company shall not enter into any collateral agreement, commitment or understanding that has the effect, directly or indirectly, of providing a security holder of the offeree issuer with consideration of greater value than that offered to the other security holders of the same class of securities. (2) Exception, employment benefit arrangements: Subsection (1) does not apply to such employment compensation arrangements, severance arrangements or other employment benefit arrangements as may be specified by regulation.
6.3.7.2 Legislative Goal Met Equality : Ensures that all shareholders are getting an equal share of the premium for their securities and you cant go making agreements that allow you to circumvent this rule by providing extra consideration to other people under the table for their shares How do you determine if youre entering into an agreement that provides a security holder of the offeree issuer 98
with consideration of greater value than that offered to the other security holders of the same class of securities vs. one that is allowed? E.g. I want to buy Canadian tire and 30% of those shares owned by dealers of CT. Dealers pay 6% royalty for right to carry on dealership. If I go to dealers, say Im going to make takeover bid for CT, and Im going to pay everyone $50 a share. If Im successful, you should know, Im going to cut your royalty from 6% to 3% (good for dealer). Want to retain dealers. E.g. 2: If I want to buy apple, give everyone $750 for their shares. Go to CEO and say, if Im successful in acquiring, Im raising your compensation from 50m a year to 150m. Should I be able to do that? Depends on the reason (intention). See test below.
Test for whether or not collateral agreements are ok May apply to the OSC to ask them if a certain agreement is okay (s.104(2)) (Why do you need it? *diff of INTENTION): (a) are you inducing that person to sell you their stock? (not okay) OR (b) do you need them and their expertise or are doing it for a legitimate business purpose that had nothing to do with whether or not that person owned shares? (okay) If Im trying to maintain them and their expertise for the best interests of the corporation and Im dropping all of this $ and think that theyd better be sticking around if Im going to spend that much, then its fine. If Im doing it to induce them to tender their shares and Im finding a way to get their shares without directly paying them more money, then not okay. Im giving someone else a benefit that Im not giving to the other SHs 6.4 Post-Bid: Directors Circular (Response) The directors of the target company have an obligation to deliver a directors circular to all their shareholders within 15 days from the date of the bid o They must tell SHs that they recommend that the shareholders accept the bid, reject the bid, make no recommendation at all, or say that theyll let them know at a later time, and give their reasons for any of these decisions o If within the 15 day period you arent ready to give your reasons, you can do it later in a second document as long as it is 7 days BEFORE the expiry of the bid As SHs, you are entitled to know what your directors/managers think of this bid! o *and keep in mind that directors dont always act in the companys best interest b/c it conflicts with their own interests
6.4.1 Section 95: Offeree Issuers Obligations (1) Duty to Prepare and Send Directors Circular: If a formal take-over bid has been made, the board of directors of the offeree issuer shall prepare and send, not later than 15 days after the date of the bid, a directors circular to every person or company to whom the bid was required to be sent. (2) Duty to Evaluate and Advise: The board of directors of the offeree issuer shall evaluate the terms of a formal take-over bid and, in the directors circular, o (a) shall recommend to security holders that they accept or reject the bid and give reasons for the recommendation; o (b) shall advise security holders that the board is unable to make, or is not making, a recommendation and state the reasons for being unable to make a recommendation or for not making a recommendation; or o (c) shall advise security holders that the board is considering whether to make a recommendation to accept or reject the bid, shall state the reasons for not making a recommendation in the 99
directors circular and may advise security holders that they should not deposit their securities under the bid until they receive further communication from the board in accordance with clause (a) or (b). (3) Further Communication: If clause (2) (c) applies, the board of directors shall communicate to security holders a recommendation or the decision that it is unable to make, or is not making, a recommendation, together with the reasons for the recommendation or the decision, at least seven days before the scheduled expiry of the period during which securities may be deposited under the bid.
