INTELLECTUAL PERSPECTIVES ........................................................................................... 7

NEOCLASSICAL ECONOMIC ANALYSIS (LAW OF ECONOMICS).....................................................7BEHAVIOURAL FINANCE..................................................................................................................7SOCIO-LEGAL PERSPECTIVE...........................................................................................................8

SOURCES OF LAW ...................................................................................................................... 8

HISTORICAL AND CONSTITUTIONAL ISSUES ................................................................... 9

HISTORY...........................................................................................................................................9CONSTITUTIONAL ISSUES: DIVISION OF POWERS..........................................................................9MAYLAND AND MERCURY OILS V. LYMBURN.......................................................................................9R V. SMITH.......................................................................................................................................10R V. MCKENZIE SECURITIES.............................................................................................................10MULTIPLE ACCESS V. MCCUTCHEON................................................................................................10QUEBEC V. OSC...............................................................................................................................10GLOBAL SECURITIES CORP. V. BC...................................................................................................11WISE PERSONS’ COMMITTEE..........................................................................................................11

OVERVIEW OF REGULATORS AND MARKETS ............................................................... 11

PURPOSES OF SECURITIES REGULATION......................................................................................11SECURITIES MARKETS...................................................................................................................11DISTINCTION BETWEEN PRIMARY AND SECONDARY MARKETS:......................................................11TORONTO STOCK EXCHANGE (TSX) AND TSX VENTURE.............................................................12ELECTRONIC TRADING SYSTEMS.....................................................................................................12REGULATORY STRUCTURE............................................................................................................13GLOBAL SECURITIES REGULATION: IOSCO...................................................................................13PROVINCIAL/TERRITORIAL REGULATION (PRIMARY REGULATORS)..............................................13PEARSON V. BOLIDEN.......................................................................................................................13Ontario Securities Commission (OSC)...........................................................................................13Judicial Review of Regulator’s Decisions......................................................................................13COMMITTEE FOR THE EQUAL TREATMENT OF ASBESTOS MINORITY SH V. OSC................................13RE CARTAWAY RESOURCES CROP.....................................................................................................13CRITICISMS OF PROVINCIAL/TERRITORIAL REGULATION AND RESPONSES....................................14OTHER SELF REGULATING ORGANIZATIONS..................................................................................15

DEFINITIONS .............................................................................................................................. 15

SECURITY.......................................................................................................................................16LEGISLATIVE DEFINITION................................................................................................................16OPTIONS/FUTURES/DERIVATIVE SECURITIES..................................................................................17INVESTMENT CONTRACT.................................................................................................................18SECURITIES AND EXCHANGE COMMISSION V. W.J. HOWEY...............................................................18STATE OF HAWAII V. HAWAII MARKET CENTRE.................................................................................18

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PACIFIC COAST COIN EXCHANGE OF CANADA V. OSC.....................................................................19VIATICAL SETTLEMENTS.................................................................................................................19IN THE MATTER OF UNIVERSAL SETTLEMENTS INTERNATIONAL..........................................................19ALBINO.............................................................................................................................................20TRADE.............................................................................................................................................20RE WORLD STOCK EXCHANGE..........................................................................................................21DISTRIBUTION................................................................................................................................21REPORTING ISSUER........................................................................................................................22

THE PROSPECTUS ..................................................................................................................... 23

ADVANTAGES AND DISADVANTAGES OF A PUBLIC OFFERING...................................................23ADVANTAGES..................................................................................................................................23DISADVANTAGES.............................................................................................................................24OVERVIEW OF PROCESS................................................................................................................24UNDERWRITING..............................................................................................................................25DEFINITION AND PURPOSE..............................................................................................................25YBM MAGNEX INTERNATIONAL.........................................................................................................25TYPES OF UNDERWRITER – ISSUER RELATIONSHIPS.......................................................................25CONFLICT OF INTEREST ISSUES.......................................................................................................27PRELIMINARY PROSPECTUS..........................................................................................................27WAITING PERIOD AND AMENDMENT............................................................................................28REVIEW PROCESS: RISK-BASED APPROACH...................................................................................28ISSUER ACTIVITY DURING WAITING PERIOD..................................................................................29NOTICE RE CAMBOIR INC.................................................................................................................29LONG-FORM PROSPECTUS - CONTENT........................................................................................31FINANCIAL STATEMENTS................................................................................................................31CERTIFICATES: NI 41-101, PART 5..................................................................................................32AMENDMENTS TO PROSPECTUS.......................................................................................................32DOCUMENTS TO BE FILED WITH PROSPECTUS.................................................................................32FORM 41-101FI: GENERAL INFORMATION REQUIREMENTS...........................................................33DEFINITION OF MATERIAL FACT.....................................................................................................34YBM MAGNEX INTERNATIONAL INC..................................................................................................34FUTURE ORIENTED FINANCIAL INFORMATION (“FOFI”)..........................................................34KERR V. DANIER LEATHER INC.........................................................................................................35ISSUING A RECEIPT FOR A PROSPECTUS......................................................................................36DUE PROCESS REQUIREMENTS IN REFUSAL....................................................................................37TRICOR HOLDINGS...........................................................................................................................37YBM MAGNEX INTERNATIONAL.........................................................................................................37COOLING-OFF PERIOD...................................................................................................................38FAILURE TO DELIVER PROSPECTUS.............................................................................................38FAILURE TO FILE PROSPECTUS....................................................................................................39LAPSE AND REFILING OF PROSPECTUS........................................................................................39PROSPECTUS REQUIREMENTS IN A SECONDARY OFFERING.......................................................39MODIFICATIONS TO PROSPECTUS REQUIREMENTS.....................................................................40SHORT-FORM PROSPECTUS.............................................................................................................40Eligibility Requirements.................................................................................................................40Content/Disclosure..........................................................................................................................40Review of SFP................................................................................................................................41SHELF-PROSPECTUS........................................................................................................................41

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POST-RECEIPT PRICING PROSPECTUS..............................................................................................41MULTI-JURISDICTIONAL DISCLOSURE SYSTEM...............................................................................42CAPITAL POOL COMPANIES.............................................................................................................42CIVIL LIABILITY AND DUE DILIGENCE........................................................................................42WHO IS LIABLE – OSA - S.130 (1)..................................................................................................43WHAT DOES PLAINTIFF HAVE TO PROVE........................................................................................43Misrepresentation............................................................................................................................43KERR V. DANIER...............................................................................................................................43REMEDIES........................................................................................................................................44KERR V. DANIER:..............................................................................................................................44LIMITATION PERIODS – S.138..........................................................................................................44STATUTORY DEFENCES TO S.130(1)...............................................................................................44Issuer defences................................................................................................................................44Additional defences for directors/officers/underwriters.................................................................45Additional Defences for Experts.....................................................................................................45Due Diligence Defence...................................................................................................................45ESCOTT ET AL.V. BARCHRIS CONSTRUCTION CORP...........................................................................46RE YBM MAGNEX INTERNATIONAL...................................................................................................46KERR V. DANIER...............................................................................................................................47

CONTINUOUS DISCLOSURE .................................................................................................. 47

POLICY RATIONALES.....................................................................................................................47CONTINUOUS DISCLOSURE OBLIGATIONS ON OTHER PARTIES.................................................48PERIODIC DISCLOSURE REQUIREMENTS: NI 51-102...................................................................48ANNUAL FINANCIAL STATEMENTS: NI 51-102 - PART 4................................................................48INTERIM FINANCIAL STATEMENTS: NI 51-102 PART 4...................................................................48MANAGEMENT DISCUSSION AND ANALYSIS (MD&A): NI 51-102 – PART 5................................49OSC STAFF REVIEW OF MD&A (2004) CONSOLIDATION..............................................................50ANNUAL INFORMATION FORMS: NI 51-102 – PART 6....................................................................50RECENT CONTINUOUS DISCLOSURE REFORMS (CAN SOX INITIATIVES)...................................51NI 52-108: AUDITOR OVERSIGHT...................................................................................................51KRIPPS V. TOUCHE ROSS AND CO.....................................................................................................51NI 52-109: CERTIFICATION OF ANNUAL AND INTERIM FILINGS.....................................................51AUDIT COMMITTEES: MI 52-110....................................................................................................52Characteristics of Non-Venture Issuer Audit Committee- Part 3...................................................52Responsibilities – Part 2.................................................................................................................52Disclosure – MI 52-110FI...............................................................................................................53NI 58-101/NP 58-201: DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES...........................53TIMELY AND SELECTIVE DISCLOSURE (MATERIAL CHANGE REPORTING)................................54DEFINITION OF MATERIAL CHANGE: OSA, S.1(1) AND NI 51-102, S.1.1.......................................54PEZIM V. BC....................................................................................................................................54YBM MAGNEX INTERNATIONAL INC..................................................................................................54KERR V. DANIER...............................................................................................................................55FORM OF DISCLOSURE.....................................................................................................................56TIMING OF DISCLSOURE..................................................................................................................57PEZIM V. BC....................................................................................................................................57AIT ADVANCED INFORMATION TECHNOLOGIES.................................................................................57RUMOURS........................................................................................................................................57SELECTIVE DISCLOSURE..................................................................................................................58

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CIVIL LIABILITY FOR BREACH OF DISCLOSURE PROVISIONS....................................................58NEW STATUTORY REMEDY - OSA..................................................................................................58Who has a cause of action?.............................................................................................................59What does plaintiff have to prove?.................................................................................................59Who is liable?.................................................................................................................................60Defences..........................................................................................................................................60Limits on Liability..........................................................................................................................61Settlements and Costs Rules...........................................................................................................61

INSIDER REPORTING AND INSIDER TRADING ............................................................... 62

DEFINITION OF INSIDER – OSA - S.1 (1)......................................................................................62REPORTING REQUIREMENTS.........................................................................................................62INSIDER TRADING REPORTS: OSA REQUIREMENTS........................................................................62SYSTEM FOR ELECTRONIC DISCLOSURE BY INSIDERS (SEDI): NI 55-102.....................................63EXEMPTIONS FROM REPORTING REQUIREMENTS: NI 55-101.........................................................63ILLEGAL TRADING.........................................................................................................................64ILLEGAL INSIDER TRADING.............................................................................................................64RE DONNINI.....................................................................................................................................65R V. FELDLERHOF............................................................................................................................65TIPPING............................................................................................................................................66R V. RANKIN.....................................................................................................................................67DEFENCES.......................................................................................................................................68REASONABLE BELIEF THAT INFORMATION GENERALLY DISCLOSED – OSA – S.76(4)..................68GREEN V. CHARTERHOUSE GROUP CAN. LTD...................................................................................68RE HAROLD P. CONNOR...................................................................................................................68NECESSARY COURSE OF BUSINESS DEFENCE FOR TIPPING – OSA - S.76(2)..................................68ROYAL TRUSTCO LTD. V. OSC..........................................................................................................69FIREWALL/CHINESE WALL DEFENCE – REG. 175(1) AND (3)........................................................69RE DONNINI.....................................................................................................................................70UNSOLICITED ORDERS – OSA - REG. 175(2)..................................................................................70OTHER PARTY HAD KNOWLEDGE – OSA – REG.175(5).................................................................70REASONABLE MISTAKE OF FACT....................................................................................................70LEWIS V. FINGOLD............................................................................................................................70R V. HARPER....................................................................................................................................71SANCTIONS FOR INSIDER TRADING/TIPPING...............................................................................71CIVIL – OSA...................................................................................................................................71ADMINISTRATIVE – OSA................................................................................................................72NEW CRIMINAL CODE OFFENCE – S.382.1....................................................................................72

PROSPECTUS EXEMPTIONS .................................................................................................. 72

SOURCES OF LAW..........................................................................................................................73EXEMPTIONS FOR SMALL AND MEDIUM-SIZED ENTERPRISES OR START-UP ISSUERS.............73PRIVATE ISSUER EXEMPTION: NI 45-106........................................................................................73SEC V. RALSTON PURINA.................................................................................................................74R V. PIEPGRASS................................................................................................................................75FOUNDER, CONTROL PERSONS, AND FAMILY EXEMPTION: NI 45-106, S.2.7.................................75GOVERNMENT INCENTIVE SECURITY EXEMPTION: OSC RULE 45-501..........................................76

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WEALTHY/SOPHISTICATED INVESTOR EXEMPTION....................................................................77ACCREDITED INVESTOR EXEMPTION: NI 45-106 – S.2.3................................................................77MINIMUM INVESTMENT EXEMPTION: NI 45-106 – S.2.10..............................................................79PRE-EXISTING RELATIONSHIP EXEMPTIONS...............................................................................79STOCK DIVIDENDS: NI 45-106 – SS.2.31 AND 2.2..........................................................................79REORGANIZATIONS: NI 45-106 - S.2.11..........................................................................................80CONVERSION, EXCHANGE, OR EXERCISE: NI 45-106 - S.2.42.........................................................80RIGHTS OFFERINGS: NI 45-106 - S.2.1............................................................................................80TRADES TO EMPLOYEES, OFFICERS, DIRECTORS: NI 45-106 - DIVISION 4....................................81OFFERING MEMORANDA (OM)....................................................................................................81DEFINITION......................................................................................................................................81CONTENTS.......................................................................................................................................81OM STATUTORY RIGHT OF ACTION – S.130.1................................................................................82FILING REQUIREMENTS....................................................................................................................82DISCRETIONARY EXEMPTIONS......................................................................................................82CONSEQUENCES OF INCORRECTLY RELYING ON EXEMPTION...................................................82JONES V. DEACON HODGSON...........................................................................................................82

RESALE RULES AND CONTROL DISTRIBUTIONS .......................................................... 83

POLICY OBJECTIVES......................................................................................................................83CHOOSING THE APPLICABLE RESALE RULE...............................................................................83SUBSTANTIVE RULES.....................................................................................................................84RESTRICTED PERIOD RESALE RULE: NI 45-102 – S.2.5(2).............................................................84SEASONING PERIOD RESALE RULE: NI 45-102 - S.2.6(3)...............................................................86TRADES BY CONTROL PERSONS...................................................................................................87ALTERNATIVES AVAILABLE TO CONTROL PERSONS DISTRIBUTING SECURITIES...........................87SUBSTANTIVE RULE – NI 45-102 - S.2.8.........................................................................................87FILING REQUIREMENTS – NI 45-102...............................................................................................87

TAKEOVER BIDS ....................................................................................................................... 88

MOTIVATIONS FOR LAUNCHING TAKEOVER................................................................................88REGULATORY OBJECTIVES...........................................................................................................89EARLY WARNING RULES..............................................................................................................89WHEN IS A TB TAKING PLACE?....................................................................................................90DEFINITIONS – S.89(1)....................................................................................................................90“Person or company acting jointly or in concert with an offeror”..................................................91COUNTING RULES IN MEETING 20% THRESHOLD..........................................................................91HOW TO CONDUCT A TB...............................................................................................................91TB CIRCULAR..................................................................................................................................92RE CANFOR CORP............................................................................................................................93DIRECTOR’S CIRCULAR...................................................................................................................94TIME PERIODS & TAKE-UP ISSUES..................................................................................................94WITHDRAWAL.................................................................................................................................94RE CANFOR CORP............................................................................................................................95BID CONDITIONS.............................................................................................................................95EQUAL TREATMENT........................................................................................................................95EXEMPTIONS FROM TB RULES.....................................................................................................96

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NORMAL COURSE PURCHASES EXEMPTION– S.100........................................................................96PRIVATE AGREEMENT EXEMPTION – S.100.1(1).............................................................................96NON-REPORTING ISSUER EXEMPTION – S100.2...............................................................................96DE MINIMIS EXEMPTION - S.100.4...................................................................................................97FOREIGN TARGET EXEMPTION – 100.3...........................................................................................97DEFENSIVE TACTICS......................................................................................................................97TYPES OF DEFENSIVE TACTICS.......................................................................................................97White Knight...................................................................................................................................97Poison Pills or SH Rights Agreement.............................................................................................97Sale of Crown Jewel.......................................................................................................................97Litigation.........................................................................................................................................98Break Fee........................................................................................................................................98GUIDELINES FOR TARGET’S USE OF DEFENSIVE TACTICS: NP 62-202 (NOT MANDATORY).........98FIDUCIARY DUTIES OF THE TARGET BOD......................................................................................98RE CW SHAREHOLDINGS INC. V. WIC WESTERN INTERNATIONAL COMMUNICATIONS LTD................98MAPLE LEAF FOODS INC. V. SCHNEIDER CORPORATION...................................................................99BCE.................................................................................................................................................99WHO IS THE APPROPRIATE DECISION MAKER?............................................................................100Poison Pills...................................................................................................................................100347883 ALBERTA LTD. V. PRODUCERS PIPELINES INC....................................................................100RE ROYAL HOST REAL ESTATE INVESTMENT TRUST........................................................................101Sale of Crown Jewel.....................................................................................................................101RE CW SHAREHOLDINGS INC. V. WIC WESTERN INTERNATIONAL COMMUNICATIONS LTD..............101Break Fees.....................................................................................................................................102RE CW SHAREHOLDINGS INC. V. WIC WESTERN INTERNATIONAL COMMUNICATIONS LTD..............102

ISSUER BIDS AND GOING PRIVATE TRANSACTIONS ................................................. 102

POLICY CONSIDERATIONS...........................................................................................................102DEFINITIONS.................................................................................................................................102SUBSTANTIVE REQUIREMENTS....................................................................................................103INSIDER BIDS.................................................................................................................................103ISSUER BIDS..................................................................................................................................104RELATED PARTY TRANSACTIONS..................................................................................................105SEARS CANADA...............................................................................................................................106RE STERLING CENTRECORP............................................................................................................106

ENFORCEMENT AND PUBLIC INTEREST CONSIDERATIONS .................................. 106

INVESTIGATION AND EXAMINATION POWERS – OSA PART V1...............................................106EXAMINATION OF DOCUMENTS.....................................................................................................107DELOITTE & TOUCHE LLP V. OSC................................................................................................107POWER TO COMPEL TESTIMONY...................................................................................................107R V. JARVIS.....................................................................................................................................107CRIMINAL ENFORCEMENT..........................................................................................................108CRIMINAL CODE: SS.380-384, S.400.............................................................................................108QUASI-CRIMINAL POWERS IN OSA...............................................................................................108R. V. HARPER.................................................................................................................................108CIVIL ENFORCEMENT: OSA S.128................................................................................................109

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PUBLIC INTEREST ENFORCEMENT POWERS..............................................................................109IS A BREACH OF THE OSA REQUIRED?..........................................................................................109RE CANADIAN TIRE CORP...............................................................................................................109ENFORCEMENT ACTION AGAINST LAWYERS.................................................................................110WILDER V. OSC.............................................................................................................................110PHILOSOPHIES OF SANCTIONING................................................................................................110ABESTOS.........................................................................................................................................110RE CARTAWAY RESOURCES CORP...................................................................................................111Donnini v. OSC.............................................................................................................................111

Intellectual PerspectivesNeoclassical Economic Analysis (law of economics) Voluntary exchanges over collective decisions: individuals should be free to make

own choices because they are capable of acting rationally to maximize their own welfare (i.e. in best place to determine what is in their interest and maximize utility)

Goal: efficiency - exchanges where the result of the exchange is that at least one person is made better of by the exchange and neither person is made worse off

Minimal role of regulation/law in achieving efficiencyo To address market failure to the extent that it fails provide sufficient

information on which to base investment decisions o To reduce transaction costs [i.e. disclosure requirements/standard K terms]

Two types of analysis:o Positive Economics (descriptive or predictive analysis): predicts outcomes

of policies on assumption that individuals are motivated by rational self-interest to maximize individual utilities

o Normative Economics (prescriptive or judgmental analysis): asks whether a policy will make individuals affected by it better off in terms of how they perceive their own welfare

Pareto Efficiency: will this change make someone better off while making no one worse off?

Kaldore – Hicks Efficiency: would this collective decision generate sufficient gains to the beneficiaries that they could compensate the losers from the change so as to render the latter fully indifferent to it but still have gains left over for themselves?

Behavioural Finance Examines decision making and factors that influence it Empirical findings: people make decisions that are not rational

o Disposition Effect: avoiding regret and seeking pride causes investors to be pre-disposed to selling winners to early and riding losers for too long

o House-Money Effect: After people experience a gain or profit, they are willing to take more risk

o Risk-Aversion (snake-bite) Effect: after experiencing financial loss, people become less willing to take a risk

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o Endowment (or status quo bias) Effect: people are more protective of things they already own rather than things they want to acquire (i.e. tendency to hold the investments they already have; demand more to sell an object than they would be willing to pay)

o Cognitive Dissonance and Investing: investors seek to reduce psychological pain by filtering out negative information and fixating on positive

o Mental Accounting: decision makers tend to place each investment into a separate mental account (investors bundle the sale of losers and separate the sale of winners over several days to prolong favourable feeling)

Socio-Legal Perspective Examines behaviour of regulatory agencies What factors influence rule making (i.e. social, economic, political, etc.)? Who

benefits from the rules? How do regulatory authorities use their enforcement power? ice theory – resources are allocated by regulators to those recipients who seek them

most forcefully usually relative small and well organized grounds that have a high per capita stake in the regulations

Condon – focus on the role of interests is problematico Interest tends to be treated as easily discoverableo Confusion between regulatory effects and causation (i.e. if new regulatory

practice benefit some identifiable constituents, it is assumed that the practice was put into place to benefit them)

Sources of LawNO NATIONAL SYSTEM OF SECURITIES REGULATION

Provincial Securities Statues and Regulators National Instruments and Multilateral Instruments: attempt to promote harmonization

by the Canadian Securities Administrators (umbrella org. of provincial regulators)o National Instruments: agreed to by all the provinces o Multilateral Instruments: rules agreed to by some of the provinceso Note: intended to be binding on market participants in the province and

territories that have implemented them (note: no legal fore on their own so must be implemented by rule in each participating province)

Local policies and national policies (not binding) Self-regulatory Organization Rules or Policies

o Mutual Fund Dealers Association, Investment Dealers Association , exchanges

Appellant Court Decisions and Regulatory orders and rulings Regulatory Decisions, Orders, and Rulings International Organization of Securities Commissions

o Source of justification for domestic regulatory activity [Ontario a member]

Note: common approach to numbering NI, NP and CSA notices [SEE pg.20]

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Historical and Constitutional IssuesHistoryShifting Focus: disclosure → quality assurance → rigorous fraud enforcement → more enhanced disclosure

Disclosure: English and Canadian Companies Acts Principle of full disclosure: freedom to sell anything provided that the whole truth

was provided (small modification to caveat emptor) Director’s Liability Acts of England and Canada: for untrue statements in prospectus English Companies Act and Ontario Companies Act: prospectus content requirements

Blue Sky Laws: The Sale of Shares Act, 1912-1926 Legislation should do more than require disclosure Regulator should determine something about quality of these investments: introduced

comprehensive licensing requirement Basic structure: issuer required to obtain permit from bank commissioner before

offering or selling securities to anyone in Kansas. To retain right to offer securities issuer required to file semi-annual reports and maintain various business records

Securities Frauds Prevention Acts, 1928-1945 Adopted in Ontario in 1929: aimed at controlling traders rather than issuers Anti-fraud provisions + requirement that brokers and salesman were registered

The Securities Acts, 1945 – 1960 Move back to the idea of disclosure: regulatory sanctions for fraud not sufficient More detailed approach to disclosure

Ontario Securities Act, 1966 Influenced heavily by Kimber report and formed basis of modern day legislation Favoured disclosure as way to protect investors and encourage efficiency Commitment to ongoing disclosure requirements beyond the point of sale

Constitutional Issues: Division of Powers Federal power to regulate - s.91: trade and commerce, POGG, and criminal law Provincial power to regulate - s.92: property and civil rights

SUM: If pith and substance of the challenged legislation is within province’s competence, then incidental effects on extra provincial rights will not render the legislation ultra vires

Mayland and Mercury Oils v. Lymburn [1932/Alta.JCPC] provincial regulator can regulate federal company whose actions extend beyond provinceFacts: federally incorporated company investigated by provincial regulator→ argues that ultra vires of province to regulate federal company based on encroachment in criminal law and made it impossible for company to operate

9

Analysis: Provincial regulator competent to enforce its own laws on federally incorporated

company – no reason to exclude from powers of AG to investigate Legislation invalid if Dominion company is sterilized in all its functions and activities

or its status and essential capacities are impaired in a substantial degree (not here)

R v. Smith [1960/SCC] federal and provincial law can operate concurrently if there is no conflict Facts: accused charged w/ offences under OSA→ argues overreaching because Criminal Code deals with same issue

Analysis: Quasi-criminal offence is necessary to enforce substantive provisions and bolster

behaviour of issuers If there is conflict between provincial and federal, provincial enactment is inoperative Both can operate concurrently because there is no conflict in the sense that

compliance with one law involves a breach of the other

R v. McKenzie Securities [1966/Man.CA] harm to residents is sufficient connection to province to engage provincial securities regulatorsFacts: broker in Ontario sells securities by mail and telephone to investor in Manitoba

Analysis: Non-resident of Manitoba can become liable under Manitoba statute if activities can

be construed as trading within the province Brokers were trading in Manitoba (broad approach to what it means to trade in

particular province) Condon: if residents of the province are harmed by the activities of those registered

elsewhere, it will be an acceptable connection to engage the jurisdiction of the provincial regulator

Multiple Access v. McCutcheon [1982/SCC] provinces can regulate in area where federal government has already regulated if no conflict Expansive approach to competence of the provinces: nothing that prevents provinces

from regulating in an area in which the federal gov’t has already regulated Provincial legislation is not inoperative because it merely duplicates the federal

legislation: only problem if actual conflict or contradiction between federal and provincial law (upheld insider trading provisions)

Quebec v. OSC [1992/Ont.CA] when province enters into the capital markets of another province, must abide by that province’s securities law Issue: Can OSC use its regulatory power against Quebec Crown Corporation?