6.4.2 Legislative Goal Met Information and time (1) Shareholders are entitled to know what the directors think: gives them sufficient information, considering they may have less knowledge than the individuals working on the inside (2) Have enough time to make an informed decision: If theyre going to give a recommendation (or not give one), they have to let the SHs know of their decision with enough time for the SHs to make an informed decision about tendering 6.5 Pre & Post-Bid Integration 6.5.1 Lock-up Agreements/ Tendering Agreements (Allowed) 93.1(1) of the OSA says you cant enter into any agreement to enter shares while bid is outstanding (in a private agreement) 6.5.1.1 Section 2.1(2) of Rule 62-504 However, Section 2.1(2) of Rule 62-504 (Take Over Bids and Issuer Bids) says I can enter into a lock-up agreement with you whereby the shareholder and offeror making bid will contract to effect that shareholder will tender his shares to a formal TOB made by the offeror made in accordance with proper terms/conditions of her bid You can negotiate this, its a contract For instance, in the clause it may state that the SH is not obligated to tender to the original bidder at a certain price if a higher bidder comes along BUT then the SH must give the original bidder a % of the profits. If there is NO such clause in the LU agreement, then the SH is stuck. o E.g. youre a big SH and I say Im thinking of making bid at $20 a share, but I will only make that bid if you agree that youll tender to it. Then negotiate (you can add whatever conditions you want, have it irrevocable where they cannot withdraw the tender and tender to a higher competing bid, or not, probably would though) Why would a big SH do that? The large shareholder would encumber themselves like this in order to ensure the bid happens and their shares get bought If they said no, not doing it for $20 a share two choices, sit with share at $10 or agree to lockup agreement, and make sure they get the $20 bid (the premium) NOTE!!! and see below chart for legislative goals still have to comply with the terms and conditions of a takeover bid (e.g. taking up shares pro rata), nothing untoward going on, there is no extra consideration or premium going to the SH who is a part of the lock up agmt 100
Pre-bid integration only protects little guys (doesnt matter that previous purchases were for less)
Ex. Say 60 D before offer to buy all shares of A (at $9/share); 45 D before offer to buy all of Bs shares (at $12/share). Then take-over bid (might be prejudicial to other parties). Therefore, take-over bid must be for highest price and highest % you purchased in the previous 90 day period. Thus to legitimize these transaction would have to buy for $12 and 100% (higher payment and higher % than before note: therefore, should not buy up 100% of A first) 6.5.1.2 Section 93.1: Restrictions on acquisitions during formal take-over bid An offeror shall not offer to acquire, or make or enter into an agreement, commitment or understanding to acquire beneficial ownership of any securities of the class that are subject to a formal take-over bid or securities convertible into securities of that class otherwise than under the bid on and from the day of the announcement of the offerors intention to make the bid until the expiry of the bid. 6.5.1.3 OSC RULE 62-504: TAKE OVER BIDS AND ISSUER BIDS Per s.2.1(2): Subsection 93.1(1) of the Act does not apply to an agreement between a security holder and the offeror to the effect that the security holder will, in accordance with the terms and conditions of a formal take-over bid, deposit the security holders securities under the bid. Interpretation: So this means they will deposit their securities in accordance with the usual bidding rules! 6.5.1.4 Legislative goal is STILL met Promote TOB, Equality and Information policy as to why this is allowed (1) Equality: all SHs are being treated equally: b/c all SHs being treated equally, big SH not getting more money than little SH (2) Information: This is not secret (it will be disclosed in the takeover circular) (3) Promotes TOB: Is not a collateral agmt b/c SHs still treated equally, however lock-ups help to allay the expense of TOBs to offerors b/c it lowers the risk of the bid failing and are thus in accordance with the intention of the Act to promote TOBs 6.5.2 Pre-Bid Integration Pre-Bid Integration: Only applies to private agreements, you can do this on the open market if you want b/c its random E.g. If I know Ill make a takeover bid tomorrow, I own no shares of a public company. B owns 19% of shares. Ill buy all your shares at $50 a share, stock trading at $10, you buy them. Nothing to stop that, 019, early warning, insider reporting, but nothing stopping it. Tomorrow, I make bid for the rest of the company at $20 a share = no. o OSA 93.2(1): when you make a formal t/o bid, going to look BACK 90 days from the date of your takeover bid. If in that 90 day period, you bought shares by way of private agreement from anybody, your t/o bid has to be for the highest price and highest percentage of shares you bought in that 90 day period. (if 91 days?) o 90 days is a stupid bright line test, no significance. Can do it at 91 and youre a-okay. E.g. 40 days before, I buy 100% of As shares at $10, B I buy 50% of their shares at $12 at day 30. My bid has to be for 100% of shares of company at $12
101