Analysis: Because Quebec corporation has entered into Ontario securities market by selling to

ON investors it is brought under umbrella of ONT securities legislation

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Quebec would have reasonable expectations that any other province, when entering Quebec’s capital markets, would abide by Quebec’s regulatory laws

Global Securities Corp. V. BC [2000/SCC] provincial power can extend to assisting foreign jurisdictions b/c main purpose is to enforce BC law (get reciprocal help) Global challenged the authority of the BC Securities Commission to order Global to

produce documents in pith and substance the provision was the enforcement of BC securities law by

obtaining reciprocal assistance from foreign regulators and by discovering foreign securities law violations by domestic registrants

Wise Persons’ Committee: Recommended a single regulator in which both the federal and provincial government have significant roles

NOTE: fear that national regulation would be Ontario regulation in disguise

Overview of Regulators and MarketsPurposes of Securities Regulation OSA - s.1.1: (a) to protect investors from unfair, improper, or fraudulent practices (b) fostering fair and efficient capital markets and confidence in capital markets Limited attention to the goal of a fair and efficient capital market (Abestos) Aided by principles listed in s.2.1

Securities Markets NOTE : capital markets can be global, national, or regional Local Infrastructures for capital raising (LICR) exist for certain industries and levels

of market capitalization (i.e. Ontario – financial services and Alberta – oil and gas)

Distinction between primary and secondary markets: Primary: market for securities that have not been previously issued (sold) by issuer

o Private Placement: sale of securities by issuer directly to investors, frequently institutional investors, using specific exemption from securities regulatory requirements

o Initial public offering (IPO): first distribution of securities to the publico Key players: issuer of securities, investors, and intermediaries (i.e.

underwriter to assist issuers in preparing securities to be sold) Secondary: market for trading securities that have already been issued by an issuer

(sold amount investors) Note : distinction between issued security (sold) and listed security (listed on

organized venues for trading)

Markets: venues where trades can be executed

Broker: intermediary who assist you in that process Full services broker: provide investment advice

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Discount brokers: use to access market to initialize their trade (no advice and will not incur liability for bad trades)

Registration requirement

Themes: increased competition in venues for trading securities, consolidating markets, and issuers listed in various markets

NOTE: previously each province had own exchange for trading securities, but there has been a consolidation of markets driven by the global nature of securities trading

Toronto Stock Exchange (TSX) and TSX Venture TSX: exchange through which shares of the largest issuers are traded (senior equities,

companies with large capitalization) o Demutualized: became for-profito Regulation delegated to Market Regulation Services (part owned by TSX)

TSX Venture: exchange for junior equities Guarantees liquidity

Electronic trading systems Can be developed to compete with TSX and TSX venture (response to concerns re

cost of trading) (e.g. Bloq book, Alpha) Considered market places but not exchanges

o Exchange guarantees the execution of a sale and has a listing process o To made good on guarantee: act as principle to buy or sell securities

themselves if they can’t find a buyer or seller on the other side [note: on TSX specific dealer will take responsibility to be buyer or seller of last resort if no one willing to buy at that price]

Other Markets: Bourse de Montreal: trading of derivative securities

o Derivatives: derive their value from the claim they give their owners to some other financial asset or security

o Option contract: allows holder to buy or sell a specified underlying asset/instrument by a specified date at a specified price

o Futures Contract: requires seller to deliver a specific asset to the buyer on a specified date for a pre-determined price

o Buyer and seller assume counter party risk Canadian Trading and Quotation System (CNQ) : trades securities of emerging

companies using innovative technology (competitor to TSX venture) Quotation and Trade Reporting Systems: dissemination of price quotation for the

purchase and sale of securities and reports of completed transactions

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Regulatory Structure

Global Securities Regulation: IOSCO IOSCO: worldwide association of regulatory bodies to establish disclosure

obligations (tries to bring consistency to market)

Provincial/Territorial Regulation (Primary Regulators)

Pearson v. Boliden [2002/BC CA] province in whose territory securities are distributed is the province that regulates the manner distribution is carried outFacts: P in BC and wants to be eligible to sue under the OSA b/c longer limitation period

Analysis: Illustrates practical problems that arise when a scheme of provincial securities

regulation is not the same as other provincial securities regulation Not open to the plaintiff to choose which Act applies If securities are distributed is province under that province’s securities legation, that

provinces legislation governs opportunities to sue

Ontario Securities Commission (OSC)

KEY ROLE: investigation and enforcement o Criticisms that regulators are not exercising their enforcement powers

rigorously enough [i.e. use soft form of compliance such as warning letters as opposed to more hard edge sanctions]

o Arguments that enforcement arm of the regulator is not sufficiently independent from adjudicative arm

Judicial Review of Regulator’s Decisions

Standard of Judiical Review: REASONABLENESS

Committee for the equal Treatment of Asbestos Minority SH v. OSC [2001/SCC] standard of reasonableness – high degree of deference due to expertise of OSCFacts: review of OSC decision with respect to applying Ontario securities law or not applying it to transactions entered into in Quebec which adversely affected Ontario minority SH

Analysis: Two goals: protection of investors and the efficiency of and public confidence in

capital markets High degree of defence to OSC decisions given its expertise Court applies a standard of reasonableness to find that the OSC appropriately

exercised discretion (i.e. found insufficient connection with Ontario to justify intervening in order to avoid policing out of province transactions)

Re Cartaway Resources Crop. [2004/SCJ] can use sanctions to deter

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Can use sanction to deter Motivation was not punishing but to protect capital markets can use sanctions to deter future behaviour, it is in their power to do so Condon: these individuals are getting punished in order to deter

Criticisms of Provincial/Territorial Regulation and Responses Inefficiency: costly to meet legal requirements and get approval of each province Inconsistency: inconsistent standards, enforcement, available sanctions Difficulties in enforcement:

o Compliance reviews can be slowed because of co-ordination difficulties o when offender is banned from participating in a capital market of one

jurisdiction, can often move to anothero potential for multiple investigations and enforcement proceeds by different

regulators in respect of the same case

Mutual Reliance Review System Developed by Canadian Securities Administrators Allows a securities regulator to rely on the review and analysis of a regulator from a

different jurisdiction in respect of prospectus review, exemptive relief applications, pre-filing, annual information forms, and waiver applications

One regulator as the principle regulator which then provides comments and a decision on behalf of all the other regulators

Depends on regulators in each province being willing to trust other regulators Regulators retain statutory jurisdiction to opt of the process at any time System does not seek to harmonize standards

Uniform Securities Legislation Project Goal: develop a uniform securities act and rules for adoption by each jurisdiction of

Canada Where harmonized approach would not to appropriate, local differences would be set

out by way of exception Local rules reviewed regularly to ensure that they reflect obvious local needs rather

Wise Persons’ Committee: Proposal for National Securities Act and Regulator Single national regulator (with commissioners drawn by region) administering a

single administrative code Body independent from commission would undertake adjudication Amendments to legislation would not be implemented if a majority of provinces

representing a majority of Canadian population objected Advantages of the structure (that the WPC argues is not achieved by passport

system):o Effective enforcemento Policy innovation and development: facilitates more timely policy making

(passport system not as effective because requires consensus amount multiple regulators with differing priorities and approaches)

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o Cost-effectiveness: efficient allocation of resources and avoids unnecessary duplication (passport system does not eliminate duplication of resources and contemplates continued payment of multiple fees)

o Responsiveness to the needs of emerging companies: less costso International perspectives: consistent with securities regulatory structure

of every other industrialized country (passport system is not)o Stability: jurisdictions can’t opt out as they could under passport systemo Accountability and governance: single point of accountability

Note: public pushback from provinces (Quebec and BC) BUT on table as a possibility

Passport System: allows jurisdictions to enter into agreements whereby one jurisdiction would recognize decision made by another on the basis of the rules applicable in that other jurisdiction MI11-101 Principle regulator for every issuer of securities (note: principle regulator determined

by location of issuer’s head office)o Principle regulator grants approval for distribution of securities qualified

by a prospectus and all other provinces that were signatories to this instrument will defer to the principle’s judgment

o Need approval of principle regular + Ontario o If principle office is in Ontario, there will be another principal regulator

(next biggest province in which you are distributing securities) New development: other provinces are defaulting to Ontario if Ontario is the province

with the closest connection [i.e. will only need to get approval from Ontario]

Other Self Regulating Organizations Market Regulation Services Inc. (RS): responsible for market surveillance,

investigation, and enforcemeno Real-time monitoring: protects investors by monitoring every single

equities trade as it occurs (i.e. computerized system flags deviations from normal patterns of trading)

o Introduced Universal Market Integrity Rules (UMIR) Investment Dealers Association (IDA): regulation of brokers (registration, reporting

and enforcement of professional standards of and business conduc)o also operates as lobby group for industry (conflict of interest?)o Note : plan for IDA and RS to merge into one body

Mutual Fund Dealers Association: regulates mutual fund dealers Canadian Public Accountability Board: oversee the auditors of public companies TSX and TSX venture listing requirements

Definitions Tiered analysis: Is item being bought or sold a security? If no, securities law N/A Is security being traded? If no, no registration/disclosure requirements

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Does trade amount to a distribution of offering of securities? If no, no prospectus requirements

Security

Legislative DefinitionOSA – s.1(1): A “security” includes, (a) any document, instrument or writing commonly known as a security,

o Refers to commonly known by members of the investment community (not commonly known by average citizen) [CM Joinder Leasing Corp.]

o Note: open ended definition allows for the nature of things to change over time (i.e. viatical settlements)

(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 Broad - could mean any commodity you buy – courts engage in policy oriented analysis

o Distinction made by courts/regulators: when person bought this did they think they were buying a commodity or did they think that they were buying an investment

(c) any document constituting evidence of interest in an association of legatees or heirs,o Historical interest: fraudsters inviting investors to pay up front on notion

that the person was eligible to get money from estate (d) any doc. constituting evidence of option, subscription, other interest in security, (e) any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit

certificate, participation certificate, certificate of share or interest, pre-organization certificate or subscription OTHER THAN a contract of insurance issued by an insurance company licensed under the Insurance Act and an evidence of deposit issued by a bank listed in Schedule I or II to the Bank Act (Canada), by a credit union or league to which the Credit Unions and Caisses Populaires Act, 1994 applies or by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act,

o Bond: Debt security issued by a business where there is an obligation to re-pay the face amount of the instrument + interest

o Note : exclusions refer to types of financial instruments otherwise regulated (insurance contracts, evidences of deposits in bank account, etc.)

(f) any agreement under which interest of purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets, except a contract issued by an insurance company licensed under the Insurance Act which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser,

o Key example: mutual fundso Purpose of mutual funds: diversify risk (couldn’t diversify with own

money) and expertise of mutual fund manager pooling money on your behalf

(g) any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or interests at the option of the recipient or of any person or company,

(h) any certificate of share or interest in a trust, estate or association, (i) any profit-sharing agreement or certificate,

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(j) any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate,

o Certificate that investors get from person called promoter (i.e. person responsible for organizing business.)

o Considered as security b/c investing money is being used to engage in profit making activity

(k) any oil or natural gas royalties or leases or fractional or other interest therein, (l) any collateral trust certificate, (m) any income or annuity contract not issued by an insurance company, (n) any investment contract, (o) any document constituting evidence of an interest in a scholarship or educational plan or

trust, and (p) any commodity futures contract or any commodity futures option that is not traded

on a commodity futures exchange registered with or recognized by the Commission under the Commodity Futures Act or the form of which is not accepted by the Director under that Act

Definition of security is broad and regulators narrow down scope using policy-based interpretation

Options/Futures/Derivative Securities Option: instrument that gives the holder the right to buy or sell an underlying interest

(shares) in respect of a named issuer at an agreed price, on or before an agreed date o Two key types issued by corporations

Option issued to existing SH (option to acquire additional SH at a specified price at future point in time)

Option issued to executives as a form of compensationo Note : inverse relationship between options trading and market stability

(b/c because you lock in price and reduce effect of volatility)o Note: persons other than corporations can issue options (call options and

put options) Call options: option writer (i.e. seller) sells option to purchaser for a price (known as

the option premium) which entitles the purchaser to force the writer to sell an outstanding share of a 3rd party corporation at a specified price on or before a specified date

Put options: purchaser of the option acquires the right to require the writer to purchase a corporate share from him or her at a stated price on or before a certain date

Futures: contracts to sell a specified asset on a stated date in the future at a stated price (Note: commodity futures contracts that are publicly traded on a commodity futures exchange are excluded)

Derivative Securities: value of a derivative security derives from the value of another security, financial asset, or other reference value (underlying interest)

o characterized as option or futures contract or a combination of the two

Buy options on value of stock index and exercise option if price you agreed to is lower than the value of the instrument at the time you are entitled to exercise it

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Investment Contract Securities and Exchange Commission v. W.J. Howey [1946/US] 4 indicators of IC: (1) investment of $ (2) common enterprise (3) expectation of profit (4) profits solely from efforts of othersFacts: sold pieces of land and offered service contract to cultivate and sell oranges on behalf of the people that bought the land → and is conveyed by warranty deed

Issue: Is this a real estate transaction or an investment

Analysis: Definition of Investment – 4 part TEST:

o (1) Investment of money o (2) Common enterprise: investors pooling sources together in a common

enterprise (i.e. not a one-on-one transaction)o (3) Expectation of profitso (4) Profits expected come solely from the efforts of others

Form is immaterial – transfer of property was incidental Court focuses on fact that purchasers attracted by expectation of substantial profits

and that those profits accrued solely from the efforts of others Common enterprise: commonality of interest – profit would be derived from purchase

of fractional interest in orange grove

State of Hawaii v. Hawaii Market Centre [1971/Haw.Sup.Ct.] Facts: retail co. raised capital by recruiting “founding members” to purchase merchandise and then could earn money/compensation for referring and establishing new members

Analysis: Broadens Howey Test (based on too narrow a concept of investor participation –

necessary to revise because investors did have some participation here) 4-part Risk capital test: investment contract is created when

o Offeree furnishes initial value to the offeroro A portion of this initial value is subjected to the risks of the enterpriseo Furnishing of the initial value is induced by offeror’s promises or

representations which give rise to a reasonable understanding that a valuable benefit of some kind will accrue

o Offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise

o Note: part 2 and 4 are the key changes All parts of the test are met

o Security is inseparable from risks of the enterprise [ability to earn money is dependant on success of the enterprise]

Court focused on fact that paid more than asset was worth – overcharges were the investments and subject to the risks

o Irrelevant that inducements leading investor to risk are founded on promises of fixed returns rather than a share in profits (note: key difference from Howey – not as open-ended – investors knew what they could be expected to make in commissions)

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o Irrelevant that investor participates in a minor way [members still have no power to influence utilization of capital or operational decisions]

o Note: could be characterized as asset transaction but court focused on fact that paid more than asset was worth

Pacific Coast Coin Exchange of Canada v. OSC [1978/SCC] policy oriented analysisFacts: bags of silver bought on margin → PC to deliver silver if and when customer pays balance (purchasing futures contracts and maintaining small inventory of coins)

Analysis: Applies Howey Test: Profits coming solely from efforts of others: depending on pacific coast to properly

invest to ensure that the money was there to pay investors – may only look to Pacific for performance of the contract (note: accepts Hawaii refinement)

Common enterprise: met when undertaken for benefit of supplier of capital and those who solicit capital

o shift : commonality is not commonality among the investors but commonality of interest between buyers and seller – if buyer and seller have same goals (i.e. make money), that is sufficient)

Condon: see watering down of many aspects of the test Policy-oriented approach: If policy objectives of security act are triggered by a

transaction (i.e. protection of investors), law applies even if 4-part tests can’t be met Dissent:

o No reliance on PC – merely an issue of insolvency o Pacific Coast itself is vulnerable to price fluctuations in the market o Managerial efforts don’t determine profitability so PC is not a source of

the risk – the market determines profitabilityo Distinguishes from Howey and Hawaii (no substantial reliance on the

market outside of promoter’s control is those cases)

Viatical Settlements Owner of life insurance policy (“viator”) sells policy to someone for something less

than the value of the life insurance policy Note : popular in US when people w/ AIDS needed money to pay for drugs

In the matter of Universal Settlements International [2006/OSC]Facts: Universal acted as intermediary in context of viatical settlements → matched up investors with policies, pricing, and engaged medical experts to get life expectancies

Analysis: Applies Howey test Whether there was a common enterprise and profits were derived solely from

significant efforts of persons other than investors was most contentious issuee US case which found that sales of viatical was not a sale of a security [Life Partners] OSC focused on when the promoter was engaging in investment related activities

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o LP: investment effort (finding viator, engaging medical experts and figuring out life expectancy) was done before investors came up

o Universal: activities done once investors had been located - more like a common enterprise because these investors were heavily dependant on Universal to make this work and were obtaining fractional interests

Note: buyers and sellers of securities – sellers have power because they have the knowledge BUT in this example have the reverse (the seller is the vulnerable party)

Albino [1991/OSC]Facts: “phantom stock options” [incentive plan to senior officials - paid the difference between the price at which the stock was traded at a certain point of time (award date) and the price at which they were trading on the exercise date) → insider trading allegations (when Albino exercised his option, knew some material undisclosed info)

Analysis: Security regulators did not agree – 3 conclusions

o Not a security: not commonly known in the business world as securities – form of executive compensation

o Is a security: should be considered the same as any other derivative securities, which draw their value form the underlying securities

Should be treated as trading securities even though no stock exchanging hands because the award is substantially the same as trading stock

o Couldn’t decide: OSC should exercise discretionary power to sanction in the public interest because behaviour was seriously prejudicial to public confidence in capital markets

Trade

Significance: If there is a trade, the trader had to be registered [s.25]

ENTITY BEING REGULATED IS THE SELLER OF SECURITIES: want to equalize position of sellers and buyers by making definition of trade broad

OSA – s.1(1): A “trade” or “trading” includes, (a) any sale/disposition of a security for valuable consideration, whether payment be on

margin, installment etc., but does not include a purchase of a security or, except as provided in (d), a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith,

(b) any participation as a trader in any transaction in a security through the facilities of any stock exchange or quotation and trade reporting system,

(c) any receipt by a registrant of an order to buy or sell a security,o (b) and (c) expand definition of trading to include regulation of persons

involved in carrying out trades on behalf of others (i.e. brokers)o Policy concern: registrants may cheat investors by misquoting price, etc.

(d) transfer, pledge or encumbrance of securities by control person for purpose of giving collateral for debt

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o Policy concern: control persons using ownership strategic for the purposes of personal gain to them at the expense of other investors

(e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any trade/sale of a security

Re World Stock Exchange Issue: Can Alberta Securities Commission sanction promoters of an “internet stock exchange” who solicited a number of Alberta residents and companies to raise money on the stock exchange despite not being registered?

Analysis: Fundamental principles of security regulation do not change based on the medium Where person/company solicits posts document on internet offering or soliciting

trades of security and that document is accessible to people in a local jurisdiction, local law (Alberta) will apply [also reflected in NP 47-201] ULESS you have taken some steps to ensure that people outside the jurisdiction will not be misguided

o NP 47-201: will not be considered a trade (or distribution if applicable) if: (a) document contains prominently displayed disclaimer that identifies local jurisdiction/foreign jurisdiction in which offering is qualified to be bad in AND (b) reasonable precautions are taken not to sell to any residents of the local jurisdiction

Distribution

Significance: If there is a distribution, prospectus is required [s.53(1)]Note: “issue” means to offer of securities for sale

OSA – s.1(1): distribution means: (a) A trade in securities of an issuer that have not been previously issued,

o Applies to first time issuers and long-lived issuers issuing new securities (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 issue (moot – can’t redeem/re-issue) (c) A trade in previously issued securities of an issuer from the holdings of any control

person,o Justification: control person has better knowledge of issuer and may be in

position to take advantage of material information; have ability to alter value of issuer and may be important factor in success of enterprise

o Definition of control person – s.1(1): (a) Holds sufficient number of voting rights to affect materially the

control of the issuer [e.g. voting agreement with other person and each hold 18% is evidence that person is in position to materially affect control]

If holds more than 20% of voting rights, deemed control person in absence of evidence to contrary [e.g. evidence to the contrary – another person holds 80%]

(b) If person or company acting in concert holds sufficient number of voting rights to affect materially the control or if that combination holds more than 20%

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(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

o Where a resale is deemed a distribution when the original issuance was under a prospectus exemption.

Reporting IssuerSignificance: continuous disclosure obligations

Two stage analysis re securities law requirements: Issuers : initial distribution requirements [Long-Form Prospectus] Reporting issuer : continuous disclosure requirements BUT even well established

issuers already operating in market, are still considered to be distributing when they sell new securities [don’t need to provide same prospectus – SHORT FORM]

OSA – s.1(1): Reporting issuer means an issuer, (a) Securities Issued under predecessor Act: corporations that issued VOTING securities

prior to the coming into force of the current act and obtained a prospectus receipt for them (b) Filed Prospectus for which Director issued a receipt for under this Act (b.1) that has filed a securities exchange take-over bid circular under this Act before

December 14, 1999o Historical significance: strategy issuers used (take over shell company and

issued securities out of them) (c) Listing on recognized stock exchange: since the 15th day of September, 1979 listed and

posted for trading on any stock exchange in Ontario recognized by the Commission, regardless of when such listing and posting for trading commenced

o Historical interest: issuers on exchanges used to transfer to TSX and be able to sell securities in Ontario w/out prospectus filed in Ontario

(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, oro (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

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o i.e. if company is formed by amalgamating two companies and one is a reporting issuer, the new company will be a reporting issuer

(f) Regulatory power to deem issuer to be reporting issuers: that is designated as a reporting issuer in an order made under subsection 1 (11)

The Prospectus

Prospectus Required - 53(1): 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 if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director

Prospectus required for initial public offering (IPO) and a primary offering of securities

o IPO: first offering of securities by an issuer entering the marketo Primary offering: first offering of a particular set of securities my an issuer

already in the market (reporting issuer) Prospectus also required in limited instance of secondary offer (i.e. resale of securities

by a control block holder)

Advantages and Disadvantages of a Public Offering

Advantages Huge market for capital Don’t have to satisfy bank requirements as debtor and more flexibility than entering

into long-term commitment with bank Creates base of interest for future capital needs (i.e. sell additional securities when

need more capital) Liquidity for investors: develops secondary market so that the securities can be traded

back and forth among investors Established method of valuing shares: in determining fair value of business, look to

value of shares Flexibility re employee compensation Ease of doing business (e.g. offer owners of assets securities of the business instead

of cash for consideration of the acquisition) Prestige and enhanced visibility Pre-existing owners can diversity their wealth and minimize risk

Note Alternative: Private Placement [sell to institutional investors privately] If can find people who qualify as private placement exemption, can avoid prospectus

requirements Disadvantages: price will reflect enhanced risk, investors suffer liquidity

disadvantage, private placement restrictions on when you can sell

Disadvantages High costs and time (i.e. prospectus, continuous disclosure requirements, meeting

regulatory requirements in general)

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Reduced flexibility re communication with SH (i.e AGM, proxy circulars, proxy contest where SH dissatisfied)

Lose confidentiality, especially with respect to competitive advantageso Increased scrutiny and anyone can access SEDAR – electronic database of

information Increased focus on short-term results Double taxation – profits of corporation are taxed and dividends paid to SH are taxed Changes in control of voting shares by virtue of fact that SH are being traded on

secondary market o Someone may be accumulating control position that may not wanto Note: control person subject to takeover bid regime, but may not hold

sufficient shares to be subject to that regime and will still have influence

Overview of Process1. Pre-filing Engage an underwriter and lawyer Collection of corporate documents to be included in prospectus (i.e. 3 years worth of

financial statements) Develop preliminary prospectus File preliminary prospectus and obtain receipt

2. Waiting Period: Distribution of commercial copies of preliminary prospectus, road shows,

negotiations with regulatorso Road show: underwriter and senior officials of issuer have meetings with

potential investors and shows them plans for expansion as a result of financing and benefits of investors

o Note: if regulators have problems with preliminary prospectus, will issue comment and then negotiate on how to respond appropriately to the comment (rather than refusing to issue receipt)

Formal due diligence: going through prospectus to ensure nothing gives investors ability to sue under s.130 for misrepresentation

Final pricing

3. Pre-closing: Receipt for final prospectus obtained, commercial copes of final printed and

distributed, cooling off period beings to run

4. Post-closing Money and securities change hands, underwriter advices issuer when issuer is out of

distribution and how much sold in various jurisdictions

Underwriting

Definition and Purpose Three main parties is offering process: issuer, underwriter, investor

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Underwriter - s.1(1): person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution, but does not include,

o (a) a person or company whose interest in the transaction is limited to receiving the usual and customary distributor’s or seller’s commission payable by an underwriter or issuer,

o (b) a mutual fund that, under the laws of the jurisdiction to which it is subject, accepts its shares or units for surrender and resells them,

o (c) a company that, under the laws of the jurisdiction to which it is subject, purchases its shares and resells them, or

o (d) a bank listed in Schedule I, II or III to the Bank Act (Canada) with respect to securities described in paragraph 1 of subsection 35 (2) or to such banking transactions as are designated by the regulations;

Business Purpose: understand market for securities (often determine terms and price of offering given market demand), find investors, offers credibility to issuers (i.e. well known investment banking firms)

Legal Purpose: gatekeeper to the capital markets o Can be sued by investors for failing to ensure that the prospectus is free of

misrepresentations [130(1)(b)]o Acts as 3rd party evaluating the issuers securities and evaluating

disclosure provided in prospectus o Relationship between the underwriter and issuer is somewhat adversarial

Certificate of Underwriter – s.59(1): subject to subsection 63(2), where there is an underwriter, a prospectus shall contain a certificate in the following form, signed by the underwriter : To the best of our knowledge, information and belief, the foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part XV of the Securities Act and the regulations thereunder (note: proposed amendment note in effect)

YBM Magnex International [2003/OSCB] high degree of care expected of underwriters in questioning disclosure Underwriter is a gatekeeper to the market – stands between issuer and pubic as an

independent 3rd party Must play devil’s advocate, going beyond statements of director and challenge

disclosure issuer proposes to make to the investing public (can’t be automatic reliance)

Must seek out and question all relevant and material facts to reasonably ensure himself that facts are full and true

Note: argument that this adversarial role is unrealistic in the business climate (underwriters want to earn money)

Types of Underwriter – Issuer Relationships Direct Issue No underwriter - Act does not require underwriter (problem w/ underwriter being

gatekeeper) Difficult for issuers to make contact directly w/ investors, but more feasible with

internet

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Best Efforts Underwriting Agency agreement in which the underwriter aggress to use its best efforts to sell

securities as agent of the issuer [No agreement to purchase as principle] Underwriter takes commission for securities it is able to sell Distribution Period - NI 41-101 - Part 8 – s.8.2(1): distribution must cease within 90

days after the date of the receipt for the final prospectus [s.8.2(1)] or within 90 days after the receipt for the amendment to the final prospectus [s.8.2(2)]

Firm commitment underwriting Underwriter makes agreement to purchase entire issue and re-sell them Risk on underwriter – only entered into when underwriter is confident of success Compensation – underwriter’s spread – difference between what the underwriter pays

(issue price) and what the underwriter receives (sale price) Clauses in underwriting agreements to address risk:

o Market-out clauses: allows underwriter to terminate agreement if it reasonably determines that securities can’t be marketing profitably due to poor conditions in the market

Phrase “state of financial markets” in the market out clause must be interpreted to refer specifically to the market for that issuers shares rather than general market downturn [Retrieve Resources v. Canaccord Capital Corp.]

o Disaster-out clauses: allows underwriter to terminate agreement if a significant event affects the issuer’s business or the capital markets

o Indemnity clause: issuer indemnifies the underwriter Note: not clear if would be upheld and undermines the policy of

securities legislation that says underwriters are suppose to be held liable (note: not liable to same degree as issuers as per s.130]

Enhanced version of firm commitment underwriter: “bought deal” agreementso Underwritings agreement made earlier in the process than traditional firm

commitment – before preliminary prospectus is filedo Preliminary short-form prospectus must be filed within 2 days of signing

the agreement, accompanied by a media release announcing transactiono Underwriter then has 2 days to solicit expressions of interest prior to filing

the preliminary prospectus o Pro: acceleration and predictability (underwriters have enhanced market

knowledge that allows them to make calls before they get the final prospectus)

o Con: underwriter is compensated for increased risk

Conflict of Interest Issues Problem: underwriters doing quality control, but may not be effective due to

relationships with issuer Example: where underwriter is a subsidiary of a bank and one of the purpose to the

issuer’s offering is to enable it to pay down debt to the bank

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CP 33-105 to NI 33-105 – Underwriting Conflicts Identifies three levels of conflicted relationships

o The underwriter as issuer or security holdero Related Issuer (cross-ownership): either the issuer or selling securityholder

and the underwriter is an ‘influential securityholder’ of the othero Connected Issuer: issuer or selling security holder has some relationship

with registrant (underwriter) which would cause a reasonable prospective purchaser to question if the registrant and issuer are independent of each other

Requires non-independent underwriters to make disclosures of relationship under a prospectus and in some instances, requires involvement of an independent underwriter

s.2.1(2): registrant may not act as underwriter if the registrant is the issuer or selling security holder or as a direct underwriter if a related issuer of the registrant is the issuer or selling security holder BUT

o s.2.1(3): 2.1(2) does not apply if certain disclosure is made and there is an independent underwriter

o Independent underwriter requirement is satisfied if at least one independent underwriter participates in the offering

Preliminary Prospectus Preliminary Prospectus - s.54: must substantially comply with the requirements of Ontario

securities law except that the report of the auditor or accountant need not be includedo NOT a DRAFT – still a high degree of formality (near-final form)o Can exclude detailed pricing information [s.54(2)]

Receipt – s.55: The Director SHALL issue a receipt for a preliminary prospectus forthwith upon the filing thereof [[key difference from final prospectus]

Material Adverse Change - 57(1): where a material adverse change occurs after a receipt is obtained for a preliminary prospectus 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, an amendment to such preliminary prospectus or prospectus shall be filed as soon as practicable and in any event within ten days after the change occurs

o KEY : if material adverse change, have to amend preliminary prospectus (practical implication is that you should keep track of how you send preliminary prospectus to)

Waiting Period and Amendment

Waiting Period - 65(1): interval of at least ten days, between the issuance by the Director of a receipt for a preliminary prospectus and the issuance by the Director of a receipt for the prospectus

Proposed Amendment – 65(1): period prescribed by regulation or, if no period is prescribed, the period between the Director’s issuance of a receipt for a preliminary prospectus and the Director’s issuance of a receipt for the prospectus.

Two things re waiting period

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o Regulators have opportunity to consider filed preliminary prospectus and determine whether it complies with all statutory and regulatory requirements

o Activities of issuer are restricted in terms of communication with potential investors

Review Process: Risk-Based Approach Selective review system: detailed review is targeted towards activities and market

participates where problems are more likely to arise Three types of reviews:

o Basic review: applies to ALL long form and short form prospectuso Full review: constitutes complete review of entire prospectus and any

documents incorporate by reference – subject to this if certain risk-based criteria are met

o Issue-oriented review: constitutes a review of a specific legal or accounting issue identified by initial screeners and does not cover the balance of the prospectus – only undertake this when criteria for full review are not met

Criteria include [p.248]:o Issuer’s corporate structure and underlying Business:

Issue appears to have little or no active business; issue proposes to use proceeds to change fundamental business purpose; issuer has complex corporate structure

o Issuer’s financial condition or results: Issuer had experienced significant changes in financial condition; issuer

has not provided all required audited financial statements; issuer is experiencing financial difficulty as indicated by going concern not disclosure, debt defaults, negative cash flow, etc.; issuer disclosure significant or unusual law suit

o Nature of the offering: Expected size of offering is unusually low; significant portion of

proceeds of offering are unallocated; expenses of offering are unusually high;

o Matters relating to advisors or corporate governance: Issuer itself or directors, officers, promoters warrants additional scrutiny;

issuer had not engaged an underwriter; issuer proposes to issue significant stock options to management, insiders, or advisers; underwriter plans to maintain significant ongoing equity position or management role with issuer; issuer plans to use significant portion of proceeds to reduce debt to underwriter; issuer discloses significant recent related party transactions

Once review process is complete, regulator sends comment letter to issuer advising of any required revisions or additional information - issuer revises accordingly and submits final prospectus to the commission

Statistics: 32% of prospectus reviewed were long form; 65% were short form; of long form, 69% got basic review and only 15% got full review

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Issuer Activity during Waiting Period Permitted distribution during waiting period – s.65(2):  Despite section 53, but subject to

Part XIII, it is permissible during the waiting periodo (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;

o (b) to distribute a preliminary prospectus; ando (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

Distribution of Preliminary Prospectus – s.66: Any dealer distributing a security to which section 65 applies shall 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

Distribution List– s.67: 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

KEY: Issuer/underwriter are able to solicit expressions of interest BUT not allowed to engage in advertising that is not directly connected with the availability of the prospectus

o Policy: that public might take info in preliminary prospectus as final representation of the accuracy of information underpinning the offer

o Problem: fine line between testing the market for expressions of interest and advertising during the waiting period

Notice Re Camboir Inc. [1986/OSC] TEST: whether the advertising can reasonably be considered to be in furtherance of a

trade so has to be prohibited until a receipt for final prospectus has been issued as per s.53(1)

Note: advertisements permitted during waiting period is limited to: alerting public of the availability of the preliminary prospectus, advising as to where to find prospectus information and the soliciting of expressions of interest

Advertising campaign in violation of securities legislation can be grounds for the issue of a cease trade order under s.127(1) and for the refusal of director to issue a receipt for a final prospectus

Advertisements which specially identify a security proposed to be qualified by a prospectus are subject to these rules

Note: OSC agreed to take no further action against Cambior on agreement that parties: case advertisement campaign, not take further steps to market issue until June 15, 1986, counsel would be reprimanded for failing to advise as to impropriety of advertising campaign

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41-101, Part 13, s.13.1(1): A notice, circular, advertisement, letter, or other communication used in connection with a prospectus offering during the waiting periods, must state specific things preliminary prospectus has been filed; subject to completion or amendment; where copies can

be obtained from; will not be any sale or acceptance of offer to buy until receipt for final is issued]

See p.102

41-101CP, Part 6, especially s.6.5(1) The prospectus requirement – s.6.2(1): Securities legislation generally provides that no one

may trade in a security where that trade would be a distribution unless the prospectus requirement has been satisfied, or an exemption is available.

6.2(2): The analysis of whether any particular advertising or marketing activities is prohibited by virtue of the prospectus requirement turns largely on whether the activities constitute a trade and, if so, whether such a trade would constitute a distribution.

Permissible Advertising/marketing during the waiting period - 6.5(1): it is permissible during the waiting period between the issuance of the receipt for t he preliminary prospectus and the receipt for the final prospectus to:

o (a) distribute notices, circulars, advertisements, letters or other communications that

“identify” the securities proposed to be issued, state the price of such securities, if then determined, and state the name and address of a person or company from whom

purchases of securities may be made, provided that any 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 the preliminary prospectus, ando (c) 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 securities, a copy of the preliminary prospectus is forwarded to the prospective purchaser.

s..6.5(2): The use of any other marketing information or materials during the waiting period would result in the violation of the prospectus requirement.

s.6.5(3): The “identification” of the security does not permit an issuer or dealer to include a summary of the commercial features of the issue. These details are set out in the preliminary prospectus which is intended as the main disclosure vehicle pending the issuance of the final receipt. The purpose of the permitted advertising or marketing activities during the waiting period is essentially to alert the public to the availability of the preliminary prospectus.

S.6.5(4): For purpose of identifying security, the advertising or marketing material may onlyo indicate whether a security represents debt or a share in a company or an interest

in a non-corporate entity (e.g. a unit of undivided ownership in a film property) or a partnership interest,

o name the issuer if the issuer is a reporting issuer, or name and describe briefly the business of the issuer if the issuer is not already a reporting issuer (the description of the business should be cast in general terms and should not attempt to summarize the proposed use of proceeds),

o indicate, without giving details, whether the security qualifies the holder for special tax treatment, and

o Indicate how many securities will be made available.

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Long-Form Prospectus - Content

Standard of Disclosure – s.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.

Two requirements: (1) full, true, plain disclosure of all material facts and (2) compliance with securities law [key rule is NI 41-101]

Financial StatementsNI 41-101, part 4 [p.86] An issuer, other than investment fund, that files a long form prospectus must include

in it the financial statements and the management’s discussion and analysis [MDNA] required by this Instrument [s.4.1(1)]

Requirement for audit of financial statements included in prospectus [s.4.2(1)] Each financial statement and MDNA included in or incorporated by reference into the

long form prospectus must be approval by board of directors before filing [s.4.4(1)]

Form 41-101FI, Item 32 [p.162] Annual financial statements - s.32.2(1): prospectus must include the following:

o (a) income statement, statement of retained earnings, and cash flow statement for each of the three most recently completed financial years ended more than

(i) 90 days before the date of the prospectus (ii) 120 days before the date of the prospectus if the issuer is a

venture issuer o (b) balance sheet as at the end of the two most recently completed

financial yearso (c) Notes to the financial statements

Definitions: Income statement: statement of revenue and losses of business [NOTE: can include

non-cash items such as depreciation expenses] Cash flow statements: exclusive attention to cash flowing in and out of the business

[NOTE: deals only with sources of cash and the uses of case – investors pay most attention]

Balance sheet: account of assets on one side and liabilities on the other Statement of retained earnings: explains changes int eh companies retained earnings

over the reporting periods – breaks down changes affecting the account such as dividends, special projects, etc.

o Retained earnings = net income which is retained by the corporation rather than distributed to its owners as dividends

Certificates: NI 41-101, part 5 Number of entitles required to give signed certificate in prospectus:

o Issuer [s.5.3(1)] [OSA – s.58(1)]

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(a) CEO and CFO (b) on behalf of the BOD by (i) any two directors of the issuer

other than the CEO and CFO OR if the issuer only has three directors, two of whom are the CEO and CFO, all of the directors of the issuer

o Underwriter [s.5.9(1)] [OSA – s.59(1)]o Promoter [s.5.11(1)] [OSA – s.58(1)]

Note: defined term in OSA – founder/organizer of company Part 5 specifically states “Except in Ontario” because OSA refers to the same thing

Amendments to Prospectus Material Changes - s.57(1): where a material adverse change occurs after a receipt is

obtained for a preliminary prospectus 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 shall be filed as soon as practicable and in any event within ten days after the change occurs

Disclosure is a continuing obligation Material Change – s.1(1)(a): when used in relation to an issuer other than an investment

fund, means,o (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

o (ii) a decision to implement a change referred to in subclause (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

Documents to be filed with prospectusNI 41-101, Part 9 [see p.95] s.9.1(a) - must file the following with a preliminary prospectus:

o (i) signed copy of the preliminary long form prospectuso (ii) documents affecting rights of security holders

Articles of incorporation By-laws Security holder agreements that can reasonably be regarded as

material to an investor in securities of the issuer Any securityholders’ rights plans or similar plans Any other contract of the issuer or subsidiary of the issuer that

creates or can be reasonably regarded as materially affecting the rights/oblations of issuer’s securityholders generally

o (iii) material contractso (iv) investment fund documents if the issuer is an investment fundo (v) mining reports if applicableo (vi) copies of reports or valuations referred to in the preliminary long form

prospectus for which consent is required to be filed under s.10.1

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Form 41-101FI: General Information RequirementsGeneral instructions as to what information is required in a prospectus [37 Items] Item 3: summary of prospectus Item 4; corporate structure Item 5: describe business Item 6: use of proceeds

o Describe each of the principle purpose for which the net proceeds will be used by the issuer [s.6.3(1)]

o If you are going to use more than 10% to retire indebtness, must indicate what proceeds of debt were used for [s.6.4(1)]

o If more than 10% of net proceeds are to be used to acquire assets, describe assets [s.6.5(1)]

Item 8: MD&A Item 10: description of securities distributed Item 15: principal security holders and selling securities Item 19: audit committees and corporate governance – must disclose who is on

audit committee and their qualifications Item 21: Risk Factors: cash flow and liquidity problems, experience of

management, general risk inherent in business carried on my issuer, environmental and health risks, reliance on key personnel, regulatory constraints, economic or political conditions, financial history, and any other matter likely to influence an investor’s decision [s.21.1(1)]

Item 23: legal proceedings and regulatory actions - must disclose legal proceedings that the issuer is or was a party to [s.23.1(1)] and legal proceedings the issuer knows to be contemplated [s.23.1(2)] and must disclose penalties/sanctions imposed by court relating to securities regulation and any settlement agreements [s.23.2]

Item 25: Relationship with Underwriter – must disclose relationships which give rise to potential for conflict of interest (i.e. connected/related issuer/issuer is underwriter) [s.25.1(5)]

Item 27: Material Contracts and NI 41-101 s.9.3 – disclosure material contracts required to be filed under s.9.3 [27.1] … conflict of interest transactions

SEE P.127 for full list of items

Definition of Material Fact “A prospectus shall provide full, true and plain disclosure of all material facts…”

[s.56(1)]o If something is not included in NI 41-101 BUT is a material fact, have to

include Material Fact – s.1(1): fact that would reasonably be expected to have a significant

effect on the market price or value of securities o “Market impact test”o This can be ANY fact that has an effect on price or value– no matter how

external on the issuer – could be things such as a general decline in interest rates, decline in Canadian dollar

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o Note: different than material change – which is a more confined threshold

YBM Magnex International Inc. [2003/OSCB]Facts: company being investigated for illegal activity → special committee to investigate concluded no disclosure required → AIF contained some general disclosure of special committee and mentioned company was subject to risks generally associated with companies doing business in Eastern Europe

Issue: did the YBM prospectus provide disclosure of all materials facts?

Analysis: Test for materiality is objective – market impact test – investor wants to know facts

that would reasonably be expected to significantly affect the market price or value of securities

Did not contain full, true, and plain disclosure of all material facts Unique risks (intermingling of business with business in Eastern Europe that were

known to be money launders) was not disclosed Did not tell investors precisely what YBM knew about the investigation or the

purpose of the special committee Note court’s concern that lead underwriter sat on special committee – if the

independence of one’s mandate is threatened then the reasonableness of one’s judgment becomes questionable (Condon: if underwriter’s suppose to be a neutral third party, this shouldn’t happen)

Future Oriented Financial Information (“FOFI”) Repeal of NP 48 → combination of NI 41-101 and NI 51-102 Definition - NI 51-102 – s.1.1(1): forward looking info about prospective result of

operations, financial position or cash flows that is based on assumptions about future economic conditions and courses of action, and presented in the format of a historical balance sheet, income statement or cash flow statement

See Form 41-101FI General Instruction 15: forward looking info included in a prospectus must comply with ss.4A.2 and 4A.3. FOFI must comply with Part 4B

o Note : NI 51 - 102 only refers to “reporting issuers” BUT Form 41-101FI deems these sections to apply as if the issuer were a reporting issuer in at least one jurisdiction

Forward Looking Information –NI 51-102, Part 4A Reasonable Basis - 4A.2: reporting issuer must not disclose forward looking information

unless the issuer had a reasonable basis for the forward looking information Disclosure – 4A.3: reporting issuer disclosing material forward looking information must

include disclosure that:o (a) identifies forward looking information as sucho (b) cautions users that actual results may vary and identifies material risk factors

that could cause actual results to differ materiallyo (c) states material factors or assumptions used to develop forward looking

information

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o (d) describes reporting issuer’s policy for updating the information if it includes procedures in addition to those listed in s.5.8(2)

FOFI and Financial Outlooks – NI 51-102 – Part4B Assumptions – 4B.2(1): reporting issuer must not disclose FOFI or financial outlook unless

the FOFI or financial outlook is based on assumptions that are reasonable in the circumstances.

4B.2(2): FOFI or Financial Outlook that is based on assumptions that are reasonable in the circumstances, must, without limitation:

o (a) be limited to a period for which the information in the FOFI or financial outlook can be reasonably estimated and

o (b) Use accounting policies that the reporting issuer expects to use to prepare its historical and financial statements for the period covered by the FOFI or the financial outlook

Additional Disclosure – 4B.3: In addition to disclosure required by s.4A3, if reporting issuer disclosure FOFI must include disclosure that states:

o (a) the date management approvedo (b) explains the purpose of the FOFI and cautions readers that the information

may not be appropriate for other purposes

Note: various disclosure obligations in s.5.8

Kerr v. Danier Leather Inc. [2004/Ont. SC] A forecast can be a fact and it can also be material Factual assertions implied in a forecast:

o Forecast represents the forecaster’s best judgment of the most probable set of economic conditions and the company’s planned course of action

o Forecast is sound and reliable in the sense that the forecaster made it with reasonable care and skill

o Forecaster generally believes the forecast and the forecaster’s belief is reasonable and the forecaster is not aware of any undisclosed facts tending to seriously undermine the accuracy of the forecast

A forecast is not an untrue statement of material fact if the results are not achieved Forecast is an untrue statement of material fact if the factual assertions implied are

untrue in that it does not represent management’s best judgment b/c:o Forecast was not made with reasonable care and skillo Management does not generally believe the forecasto Management’s belief in the forecast is unreasonableo Management is aware of undisclosed facts that would seriously undermine

the forecast Because the market had an expectation as to the company’s results due to the

statement, the facts are material Court finds untrue statement of material fact based on idea that they failed to act with

reasonable care and skill and that any belief in the forecast was unreasonable (i.e. not adequate analysis, failure to consult with professionals regarding impact of this information on the forecast and impact on the share price, etc.)

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Issuing a Receipt for a ProspectusDiscretionary refusal where it is not in public interest to issue a receipt [61(1)] and mandated refusal in certain circumstances [61(2)]

Issuance of receipt - 61(1): Subject to (2) and 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 Residual discretion residing to refuse to issue a receipt for a prospectus Merit jurisdiction – regulators can say they don’t think that it is a good investment

for anyone to make BUT Note : language in bold saying no securities commission has passed on merits (i.e.

can’t say where regulator has issued a receipt the regulator is saying there is worth the investment)

Reasons for Refusal of Receipt – 61(2): (a) the prospectus or any document required filed with it (i) does not comply with in any

substantial respect with any of the requirement of the Act/regulations or (ii) contains a statement, promise, estimate or forecast 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;

(c) the proceeds from the sale of the securities under the prospectus and other resources of the issuer are insufficient to accomplish the purpose of the issue stated in the prospectus

o Comment: underlying reasoning is that they haven’t made business plan that will allow success of this venture

o Example: Loki Resources Ltd (d) issuer cannot reasonably be expected to be financially responsible in the conduct of its

business because of the financial condition of (i) the issuer, (ii) an of issuer’s officers, directors, promoters, or control persons, or (iii) the investment fund manager of the issuer

(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) issuer, (ii) any of the issuer’s officers, directors, promoters or control persons, or (iii) the investment fund manager of the issuer

o Example: Tricor Holdings (f) 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;

(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

(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.

Due Process Requirements in Refusal Hearing - 61(3): Director shall not refuse to issue a receipt without giving the person or

company who filed the prospectus an opportunity to be heard Referral to Commission - 61(4): Where it appears to the Director that a preliminary

prospectus, pro forma prospectus, or prospectus raises a material question involving the public interest under subsection (1) or a novel question of interpretation under subsection (2)

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that might result in the Director refusing to issue a receipt, can refer the question to the Commission for determination

Hearing by Commission – 61(7): Commission, after giving the parties an opportunity to be heard, shall consider and determine the question and refer the matter back to the Director for final consideration under subsections (1) and (2).