6.5.2.1 Section 93.2(1): Restrictions on Acquisitions Before Formal Take-Over Bid s.93.2(1): Restrictions on Acquisitions before Formal Take-Over Bid: If, within the period of 90 days immediately preceding a formal take-over bid, an offeror acquired beneficial ownership of securities of the class subject to the bid in a transaction not generally available on identical terms to holders of that class of securities, (private agmt ONLY) (a) the offeror shall offer, o (i) consideration for securities deposited under the bid at least equal to and in the same form as the highest consideration that was paid on a per security basis under any such prior transaction, or o (ii) at least the cash equivalent of that consideration; and (b) the offeror shall offer to acquire under the bid that percentage of the securities of the class subject to the bid that is at least equal to the highest percentage that the number of securities acquired from a seller in any such prior transaction was of the total number of securities of that class beneficially owned by that seller at the time of that prior transaction.
(2) Exception **once again, the rule in (1) ONLY APPLIES TO PRIVATE AGMTS!!: Subsection (1) does not apply to trades effected in the normal course on a published market if the trades satisfy such conditions as may be specified by regulation. 6.5.2.2 Legislative Goal Met Equality: Ensures that certain shareholders are not being paid a premium that other SHs are not getting the advantage of, just b/c it was done in a roundabout way prior to the formal bid 6.5.3 Post-Bid Integration Same as above in that this only applies to private agmts, not trades on market E.g. If you have takeover bid outstanding, youre a big SH. You dont want to tender at $20 a share and I need your shares. I say dont worry, let me buy everyone elses at $20, then buy yours a day after I close by bid by priv agreement at $25 a share (or do a new bid) o Obviously cant do this o Section 93.3(1): if you have t/o bid outstanding, you cannot enter into any agmt with anyone else to buy their shares at a different price, or make a takeover bid at a higher price for at least 20 trading days after the expiry of the bid 6.5.3.1 Section 93.3 s.93.3(1) Restrictions on acquisitions after formal bid: During the period beginning with the expiry of a formal bid and ending at the end of the 20th business day after that, whether or not any securities are taken up under the bid, an offeror shall not acquire or offer to acquire beneficial ownership of securities of the class that was subject to the bid except by way of a transaction that is generally available to holders of that class of securities on identical terms. **MUST BE ON IDENTICAL TERMS TO THE BID AND OPEN TO EVERYONE!! (2) Exception **again only applies to PRIVATE agmts: Subsection (1) does not apply to trades effected in the normal course on a published market if the trades satisfy such conditions as may be specified by regulation.
6.6 Exemption from Pre-Bid and Post-Bid Restrictions EXEMPT Takeover Bids! 102
Sometimes can take over 100% without doing t/o bid circular 6.6.1 Private Agreement Exemption (s.100.1(1) of OSA, most important) S.100.1(1): Takeover bid exempt from rules (requirement to do t/o bid circular to all SHs) if youre going to buy from 5 or fewer people and the price youre going to pay, including commissions, does not exceed 115% of the market price at the date of the takeover bid (or if no public listing, then what they think would be 115%) o market price: defined as 20 day avg closing price (20 days preceding your bid) your purchase from your 5 people cant be for more than 115% above that market price o Can OFFER to more than 5, but can only buy from 5 o * Remember, you cannot act jointly. You cannot prepare your seller to fit within the 5 or fewer exemption
POLICY: why have this exemption? TOB: we dont care who owns it or controls it, we care if youre selling it at a premium, that doesnt belong to you, belongs to all shareholders. But if premium is small enough and they define 15% as de minimis, then all it is is whether you control company it or I control it, and who cares? So 15% is insignificant. They only care if theres a big enough premium that it should be shared b/w everyone, all SHs (if its small, it doesnt matter). If control person wants to sell it for under 15% premium, not really a control premium (theory) Overall: efficiency of capital markets, want big SHs to be able to extract themselves from companies, if they want to extract from without a big premium, then cool 6.6.2 S.100 Normal Course Exemption Dont Exceed 5% in 12 Months Even though what you own together with what you buy will come out to more than 20, well exempt you from takeover bid requirements if you buy no more than 5% of shares in any 12 month period and price you pay does not exceed market price If market is dumb enough to let you keep doing it, then fine we dont care, not at a premium
Ex. Exam Q: A(2%); B(4%)H(3%) Always get to 19.9% with fewest purchasers poss (enter with 5/fewer sellers) therefore, own most amount without triggering T/o bid 6.7 Voting & Non-Voting Shares I need to raise money, but I dont want to lose control; thus, issue shares in classes, some voting, some not. I can issue equity without losing control. Investors are satisfied because they just want your expertise, dont want to own the company. Problem: investor does not have a problem with founder controlling the company, but there would be a huge issue if controlling SH can sell shares at a PREMIUM that investors have no right to participate in. Solution - Canada Decides (a) IF you want to create restricted voting shares, have to get a majority of the minority vote (b) Have to call them restricted voting shares and (c) COATTAIL Provision: if someone makes a takeover bid for my shares, then my shares become exactly like yours and we all get one vote, i.e. a bidder cannot attain control without making the same offer to all SHs. Canadian Tire (1986, OSC) 103