Decision of Commission – 61(8): binding on director

Tricor Holdings [1998/OSCB] Refused to issue receipt for prospectus based on evidence that issuer had previously

been controlled by individual convicted of securities related offences and only circumstantial evidence that the convicted individual continued to have close relations (i.e. son was still a substantial SH)

Canadian Depository for securities was named as only registered owner of more than 10% of shares [i.e. clearing house for all securities traded on stock exchange]

o Couldn’t get independent verification of beneficial owners→ refused to issue receipt based on suspicion of unsavory character associated with the company

Note: this discretion is rarely exercised

YBM Magnex International [2003/OSCB] Regulators required YBM to engage an auditor from one of “big six” accounting

firms to approve of financial statements During course of review opened investigation file on YBM – staff requested source

documentation underlying YBM’s disclosure record in connection with the 1996 statements – final prospectus disclosed most but not all of the recommendations

Commission issues receipt following 5 months of review Why didn’t OSC refuse to issue a receipt?

o Condon: financial pressure on YBM – would not be able to pay off debts if didn’t get capital and would have gone bankrupt – caused regulators to gave Right to Withdraw or Rescission

o Court: fundamental concern in refusing to issue a receipt for a prospectus is one of fairness – substantial fairness to the company which may be accomplished by providing as much information as possible without necessarily disclosing the precise information or sources

Cooling-off Period Investors have a “cooling-off” period to consider the final prospectus once a receipt is

issued and the prospectus has been delivered to them Withdrawal from purchase – s.71(2): An agreement of purchase and sale 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: close interaction with s.57(1) - obligation to report material changes – see p.34

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Example 1 Example 2 Example 3Day 1: receives final prospectusDay 2: agree to buyDay 5: prospectus amendment filedDay 6: wants out

Cooling off period starts on day 1 – can’t get out of the agreement b/c amendment was not filed until after this purchaser’s cooling off period was over

Day 1: agree to buyDay 4: receive final prospectusDay 5 prospectus amendment filedDay 8: amendment deliveredDay 9: want outFact that amendment filed before cooling off period ended triggers obligation to receive the amendment – cooling off period re-starts on date the amendment is received

Day 1: receive final prospectusDay 4: agree to buyDay 5 prospectus amendment filed Entitled to re-start cooling off period on receiving amendment? NOCooling off period started on day 1 – cooling off period ended before agreement to buy and can’t re-start because amendment filed after cooling off period ended

SUM: Not bound by agreement during cooling off period Cooling off period runs from the date purchaser receives latest prospectus (date of

agreement is irrelevant) If an amendment is filed during cooling off period, period will re-start on date

amendment is received If an amendment filed after cooling off period, does not re-start the period

Failure to Deliver Prospectus Penal Sanction – s.122(1)(c): everyone who contravenes Ontario securities law, is guilty of

an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both

Administrative orders – s.127(1): Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders…

o Para. 5. If the Commission is satisfied that Ontario securities law has not been complied with, an order that a release, report, preliminary prospectus, prospectus …be provided by a market participant to a person or company

Civil Sanction– s.133: purchaser of a security to whom a prospectus was required to be sent/delivered but was not sent/delivered in compliance with subsection 71 (1) has a right of action for rescission or damages against the dealer or offeror who failed to comply with the applicable requirement

o Note: can sue both underwriter and issuer o Note: slightly different treatment associated with failure to deliver

prospectus than with respect to failure to file

Failure to File Prospectus Penal Sanction – s.122: Administrative Orders – s.127: cease trade order [para.2]

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Civil sanction – s.128(1): Commission may apply to the Superior Court of Justice for a declaration that a person or company has not complied with or is not complying with Ontario securities law

o Note: very rarely used – argument that if the commission went to court more frequently, judges would take infractions of securities law more seriously

o More outcome would relief through the opportunity at common law for SH to sue for breach of contract where a prospectus should have been provided and was not

o Jones v. Deacon Hodgson: failure to file prospectus renders contract of purchase and sale void and there is no limitation period for a remedy to be available (unlike misrepresentation)

Lapse and Refiling of Prospectus (note: not covered in class) Lapse Date – s.62(1): 12 months after the date of the most recent prospectus relating to the

security No distribution – s.62(1.1): No distribution of a security to which subsection 53(1) applies

shall continue after the lapse date unless a new prospectus is filed and a receipt for the new prospectus is obtained from the Director

Continued Distribution – s.62(2): A distribution may be continued for a further 12 months after a lapse date if:

o (a) a pro forma prospectus prepared in accordance with the regulations is filed not less than 30 days prior to the lapse date of the previous prospectus;

o (b) a prospectus is filed not later than 10 days following the lapse date of the previous prospectus; and

o (c) a receipt for the prospectus is obtained from the Director within the 20 days following the lapse date of the previous prospectus

Prospectus Requirements in a Secondary Offering (note: not covered in class)Control persons distributing previously issued securities need to file a prospectus

Prospectus is required where there is a sale of previously issued securities by a person distributing within the meaning of securities legislation where the person has not received an exemption (includes control persons)

Rationale:o Information possessed by control persono Control person’s ability to influence the issuero Control person can affect the market price

Orders to furnish information re distribution to the public – s.64(1): Issuer and its directors and officers must supplying information and certificates that allow the holder to sell the securities in that if the issuer doesn’t co-operate the regulator has authority to order the issuer to furnish such information OR

Waiver – s.64(2): Director can waive statutory requirements if satisfied that all reasonable efforts have been made to comply with this Part and the regulations and that no person or company is likely to be prejudicially affected by such failure to comply

Modifications to Prospectus RequirementsResponse to problems re time and cost with the long-form prospectus

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Short-Form Prospectus Governing law: 44-101 Underlying policy: these issuers are already in the market, listed on exchanges, and

have widely disseminated information about them OSA – s.63(1): permits SF prospectus and deems it to provide sufficient disclosure of all

material facts for purposes of s.56 if it complies with regulations Trend: move towards SFP rather than LFP [2005 – 51% were SFP; 2007 – 65% were

SFP]

Eligibility Requirements

Expanded in NI 44-101: initially confined to a small area of senior issuers → focus now on being listed on an approved exchange

Basic Qualification criteria – NI 44-101 Part 4.4– s.2.2:o (a) Electronic filer (CDAR)o (b) Reporting issuer in at least one jurisdiction in Canada (NO IPOs)o (c) Filed all periodic and timely disclosure documents that you are

required to have filed (i.e. met continuous disclosure requirements)o (d) Has (i) current annual financial statements and (ii) current AIF in at

least one jurisdiction o (e) Equity securities are listed on short form eligible exchange and is not

an issuer (i) whose operations have ceased or (ii) whose principle assert is cash, cash equivalent, or its exchange listing

Short form eligible exchange – s.1.1: ALL organized exchanges [TSX, Tier 1 and Tier 2 TSX Venture exchange, and CNQ]

Note: different eligibility requirements re debt securities

Content/Disclosure

Form 44-101FI [p.1176]o Item 7: Characteristics of securities being distributed (this is the focus)o Item 11: Documents incorporated by reference – must incorporate by

reference your continuous disclosure record (i.e. current AIF, current financial statements, interim financial statements most recently filed, content of any news release re financial information, any material change report filed since last AIF)

Note : any misrepresentations in these documents will be considered part of the SF prospectus and thus be subject to liability for misrepresentation

o Item 17: Risk factors [may cross reference to other documents already filed with regulators – i.e. risk factors discussed in current AIF]

44-101 CP, part 4 [p.1212]

Review of SFP

Much shorter review period for SF prospectus under MRRS NP 43-201 – s.5.3: principal regulator will use its best efforts to issue a comment

letter on preliminary SF prospectus within three working days of the issuance of the preliminary MRRS decision doc (i.e. receipt)

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Note: enhanced passport system – ONT had undertaken to review SFP within two days of receiving

Shelf-Prospectus Governing law: 44-102 Eligibility: issuers eligible for SFP [s.2.2] Self-prospectus can qualify a series of distributions over a 2 year period [i.e. file and

the same document can qualify a number of subsequent distributions as long as they occur within a two year period of getting the receipt for the shelf prospectus]

44-101CP – s.1.6: Issuers qualified under NI 44-101 to file SFP using the self distribution procedures are governed by requirements and procedures of NI 44-101 [should have regard to NI 44-101 then refer to NI 22-102 and any accompanying policy for additional requirements]

NI 44-102 – s.5.6: Information that may be omitted from shelf-prospectus if not known by the issuer at the time it is filed

o Terms of the securities that may be distributed o Dollar amount, size, and other specific terms of each o Terms of plans of distributiono Information about underwriter

Post-receipt Pricing Prospectus Governed law: 44-103 Eligibility: available to ALL ISSUERS Similar to shelf-prospectus in that you can distribute securities and decide pricing

after you receive receipt for prospectus as long as they are distributed within 90 dayso Often used in situations where need additional financing but are still

deciding on kind of security o Receipt expires after 90 days [s.3.5]

Can only be used to qualify a specific transaction and a single type of securityo not including a rights offering [s.2.1]

Two-step filing process:o Based prospectus document filed pluso Supplement (one page document) dealing with the actual securities [s.4.1]

Does not need further regulatory approval

Multi-Jurisdictional Disclosure System Governing law: NI 71-101 (governs application of MJDS rules to US issuers wishing

to issue securities in Canada) Underlying principle of mutual recognition: allows US issuers to distribute securities

to Canadian investors using US disclosure documents Eligibility requirements for Canadian issuers wishing to issue securities in US:

o Reporting issuer in Canada for one yearo Public float of US 75 million o Canadian prospectus + relevant US form (usually form F-10)o Financial statement reconciled to US GAAP (this is key thing)

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Note: under major reconsideration at the moment o International financial reporting standards [IFRS]– push to harmonize

reporting standards across the globeo Canada will come on board with this in 2011

Continuous disclosure requirements (Canadian disclosure + Form 40F)

Capital Pool Companies Capital Pool Companies: no assets other than cash and have not commenced business

activity Capital Pool Companies (OPC) operating Agreement with TSX Venture (approved by

security regulators in Ontario, Alberta, BC, Saskatchewan, and Manitoba): allows CPC to be listed on TSX Venture

OSC Policy 41-601o Key Requirement - CPC prospectus in each jurisdiction proposed

distribution will be made + TSX Venture listing o Qualifying transaction has to be completed within 18 monthso Once CPC has reached an agreement in principle to a proposed qualifying

transaction must issue news release and get approval of CDNX and majority of minority SH

o If prior to completion of IPO, an agreement in principle is reached, the program will not be available and should prepare a regular prospectus

Civil Liability and Due DiligenceTwo choices wrt enforcing good behaviour:1. Regulators 2. Private enforcement

Policy La Porta research: Capital markets that have most growth had securities law that

emphasized lots of disclosure and also had an investor friendly enforcement regime Contributes to investor confidence and enables them to get their money back Public enforcement had a modest role in stock market size

NOTE: availability of CL remedies for misrepresentations [OSA - s.130(10)]

Who is Liable – OSA - s.130 (1) (a) Issuer or selling SH on whose behalf the distribution is made

o Note : only control SH selling meets def’n of distribution and is liable (b) Each underwriter required to sign certificate

o Note : Certifying to their belief that the prospectus contains full, true, and plain disclosure of all material facts as required by s.59(1)

(c) Every director of issuer at time of prospectus filing or amendment (d) Every expert in relation to: reports, opinions, statements made by them (e) Every other signer of prospectus or amendment to the prospectus (i.e. CFO)

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What does Plaintiff have to ProveOSA – s.130(1)1. Purchase of securities offered under the prospectus2. Purchase was made during period of distribution 3. Misrepresentation in the prospectus

Misrepresentation

Definition of misrepresentation - s.1(1): (a) untrue statement or material fact or (b) 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

o Note: broader than CL rules – can’t necessarily sue for omissions Material Fact – s.1(1): fact that would reasonably be expected to have a significant

effect on the market price or value of the securities DEMEED RELIANCE : “without regard to whether P relied on misrepresentation”

Kerr v. Danier [2007/SCC] no liability for non-disclosure of material facts arising after receipt Facts: May 6: receipt obtained for final prospectus – forecast of Q4 financial results May 16-19: Q4 results lagging behind due to unseasonably warm weather May 20: distribution closed June 4: issues revised forecast and material change report; share price drops June 27: Q4 ends; original forecast substantially achieved

Analysis: Inconsistency in wording of s.57 and s.130

o If material change occurs after receipt and prior to end distribution, have to file an amendment [s.57]

o Right of action for misrep (misrep. defined as a material fact) [s.130] Can’t read s.130 as a self-standing provision – only Only positive obligation to disclosure material changes after receipt – no liability

under s.130 for failing to disclosure material facts that don’t amount to material changes after receipt

Material change – s.1(1): 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

Changes here was a material fact not change because the financial downturn was a results of a change in weather (external to issuer)

Earnings (results of operations) not read into provision Condon: doesn’t accord w/ what investors want to know – earnings affect price a lot

Remedies Rescission [only if defendant is issuer/selling SH (130(1)(a) or underwriter (130(1)(b)] or damages

Limitation re underwriters – s.130(6): not liable for more than they underwrote

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Non-liability for damages - s.130(7): not liable for damages that the D proves do not represent depreciation in value of the security as a result of the misrepresentation

Joint and several liability – s.130(8): can choose D - subject to court discretion if satisfied that to permit recovery of such contribution would not be just and equitable

Limitation re amount recoverable – s.130(9): damages limited to price at which the securities were offered to the public (no opportunity $ - i.e. would have bought something else)

Kerr v. Danier: Prima facie measure of damages is difference between price paid and post-misrepresentation price (don’t have to crystallize loss – can still hold securities)

Limitation Periods – s.138 Can’t bring action for rescission more than 180 days after the date of the transaction

that gave rise to the cause of action; or Can’t bring any other action more than 180 days after P first had knowledge of the

facts giving rise to cause of action or 3 years after date of transaction (earlier of)

Statutory Defences to s.130(1)

Issuer defences

Purchaser knowledge of misrepresentation – OSA - s.130(2): when purchased Depreciation not caused by misrepresentation – OSA – s.130(7): not liable for that

portion of damageso Condon: if market wide loss accounted for some of loss, may be off the hook for

that portion – BUT there are few opportunities for this

NOTE: ONUS ON DEFENDANT

Additional defences for directors/officers/underwriters

No knowledge or consent of filing – OSA - s.130(3)(a): prospectus or the amendment to the prospectus was filed without knowledge or consent, and on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed

Withdrawal of consent – OSA - s.130(3)(b): on becoming aware of misrepresentation after the issue of a receipt and before the purchase of the securities by the purchaser, withdrew consent, gave reasonable general notice of withdrawal and reason for it

Reliance on Expert Statement - s.130(3)(c): wrt any part of prospectus made on the authority of an expert or purporting to be a copy/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 it 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

NOTE: These defences do not apply to issuer OR selling security holderNOTE: ONUS ON DEFENDANT

Additional Defences for Experts

Expert Defence – OSA - s.130(d):

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o (i) After reasonable investigation, had reasonable grounds to believe that such part of the prospectus/amendment fairly represented report, opinion or statement

o (ii) on becoming aware of misrepresentation 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

No knowledge or consent of filing – OSA - s.130(3)(a)o Condon: more likely to work if prepared report and gave to issuer for

some other purpose

Due Diligence Defence

Key requirements: Actual belief that there is no misrepresentation Reasonable investigation to provide reasonable grounds for that belief *Issuer and Selling SH do NOT have due diligence defence*

Due Diligence Defence – OSA- s.130(4)(5): No person or company, other than the issuer or selling security holder UNLESS: (a) Filed to conduct reasonable investigation as to provide reasonable grounds for a belief that

there had been no misrepresentation; or (b) Believed there had been a misrepresentation.Note: (4) refers to experts; (5) refers to main body of prospectus Note: ONUS ON PLAINTIFF

Statutory Standard of Reasonableness – OSA - s.132: that required of a prudent person in the circumstances of the particular case (objective-subjective) Most securities firms have a due diligence checklist

Escott et al.v. BarChris Construction Corp. [1968/US]Facts: Didn’t disclose financial difficulties (building for cosuteromes that weren’t paying entire costs) → signers of document were the 9 directors

Issue: Did the defendant’s prove their due diligence defences?

Analysis: Key: each defendant is considered separately Insider directors/Officers: could not have believed no untrue statements

o CEO: knew all the relevant facts and even if not able to show that they didn’t believe, could show there was no reasonable grounds for this

o Similar results for two VPs: court makes mention of fact that they were relatively uneducated, but there was nothing to show that they made reasonable investigation to provide reasonable grounds for belief that there is no misrepresentation (didn’t matter that they couldn’t read)

Lawyer/outside directorso Outside director who participated as lawyer in preparation of prospectus

held to higher standard than other outside directors (should have known obligations under statute)

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o Condon: Those who sit on board who have particular set of expertise and experience will be assessed in connection whether they acted in accordance with the appropriate standard for that profession or for that skill set

Outside Directors and underwriters: need to make some effort to verify info given by officers/inside directors

NOTE: burden of proof falls on defence in US

Re YBM Magnex International [2003/OSCB] approach to due diligence – look at individual directors in terms of skill, experience, participation, and access to infoFacts: investigated for illegal activity (money laundering and organized crime) → short-form prospectus offering → special committee said no disclosure → AIF only said subject to risks generally associated with companies doing business in Eastern Europe

Analysis:Issue 1: Definition of materiality Reinforces statutory standard: whether undisclosed facts would have revealed that

YBM was exposed to risks that would have significant effect on value of shares if disclosed

Some facts may be material on their own while other facts may be material in accordance with other facts (must be assed contextually)

Common sense must prevail Condon: compare to Kerr – big difference in SCC approach to material and OSC

(SCC never references broader factual context)Issue 2: role of OSC re assessing due diligence Jurisdiction to make sanctions is independent of whether or not they would have met

their due diligence defence under s.130 Even if due diligence defence is made out, can still mark order in public interestIssue 3: Approach to due diligence Look at individual directors in terms of skills and experience and whether they

exercised an appropriate level of due diligence Members of Committee:

o Mitchell: belief not reasonable given that he was an experienced director/underwriter, had considerable skill, access to most information, and extensive participation (focused on potential conflict of interest acting as director and underwriter)

o Davies: belief not reasonable given his skill and business experience – he didn’t act prudently after personal visit from FBI (didn’t ask questions)

o Schmidt: age, inexperience, and lack of information – reasonable to rely on advice from experienced counsel and advisors

Outside Directors:o Peterson: lawyer - Due diligence available but barely given professional

reputation o Antes and Greenwald: adverse comments about being more appreciative

of muddy disclosure, but pass (no material role/participation)

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o Condon: OSC more generous to outside directors (but more expectations since Enron scandals)

Underwriter: defence not available as it was a sophisticated and experienced underwriting firm, had more knowledge than typical underwriter

Kerr v. Danier [2007/SCC] After receiving report of Q4 results, must have known wouldn’t achieve forecast Fact that management may have believed that by the end of the quarter the forecast

will be achieved does not relieve them of their obligation to disclose material information that would reasonably be expected to have a significant effect on the market price or value of the shares

Continuous DisclosureALL REPORTING ISSUERS are subject to periodic and timely disclosure obligations

Policy Rationales Up to date disclosure assists in valuing securities (EMH – efficient market means

information reflect in price in fasted way) Reduces possibilities for fraud (insiders of issuers can’t take advantage of position) Assists w/ achieving corporate governance goals (i.e. managerial accountability) Equality of opportunity as between all investors Increases investor confidence Facilitates the issuance of new securities b/c can use publicly available info to gain

timely access to financing through SF, shelf, post-receipt pricing, multijurisidctional disclosure system prospectuses

Arguments against mandatory disclosure regime: Market is better regulator of info than regulator rules

o Rules fossilized –don’t meet future needso Flexible Market –issuers respond to signals from investors re info neededo Too onerous and costly – keeps companies private

Issuers have incentives to voluntary disclose Role of gatekeepers in disclosure system Costs of mandatory disclosure lowers value of issuer Info overload problemNOTE: 94% of capital market activity takes place in secondary market

Continuous Disclosure Obligations on Other Parties Insider reporting requirements - OSA - s.107 Early warning system re TB- OSA – s.101

Periodic Disclosure Requirements: NI 51-102*OSC Rule 51-801 implements NI 51-102 and indicates that it supersedes certain provisions of OSA*

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Annual Financial Statements: NI 51-102 - Part 4Statements Required – s.4.1(1): Income, retained earnings, cash flow Balance sheet Notes to financial statements Comparative: most recently completed financial year and preceding year

NOTE: MUST be audited [s.4.1(2)] Approval by BOD before filed with regulators [s.4.5(1)] Auditor’s report required: financial statements are fair representation of the reporting

issuer [auditors as gatekeepers]

Filing Requirements - s.4.2 (different from OSA): Non-venture : 90 days after end of most recently completed financial year or date of

filing in foreign jurisdiction (earliest of)o Policy: venture issuers get more time b/c will have fewer resources

Venture : 120 days after end of most recently completed financial year or date of filing in a foreign jurisdiction (earliest of)

Delivery Requirements – s.4.6 Send request form to registered and beneficial security holders to allow them to

request copies of statements [s.4.6(1)] if copy is requested must send the later of 10 calendar days after filing deadline and

10 days after request [s.4.6(3)]

Interim Financial Statements: NI 51-102 Part 4Statements Required – s.4.1(1): same as AFS [see s.4.3(2)] Approval by board can be delegated to audit committee [s.4.5(3)] KEY DISTINCTION B/W INTERMIN AND ANNUAL: Auditor report is not

required for interim, but must disclose the fact that they are not audited [s.4.3(3)]o Disclose if auditor was unable to complete review and give explanation

and must include review report from auditor if expressed reservations

Filing requirements – s.4.4 Non-venture : 45 days after end of quarter or date of filing in foreign jurisdiction Venture : 60 days after end of quarter or date of filing in a foreign jurisdiction

Delivery Requirement – 4.6: same procedure as annual statements

Management Discussion and Analysis (MD&A): NI 51-102 – Part 5Reporting Issuer must file MD&A re annual and interim financial statements [s.5.1]

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Definition: narrative explanation of how company performed in period covered by financial statements (reasons for financial results), financial condition, and future prospectus

Content: NI 51-102, s.5.4 and Form 51-102FI Definition of Materiality – Form 51-102FI – Part 1: if reasonable investor’s decision

whether or not to buy, sell, or hold securities in your company would likely be influenced or changed if the information if the information was omitted or misstated

Content of Annual MD&A –Form 51-102F1 – Part 2 [see p.1635]o Overall performanceo Selected Annual Information o Results of operationso Summary of quarterly resultso Liquidity (i.e. how much cash company has to meet its obligations)o Capital Resourceso Off-Balance Sheet arrangements (that are reasonably likely to have an effect on

current or future operations of financial condition)o Transactions with related partieso Proposed Transactionso Critical accounting estimateso Changes in accounting policies

Content of Interim MD&A – Form 51-102F1- Part 2 [see p.1647]o Update company’s annual MD&A o Discuss current quarter results and compare results of operations and cash flows

with previous yearso Changes in operations or elements of income or loss that are not related to

ongoing business enterpriseso Seasonal aspects of company that may affects its financial condition

Must disclose info number of outstanding shares have in market place [s.5.4]o Policy: tells how many SH have claim on the assets of the issuers

FOFI – NI 51-102 - s.5.8(3):o If previously FOFI is no longer accurate, but disclose this in MD&Ao Discuss events/circumstances that are reasonably likely to cause actual results

that differ material from FOFI and expected differences o Exceptions : if already disclosed in news released and filed and identifies

the news release (its date and where it is available) in the MD&A

Approval Requirements - s.5.5 Annual: approved by BOD Interim: BOD or approval can be delegated to audit committee

Filing Requirements – s.5.1 (2): same as for financial statements

Delivery Requirements – s.5.6: if security holder requests, must send copy by delivery deadline for annual or interim financial statements

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OSC Staff Review of MD&A (2004) Consolidation Arguably the regulators track this more closely than financial statements as they are a

more novel form of disclosure and is a specific securities requirement General observations : omit information that may be material, disclose of excessive

amount of immaterial information, disclose good news not bad, lack adequate internal policies and procedures for preparing, reviewing, and approving

Annual Information Forms: NI 51-102 – Part 6Reporting issuers that are not venture issuers must file AIF [6.1]

Content – NI 51-102F2 Definition: document to provide material info about company and its business at a point in

time in the context of its historical and possible future developments – describes company, operations and prospects, risks, and other external factors that impact company specifically

Materiality – Part 1: Reasonable investor definition (same as MD&A standard) Items 5.1(4), 5.2, & 10

o Item 5.1(4): social or environmental polices If company implemented polices that are fundamental to operations,

describe them and the implementation steps o Item 5.2: risk factors

cash flow and liquidity problems, general risks inherent in business, environmental/health risks, regulatory constraints, economic or political conditions and other matters likely to influence investor’s decision to purchase

o Item 10: directors/officers Identify, personal info, security holdings, members of each committee 10.2: cease trade orders against directors/officers within last 10 yrs 10.2(1.2): bankruptcy proceedings or sanctions against

directors/officers or SH holding a sufficient number of SH to affect materially the control of the company within last 10 yrs

NOTE: doc most like prospectus (description of business, directors, major business contracts, legal liabilities, etc.)

Filing Requirement – s.6.2: 90 days after end of most recently completed financial year NOTE: There is nothing in rule that says anything about having to deliver the AIF Access electronically on SEDAR –provided by Canadian securities Regulators

Recent Continuous Disclosure Reforms (Can Sox Initiatives) Response to concern over Enron in US and Nortel in Canada: misleading financial

disclosure and directors engaging in fraudulent activity Canada Can Sox Initiatives Following Sarbanes Oxley in US

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NI 52-108: Auditor Oversight Canadian Public Accountability Board (CPAB): responsible for governing auditors

who are responsible for auditing financial statements of reporting issuers Oversees credentials of auditors Public accounting firms have to sign participation agreement w/ CPAB to be in good

standing Policy: addresses deficiencies wrt to auditor accountability (auditors lost sight of

gatekeeper role –concerned re other roles such as business advice/tax consulting)

Kripps v. Touche Ross and Co. Auditors are retained to form an opinion on the fairness of financial statements not

merely on their conformity with GAAP It is not appropriate for auditors to sign an unqualified auditor report because the

financial statements are prepared in accordance with GAAP if the auditors know or ought to know that the financial statements are misleading

NI 52-109: Certification of Annual and Interim Filings Certification by CEO and CFO (or persons who perform similar functions) [2.1 –

annual; 3.1 – interim] Exemption if comply with certification requirements of Sarbanes Oxley and signed

certificates are filed on SEDAR [s.4.1] Content of Certification - Form 52-109FI:

o Reviewed filingso No misrepresentation (no untrue statement of material fact or omission of

material fact)o Fairly represent financial condition, results of operations, and cash flowo Responsible for establishing and maintaining disclosure procedures and control

over internal financial reporting for the issuer and that you have designed such disclosure procedures to provide that reasonable assurance re reliably of financial reporting and evaluated effectiveness

o Caused issuer to disclose in MD&A any material change in internal control over financial reporting

Liability – NI 52-109CP- Part 12: quasi-criminal (122), administrative(127), or civil proceedings under securities law for providing false certification

NOTE: internal control over financial reporting (reporting financial info across all segments of business and operating divisions) is controversial Compliance costly in US Canada: rejected proposal to require internal controls audited (just have to certify that

these are in place and working to the best of their knowledge)

Audit Committees: MI 52-110Venture issuers are exempt from composition requirements in Part 3 and reporting obligations in Part 5 [s.6.1]

Characteristics of Non-Venture Issuer Audit Committee- Part 3

Three Key Requirements –3.1:

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o (1) Three memberso (2) Every member must be a director of the issuero (3) Every member must be independento (4) Must be financially literate

Meaning of Independence Meaning of Independence - s.1.4(1): no direct/indirect material relationship w/ issuer. Material Relationship - s.1.4(2): relationship which could, in the view of the issuer’s

board of directors, reasonably interfere with the exercise of a member’s independent judgment.

List of individuals deemed to have material relationship - s.1.4(3):o Employee/executive officer of the issuer within last three yearso Immediate family member an executive officer of the issuer within last 3 yrso partner or employee of firm that is issuer’s internal or external auditor within last

3 yrs (or whose spouse or child living in home is)o individual who is financially compensated for advisory roleo See p.1961 for additional material relationships

Meaning of Financial Literacy Definition – s.1.5: ability to read and understand financial statements that present a

level of complexity of accounting issues that can reasonably be expected to be raised NOT necessary to have comprehensive knowledge of GAAP or GAAS [52-110CP –

s.4.1] NOTE : can be appoint member who is not financially literate if member becomes

financially literate within a reasonable time [s.3.8]

Responsibilities – Part 2

Relationship with External Auditors – s.2.2: external auditor must report directly to audit committee

Mandated Audit Committee Responsibilities – s.2.3:o (1) Must have written charter that sets out mandate and responsibilities.o (2) recommend external auditor and compensation to BODo (3) Directly responsible for overseeing the work of the external auditoro (4) Pre-approve all non-audit services provided by the issuer’s external auditor.o (5) Review financial statements, MD&A and annual and interim earnings press

releases before disclosureo (6) Be satisfied that adequate procedures are in place for review public disclosure

of financial information and assess the adequacy of those procedures.o (7) Establish procedures for receipt, retention and treatment of complaints

received re accounting, internal accounting controls, or auditing matterso (8) Review and approve hiring policies of issue regarding former or present

partners and employees of external auditor of the issuer.

Disclosure – MI 52-110FI: must disclose all information re audit committee in AIF, including: composition, education and experience, reliance on exemption, audit committee oversight, pre-approval policies and procedures, external auditor fees

Audit committee Compliance reviews by CSA staff (CSA Staff Notice 52-312)

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64% overall compliance level – CSA says inadequate Area of non compliance most commonly for establishing procedures for complaints

about auditing and responsibility to review and approve issuer’s hiring practices for partners and employees of issuer’s current and former auditors

Good compliance w/ independent requirements (92%)

NI 58-101/NP 58-201: Disclosure of Corporate Governance PracticesDisclose and Explain Approach to Corporate Governance

Non-venture issuers required to disclose and explain approach to corporate governance practices in management information circular

NI 58-101F1- Disclosure: BOD: identity and whether they are independent, whether the majority of directors are

independent (if not describe what BOD does it facilitate its exercise of independent judgment), whether chair is independent

BOD mandate Whether BOD has written position descriptions Training and continuing education for new directors Whether BOD has adopted a written code of conduct and any other steps taken to ensure

exercise of independent judgment and encourage ethical business conduct Process for nomination of directors Compensation (how it is determined whether there is an independent compensation

committee, etc) Other Board Committees Assessments (whether committees and individual directors are regularly assessed)

NP 58-201 - Corporate Governance Guidelines: best practices re Composition of BOD Meetings of Independent Directors BOD mandate Position Descriptions Training and Education Code of Business Ethics Compensation Nomination of Directors

Policy: Should securities regulators be involved in corporate governance matters when there goal to ensure integrity of capital markets?

NOTE: problem of accelerate revenue recognition Nortel Example: recognizing revenue before its been earned (i.e. stating entire

amount of revenue from some service you are providing but haven’t completed) Corporate Finance Branch 2006 Report – consolidation p.1864 and especially

pp.1873ffo Review of issuers that have come up review by regulatorso Not adequate accounting policy disclosure, esp. wrt revenue recognition o Multiple deliverables – each separate element should be accounted for I

individually because could affect timing of revenue recognition

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Timely and Selective Disclosure (material change reporting)

Definition of Material Change: OSA, s.1(1) and NI 51-102, s.1.1Definition – material change – s.1.1: Change in the business, operations or capital of the reporting issuer that would

reasonably be expected to have a significant effect on the market price or value of any of the securities of the reporting issuer; or

Decision to implement a such a change where it is believed that confirmation of the decision by BOD or any other persons acting in a similar capacity is probable

Pezim v. BC [1994/SCC] Drilling Results: material change and should be disclosed in a timely way

o Contextual analysis: BC Act referred to as a change in “business, operations, assets or ownership” that is reasonably expected to significantly affect market price of value of securities of issuer – in order to give meanings to expression, necessary to read in “value” (of assets)

Problematic as per SCC that stock options were awarded to senior mangers a day or two before disclosure of results

o Senior management/directors have a positive duty to inquire as to all material changes if issuer wants to engage in securities transactions BUT if disclosed prior to transaction wont’ be possibility of insider trading

o Duty to disclose before reporting issuer engages in a securities transaction Private Placement of Shares: material change if potential to have significant effect on

material ownership of issuero Material change - put a significant SH in position to block transactions

Break down in contract for sale of new securities for over 4M: material change

YBM Magnex International Inc. [2003/OSCB] material change where implication of even is a material change - when it is uncertain if change will occur, apply probability/magnitude testFacts: audit suspension Apr19 due to concerns wrt to validity of transactions, whether counterparties to YBM were legal entities, organized crime money laundering → auditing deadline mid-may → lawyer said didn’t need to disclose

Analysis: Implication of audit suspension: YBM missing filing deadline and having securities

subject to cease trade order Implications of the audit suspension constituted a material change Materiality is a question of mixed law and fact Supercritical interpretations of meaning of material change doesn’t support goal of

promoting disclosure or protecting investing public Material change is not certain to occur Probability/magnitude test: significance of information as it affects the price of

securities discounted by the changes of it occurring Affect on price of securities would be significant (cease trade order) and it was

probably to occur given extraordinary nature of concerns and D&T’s request for forensic investigation, after which it would decide whether to continue audit

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Kerr v. Danier [2007/SCC] material change does not include change in results of operations caused by something external to the issuerFacts: claim under s.130 for damages arising from alleged misreps contained in prospectus wrt forecast (FOFI) → fourth quarter results were lagging behind its forecast due to “unseasonably warm weather” but didn’t update info until 2 weeks after IPO closed

Issue: whether intra-quarterly financial results amounted to a material change

Analysis: Distinction b/w material fact and material change: material change is limited to

change in business, operations or capital Literal/narrow reading of “change in business, operations, or capital” Change in intra-quarterly financial results is not a change in issuer’s business,

operations, or capital Not a change in operations – was a change in result of operations caused by

something external to issuer Poor intra-quarterly results may reflect a material change in business operations if

caused by something internal to the issuer (e.g. restructuring) Condon: less expansive view than Pezim – could be b/c Pezim originated as question

of JR while Kerr originative as action under s.130

NP 51-201 – Examples of Material Information – NOT MANDATORY - s.4.3: Changes in corporate structure

o Reorg, amalgamations, mergerso TB, issuer bids, insider bids, or changes in ownership

Changes in capital structureo Sale of additional securitieso Changes in dividend paymentso Material modification to rights of security holders

Changes in financial results (conflicts w/ Kerr v. Danier)o Significant increase/decrease in near term profitso Changes in value or composition of companies assets (Pezim)

Changes in Business and operationso Legal proceedso Labour disputeso New contractso Changes to BOD

Acquisitions and Dispositions Changes in Credit ArrangementsNOTE: similar to US model (qualitative test in Canada vs. itemized checklist in US)

Form of DisclosureTwo disclosure requirements where material change– OSA – s.75

1. Immediately issue press release

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2. File material change report with regulatorso Also see NI 51-102 – s.7.1

NI 51-102F3 – Material Change Report:o Date, news release and summary of material changeo Full description of material changeo If report is being filed on confidential basis, must state reasons and state

whether any info has been omitted on basis tat it is confidential NP 51-201 - s.2.1: announcements should be factual and balanced – Companies that

disclose positive news but not negative, will be subject to scrutiny o NOTE : influenced decision in YBM that YMB was disclosing positive

changes at same time as withholding negative (shows aware of obligations just not willing to disclose negative)

Confidential Disclosure – OSA – s.75: Can disclose material change to regulator but not disclose to general market [s.75(3)]

o Must make articulated case that disclosure would be unduly detrimental to reporting issuer or material change consists of a decision to implement a change made by senior management of the issuer and no reason to believe that people have made use of information in purchasing or selling

10 days –must seek permission from commission to reactive [75(4)] Must disclose on becoming aware or having reasonable grounds to believe that

persons or company are purchasing or selling securities w/ knowledge of material change that has not been generally disclosed [75(5)]

Condon: once you make confidential disclosure, you acknowledge that a material change has occurred (can’t not disclose later and argue that it isn’t material change)

NP 51-201 – s.2.3: issuers must monitor trading in securities very closely. If unusual market activity, may mean that info is leaked and full public disclosure must be made

Timing of Disclsoure Timing – OSA – s.75(1): immediately issue press release and file report as soon as

practicable and within 10 days from date of change

Pezim v. BC Threshold test for timing - probability/magnitude test – disclose when significant

impact on price or value of securities and when it is probable to occur Duty to disclose prior to engaging in self-dealing security transaction (i.e. awarding

stock options to senior management)

AIT Advanced Information Technologies [2007/OSC]Facts: Feb 17: unsolicited approach for 3M April 11: meeting re valuation (AIT thought company was worth more than 3M) April 25: lie to creditor in saying 3M has received approval of CEO and VP April 26: Letter of intent signed, subject to 2nd due diligence and approval May 7: second due diligence visit May: call from market regulation services wrt rumours May 14: Draft merger agreement delivered and board approves acquisition of AIT

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May 22: AIT board approves final merger agreement May 23: final agreement executed and press release issued by AIT

Analysis: Discussion of probability/magnitude test

o Cautions that US doesn’t have equivalent concept of material changeo May be useful for issue of materiality, but not useful in determining

whether a change has actually occurred Meaning of implement

o Act specifies that there is material change when decision to implement change made by BOD and it is believed that approval is probable

o TEST : in circumstances of merger and acquisition transaction, whether there is sufficient commitment by both parties (commitment by one party is insufficient)

o 3M not sufficiently committed to this at end of April Role of LOI with respect to small public issuer, paras 246ff and para 255, 263

o Signing of LOI will trigger disclosure in some cases depending on content o Did not trigger disclosure in this case: Non-binding, price not firm, and

most of conditions precedent were beyond ability of AIT to resolveo Circumstances where signing of LOI might result trigger disclosure:

smaller less process driven acquirer, negotiations being lead by acquirer’s CEO, previous board resolution setting out pre-authorized criteria for approval

AIT not in breach of disclosure obligations

Rumours (that a particular change is about to occur – company can’t always contain confidential info) NP 51-201 - s.2.3: If a confidential material change has had leaked out or appears to

affect share price, company should take immediate steps to ensure full public announcement and get exchange to halt trading until news release is issued

NP 51-201 – s.6.13: adopt a no comment policy and ensure it is applied consistently (inconsistent response may be interpreted as tipping)

Selective Disclosure Reporting issuers or executives/officers within reporting issuers may make disclosure

to some subset of market participants but not to the market generally (e.g. info preferentially distributed to analysts within brokerage firms)

o Condon: can lead to tipping allegations

NP 51-201 (NOT MANDATORY)Don’t privilege particular types of investors or particular types of market participants 3.3(5): necessary course of business exception for tipping doesn’t generally permit

company to make selective disclosure of material information to analyst, institutional investor, or other market professional

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3.3(7): distinction b/w disclosures to credit rating agencies (necessary course of business) and disclosure to analysts (not necessary course of business)

3.7: mitigating factors considered in selective disclosure enforcement proceedingso Implemented, maintained and followed policies to prevent tipping?o Selective disclosure was unintentional?o Steps taken to disseminate information unintentionally disclosed?

Part V – Risks Involved with relations w/ analysts:o 5.2: Analyst reports (analysts often ask companies to confirm)o 5.3: Confidentiality Agreements w/ Analysts (no exception to tipping

provisions for this) Part VI – Best Disclosure Practices

o Establish corporate disclosure policieso Review by BOD/audit committeeo Designate authorized spokesperson (i.e. to media, analysts, and investors)o Establish policy re analyst conference calls and reportso Establish policy re quiet period and insider trading monitoringo Establish policy re electronic communications

Civil Liability for Breach of Disclosure Provisions

NOTE: Key DIFFICULTY w/ CL misrepresentation actions - reliance and duty of care (i.e. need to show individual reliance in class action) Efficient capital market hypothesis in US: if fraudulent disclosure is made, assume

this got impacted into the stock price (no need for investors to show reliance)

New Statutory Remedy - OSAArguments for: La Porta Research: stock market growth is correlated with plaintiff friendly remedies Consistency with the primary market (can sue for misrep. in prospectus) Consistency with the US Deterrence/compensation

Three possible actions that can be launched: 1. Documents that contain a misrepresentation [s.138.3(1) and (3)] (if made by a

person w/ actual, implied, or apparent authority to speak on behalf of issuer)2. Public oral statements containing misrepresentation [s.138.3(2) and (3)] (if made

by a person w/ actual, implied, or apparent authority to speak on behalf of issuer)3. Failure to make timely disclosure [s.138.3(4)]

Remedy NOT available for [s.138.2]: Securities purchased under prospectus (covered under s.130) Acquisition of securities privately under exemption from prospectus requirement Acquisition or disposition of securities in connection with TB or issuer big

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LEAVE OF COURT Required: grant only when satisfied that action is being brought in good faith and reasonable possibility that action be resolved in favour of P [s.138.8] Merit-based assessment to prevent US type frivolous litigation (gatekeeper)

Who has a cause of action?

Misrepresentation : person or company acquiring/disposing of security between the time when document was released and time when misrep. was corrected

Public oral statements containing misrep : same as above Failure to make timely disclosure : persons or company acquiring/disposing of

security between time material change was required to be disclosed and subsequent disclosure of material change

What does plaintiff have to prove?

Acquisition or disposition of security at the relevant time Existence of misrepresentation in document/public oral statement or failure to make

timely disclosure o Definition of misrepresentation: untrue statement of material fact or omission to

state a material fact that is required to be stated/necessary to make a statement not misleading

DO NOT NEED TO SHOW RELIANCE For non-core documents and public statements [138.4(1)]

o Person/company knew that there was a misrep.o Person/company deliberately avoided acquiring such knowledge oro Person/company was guilty of gross misconduct in connection with the

document/statement For failure to make timely disclosure (directors and influential persons) [138.4(3)]

o Person/company knew of the material changeo Person/company deliberately avoided acquiring such knowledge oro Person/company was guilty of gross misconduct in connection with failure

to make timely disclosure Definitions Core Documents:

o Directors/influential persons - includes prospectus, TB circulars, issuer bid circular, directors circular, notice of change, MD&A, AIF, annual and interim financial statements

o Issuers/officers – same as above and material change reports Influential Persons: control persons, insiders that are not directors, and officers

o Condon: major departure from understanding that you sue issuer of those who are senior officers/directors (allows you to sue SH)

o Policy: Deterrence by targeting people that are responsible

Who is liable?

Documents containing a misrepresentation – s.138.3(1): Responsible issuer (reporting issuer and any other issuer with a real and substantial

connection to Ontario, of which are publicly traded) Directors at the time the document was released

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Officers who authorized, permitted or acquiesced in the release of the document; Influential persons who knowingly influenced Experts where: misrep. is also contained in a report, statement or opinion made by the

expert, document includes, document summarizes or quotes it, and expert consented in writing to the use of the report, statement or opinion in the document

Public oral statements- s.138.3(2): same + “person who made a public oral statement”

Failure to make timely disclosure, - s.138.3(4): responsible issuer, directors and officers of responsible issuer, influential persons who knowingly influenced

Defences

Misrepresentations in Documents and Oral Public Statements Plaintiff acquired or disposed of security w/ knowledge that the document or

statement contained a misrepresentation [s.138.4(5)(a)] Made reasonable investigation and at time of release of document or statement had no

reasonable grounds to believe that it contained a misrepresentation [s.138.4(6)(a)]o Due diligence defence is more viable (note: not available in primary

market under s.130)

NOTE: Available to responsible issuer itself and individual defendants

Failure to make Timely Disclosure P acquired/disposed with knowledge of material change [s.138.4(5)(b)] Made reasonable investigation and no reasonable grounds to believe that a failure to

make timely disclosure would occur [s.138.4(6)(b)] Defence based on prior confidential disclosure [s.138.4(8)]

Safe harbour for forward looking information - s.138.4(9) Document contained reasonable cautionary language identify information as forward

looking material factors that could cause actual results to differ materially from forecast

Statement of material assumptions Reasonable basis for drawing conclusions or making forecast

Factors considered in determining whether there was reasonable investigation or person or company is guilty of gross misconduct – s.138.4(7) nature of the responsible issuer; knowledge, experience and function of the person or company; office held, if the person was an officer; presence/absence of another relationship w/ issuer, if person was a director; the existence and the nature of any system re continuous disclosure obligations;

o Pezim: duty to inquire engage before self interested transaction reasonableness of reliance by the person or company on the responsible issuer’s disclosure

compliance system period within which disclosure was required to be made under the applicable law; any professional standards applicable to the expert;

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extent to which the person or company knew, or should reasonably have known, the content and medium of dissemination of the document or public oral statement;

role and responsibility of the person or company in the preparation and release of the document or public oral statement or decision not to disclose material change

Limits on Liability

Damages only – no recession Proportionate liability – s.138.6: for each defendant (can’t look to deep pockets) BUT

not available where defendant other than issuer knowingly authorized or permitted misrepresentation or failure to disclose material change

Assessment of damages – s.138.5: calculation varies depending on whether P has crystallized their losses and whether they have crystallized them in a 10 day period after knowledge of misrepresentation

Maximum Damages – s.138.7: lesser of aggregate damages and liability limit Liability Limits - s.138.1:

o Responsible issuer or influential person: greater of 5% of market capitalization & 1M

o Director or officer or influential person: greater of 25,000 and 50% of aggregate compensation for that year

Exception to Limits – s.138.7(2): if plaintiff proves person/company authorized, permitted or acquiesced or influenced in the making of misrepresentation/failure to make timely disclosure while knowing that it was a misrepresentation or a failure to make timely disclosure

Settlements and Costs Rules

Court approval of settlements required - s.138.10: Policy concern re collusion b/w P lawyer and defendant’s

Costs rule - s.138.11: court can award costs to winning party

Insider Reporting and Insider Trading

Insider Trading is permissible if insiders report trades within a certain time period and such trades are not based on undisclosed material information

Definition of Insider – OSA - s.1 (1) (a) director/officer of a reporting issuer, (b) director/officer of a person/company that is insider or subsidiary of reporting issuer,

o If reporting issuer own 50% or more of a company, that company is a subsidiary (c) a person or company that has:

o (i) beneficial ownership, control, or direction over securities of a reporting issuer carrying more than 10% voting rights attached to all the reporting issuer’s outstanding voting securities

Hold more than 10% of the securities that carry a right to voteo (ii) if acting in combination w/ people or companies that hold more than 10% of

the voting rights (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,

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(e) person or company designated as an insider in an order made under s.1(11),o PUBLIC INTEREST STANDARDo s.1(11): If in public interest, discretion to designate someone as an insider

if they are reasonably expected to have in the ordinary course access to material info about the business, operations, revenue or assets of the issuer

o Example: professionals having ongoing relationship w/ issuero s.1(10): discretion to make order that a person is not an insider if not

prejudicial to public interest (f) a person or company that is in a class of persons or companies designated under

subparagraph 40 v of subsection 143 (1)o Commission can designate classes of persons/companies as insider if

person/company would reasonably be expected to have, in the ordinary course, access to material info about business, operations, assets, revenues of issuer

Note: retrospective aspects of definition (proposed REPEAL ) Issuer as Insider of Reporting Issuer - s.1(8): where issuer becomes an insider of

reporting issuer, every director or senior officer of issuer is deemed to have been an insider for previous 6 months or for such shorter period than he or she was director or senior officer of the issuer

Rationale: unfair informational advantages [i.e. officer of company privy to company’s plan to buy another company, could buy stock in the other company and make large windfall]

Same for when a reporting issuer become insider of any other reporting issuer [s.1(9)]

Reporting Requirements

Insider Trading Reports: OSA Requirements Insider Report – s.107(1): Person or company must file report within 10 days of becoming

an insider disclosing beneficial ownership/control/direction over securities of the issuer Change of Insider Holdings – s.107(2): must file report within 10 days Retrospective Reports – s.107(3) [Proposed REPEAL]: must file report within 10

days after becoming an insider under 1(8) or 1(9)

Note: Proposed expansion of reporting requirements under s.107 (not proclaimed yet) Requires insiders to report ownership and change in “related financial instruments” “Related financial instruments” includes derivatives, options, futures contracts, etc. Policy: recognition that people trade options (whose value is based on the value of the

securities)

System for Electronic Disclosure by Insiders (SEDI): NI 55-102 Requires insiders to file Insider profile [55-102F1] and reports required by s.107(2)

[55-102F2] on the internet Reports are available through SEDAR instead of only through commission and

business publications.

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Exemptions from Reporting Requirements: NI 55-101Directors/Senior Officers of Subsidiaries – Part 2: Director of a subsidiary of reporting issuer [s.2.1] and senior officers of reporting

issuer or subsidiary of reporting issuer in relation to trading securities of the reporting issuer [s.2.2] If doesn’t have access in the ordinary course to material information before general disclosure

Must show you don’t have access to certain info to be exempted

Directors/Senior Officers of Affiliates – Part 3: Directors/senior officers of an affiliate of an insider of a reporting issuer in relation to

trading securities of the reporting issuer [s.3.2] If doesn’t have access in the ordinary course to material information before general disclosure

Affiliate relationship: A and D are both significantly owned by company C - A and D would be affiliates because they are both subsidiaries of C – if director of A and you hold securities of D, may be able to get exemption

NOTE: Exemptions by Order of Commission on Application– OSA – s.121(2): (a) (i) requirement of this Part conflicts with a requirement of the laws of the

jurisdiction under which the reporting issuer is incorporated, organized or continued, or (ii) if otherwise satisfied in the circumstances of the particular case that there is adequate justification for so doing; or

(b) upon its own motion

Policy: Adequate enforcement for failure to file insider trading reports? McNally and Smith study: only two cases where insiders found to have failed to

report trades (suggest lack of surveillance and enforcement) Freeman settlement agreement: und to engage in 30 transactions without filing insider

reports - agreed to make insider report filings and pay costs of enforcement (7,000)

Policy: McNally and Smith’s assessment of insider trading rules in Canada Two obstacles (1) if illegal trades are not disclosed, their detection is difficult and (2)

if trades disclosed, proving made on the basis of undisclosed material information is difficult

Lack of Insider trading convictions in Canada [15 from 80 to 2002] Incidence of Insider trading in Canada [larger volume of shares sold before bad news

is released; larger volume of shares purchase before good news is released]

Illegal Trading

Illegal Insider TradingElements of Proof Required: (1) Accused in a special relationship with reporting issuer (broader than “insiders”)(2) Accused purchased or sold with knowledge of material fact or change (“material information”)(3) Material information not generally disclosed

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Prohibition on Insider Trading – OSA - s.76(1): 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

Special Relationship – OSA – s.76(5) (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, 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,

(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 (a) (ii) or (iii),

(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 (b),

(d) person or company that learned of material fact or material change wrt the reporting issuer while the person or company was a person or company described in clause (a)(b) or (c),

o Employee learns of information and quits job (no longer in category when purchase or sell) is still subject to prohibition

(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

NOTE: Argument that Canadian prohibition in broader than US (limited to insiders)

What Does General Disclosure Require?