Ratio: Coattail provision, despite not countering statute or case law, was not allowed to go through as it would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public interest). Found that collateral agreement rule only applies in the context of a t/o bid (since this was not a takeover bid, collateral agreements did not apply) Facts: Dealers of Canadian Tire formed a company, made an offer to purchase 49% of voting shares of Canadian Tire from Controlling SH (at a price of 160.24/share, when the stock was at $16/share= a massive premium for the voting shares of Canadian Tire!) As evidence of good faith, 30 million dollar irrevocable deposit. Dealers already owned 17.4% of the voting shares. If they were successful in their offer, they would own 66.66% of the voting shares. Coattail says in the event an offer is made and a majority of the voting shares have been tendered, each non-voting share shall be entitled to 1 vote. (Thus, we wont get a premium you wont get protected in event of TOB). On that promise to SHs, they agreed to take back non-voting shares and give the family voting shares. Coattail was triggered by an offer. Dealers read the coattail, and said look at this. If we make an offer for 49% of the voting shares, it doesnt trigger the coattail, we only have to buy from Controlling Family, and we get control of Canadian Tire (we already own 17%), and we can shut out the rest of the public. So they do it. The non-voting SHs go apoplectic.
Decision: OSC says nothing in this coattail stops this transaction. There is nothing in the case law that would stop the dealers. Nothing in the statute stops this transaction. No law, not precedent, no contract stopping this. I have no way of stopping the transaction. But they stopped it anyway cease trade. Counter Argument: Can we not rely on the commercial world for certainty? The law is the law, there is a valid contract! (arbitrary!)
Collateral Agreement Rule Only Applies in the Context of a Takeover Bid This is not a takeover bid, therefore collateral benefits do not apply; everyone would get the same price; 30 million was merely a deposit. It was not a premium. Collateral benefits only apply to takeover bids; this isnt a takeover bid because the OSC said it isnt a takeover bid. Once the OSC said no takeover bid, no takeover bid and collateral agreements dont apply. Now, if there is a takeover bid, (a legit one), the DEPOSIT will be deducted from the same price, and everyone gets the same price. It is simply a contract between dealers and Billes family, irrevocable. Now diff classes of shares and coattail provisions are much rarer
6.8 Directors Duties and Responsibilities in a Takeover Bid Situation Defensive Tactics to Buy Time Policy for defensive: you can do w/e you want to fight bid, but if you deprive SH of choice, youre dead (prob b/c conflict of interest between directors interests and SHs interests). Its good to have them, because you maximize value of the enterprise. 6.8.1 Fiduciary Duty in the Context of Takeover Bid Traditionally, directors actions evaluated under the business judgment rule (Smith v. Van Gorkom) and have fiduciary duties of care/loyalty under CBCA
However, in the context of defensive measures, a more stringent view emerges. Directors must show: 104
(a) They have reasonable grounds, based upon good faith and reasonable investigation, to believe that the takeover threat is harmful to the enterprise; and (b) Actions taken in response to the threat are reasonable or proportionate in relation to the threat posed. o This is Intended to address the potential conflict of interest between management and SHs (that directors will just act in their own best interests in a TOB situation to entrench themselves)
6.8.1.1 NP 62-202: Tactics that will come under scrutiny Tactics that will come under scrutiny include: a. Issuance of grant on, option, or purchase of outstanding securities of target b. Sale or acquisition of asset of a material amount c. Entering into a contract other than in the normal course of business. 6.8.1.2 Duty to Maximize SH Value Competing goals of the directors: immediate maximization of SH value and pursuing the long-term best interests of the corporation. 6.8.2 Examples of Defensive Tactics Issue new shares Seek a white knight Issuer bid for own shares Crown Jewel: sell of asset coveted by bidder. Or, grant option to third party to purchase jewel at low price if hostile bid succeeds Bust-up fee with white knight: if white knights bid is unsuccessful, target must pay a significant sum to white knight (i.e. substantial debt on hand for successful bidderless valuable company) Delay the bid: commence litigation seeking an injunction until litigation is resolved, i.e. competition laws, poison pill (see below)