Re Harold P. Connor: must be disseminated to trading public and public must be given sufficient amount of time to digest (OSC suggest 1 full day following release)

Dissemination + Analysis - NP 51-201 – s.3.5: info is materially disclosed if:o (a) Info has been disseminated in manner calculated to effectively reach

marketplaceo (b) Public investors have been given a reasonable time to analyze info

Pezim v. BC : insiders have a duty to inquire that there is no material information that has not been disclosed prior to trade

Re Donnini [2002/OSCB] event not certain to occur at the time of trading (contingent event) can still be material fact based on probability that it will occur and the magnitude of the event Facts: D a trader w/ Yorkton→ Yorkton assisting KCA wrt second special warrants financing → Paterson made D aware of possibility of KCA financing→ that day and day after D traded an unusual high volume of KCA stock (short trading – i.e. selling SH don’t own to be bought back later in expectation of a decrease in price)

Issue: whether Donnini engaged in insider trading of shares of KCA in that he had knowledge of a material fact even though the fact was not certain to occur at the time of trading

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Analysis: D was in special relationship w/ KCA [s.76(5)(b)] D purchased and sold securities of KCA Argument: second financing not material info b/c nothing had crystallized - approval

required by both parties and approval did not occurs until after the change Court applies probability/magnitude test: probability that event will occur and the

anticipated magnitude of the event (materiality is met where some level of both probability and magnitude is reached)

o Highly probable that financing would occur: P wanted to do deal and instructed Y to prepare engagement letter

o Significant effect on value of KCA SH (considers US test – whether reasonable investor considers fact to be important in investment decision)

o Proposed special second warrants financing, negotiations concerning it, and the proposed price and size of it were all material facts

o Potential magnitude was high, so lower probability of occurrence than found in this case would still lead to same conclusion

D had knowledge: director and 4th largest SH of Y’s parent, colleague of Patterson (akin to partnership), intimately involved with Y’s exposure to KCA, three minute meeting with P, D’s trading

Condon: case criticized b/c OSC sanctioned Donnini w/ 15 year ban on trading securities (significantly more serious than sanction in past to send deterrent message)

Policy: is probability/magnitude test fair considering test is applied in hindsight after contingent event occurs?

R v. Feldlerhof [2007] guilt does not depend on use of material info –consider materiality of each fact sepeartelyFacts: Feldlerhof: VP of exploration and director of Bre-X June 20/96-Feb17/97: good stock performance (270/SH) due to 4 press releases Due diligence by company entering into joint venture w/ Bre-X revealed property had

virtually no gold May 4/97: Bre-X confirmed results, issued press release, stock dropped to 0.90/SH Insider trading allegations against F

Analysis: Requirement #1: D must be in special relationship with the company - YES Requirement #2: D must have purchased or sold securities

o Not necessary for D to personally give direction to purchase or sell o What if broker exercises sale/purchase in discretionary client account

w/out receiving instructions? Defence of due diligence available if insider took care to prevent purchase or sale

o Circumstantial evidence that F directed sale from Nesbitt Burns account (faxes giving instructions/insider reports filed and signed by F)

Requirement#3: D must have knowledge of material information that is not generally disclosed

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o Whether the alleged information was (at time of trade) (1) a fact, (2) known by F at the relevant time, (3) material, and (4) not generally disclosed

o Irrelevant whether D makes use undisclosed material fact o Must show that at least one particular was true, that the defendant had

knowledge of it at the time of the trade, that it was material, and that it was undisclosed at the time of the trade

o Example: Count 1: particular 1 and/or particular 2 and/or particular 3 Count 2: particular 1 and/or particular 2 and/or particular 3

Acquitted b/c prosecution failed to examine each fact (particular) individually when assessing materiality (i.e. said facts as a whole were material)

Tipping Key elements: (1) Accused (“tipper”) in special relationship with reporting issuer (2) Accused informs another person (“tippee”) of material information wrt reporting issuer other than in the necessary course of business (3) Accused informed of material information before it was generally disclosed

OSA – Prohibition on Tipping – s.76(2): 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

DOES NOT HAVE TO BE TRADING BY TIPPEE AND TIPPE DOES NOT HAVE TO KNOW THAT TIPPER IS IN SPECIAL RELATIONSHIP*

R v. Rankin [2006/Superior Court]Facts: Rankin employed as investment banker @ RBC Allegation that Rankin tipped close friend Duic Duic made settlement w/ OSC allowing him to keep 1.2M in profits in return for

identification of source of insider info and testimony in future proceedings Sought quasi-criminal sanction under s.122 of the OSA

Trial Circumstantial evidence included: proximity b/w trading and deals worked on by D,

access to info, extensive contract between D and R Evidentiary issues:

o Circumstantial case may not be enough – but will be if accept D’s testimony

o TJ accepts D’s evidence over R’s even though R of bad character (i.e. he accepted that D can’t recall how he got info for most of the deals, tailored evidence to what OSC wanted, pushed envelope when he said R knew of trading, and probably tried to hack into computer)

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Guilty based on circumstantial evidence + D’s testimony – 6 months imprisonment

Superior Court of Justice R appeals conviction and sentence on basis that TJ: (1) placed too much confident in

D’s credibility and (2) paid insufficient attention to whether there was enogh evidence for each count

No requirement that tipper know, or be reckless to whether, the person receiving the information would use it (strict liability – no mens rea – due diligence defence)

TJ made improper inference wrt R’s credibility and flow of informationo Relied on other transaction which had no material relevance to this caseo concluded info wrt to transactions was free-flowing BUT all evidence on

issue was that deal specific information was not free-flowing o most other reasons for rejecting based on fact that couldn’t remember

things (but note that D couldn’t either) TJ made improper inferences wrt flow if information Problematic nature of D’s motivation not sufficiently addressed by TJ – strong

motivations to lie TJ should have approached each count individually

o R only involved in 3 of the 10 transactions Court finds problem in fact that rejects Rankin’s evidence as raising reasonable doubt

b/c he couldn’t recall but accepts Duic’s as proving beyond a reasonable doubt when he couldn’t recall

Other rational conclusions – other people who were privy to the info – D had access to C’s computer and admitted to trying to break into computer

New trial ordered NOTE : early 2007, OSC decides to pursue s.127 hearing (permanently restrict from

being member of securities industry in ONT) in hopes of settlement Condon: demonstrates difficulties of criminal proceedings – higher burden of proof -

must have sufficient evidence for every count beyond a reasonable doubt Condon: argument that OSC paid high price to get charges on Rankin

DefencesStatutory Defences

Reasonable Belief that Information Generally Disclosed – OSA – s.76(4) s.76(4): No contravention of illegal insider trading OR tipping provisions if the person or

company proves that the person or company reasonably believed that the material fact or material change had been generally disclosed

BURDEN ON DEFENCE NOTE : insider trading applies to material changes AND material facts; thus,

continuous disclosure requirements that require only reports of changes don’t protect from insider trading contraventions

Green v. Charterhouse Group Can. Ltd. [1976/Ont.CA] disclosure of material change without saying what it is not sufficient

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Facts: Green agreed to offer to sell his shares to D before others → D gained knowledge of possible takeover (offer for shares at higher price) → disclosed possibility of possibility of TB and that there was info but can’t disclose info

Conclusion: limited disclosure was not sufficient – what letter is really saying is that confidential info exists which might be of substantial significant to you but which I am not at liberty to disclose”

Re Harold P. Connor [1976/OSCB] insider can’t trade immediately after disclosureFacts: 3rd quarter showed unexpected loss → decision made to issue press release on June 25th → usually sent out immediately, but here not until morning of June 26th → D sold SH on June 26th morning → defence was that he believed the press release had been sent and it was public knowledge

Analysis: Insider is not free to trade immediately after press release is sent out Appropriate standard is for press release to have been sent, received, and pubic given

time to process the information Time will depend on specific circumstances, but safe working rule is insider should

wait at least one full trading day after info is released

Necessary Course of Business Defence for Tipping – OSA - s.76(2)

NI 52-201 - s.3.3(2): s.3.3(2): Necessary course of business will generally cover communications with

o Vendors, suppliers, or strategic partners on issues such as research and development, sales and marketing, and supply contracts

o Employees, officers, and board memberso Lenders, legal counsel, auditors, underwriters, and financial and other

professional advisors to the companyo Parties to negotiationso Labour unions and industry associationso Government agencies and non-government regulatorso Credit rating agencies

s.3.3(5): necessary course of business exception generally not permit company to make selective disclosure of material information to an analyst, institutional investor, or other market professional

Royal Trustco Ltd. v. OSC [1983/Ont. Gen. Div.] disclosing info in some SH and not others in context of hostile TB is not disclosure in ordinary course of business – can’t tip a material fact or changeFacts: hostile TB → Directors told some SH of possibility of takeover and that bidder would not win b/c reason to believe 60% → wanted to prevent selling shares

Analysis: Court recognized difference b/w material facts and material change

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o Intentions of bidder not necessary be material change, but would constitute a material fact

o Can’t tip a material fact OR changeo Even though could not guarantee that SH of Trustco wouldn’t tender

shares, still a material fact Can’t give informational advantage to SH and claim it is in the necessary course of

business

OSA Regulations

Firewall/Chinese Wall Defence – Reg. 175(1) and (3)

NOTE: Corp. has knowledge when one of its officers, directors, employees or agents has knowledge; thus, if trader for corp. w/out actual knowledge traded shares when an officer/director/employee had knowledge, the corporation can be guilty of insider trading

s.175(1): A person or company that purchases or sells securities of a reporting issuer w/ knowledge of material fact or change that has not been generally disclosed, is exempt from liability if can prove that no director, officer, partner, employee or agent of person/company who made/participated in decision to purchase or sell had actual knowledge of material fact or material change AND no advice was given to them by a director, partner, officer, employee or agent of the person/company who had actual knowledge of the material fact or the material change

Importance of keeping information confidential : consider extent to which company has implemented and maintained policies to prevent insider trading and prevent the transmission of information with respect to material changes and facts [Reg. 175(3)]

o i.e. Grey list/restricted lists OSC policy 33-601 – registrants should consider establishing written policies and

procedures in the following areas:o Education of employeeso Containment of inside infoo Restriction of transactionso Compliance

Purpose of erecting Chinese walls: (1) allows traders to continue to trade and (2) enhances market confidence

GREY LISTS: OSC Policy 33-601 Grey List: list of issuers registrant has inside information on

o Should place on grey list when registrant is invited to manage/participate in possible offering or act on M&A [s.2.5(1)]

o Should disseminate only to employees who require list to monitor unusual principle or agent trading [s.2.5(3)]

Restricted List: list of issuers registrant may have inside information ono Should move from grey list to restricted list when agree to act and the

transaction has generally been disclosed, but may get gain access to inside information during course of transaction [s.2.6(1)]

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Re Donnini Defence doesn’t apply because material information flowed from corporate finance to

trading department Must have procedures to prevent confidential informationt to flow to those who trade

(Chinese walls, grey lists)

Unsolicited Orders – OSA - Reg. 175(2) Purchase or sale entered into as an agent of another person or company pursuant to a

specific unsolicited order (i.e. if a broker receives an order to execute a trade, can execute and will not be guilty of insider trading)

Other Party had Knowledge – OSA – Reg.175(5) (a) No liability for insider trading, if prove reasonable belief that other party to the

purchase or sale had knowledge of the material fact/change (b) No liability for tipping, if prove reasonable belief that the person informed of the

material fact or material change already had knowledge of material fact/change

Common Law Defence

Reasonable Mistake of Fact Not liable if mistaken wrt facts underlying the insider trading transaction (reasonable

belief that the information was not material)

Lewis v. Fingold [1999/Ont. Gen. Div] accused can escape liability if prove had a reasonable belief that the fact is not material (i.e. would not have a significant effect on the share price)Facts: director of movie company heard info @ BOD meeting (unexpected bad 4th quarter results) and sold shares before disclosure of the info to the public → Fingold argued that he had a genuine reasonable belief that results were not a material fact

Analysis: No liability if defendant can prove on balance of probabilities that he reasonably

believed in a mistaken set of facts which, if true, would render the act or omission innocent

Note: prosecution must prove that the fact is reasonably expected to have an effect on market security (thus success of defence is remote)

Fingold reasonably believed that the disappointing fourth quarter results would not have a significant effect on the market price of the shares

Belief in the viability of ongoing projects was reasonable given his long involvement with the company and confidence in it

R v. Harper [2000/Ont. CJ] Facts: Sold 227,600 SH w/ knowledge of undisclosed material fact (soil sample results)

Analysis: H argued that he reasonably believed test results were not material

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Court did not accept because H disclosed positive results in same period Reliance on expert finding that results not significant wasn’t reasonable given his

experience Argued that results were not reliable - again, he still reported the good results

Sanctions for Insider Trading/TippingCriminal - OSA s.122(1): fine (5M max), imprisonment fine (5 years less a day max), or both Enhanced financial penalty for violation of s.76- s.122(4): Minimum fine equal to

the profit made or the loss avoided and maximum is the greater of 5 M or triple profit made or loss avoided

Civil – OSA s.134(1): Inside Trader liable to compensate anyone that sold or purchased securities

for damages that resulted from the trade UNLESS…o Inside trader proves that they reasonably believed that material

information was generally disclosed o Material information was known or ought reasonably to have been known

by the seller or purchasero NOTE : difficult to find out who person on the other side of the transaction

is in the electronic era (no paper trail) o Also applicable to tipping [see s.134(2)]

134(4): allows reporting issuer to sue insider trader/tipper for any advantage or benefit received or receivable from purchase or sale UNLESS

o Proves that the person or company reasonably believed that the material fact or material change had been generally disclosed

135: allows OSC to take civil action on behalf of the issuer if the issuer fails to

Administrative – OSA s.127: Orders in the public interest s.128(1): OSC can apply to Superior Court for declaration that person or company is

not or has not complied w/ securities lawo if court makes declaration, court can may any order it considers

appropriate despite the imposition of any penalty under s.122 or order given under s.127 [s.128(3)]

Rankin settlement: not guilty at criminal level, but OSC entered into settlement agreement under power under s.127 to make orders in the public interest

Donnini: used s.127 power to ban trading for 15 years

NEW Criminal Code Offence – s.382.1 Makes insider trading an indictable offence Imprisonment for not more than 10 years Categories of potential accused

o (a) Shareholder of the issuer o (b) person in business or professional relationship with issuer

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o (c) Those involved w/ proposed takeover, reorganization, amalgamation, merger, or similar combination with the issuer

o (d) Employees/officers of issuer or person referred to in (a) or (c)o (e)Person who obtains information from person in (a) to (d)

Differences between offence in CC and criminal provisions in OSA s.122 : Requirement for “knowingly using” inside information to buy or sell securities

o Condon: does this set the bar too high? Applicable to issuer’s securities – not just reporting issuers Knowingly use inside information that you possess by virtue of being a shareholder

NOTE: criminal offence for tipping [s.382.1(2)] Indictable offence punishable be imprisonment for not more than 5 years or summary

conviction Requirement for “knowingly conveys” and “knowing that there is a risk that the

person will use information to buy or sell”

Prospectus Exemptions Competing Policy Concerns: efficiency/cost reduction vs. investor protection (note:

minimal liability w/ no prospectus b/c can’t sue for misrep.) Prospectus Exemptions apply to both reporting issuers and non-reporting issuers Closed system of regulation: all legal ways of distributing securities are considered

under existing laws - options include:o Provide a prospectuso Qualify for explicit exemption or apply for a discretionary exemption

(resale regulate when those securities originally issued under an exemption are re-sold in the secondary market –closes of back door underwriting)

Policy Justifications Easing the burden on small and medium sized business enterprises by allowing more

flexibility to generate initial working capital Wealthy and/or sophisticated investors are capable of making investment decisions

without the information that a prospectus provides Issuers are issuing securities to those with whom they have a pre-existing relationship

(assumption that investor has or has access to information about the issuer and its financial prospects)

Some securities are considered extremely safe investment (i.e. government bonds)

Sources of Law NI 45-106 (not all sections applicable in Ontario/proposed amendments published for

comment/replaces MI 45-103) OSC Rule 45-501 OSA Part XVII (some parts not current law and inconsistent with NI 45-106)

o NOTE : OSC Rule 45-501 – s.3.1: exemptions in OSA 72(1)(a)(c)(d)(l)(p) and 73(1)(a) are not available

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NI 45-102 (Re-sales) Companion Policies helpful to provide guidance on way rules work

o 45-106 CP [see p.1399]o 45-102 [see p.1318]

Exemptions for Small and Medium-Sized Enterprises or Start-up Issuers Private Issuer Exemption [NI 45-106, s.2.4] Founder Control Person and Family Exemption [NI 45-106, s.2.7] Government Incentive Securities [OSC Rule 45-501, s.2.1]Note: Ontario closely held issuer exemption – REPEALED by 45-106

Private Issuer Exemption: NI 45-106Prospectus requirement does not apply wrt trade in a security in circumstances outlined in s.2.4(2) [s.2.4(3)]

Definition of Private Issuer – s.2.4(1) (a) Issuer that is NOT a reporting issuer or an investment fund

o Condon: accords with the goal to provide funds for start-up companies (b)(i) Restrictions on transfer of securities contained in issuer’s constraining

documents (i.e. articles of incorporation) or SH agreements (b)(ii) Cap on the number of security holders

o Securities not beneficially owned by more than 50 persons [NOT including employees and former employees of the issuer or its affiliates]

o Each person is counted as one beneficial owner BUTo Anti-avoidance provision : each person counted as one beneficial owner

UNLESS person is created or used solely to purchase/hold securities of in each beneficiary must be counted as separate beneficial owner

Prevents issuers from setting up trusts/companies (where could be many SH) to hold securities of the private issuer

Note : “person” includes individual, corporations, partnership/trust/fund/association, and individuals in capacity as trustee/executor/administrator/personal or legal representative

(c) Distributed securities only to persons described in this section

Substantive Requirements - s.2.4(2): Trade in securities of a private issuer to a person who purchases the security as principle and is: (a) Directors, officers, employees, founders or control persons of the issuer (b) spouses, parents, grandparents, brothers/sisters or children of director, executive officer,

founder, or control person of the issuer (c) spouses, parents, grandparents, brothers/sisters or children of the spouse of a director,

executive officer, founder, or control person of the issuer a director, executive officer, founder, or control persons

(d) Close personal friends of directors/executive officers/founders/control persons (e) Close business associates of directors/executive officers/founders/control persons (f) Family members selling SH or selling SH’s spouse (g) SH of the issuer

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(h) Accredited investor: sophisticated investors that are in the business of in vesting securities (banks, mutual funds, financial institutions, etc.) and also includes high net worth individuals

(i) a person by which a majority of voting securities are beneficially owned by or a majority of directors are persons described in para (a) to (h)

(k) trust or estate of which all beneficiaries or a majority of the trustees or executors are persons described in para (a) to (h)

(k) Person who is not the public

Policy Question: is the list of people really targeted to types of people that should be eligible to get this exemption?

Prohibition on commissions/finders fees paid to director/officer/founder/control person in connection with a trade, except for trade to an accredited investor [NI 45-106, s.2.4(4)]

o Note : this does not prohibit use of registrants, finders or advertising in any form to solicit purchasers under exemptions BUT use of these means may give rise to the presumption that relationship required for use of these exemptions is not present (i.e. if paying someone to find investors, precondition of close relationship is likely not present) [NI 45-106 CP, s.3.1]

Meaning of “persons or companies that are not public”:

SEC v. Ralston Purina [US] “need to know test” – low level employees need to know TEST: Whether persons who are offered the security need to know the kind of

information that a prospectus would provide o If investor needs to now info that a prospectus would provided, they are a

member of the public and not eligible for this exemption Low levels employees of the company should be considered members of the public in

terms of their investor sophistication and are therefore not eligible for the exemption (i.e. likely to have little knowledge of security markets or investment activity)

R v. Piepgrass [CAN] “common bonds test” TEST: Whether the purchasers are friends or associates or persons who have

common bonds of interest or association Sought capital from farmers, most of whom were known by the promoter from

previous business dealings – CA held that the farmers were not in any sense friends or associates of the accused or persons having common bonds or interests

Didn’t expand on reasoning for the test – likely justification is that one is not likely to take advantage of friends/associates w/ common bonds of interest and persons having common bonds may have access to type of info that would appear in prospectus

CP 45-106 – “close personal friend” - s.2.7: – individual who knows director/executive officer/founder or control person well enough and for a sufficient period of time to be able to assess their capabilities and trustworthiness Applies to private issuer exemption and family, friends, business associates

exemption

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Term “close personal friend” can include family member who is not already specifically identified in the exemption if family member satisfies this criteria

Individual is NOT a close personal friend solely b/c individual is:o A relativeo Member of the same organization association or religious groupo A client, customer, former client, or former customer

Reporting requirements: NONE Prevents cost-burden on small business trying to grow Condon: may be some role for minimum report to indicate use of private issuer

exemption so that commission could investigate if it wanted to inquire whether exemption appropriately

Founder, Control Persons, and Family Exemption: NI 45-106, s.2.7Prospectus requirement doesn’t apply wrt distribution of security in circumstances outlined in s.2.7(2) [s.2.7(3)]

Definitions of Founder, Affiliate, Control Person – s.1.1 Founder: person who: (a) acting alone, in conjunction, or in concert with one or more

persons, directly or indirectly, takes the initiative in founding, organizing or substantially reorganizing the business of the issuer AND (b) at the time of the trade is actively involved in the business of the issuer

Affiliate – s.1.2: issuer is an affiliate of another issuer if: (a) one of them is the subsidiary of the other, or (b) each of them is controlled by the same person.

o Control – s.1.3: Persons controls another person if (a) first person beneficially owns or exercises control over securities of

the second person carrying votes which, if exercised, would entitle the first person to elect a majority of the directors of the second person, unless that first person holds the voting securities only to secure an obligation

(b) second person is a partnership, other than a limited partnership, and the first person holds more than 50% of the interests of the partnership

(c) Second person is a limited partnership and the general partner of the limited partnership is the first person.