Regulation tends to encourage defensive tactics. It also facilitate white knight defences. Union Enterprise (Unicorp Tender) (Example) Example of defensive tactics bought a pig farm to make company unattractive to bidder (too extreme, but case was before sec law) Facts: Union enterprises was a massive utility company in Canada. Then a little nobody company, Unicorp makes hostile bid for union enterprises. Directors dont like that, they get lots of perks, fight goes on for mont hs. Costing Unicorp millions, union enterprises to fight it. Looks like unicorp is going to win. And Union Enterprise comes up with a smart idea. Decide they need a pig farm. Find two people that own one worth $10m, say were going to pay you $80m for your pig farm, but wont give you cash, will give you new shares of Union Enterprises. If you do that, will expect you not to tender your shares to the unicorp bid. Makes bid at least $80m more expensive b/c new shares out there they have to buy. Also makes it hard b/c those 80m shares wont be tendered to the bid, and if you win bid and buy union enterprises, you get a utility AND a pig farm! They do the deal. Scorched earth make it so unattractive bidder wont want the company anymore. Unicorp still buys union enterprises, somehow was allowed to happen. Before they had defensive tactics. Labatts (just an example)
105
Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab); after this case brought in law re: defensive tactics (however, board did its job to buy time and eventual had a preferable bidder) Facts: Labatts was controlled by Brascan, owned 40-50% of Labatt. Had big fight with CEO of Labatt. Rumour theyd be taken over (Labatt), so everyone wanted it, they owned beer company, TSN, Toronto blue jays, food, etc.. For months, speculation someone was going to make a takeover bid for Labatts. So they decided poison pill turned down by SHs, so evidence it would absolutely be in play. Had some time (unusual) to prep for takeover bid (its usually by surprise). Saw stupid provision in income tax act if we turn TSN from a corporation into a partnership, then we can trigger $150m tax liability on a change of control of Labatts. If someone acquires control of Labatts, will pay $150m of tax for nothing, if we change from corp to partnership, but only triggered if someone gains control. So changed it, didnt tell anyone. Then Onex makes hostile t/o bid at huge premium to market. Everyone thought it was over, Labatts done. Time is $ for takeover bids, Labatts wants white knight, Onyx wants it to go quickly. Onyx sees change, goes nuts suing board, suing directors, everyone. (after defensive tactics introduced)
Onex Argument: these guys are crooks b/c they entrenched themselves, denied SHs right to decide if they want to take our bid or not by creating an artificial $150m tax liability for no reason This actually levelled the playing field, and allowed Onex and Labatt to talk about it (Onex realized it would be long and drawn out if they didnt talk to the board). But then someone else came and bought it from Belgium (COMPANY DID THEIR JOB, THEY BOUGHT TIME) Max Milk and Beckers Example of attempt by Max Milk to find a white knight Facts: fierce rivals for years. Couche-Tard made an offer to buy Max Milk, then made a deal with Beckers (paid a lot). Sold shares on condition that they wouldnt tender them to Couche-Tard. 2 years later Couche-Tard bought both! 6.8.2.1 Due Diligence can restrict access Want to find white knight. Example of making info available to all bidders except you. Every time bid is made on hostile basis, everyone gets access except original bidder. And when OG bidder sues all directors, never heard of success Sun Media and TorStar Example where info was not made available to bidder. Also in this case, complained to competition bureau. Worked out since delay led to higher bid. Facts: Sun Media went to competition bureau to buy itself time to think about TorStar bid. If in the same industry, might complain to anti-competition bureau and maybe a better bid comes along. But keep in mind you cant fix this one!! SH of Sun Media and TorStar angry took decision out of their hands! However, directors insulated b/c they bought time then Quebecor made a higher bid! So it worked out. Second Cup Example of poison pill- not actually used, just threatened to give opp to talk Facts: Owned partially by Cara. Made bid to own rest of company. Existing directors put in a poison pill (once x% acquired then every SH, gets ability to buy shares) 106
NO ONE has ever actually triggered a poison pill just threatened often to give an opp to talk
6.8.2.2 Golden Parachutes all legal. Temptation to offer everyone a huge severance in case they get taken over b/c its the acquirors money. This is LEGAL. Policy argument is: important to behave in best interests of SHs, so if they give you that golden parachute, relieving you of any personal concerns of losing your job, so you can just act BIC
6.8.2.3 Poison Pills Rights Plan - Put provision in articles of corp saying if someone acquires more than 20% of shares of this company, every SH of this company automatically [except person owning 20%] gets the right to buy 10 more shares at a penny Makes the company impossible to buy b/c there are 10X as many shares that everyone acquires for a penny, so astronomical price. Almost every company subj to poison pill threatens to sue, every single company says dont push us or well exercise our rights plan, every company fighting takeover bid is afraid of implementing it, no company in history of world has ever executed a rights plan. Again, levels the playing field: tells acquirer just relax. Talk to us. Because we need to talk. If you think youll dictate terms, we have a weapon. It buys time, it levels the playing field, and it creates a bit of leverage for there to be a negotiation o SEC COMM CAN LIFT IT!!, but rarely would. (e.g. Cara for Second Cup) o Dont lift it usually b/c think it creates opportunity for someone to come in at a higher price b/c thats what they want. 6.8.3 Defensive Tactic Rules - NP 62-202 Rules developed after Unicorp: Needed to have a system thats conscientious and fair to determine what defensive tactics are ok in the context of a TOB 6.8.3.1 NP 62-202 Main Principles:1) takeover bids are a good thing; 2) primary objective of t/o bid legislation is protection of bona fide interests of SHs of target company; 3) second purpose/ objective: create a reg framework where bids can happen in an open and even-handed manner; 4) Regulators believe it is inappropriate to specify a code of conduct for directors b/c that code runs risk of being insuff in some cases and excessive in others; 5) SH approval desirable (BUT this is unrealistic); 6) administrators believe that unrestricted options produce most desirable results in t/o bids and are reluctant to intervene in contested bids; 9) although auctions are best and dont want to intervene, administrator will punish you if your action is to deprive SHs of opp/ rt to respond to a bid; 10) cannot come to administrator to get prior approval for defensive tactic (1) Takeover Bids are a Good Thing : Media try to paint good/bad guys, there are just people that want to make $. (a) discipline on management (to make sure they do a good job) (b) reallocation of resources to their most effective uses But we recognize that theres a possibility that interests of management/board of target might differ from its SHs. Management and board might take certain steps to defeat that bid, either b/c they think its best for the company to do so/want a higher offer (good), or to entrench themselves (bad) 107
(2) Primary objective of takeover bid legislation is protection of bona fide interests of SHs of target company (3) Second purpose/objective: create a regulatory framework where bids can happen in an open and evenhanded manner (shouldnt favour management or offeror should put SHs in a position to make a fully informed decision) Concerned that certain defensive tactics employed by board may frustrate a fair bid and deny SHs the right to make the choice Directors MIND the store, they dont own it. (4) We, the regulators, believe is it inappropriate to specify a code of conduct for directors of a target company b/c that code runs risk of being insufficient in some cases and excessive in others Uncertain, theyll review tactics in hindsight. IF theyre abusive to SHs (denies them rt to make choice), well kill you (5) SH Approval (unrealistic) If youre worried, get SH approval of your defensive tactic, if they say its okay, its okay. That sounds okay, but taking meeting of SH takes 60 days min, the game is over, takeover bids are fast unrealistic in almost every case. (6)***most significant point theyre going to make: administrators believe that unrestricted options produce most desirable results in takeover bids, and are reluctant to intervene in contested bids They want an auction! get as many bidders as possible, get price as high as possible for SHs **why it might be okay to engage in these tactics: have time to get other bidders. (9) although thats the case and auctions are best results/we dont want to intervene, we really are going to kill you if results of your action is to deprive SHs of opportunity/right to respond to a bid*** Difficult b/c forgetting bad intentions, if you dont engage in DTs, might get a bad bid. But if you do, bid you dont want might walk, and no white knight will come in looks like youve denied SHs right to make a decision **blabla about not being worried about protecting yourself as a lawyer, do best for your client. o When it turns out properly, SHs get more. If youre legitimately pursuing higher offer or better deal for SHs and a risk it might turn out badly, but measured risk that makes sense (10) dont think you can come to us and get prior approval for defensive tactic Do whatever you think you have to do, well tell you if youre right or wrong with benefit of hindsight later, wont bless your transaction 6.8.3.2 Case Law Teck Corp v Miller (BC SC) Best Interests Test Ratio: Best interests test: need to act in best interests of SHThe directors must act in good faith. Then there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the companys interests, then there must be reasonable grounds for that believe. If there are not, that will justify a finding that the directors were actuated by an improper purpose. Producers Pipelines (Sask CA) Proportionality Test Ratio: Canadian law does not conflict with the business judgment rule. In takeover situations, directors will often be in a conflict. In implementing a poison pill, the directors must be able to establish that (a) in good faith they perceived a threat to the corporation, (b) they acted after proper investigation, and (c) the means adopted to oppose the takeover were reasonable in relationship to the threat posed Defensive tactics that result in shareholders being deprived of the ability to respond to a takeover bid or to a competing bid are unacceptable 108