Control Person: A person who (a) holds a sufficient number of any of the securities of an issuer so as to affect materially the control of the issuer, or (b) more than 20% of the outstanding voting securities of an issuer except where there is evidence showing that the holding of those securities does not affect materially the control of the issuer

Substantive Requirements – s.2.7(2): Trade in a security to a person who purchases the security as principal (i.e. for themselves rather than on behalf of someone else) and is: (a) founder of the issuer (b) affiliate of the founder of the issuer (c) spouse, parent, brother, sister, grandparent, or child of an executive officer,

director, or founder of the issuer or (d) A person that is a control person of the issue Note : no limit on value of offering or number of investors [built in cap]

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Reporting Requirements: NONE

Government Incentive Security Exemption: OSC Rule 45-501Definition – s.1.1: Investment in a security to fund activities of junior exploration issuers in the resource

sector and northern communities for which a tax shelter is offered Income Tax Act allows expenses to flow to investors as opposed to being taken by

business entity itself

Substantive Requirements – s.2.1(1): Maximum of 75 investors may be solicited Maximum of 50 investors may purchase the GIS

o Note: Anti-avoidance rule – s.2.1(2) Each investor must have access to substantially the same info as a prospectus Investor must:

o Be in position to evaluate investment because of net worth and investment experience or consultation with an investment advisor (not promoter) OR

o Be executive officer/director of the issuer or affiliate of the issuer or their spouse or child

o Note: position to evaluate is not something usually required in IPO No publicity or advertising Promoters limited to using once every calendar year

Condon: Substantive Requirements make the exemption impractical

Disclosure and Reporting Requirements: Investors must be supplied with offering memorandum [s.2.1(1)(b)]

o Identify every officer and director of the issuero Identify every promoter of the issuero Giving particulars of professional qualifications and associations during

lat 5 years of every officer, director, promoter related to the offeringo Indicating each director that will be devoting full time to the affairs of the

issuero Civil remedieso Note : not reviewed by regulators but gives investors some right of action

for misrepresentation A report is required within 10 days of the trade [s.7.1, Form 45-501FI]

o To inform regulator that GIS exemption is being used and could use this to investigate the content of this “prospectus-like” info [not reviewed often in practice]

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Wealthy/Sophisticated Investor Exemption

Accredited Investor Exemption: NI 45-106 – s.2.3Prospectus requirement does not apply if purchaser purchases security as principle and is an accredited investor [s.2.3(2)]

Accredited Investor Definition – s.1.1:

Institutions (a) Canadian financial institutions [banks, trust companies, insurance companies…] (b) Business Development Bank of Canada [bank operated by federal gov’t w/ objective to

assist start up business enterprises under fairly stringent conditions] (c) Subsidiary of any Person referred to in (a) or (b) if person owns all voting securities of

the subsidiary except that required to be by law to be owned by directors of subsidiary (d) Person registered under securities registration as advisor or dealer [investment

banking/brokerage divisions of major Canadian banks] (e) Individual registered or formerly registered under SA as rep of person in (d) (f) Government of Canada or crown corporation (g) Municipalities, Public boards, Commissions, school boards (h) any national or federal state, provincial, territorial gov’t of foreign jurisdiction (i) Pension funds operated by financial institutions or provincial

o i.e. pension whose business it is to invest assets of employees (n) Investment funds [captures mutual funds] (p) Trust companies (q) Persons acting on behalf of fully managed account if they are registered to carry on

business as advisor (r) Registered charity under Income Tax Act that has obtained advice from eligible advisor (s) entity organized in foreign jurisdiction analogous to entities in para (a)-(d)

Individuals

(1) Financial Asset Test – Branch (j): Individual (alone or with spouse) beneficially owns financially assets net valued at 1M [before taxes but net of related liabilities to ensure you are targeting high net worth individuals] Financial assets – s.1.1: cash, securities, or any contract of insurance or deposit that

is not a security for the purpose of this act Related Liabilities – s.1.1: (a) liabilities incurred or assumed for the purpose of

financing acquisition/ownership of financial assets or (b) liabilities that are secured by financial assets

Factors indicative of beneficial ownership – Rule 45-106CP – s.3.5(3):o Physical or constructive possession of evidence of ownership of financial

assetso Entitlement to receipt of any income generated from asseto Risk of loss of value of the asseto Ability to dispose of financial asset or otherwise deal with it as the

individual sees fit

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(2) Income Test – Branch (k): net income before taxes exceeds 200,000 in two most recent calendar years OR combined income with spouse exceeds 300,000 in each of those years AND reasonably expects to exceed that net income in the current calendar year Condon: “reasonably expect to exceed” BUT only seems necessary to show

maintaining current income levels Condon: Is 200,000 is the right threshold to put in category of sophisticated investors

(3) Net Asset Test – Branch (l): Individual who, alone or w/ spouse, has net assets of at least 5M

Substantive Requirements: REQUIREMENT: PURCHASER MUST BE ACCREDITED INVESTOR Anti-avoidance Rule – s.2.3(6): exemption doesn’t apply to trade in security to

person if person is created or used solely to purchase or hold securities as an accredited investor

Focus on purchaser NOT issuer! Seller to accredited investor does NOT have to be issuer – provides flexibility in

allowing accredited investors to sell to each other

Reporting Requirements: Report of Exempt distribution –s.6.1: If ISSUER distributes security of its own issuer

under accredited investor exemption, must file report no later than 10 days after the distribution BUT

No report required – s.6.2(1): if making trade of debt security of its own issue OR concurrently with distribution of debt security, an equity security of its own issue to Canadian financial institution or bank

NOTE: If don’t qualify as an accredited investor, could make large investment and qualify for minimum investment exemption

Minimum Investment Exemption: NI 45-106 – s.2.10Prospectus requirement doesn’t apply to distribution in circumstances in s.2.10(1) [s.2.10(2)]

Substantive Requirements – s.2.10(1): Person purchases as a principal Security costs at least $150,000 paid in cash at the time of the trade Trade is in a security of a SINGLE ISSUER

o Anti-avoidance Rule – s.2.10(3) : exemption doesn’t apply to trade in security to person if that person is created or used solely to purchase or hold securities in reliance on this exemption

Reporting Requirements: Report of Exempt distribution - s.6.1: must file report within 10 days after

distribution under minimum amount investment

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Exception – s.6.2(2): investment fund if files report not later than 30 days after financial year end of the investment fund

Policy Issues: OSC Rule previously appealed this and introduced accredited investor exemption

instead, BUT other provinces were keen so it was brought back in with NI 45-106 Problem: distorting type of transaction going on in the market – forcing issuers to sell

securities in groups worth more than 150,000 to get access to exemption – causing people to take more risk

Study of the Economic Impact of OSC Rule 45-501 Exempt Distributions: taking away 150,000 threshold, results in more variety in types of transactions and more high net worth individuals

Pre-existing Relationship Exemptions

Stock Dividends: NI 45-106 – ss.2.31 and 2.2Dividends – Security as Payment - s.2.31:

No prospectus required where new securities are issued to pay dividends Trade by issuer in securities of (1) its own issue or (2) security of a reporting issuer

to a security holder of the issuer as a dividend Condon: requiring prospectus would undercut dividend payout

Dividend Re-Investment Plans – s.2.2:

No prospectus required when dividends, interest, or cash payments paid to SH of issuer are applied to acquire additional securities of the issuer Instead of giving stock as dividend, give cash and option to roll cash into new stock Limitations:

o Security holders must purchase securities of same class to which the dividends or distributions are attributable to (Ontario???)

o Must not exceed 2% of issued/outstanding shares of the class to which the plan relates

Reorganizations: NI 45-106 - s.2.11 Amalgamation, merger, re-organization under statutory procedure Dissolution or winding up of the issuer

Conversion, exchange, or exercise: NI 45-106 - s.2.42No prospectus when issuer trades its securities to a security holder of the issuer in accordance with terms and conditions of a security previously issued Examples: options, convertible debt securities (can be converted to equity securities

under certain conditions), convertible preferred shares (can be converted to common under certain conditions)

Would technically be a new distribution when exercise conversion option

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Policy Justification: dealing with limited group of security holders and people that already have an investment in that issuer (thus access to info)

Rights Offerings: NI 45-106 - s.2.1No prospectus requirement wrt granting of existing security holders right to purchase securities and the issue of securities pursuant to that right [s.2.1(2)]

Substantive Requirements: KEY Limitation: Must comply with requirements in NI 45-101 [s.2.1(1)(c)] Rights Offering Exemption Not Available - NI 45-101 - s.2.2:

o If exercise of rights will result in an increase of more than 25% in the number of outstanding securities of the class to be issued

o See p.1285 for additional restrictions in NI 45-101 Rights Offerings Can only trade under exemption if regulator as not objected to trade within 10 days of

receipt of notice OR if there is an objection, the issuer has delivered information that is satisfactory and acceptable to the regulator [s.2.1(1)(b)]

Reporting and Disclosure Requirements: Notice to Regulator – s.2.1(1)(a): Must provide written notice to regulator of date,

amount, nature, and conditions of the trade, including approximate net proceeds to be derived from issuer

o REGULATOR HAS 10 DAYS TO REVIEW Rights Offering Circular – NI 45-101 – Part 3): Must send a rights offering circular

prepared in accordance with Form 45-101F to regulator [s.3.1(1)] AND each security entitled to security holder entitled to receive rights under the offering [s.3.2]

o Policy: still want some kind of protection for existing security holderso Condon: why are we giving existing security holders protection in some

contexts but not others? Purchasing here rather than receiving as payment of dividend

Information Required in Rights Offering Circular - Form 45-101F [p.1289] includes:o Item 2 – Summary of Offeringo Item 4 – Brief description of business of the issuero Item 5 – Details of rights and securities Offeredo Item 8 – How to exercise rightso Condon: not as detailed as prospectus, mostly about how to exercise rights

Trades to Employees, Officers, Directors: NI 45-106 - Division 4No prospectus for distribution to employees of issuer or a “related entity”

Substantive Requirements: Key Requirements – s.2.24(1): Distribution to employee, executive officer, director,

or consultant of the issuer or of a related entity of the issuer and participation in trade is VOLUNARY

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Condon: short-term contractual relations are contemplated under exemption [i.e. choosing to compensate consultant or short-term service w/ stocks can come within exemption]

Voluntariness – s.2.23(2): Participation is voluntary if not induced to participate by expectation of employment or continued employment with issuer or related entity

o Condon: difficult to ascertain o 45-106 CP specifically indicates that where expectation of continued

employment hinges on acceptance of stock as a form of compensation, voluntary requirement not met

Note: “related entity” means a person that controls or is controlled by the issuer or that is controlled by the same person as the issuer

Offering Memoranda (OM)Exemption if issuer provides OM BUT Ontario is NOT included [NI 45-106 – s.2.9]

ONTARIO: GIS exemption requires OM to be distributed [OSC Rule 45-501 – s.2.1(1)]

Definition OSC Rule 14-501 – s.1.1; OSA – s.1(1): document purporting to describe business and

affairs of issuer that has been prepared primarily for deliver to and review by prospective purchaser to assist purchaser in making investment decision for a security being sold in distribution to which s.53 would apply but for availability of exemption but does NOT include document setting out current information on issuer for prospective purchaser familiar w/issuer through prior investment or business contracts

Contents OSC Rule 45-501 – s.2.1(1):

o Identify every officer and director of the issuero Identify every promoter of the issuero Giving particulars of professional qualifications and associations during lat 5

years of every officer, director, promoter related to the offeringo Indicating each director that will be devoting full time to the affairs of the issuero Civil remedies

OSC Rule 45-501 Part 6 – 6.3: must inform prospective purchaser of rights under s.130.1 of the OSA [civil liability provision which gives purchaser ability to sue for misrepresentation]

o See OSC Rule 45-501CP Part 5 Condon: Not reviewed by regulator in the same way prospectus is and very little

prescribed content, but can sue if there is a misrep.

OM Statutory Right of Action – s.130.1 Grounds of Liability :

o Misrepresentation [s.130(1)]o Note: Deemed reliance

Defences :

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o Purchaser knowledge [s.130.1(2)]o Depreciation not due to misrepresentation [s.130.1(3)]o Not receiving proceeds and the misrepresentation was not based on

information provided by the issuer [s.130.1(5)] Remedies :

o Damageso Recession

Filing requirements Delivery – s.6.4: Copies of OM to be filed with OSC within 10 days of the date of

distribution NOTE: No review of OMs and OMs not made public (SEDAR)

Discretionary Exemptions If don’t qualify for specified exemption, can apply for discretionary exemption

Application for Exemption - OSA – s.74: on application of interested person or company, Commission may rule that trade is not subject to a registration or prospectus requirements where to do so wouldn’t be contrary to public interest and can impose any terms as necessary

Condon: since the national instrument 45-106, regulators more reluctant to grant exemptions b/c not happy about expanding the boundaries even further

Consequences of Incorrectly Relying on Exemption Jones v. Deacon Hodgson [1989/Ont. SC HCJ] incorrect reliance on exemption renders K void – no limitation period for failure to file prospectus Failure to file prospectus renders contract void [recession under s.53] Where issuer sells securities on an incorrect reliance private issuer exemption, K is

void and purchaser should be entitled to $ back Distinction between failure to file prospectus and failure to deliver one

o Statutory right of action for failure to delver prospectus has limitation period of 3 years

o NO limitation period for failure to file a prospectus b/c rule is so fundamental to the statutory scheme –serious infraction

Note: not high level court, but not superseded or overturned

NOTE : Responsibility for Compliance - NI 45-106 CP – s.1.10: Can rely on factual reps by purchaser provided that there are no reasonable grounds to believe they are false; however, person trading in securities is responsible for determining, whether given the facts available, the exemption is available. Generally should retain all necessary documents that show the person properly relied on exemption

Resale Rules and Control DistributionsPolicy Objectives Disclosure

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o Subsequent purchasers may not be well positioned to buy w/out info Preventing Backdoor Underwriting

o Prevent abuse [i.e. use of exemptions to do large scale public offering]]o Initial distribution to an exempt purchaser who then resells to the broader

market (avoiding regulation) Pricing

o Incentives for issuers to become reporting issuers and for transactions to occur on the secondary market by way of giving purchasers more advantageous pricing when purchasing from issuers on the exempt market

Control Distributionso Definition of distribution includes sales by control persons in OSA

requiring control persons to provide prospectuso Resale rules allow for sale from control block holders under similar

conditions imposed by other resale rules and expands range of alternatives

NOTE: Removal of OSA RR (NI 45-102, s.2.2 and Appendix C)

NI 45-106 does not restrict repeated use of prospectus exemptions beyond the first distribution w/out triggering re-sale rules [NI 45-102CP – s.1.2(3)]

Choosing the Applicable Resale RuleExemption under NI 45-106 Applicable NI 45-102 Resale Rule

Government Incentive Security (GIS) Exemption s.2.5 (NI 45-102, s.2.3 and App D)

NOTE: RR 2.5 only when one of the initial purchasers wants to sell outside initial parameters – i.e. if trade is amount group of original 50 purchasers, continued exemption under OSC Rule 45-501, s.2.2

Private Issuer Exemption 2.6 NI 45-102 s.2.4 and App.E)Founder, Control Person and Family Exemption 2.5 (NI 45-102, s.2.3 and App.D)Accredited Investor Exemption 2.5 (NI 45-102, s.2.3 and App.D)Minimum Investment Exemption 2.5 (NI 45-102, s.2.3 and App.D)Stock Dividend Exemption 2.6 (NI 45-102 s.2.4 and App.E)Re-organization Exemption 2.6 (NI 45-102 s.2.4 and App.E)Conversion. Exchange, Exercise Exemption 2.5 OR 2.6, depending exemption under

which previously issued security was first acquired Example: If previously issued (original)

security was issued to an accredited investor, resale of underlying security attracts RR 2.5 (RR applicable to accredited investor)

Example: If original security was issued by way of stock dividend, resale of underlying securities attracts RR 2.6

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Note: Underlying security means the security issued on conversion or issued on exchange [NI 45-102]

Rights Offering Exemption 2.6 (NI 45-102 s.2.4 and App.E)Employees / Officers / Directors / Consultants 2.6 (NI 45-102 s.2.4 and App.E)Resale Rules for Control Persons If the control person sells through an

exemption under NI 45-106, the respective NI 45-102 resale rules apply

Substantive Rules

Restricted Period Resale Rule: NI 45-102 – s.2.5(2)

NOTE: More stringent [conditions on issuer and re-seller] because the exemptions are more likely to cause regulatory concern of lack of disclosure and back-door underwriting

Condition #1 –Seasoning Requirement: issuer is or has been a reporting issuer for the 4 months immediately preceding the trade (resale) Rationale: Have to provide docs to become a reporting issuer and within 4 months

will be at least one set of interim financial statements Exception - NI 45-102 s.2.7: seasoning period doesn’t apply if became a reporting

issuer after the distribution date by filing a prospectus Distribution date = date securities originally issued in reliance on exemption

Condition #2 – Restricted/Hold Period Requirement: at least 4 months have elapsed since distribution date (purchasers must hold for 4 months) Rationale: prevents back-door underwriting - circumventing quick turnaround and

avoids possibility of collusion between issuer and initial purchaserso Some argue rationale is to push issuers into public market

NOTE : Purchasers will want discount in price to compensate for lack of liquidity NI 45-102 CP - s.1.11: if issuer is not a reporting issuer at distribution date but

subsequently becomes a reporting issuer, seasoning requirement not longer applies and can be re-sold provided that restricted period has expired [can decrease seasoning period but not restricted period]

Calculation of restricted periods where more than one exempt purchaser – NI 45-102 CP s.1.8: calculated from distribution date - date securities were distributed in reliance on exemption from prospectus requirement by issuer or control person

Example under NI 45-102 CP s.1.8:o Issuer distributes securities under exemption to purchaser in Saskatchewano Purchaser subsequently re-sells under an exemption during the restricted

period to purchaser in Albertao Alberta purchaser wants to sello Determine whether restricted period has expired from date the

issuer/control person distributed securities to Saskatchewan purchaser

Note: application of restricted/seasoning period rules to underlying securities

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Underlying securities - NI 45-102 CP s.1.10: Restricted period or seasoning period applicable to trades in underlying securities is calculated from the distribution date of the original convertible or exchangeable security which entitled the holder to acquire underlying security NOT date of the conversion to new type of security.

o Example : if accredited investor held a convertible security for 6 months and upon conversion wants to re-sell, there is no further restricted period as it expired while the accredited investor held it as a convertible security

Condition #3: Legending Certificate representing securities must carry a legend indicating the date on which

securities are eligible to be re-sold Does not apply trade of underlying security if four months has passed since the

original convertible security was issued [NI 451-02, s.2.5(3)] Rationale: Linked to hold period - prevent holders of from trying to resell at earlier

date to unwary investors not aware of requirements

Condition #4: not a control distribution: separate rules dealing with sales by control block holder [RR s.2.8]

Condition #5: no unusual effort to prepare the market or create a demand for security that was subject to the trade Rationale: Prevents back door underwriting –indication is engagement in fair amount

of marketing activities to get interest – demonstrates wariness of regulators wrt to use of exemptions – don’t want to make it more attractive to use exempt market

Legislation itself does not elaborate on ‘unusual effort’, but 45-102CP refers to ASC Rules – Section 4

o Dissemination of soliciting material to prospective purchaser unless the material consists only of a letter/communication identifying securities being sold and advising that they are available

o Formation of selling group to coordinate the efforts of more than one registrant to effect the sale

o Implementation of transaction or plan to adjust market price of securities o Sales effort that is illegal or improper by standards of marketo Sale to non-arm’s length purchasers

Condition #6: no extraordinary commissions Can’t compensate person/company > than customary for transactions of a similar size Rationale: Don’t want to provide underwriters with incentives to sell securities for

you in context in which prospectus level disclosure has not been provided (see also Condition 5 rationale)

Condition #7 : Selling security holder has no reasonable grounds to believe issuer in default of securities legislation (if selling security holder is an insider or officer of the issuer) Rationale: decrease asymmetry of information

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Seasoning Period Resale Rule: NI 45-102 - s.2.6(3)ONLY DIFFERENCE: NO HOLD PERIOD ON PURCHASER

Conditions: Seasoning Period: issuer reporting issuer in preceding 4 months before trade

o Seasoning period N/A where issuer becomes a reporting issuer after the distribution date [NI 45-102 - s.2.7]

Not a control distribution No unusual effort to prepare of market or to create a demand for the security that is

the subject of the trade If selling security hold is insider or officer of the issuer, the selling security holder has

no reasonable grounds to be issuer is in default

Condon: s.2.6 is very easy to meet if you are already a reporting issuer and in good standing with continuous disclosure requirements

Policy Questions: Is 4 month seasoning requirement enough to provide investors disclosure? Is 4 month hold period enough to prevent backdoor underwriting?

EXAMPLE Issuer XYZ qualifies to be a private issuer; Directors of XYZ are A, B, and C; XYZ has 20

security holders, including D and E; D is a close personal friend of A; E is a close personal friend of B

Can XYZ issues securities to F who is a close personal friend of C?o YES - F is eligible under private issuer exemption (close personal friend of

directors) and sale does not put private issuer over 50 person limit Can D sell securities in XYZ to E?

o YES – E is eligible under private issuer exemption (existing SH) XYZ does an IPO on March 2006 and on April 1, 2006 E wants to sell his securities

o RR s.2.6 RRo OK – seasoning period met b/c issuer became reporting issuer after distribution

date

Trades by Control Persons

Alternatives Available to Control Persons Distributing Securities Control person/issuer issues a prospectus

o Not feasible b/c of high $ but may tag along if issuer is filing prospectus Discretionary exemption from OSC under s.74

o Not likely to get b/c will undercut goals and concern re asymmetry of info o Could apply on basis that there has been recent prospectus by issuer and

make declaration that nothing has changed Use of another prospectus exemption

o Sell to someone who qualifies for prospectus exemption (i.e. accredited investor) BUT

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o Buyer will suffer loss of liquidity b/c buying from a control block holder RR applicable to subsequent sale to someone not qualifying under

exemption RR in 45-102, s.2.8

Substantive Rule – NI 45-102 - s.2.8Prospectus requirement does not apply to a control distribution if conditions in s.2.8(2) are satisfied [s.2.8(1)] Condition #1: Seasoning Period Requirement (same as s.2.6)

o Issuer is or has been reporting issuer in jurisdiction of Canada for 4 months immediately preceding trade

o Seasoning period N/A where issuer becomes a reporting issuer after the distribution date [s.2.7]

o Note: distribution date is date security that was subject of the trade was acquired by selling security holder [s.1.1]

Condition #2: Restricted Period Requiremento Selling security holder has held securities for at least 4 monthso Determination of time periods in context of convertible/exchangeable

securities: 4 months from the time original securities are first acquired NOT 4 months for the date the security is converted into underlying security [s.2.9(3)]

Condition #3: No unusual effort is made to prepare the market or to create demand for the security that is subject of the trade

Condition #4: No extraordinary commission or consideration is paid to a person or company in respect of the trade

Condition #5: Selling security holder has no reasonable grounds to believe that issuer is in default of securities legislation

Filing Requirements – NI 45-102 Filing Requirements - s.2.8(3): Selling security holder must

o (a) sign Form 45-102FI no earlier than one business day before form is filed

o (b) File Form 45-102FI on SEDAR at least 7 days before first tradeo (c) File an insider report prepared under Form 55-102F6 or 55-102F6

within three days after completion of trade Form expires 30 days from date filed [s.2.8(4)]

Terms of Form 45-102FI [see p.1316] Name of reporting issuer Info re selling security holder (name; positions held w/ reporting issuer; whether

selling as lender, pledge, mortgagee or other encumbrance; number and class of securities beneficially owned)

Distribution (i.e. number/class of securities proposing to sell; whether selling privately or on an exchange or market)

Warning (offence to submit info that is materially misleading or untrue)

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Certification that have no knowledge of material fact or material change wrt issuer and the information in form is true and complete

EXAMPLE: B becomes control block holder of NYZ (a private issuer) in FEB 06 XYZ does IPO in MAR 06 B wants to sell securities in APR 06 Selling securities of a private issuer attracts 2.6 RR BUT this is a control block distribution

(Condon: thinks 2.8 trumps 2.6 but not case law) B cannot sell, because the 4 month hold period is not met

Takeover Bids Takeover bid: Bidder makes offer to purchase outstanding shares of another

corporation (“the target”) Hostile: target management/BOD don’t invite bid and aren’t in favour OR Friendly: target management/BOD approve of bid and cooperate

TB v. other forms of control transactions: only change SH identitiy – Key consequence: replace existing management Policy: Stakeholder v. Efficiency Debate

o Economic Efficiency Argument: If want to have thriving economy w/ assets used in most efficient way, should support TB and eliminate regulatory concern for target SH (i.e. shut down unproductive plants)

o Stakeholder Argument: various stakeholders are adversely affected (employees, communities, etc.)

Motivations for launching takeover Replace insufficient management Synergies [b/w assets and operations of the target and its own] Desire to increase market power/empire building Tax considerations Undervaluation of shares

Regulatory Objectives Disclosure of Information: bidder giving info to target (misplaced concern?) Time to respond: time to target SH to respond and target management to give

recommendation Equality of Treatment: equal consideration to target SH (compare to US where able

to offer incentives to SH who tender early – i.e. better price for SH)

Early Warning Rules EWR (news release, file report, & one day freeze) apply in two circumstances: Purchase results in beneficial ownership of 10% of outstanding voting or equity

securities of any class [s.102.1(1)] Every subsequent 2% increase after 10% threshold is met [s.102.1(2)]

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Policy Objective: to provide warning of potential TB but argument that these rules make TB more costly and results in not achieving optimal number of takeovers in the economy

10% Threshold – s.102.1(1): Every acquiror who acquires beneficial ownership of, or power to exercise control or direction over, 10% or more of outstanding voting or equity securities of any class of securities (or securities convertible into voting or equity securities) must disclose in two ways – issue and file news release and file report w/OSC containing info required in the news release

o NOTE: In determining whether 10% threshold is met, count “acquiror’s securities (definition – s.102: securities of that class owned on the date of an offer to acquire either by the acquiror or any person or company acting jointly or in concert with the acquiror)

o News release must be issued promptly and report must be filed within 2 business days from the day of the acquisition [OSC Rule 62-504 – s.7.1]

Content of news releases/reports – NI 62-103, Part 3, s.3.1(1): info in Appendix E Appendix E [see p.2327]:

o Name and address of offeroro Principle amount of securities and security holding percentage in the class of

which the offeror has acquired ownership wrt the transaction giving rise to reporting obligation

o Information about any actor who is acting jointly with the offeror (i.e. names of joint actors and ownership)

o Name of market in which transaction giving rise to obligation took placeo Purpose of offeror and any joint actors (i.e. signal intention to make any

further acquisitions) (Condon: rarely reported b/c price will increase) Additional News Release/Reporting Requirement– s.102.1(2):

o for EVERY subsequent acquisition of 2% by the acquirer (or by any person acting jointly or in concert w/ acquirer) of securities of the class for which disclosure under 102.1(1) was required or securities convertible into that class

o for change in material fact in info contained in disclosure o wait one business day from when report is filed to start acquiring

additional securities Freeze Period – s.102.1(3): acquiror (and persons acting jointly and in concert with

acquiror) must wait one business day from when report is filed to start acquiring additional securities of the applicable class

LOWER THRESHOLDS IN CONTEXT OF FORMAL TB – S.102.2

Policy: Inform SH of potential competing bids to assist in deciding whether to tender

5% Rule - s.102.2(1): Must issue and file news release if acquire beneficial ownership of 5% or more of outstanding voting/equity securities of class subject TB

o Further news release/report for additional acquisitions of 2% [s.102.2(2)] OSC Rule 62-504 – s.7.2: must, before the opening of trading on the next business

day, issue and file a news release containing the following information:

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o Name of acquirer o Number of securities acquired in transaction that gave rise to the requirement to

issue news releaseo Beneficial ownership by acquiror and all persons and companies acting jointly or

in concert with the acquiror immediately after the acquisition o Number of securities beneficially acquired by acquiror and all persons/companies

acting jointly and in concert w/ acquiror since commencement of the bid o Name of market transaction took place ino Purpose of the acquirer and anyone acting jointly w/ them for acquiring the

securities

Alternative Reporting System for Eligible Institutional Investors: NI 62-103 – Part 4 Condon: relatively low thresholds – exempt entitles who acquire significant amounts

but don’t intent to take over (i.e. mutual funds on behalf of a large number of beneficial owners

S.4.1: early warning requirements don’t apply to an eligible institutional investor if intends to file monthly reports under this Part or is not in arrears of filing reports under this Part

S.4.2: eligible institutional investors shall not file reports under this part if they intend to make a formal bid

Eligible institutional investors: financial institution, pension fund, mutual fund that is not a reporting issuer, investment manager in relation to securities it exercises discretion to vote, acquire or dispose…

When is a TB taking place?