Securities (Lastman) - 2013-14 (1) - 2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Securities (Lastman) - 2013-14 (1) - 2

Uploaded by

Copyright:

Available Formats

Securities Regulation Summary

2.3.1 2.3.2 2.4

2.4.1 2.4.2 2.4.3 3.0 3.1

3.1.1 3.1.2 3.1.3 3.1.4 3.2

3.2.1 3.2.2 3.2.3 3.3

Prospectus Preparation .......................................................................................................................... 20 Prospectus General Rule ................................................................................................................ 21

4.2.1 4.2.2 4.3

PART II: Timely Disclosure (of changes)............................................................................................. 54

4.3.1 4.3.2 4.3.3 4.4

4.4.1 4.4.2 4.5

4.5.1 4.5.2 4.6

4.6.1 4.6.2 4.6.3 4.6.4 4.6.5 4.6.6 5.0 5.1

5.1.2 5.1.3 5.1.4 5.1.5 5.2

5.2.1 5.2.2 5.2.3 6.0 6.1

6.1.1 6.1.2 6.1.3 6.2

6.2.1 6.2.2 6.3

6.3.1 6.3.2 6.3.3 6.3.4 6.3.5 6.3.6 6.3.7 6.4

Post-Bid: Directors Circular (Response)............................................................................................. 99

6.4.1 6.4.2 6.5

6.5.1 6.5.2 6.5.3 6.6

Voting & Non-Voting Shares ............................................................................................................... 103

Exceptions to the Disclosure Rule .................................................................................................. 2

Private Trades ................................................................................................................................... 5

2.4.1 2.4.2 2.4.3 3.0 3.1

Section 65 of the OSA Waiting period .................................................................................................. 29

Purpose of the Waiting Period ..................................................................................................... 29

Application to Reporting Issuers................................................................................................... 54

Incomplete Public Disclosure ....................................................................................................... 58

4.4.2 4.4.2.1 4.4.2.2 4.5

4.5.1 4.5.2 4.5.2.1 4.5.2.2

SEGMENT 3: THE CLOSED SYSTEM: ...................................................................................73 xix

5.1.3.1 5.1.3.2 5.1.3.3

6.4.1 6.4.2 6.5

6.6.1 6.6.2 6.7

Union Enterprise (Unicorp Tender) (Example) ...................................................................................... 105

property, profits, earnings or royalties of any person or company,

(n) any investment contract,

National Instrument 41-101 (Form 41-101F1): General Prospectus Requirements

Section Item 1.1: Required Statement (Lies)

66: Distribution of Prelim Prospectus 67: Distribution List

68: Defective Prelim Prospectus

Lake Forest Fund 35

DUE DILIGENCE DEFENCE 47

Statute (OSA s.7.1(1))

4.5 PART IV: Insider Reporting 61

ii. iii. iv.

*subject to defences above

You might also like