Definitions – s.89(1) Takeover Bid: offer to acquire OUTSTANDING voting securities or equity securities of a

class made to one or more persons or companies where the securities subject to the offer to acquire, together with the offeror’s securities, constitute 20% or more of the outstanding securities of that class . 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 Relevance - “voting securities”: BOD election– get rid of managemento Rules apply equally to offeror holding more than 20% (BUT likely

exemption for small purchases) Equity Securities: Security of issuer that carries residual interest in earnings of issuer

and residual interest in the assets on liquidation or winding upo Relevance: some are convertible into voting securities

Offer to acquire: (a) offer to purchase or a solicitation of an offer to sell (b) an acceptance of an offer to sell, whether or not the offer had been solicited or (c) any combination of the above

Offeror’s securities: securities beneficially owned, or over which control or direction is exercised, on the date of an offer to acquire, by an offeror or by any person or company acting jointly or in concert with the offeror (note: question of fact)

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“Person or company acting jointly or in concert with an offeror”

s.91(1)(a): following is deemed to be acting jointly or in concert with the offeror …o (i) As a result of any agreement, commitment or understanding with the

offeror or with any other person or company acting jointly or in concert with the offeror, acquires or offers to acquire securities of the same class as those subject to the offer to acquire, and

o (ii) an affiliate of the offeror S.91(1)(b): presumed to be acting jointly and in concert with offeror…

o Person or company who, as a result of agreement/commitment/understanding w/ offeror or anyone acting jointly or in concert with the offeror, intends to exercise any voting rights jointly or in concert with the offeror or anyone acting jointly or in concert with offeror

o Condon: if want to make case, have to have some evidence of a formal or informal agreement or commitment between the parties to exercise voting rights jointly and in concert

Counting Rules in Meeting 20% Threshold People acting “acting jointly or in concert” with offeror [see definition of offeror’s

securities] Securities convertible into relevant class within 60 days [s.90(1)] Securities that offeror may or must acquire within 60 days (i.e. by exercise of option,

right, etc) [s.90(1)]

NOTE: Anti-Avoidance Rule Indirect Offers – s.92: offer to acquire includes a direct or indirect offer to acquire Example: if you make TB for Company A, it could be treated by regulators as

takeover for Company B if factual the only real asset of A is securities of B

How to Conduct a TB

Two means of commencing TB:1. Delivering a TB circular to all SH of the target [s.94.1(b)] [used to be only option]2. By advertisement – i.e. publishing an announcement of the TB in major daily

newspaper [s.94.1(a)] File and deliver bid/circular to target on or before date of advertisement [s.94.2(2)(a)] Deliver bid and circular shareholders within 2 days of receiving shareholder list

[s.94.2(2)(c)] Policy: advantage to bidder by making process quicker given that bid must remain

open for 35 days (can start open period up to 10 days earlier )

TB CircularPolicy: SH must have full info about bid and bidder so can make an informed decision [Condon: Is putting too high of a burden on bidders problematic?]

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Content: OSC Rule 62-504FI Part 2 (NOTE: similar to prospectus) Item 1: Name/description of offeror Item 2: Name of offeree issuer Item 3: Description of securities subject to TB Item 4: dates on which TB will begin and end Item 5: consideration (i.e. cash/securities of the offeror) – if offering securities of the offeror, must

disclose details of those securities – particulars of rights, conditions and restrictions attaching to those securities

Item 6: ownership of securities of offeree Item 7: description of trading in securities of offeree issuer Item 8: commitments to acquire securities of the offeree Item 9: terms and conditions of bid Item 10: particulars for payment for deposited securities Item 11: description of right to withdraw deposited securities Item 12: source of funds for payment Item13. Trading in securities to be acquired Item 14 and 15 and 16: arrangements between offeror and directors/officer of offeree and SH of

offeree and w/ offeree in general Item 17: purpose of the bid – includes proposals and future plans re

o subsequent transactions involving the offeree issuer such as a going private transactiono material changes in business of target

Item 18: valuation Item 19. Securities of an offeror or other issuer to be exchanged for securities of offeree issuer

(must provide additional info about offeror’s financial position as an issuer) Item 20: Right of appraisal and acquisition Item 21: Market purchases of securities (i.e. whether offeror intends to purchase in securities subject to

bid in market Item 22: state that it has been approved by directors Item 23: Other material facts (material facts re securities of offeree issuer and any other matter

that is not generally disclosed and known to the offeror and that would reasonably be expected to affect decision of SH to accept or reject offer)

Item 24: disclose person/company retained by offeror to make solicitations and the compensation Item 25: Statement of rights of securities of offeree issuer (i.e. recession or damage for misrep) Item 26: Certificating statement no untrue statement of material fact or omission of material factNOTE: Civil liability for misrepresentation [s.131(1)] and directors [s.131(2)]

To whom should bid be delivered Security Holders: of class subject to the bid who are in Ontario AND of convertible

securities that are convertible in the relevant class before expiry of bid [s.94] Offeree: on day bid is sent or as soon as practicable [94.2(3)] File with OSC [94.2(3)]

Variation in Terms of Bid/Material Information - s.94.3(1) If change in information contained in bid circular that would reasonably be expected

to affect decision of security holders to accept or reject bid occurs before expiry of bide or expiry of rights to withdraw securities deposited under bid, offeror MUST:

o Issue and file a news releaseo Send notice to change to every person/company to whom circular was

required to be sent and whose securities were have not been taken up

Certificates Required - s.99(1) and Form 62-504FI, Item 26

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“contains no untrue statement of a material fact and does not omit to state a material fact 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”

Signed by: CEO or whoever performs functions of CEO, CFO or whoever performs functions of CEO, 2 other directors OR offeror if offeror is an individual

RE Canfor Corp. [1995/OSCB]

Facts: Canfor made bid for Slocan securities (forestry company) Complicated bid structure - two stage transaction:

o Receive deposit receipts in consideration for depositing securities o Entitled to receive common shares at date determined by Canfor

Reasons: need consent of forestry minister for a change in control of a company that operates timber licenses

Allegations re adequacy of disclosure in Canfor circular Inadequate description of consideration offered for S shares Didn’t disclose that method for avoiding change of control provisions of Forest Act

(i.e. deposit receipts) was untested and it might violate act Canfor also had a substantial “out-clause”

Analysis: Test of materiality – OSC Rule 62-504 FI - Item 23: whether information would be

reasonably expected to affect decision of security holders in deciding whether to accept or reject bid

Inadequately disclosure wrt: out clause, fact that method wasn’t tested, complexity and difficulty of approval process

Public interest power – s.127 cease trade order (prevent TB from proceeding)

Director’s CircularMust send to all persons/companies the bid was required to be sent within 15 days after date of bid [s.95(1)] Policy: directs advise whether to accept or reject b/c in the best position to value

shares of the target and its going concern aspects AND gives directors opportunity to shape response of SH and engage in defensive tactics

Duty to evaluate and advise – s.95(2): o (a) whether accept or reject bid and reasons for recommendation o (b) state that it is unable or is not making a recommendation and reasonso (c) state BOD is deciding and advise not to deposit securities until they

receive recommendation o Also see OSC Rule 65-504F3, Item 15

OSC Rule 62-504F3: o Item 7: Material relationship material w/ offeror or offeror’s officers or

directors o Item 8: Arrangements between offeree issuer and officers and directors

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o Item 9: Arrangements between the offeror and security holders of offeree issuer

o Item 10: Interests of directors and officers of the offeree issuer in material transactions with offeror

o Policy: concern that director’s of target may want to act in their own interest wrt bid rather than in interest in SH

Time Periods & Take-up Issues Bid Period – s.98(1): Bid must be open for 35 days

o May not extent formal bid period unless offeror first takes up securities deposited under bid that have not been withdrawn [s.98.3(4)]

Prohibition on Take-up – s.98(2): No securities to be taken up (accept for purchase) until 35 day period expires

Take-up – s.98.3(1): Offeror has to take up securities not later than 10 days after expiry of bid

Payment – s.98.3(2): Securities must be paid for not more than 3 days after take up

NOTE: Issues of take up/payment in Canfor - when are the Slocan securities taken up? OSC held that take-up occurred when first stage of transaction was complete (deposit

receipts given to shareholders who tendered) Taking up means communication by the offeror of its irrevocable decision to

complete the purchase of shares tendered under its offer

Withdrawal Withdrawal– s.98.1(1): can withdraw securities deposited under a formal bid:

o (a) any time before the securities have been taken up by the offeror (i.e. any time before the end of the 35 day period);

o (b) at any time before end of 10 days after notice of change o (c) if the securities are not paid for within 3 days of take-upo Policy: want to allow SH opportunity to get out if discover unfavourable

info or a more favourable bid comes along

RE Canfor Corp. [1995/OSCB]Facts: Canfor had at least 100 days before its shares would be exchanged for deposit receipts, but Slocan shares irrevocably deposited → Slocan argues that offended withdrawal rights b/c bid could not be completed for an indeterminate period of time

Analysis: Would have been fairer to Slocan SH to extend withdraw rights until deposit receipts

exchanged for Canfor shares or if Canfor provided a withdraw rate that would operate if there was another bid made after 45 days of Canfor bid

Infringement wasn’t serious enough to sue public interest power to cease trade – extended time period during which Slocan shares could be tendered

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Bid Conditions Bidders can have conditions on their takeover offer (fewer conditions make it easier

to persuade target shareholders to tender) 97.3(1): if consideration is to be paid in cash, offeror must make adequate financing

arrangements before bid to ensure that funds are available to make payment 97.3(1): financing arrangements may be subject to conditions if the offeror reasonably

believes that it is remote that offeror will be unable to pay if financing condition is not satisfied

Note: in US can’t be conditions re financing

Equal Treatment Identical consideration – OSA – s.97(1): to all holders of the same class of securities

o Does not prohibit offering an identical choice of consideration (i.e. all cash or part cash/securities) [97(2)]

o Policy: SH tendered initially will not deprived of change in offer price Increase in Consideration - s.97(3): offeror must pay increase to each person or

company to whose securities were taken up Prohibition on Collateral Agreements - s.97.1(1): If a person or company makes or

intends to make a formal bid, agreement has the effect of providing a security holder of the offeree issuer with consideration of greater value than other security holders of that class (i.e. can’t offer inducements to large security holders)

o Exceptions - OSC Rule 62-504 s.4.1 - Employment compensation arrangements

Pre-bid Integration Issues - s.93.2(1): If within 90 days preceding formal TB the offeror acquired beneficial ownership of securities of class subject to bid in a transaction not generally available to holders of that class of securities, the amount offered in TB must be the same or higher

o Policy: prevent approaching SH prior to bid and giving more money Lock up agreements - s.93.1(1): prohibited during the period of the bid

o lock-up agreement is permitted before (where whereby a security holder and an offeror will contract to the effect that the security holder will tender his shares to a formal TB) BUT can’t give more consideration

Partial Bids Proportionate Take UP– OSA – s.97.2(1): where greater number of securities is deposited under bid than offeror is bound or willing to acquire, must take-up and pay for securities proportionately according to the number of securities deposited by each security holder

Exemptions from TB Rules

Normal Course Purchases Exemption– s.100 Bid is for not more than 5% of outstanding securities of a class Not more than 5% are purchased in reliance exemption within a one year

o Anti-avoidance rule : can’t use exemption to do creeping TB by completing sequential 4.5% purchases in a closely related period of time

o Includes offeror or anyone acting jointly or in concert with offeror There is a published market for the class of securities subject to the bid

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o Make sure sellers of securities can find out if they are getting fair price Purchase price does not exceed market price at the date of acquisition Policy: Available to significant security holders to by small numbers of additional

securities as long as the above conditions are satisfied

Private Agreement Exemption – s.100.1(1) Purchases are made from 5 or less persons or companies (including persons or

companies outside of Ontario) If there are more than 5 security holders of the class subject to the bid, it is not made

generally to all security holders Cap on consideration:

o Published market: consideration <= 115% of market price @ date of bido No published market: reasonable basis for determining that consideration

is <= 115% of the value o NOTE : Calculation of “market price” re 15% premium – average of

closing price in the previous 20 business days [OSC Rule 62-504, s.1.3] Policy: prevent strategic behaviour to increase market price

Non-reporting Issuer Exemption – s100.2 Policy: While TB rules apply to all issuers, regulators are really interested in

enforcing good behaviour re timing and disclosure wrt reporting issuers b/c reporting issuers likely to have more security holders

Additional Requirements - OSC Rule 62-504 - s.6.1: o No published market for securities that are subject to the bido Number of security holders of class at commencement of bid is not more

than 50 (not including employees of offeree issuer of affiliate of offeree issuer (or former employees who were security holders at time of employment)

De minimis exemption - s.100.4 Small number of Ontario SH: Number of beneficial owners of class subject to bid in

Ontario is < 50 and securities held by them constitute less than 2% of that class Equal participation: Ontario SH entitled to participate on same terms as rest of class

Foreign Target Exemption – 100.3 Small number of SH in Canada: Bidder reasonably believes that registered and

beneficial security holders in Canada hold less than 10% of class subject to the bid o Condon: bid is not primarily directed to Canadian security holders

Limited trading: Published market on which greatest dollar volume of trading occurred during last 12 months was not in Canada

Equal participation: Ontario SH entitled to participate on same terms as rest of class

Defensive Tactics

NOTE: Conflict of Interest Position of Target Board - obligated to act in best interests of company BUT stand to lose positions if the bid is successful

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Types of Defensive Tactics

White Knight

Alternative bidder in the context of a hostile bid BOD and white knight typically negotiate agreement that could contain other

defensive tactics (such as break free) Policy: regulatory concern that value offered by white knight will be too low

Poison Pills or SH Rights Agreement

Agreement establishing rights for SH to acquire additional securities of the same class Price at very uneconomical level (above market price) in normal course BUT drops to

very low price when triggering event occurs (TB or acquisition of 15% of shares) Permitted bids: will not trigger SRA Can be put in place when a hostile TB is made or well in advance of the possibility of

TB (i.e. agreement that is in effect for 5 years and comes up for renewal) Purpose: dilute bidder’s holdings and puts target directors back in control Policy concern: bidder is treated differently than other SH (divergence from

corporate law principle that you must treat all SH the same) Danger signal if it is a tactical pill put in place with out SH approval (note: regulators

can use cease trade power under s.127) Upheld if elements of the plan are appropriate and there is shareholder approval

Sale of Crown Jewel

Target enters into agreement w/ 3rd party to sell a significant asset (“crown jewel”) if TB is successful

Purpose: to discourage initial bidder Policy concern: whether the target board is appropriate value for asset (i.e. is this

something working to the benefit of the company as a whole)

Litigation

Applications to OSC on basis that bidder not acting in conformity with securities law and applications to competition tribunal

Purpose: delay TB – more time for SH to decide BOD to seek out alternative offers Beware: can also work to prevent target BOD from using defensive tactics Example – stakeholders of target can use litigation to intervene: BCE decision

o Major group of bond holders sought corporate law remedies and argued terms of merger were oppressive to them

Break Fee

Fee payable in the event that the 3rd party doesn’t succeed (3-5% of value T)

Guidelines for Target’s Use of Defensive Tactics: NP 62-202 (NOT mandatory) Primary Policy Objective – s1.1(2): to protect bona fide interests of target SH

o Tactics that are likely to deny of severely limit ability of SH to respond to TB or competing bid may result in action by regulators (i.e. cease trade power) [s.1.1(7)]

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No fixed code of conduct in addition to fiduciary obligations required by corporate law – s.1.1(3): BUT regulators will examine tactics to determine whether they are abusive to SH rights. Prior shareholder approval may ally such concerns.

Circumstances where DT might come under scrutiny – s.1.1(4):o Issuance, granting of an option on, or purchase of securities representing a

significant % of o/s securities of the target (i.e. board might offer to 3rd party option to purchase another 20% of company)

o Sale of crown jewelso Entering into K other than in normal course of business (tactical poison

pill or break fee) Unrestricted Auctions – s.1.1(5): produce most desirable results in TB

o Condon: increases price that bidders will to pay for target

Fiduciary Duties of the Target BODRe CW Shareholdings Inc. v. WIC Western International Communications Ltd [1998/Gen.Div] duty is of target board to act in best interest of the shareholders as a whole and to take active and reasonable steps to maximize shareholder value by conducting auction

Facts: CanWest made bid to acquire all o/s Class A and B shares of WIC → BOD thought inadequate → initiated SRA → break fee to Shaw and radio asset option which is exercisable whether bid is successful or not → application by CanWest to cease trade

Analysis: In context of hostile TB where the corporation is “in play”, duty is of target board to

act in best interest of the shareholders as a whole and to take active and reasonable steps to maximize shareholder value by conducting auction

o Auction: doing best to find alternative bidders who will maximize value being offered for shares

o “where corporation is in play”: where it is apparent that there will be a sale of equity (where there is at least one bid on the table)

Mapeleaf: uphold TJ statement that corporation not truly in play because controlled by family who could decide whether or not to sell shares (no public expectation of auction)

Not always apparent when put “in play”: BCE put into play when teacher’s changed its investment intent from passive to active?

Directors obliged to carry out these duties in manner that minimizes, to the fullest extent reasonably possible, their conflict of interest position

Producers Pipelines [Sask.CA]: onus on directors to show that their acts were reasonable in relation to the threat posed and were directed to the benefit of the corporation and its shareholders as a whole and not for an improper purpose (such as the entrenchment of directors)

Blair: onus is too high – should be more deference to decision of target BOD should Business judgment rule: where business decisions are made honestly, prudently, in

good faith, and on reasonable and rational grounds, court will not interfere

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Maple Leaf Foods Inc. v. Schneider Corporation [1998/Ont.CA] auction not always required – market canvass is acceptable where single offer and no means to assess adequacy Facts: BOD rejected ML in favour of bid from another bidder preferred by target’s controlling SH (even though value of ML was higher)→ argument that unfairly disregarded minority interest (non-family)

Analysis: BOD to act in best interests of the corporation Decision does not need to be perfect, just in range of reasonableness Special Committees: If BOD has acted on advice of committee composed of persons

having no conflict of interest and the committee has acted independently, in good faith, and made an informed recommendation, business judgment rule applies

o Application: composed of members of BOD at arm’s length from controlling SH and did a reasonable job of canvassing alternatives

Condon: If controlling SH won’t tender, little chance of succeeding Distinction between duty to auction and duty to canvass the market Auction not required in every change of control – required where several bidders time

achieve the best value Market canvass fine where single offer and BOD has no means to assess adequacy Duty to set up committee who use reasonable efforts to canvass whether other bidders

are on horizon Holds Farley’s decision correction: corporation never truly in “play” because it was

known

BCE [Quebec Superior.Ct]Facts: cash offer for shares of BCE by Ontario Teachers Pension Plan and US equity firms→ financing for purchase from increasing debt load for which Bell (subsidiary of BCE) is forced to guarantee→ argument that this unfairly disregarded interest of Bell and BCE debenture holders and breached their reasonable expectations

Analysis: Fiduciary duty to act in corporation’s best interest and maximize value of corporation

BUT when corporation is put “in play” there is an added burden of having to maximize value of the corporation’s shares for the benefit of its shareholders

o Two objective are not necessarily incompatible or mutually exclusive Revlon Duty: hold auction to maximize shareholder value and obtain highest value for

shares (US decision)o In Revlon, no duty to debt holders because rights were already fixed by

contract that they don’t need further protection Revlon duty may have an appropriate place in Canadian corporate law – exercise of

Revlon duty by BCE is not incompatible with fiduciary duties required by People’s (act in corporation’s best interest – consider other stakeholders)

Sole fact that SH stand to benefit while debt holders are prejudiced does not give rise to conclusion that directors have not performed their fiduciary duties

Appeal to CA Condon: state of law is ambiguous

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Who is the Appropriate Decision Maker?Decision Maker Approach Defensive TacticsRegulatorShareholder Rights Analysis

SH autonomy: whether SH are able to make own decision on whether or not to tender to bid

Poison Pills/SRA most within securities mandate (involve trading of securities and bidder will want cease trade re issuance of new shares)

CourtsFiduciary Analysis

Did BOD satisfy their fiduciary duties?

Poison pills, break fee, sale of crown jewel

Poison Pills

Decision maker: courts and regulators o Courts: Are directors exercising their business judgment appropriately?o Regulators: Have directors of the target tried to achieve the proper balance

between enhancing value of bid and allowing SH to make their own decisions about whether to tender or not?

Three Key Approaches: Improper Purpose (Producer Pipelines) or business judgment (WIC) [Courts] Checklist to structure regulatory discretion (Royal Host) [OSC]

347883 Alberta Ltd. v. Producers Pipelines Inc. [1991/Sask.CA]

TEST: whether directors, in adopting the defensive tactic, met the onus on them to show that they acted in the best interest as a whole and whether their actions were reasonable in relation to the threat posed (proportionality test)

Defensive action was neither reasonable in proportion to threat posed nor taken in best interests of the company (i.e. improper purpose to entrench directors)

o BOD made no effort to show that TB by Saskoil would be harmfulo No effort to negotiate with Saskoil to increase bid amounto Did not seek out competing bidso No effort to establish that tender of shares to issuer bid would ultimately

result in better value to SHo Would not permit bid under SRA unless 25% over appraised valueo Did not seek shareholder approval

Re Royal Host Real Estate Investment Trust [1999/OSCB]Facts: adoption SRA w/out approval of holders → offeror seeks order to cease trading

Analysis: If rights plan is put in place in the face of TB w/out a vote of SH it is at least

necessary for target company to show that it was necessary to do so b/c of coercive nature of bid or some other substantial unfairness or impropriety

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Must determine an appropriate balance b/w permitting directors to fulfill their duty to maximize shareholder value and protecting right of SH to decide whether to tender

Relevant factors:o Whether shareholder approval was obtainedo When the plan was adopted (normal course or in the face of TB)o Whether there is broad SH support for the continued operation of the plan

i.e. whether approved by generous margino Size and complexity of the target companyo Any other defensive tactics implemented by the target companyo Number of potential viable offers (that was the issue in ML – directors concluded

there wasn’t any other viable offers)o Steps taken by target company to find an alternative bid that’s better for SHo Likelihood that, if given further time, target co. will be able to find a better bid

Note: regulators rely on information provided by target board o Nature of bid, including whether it is coercive or unfair to SH of target company

Where bid is issuer bid, it causes them to look more closely o Length of time since bed was announced and madeo Likelihood that bid will not be extended if rights plan is not terminated

Condon: Regulators tend to make SRA time limited rather than completely eliminating

Sale of Crown Jewel

Re CW Shareholdings Inc. v. WIC Western International Communications Ltd [1998/Gen.Div] Note: Regulators decide was not the proper forum – sent to court Asset purchase options are acceptable where it strikes a reasonable commercial

balance between its potential negative effect as an auction inhibitor depressing SH value and its potential positive effect as an auction stimulator enhancing SH value having regard to various factors:

o Whether BOD complied with duties (i.e. obligation to max. SH value) Special committee? Solicitation of valuations of asset? Did they

push third party to offer more beyond purchase price?o Whether overall commercial balance and proportion between auction

inhibiting and auction stimulating effect has been struck Whether it is likely to preclude further bidding that will deprive

SH of other future bidders with increase in valueo Price for asset is within range of reasonable value attributed to the asseto Whether competing bid provides enough additional value to justify

granting option

Break Fees

Re CW Shareholdings Inc. v. WIC Western International Communications Ltd [1998/Gen.Div] Break fees have a role to play in inducing auctions – inducing competing bids to

come forward (regulators and courts) Break fees are appropriate in circumstances where: (1) they are necessary to induce a

competing bid to come forward (2) the bid represents a better value for the

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shareholders, and (3) the break fee represents a reasonable commercial balance b/w negative effect as an auction inhibitor and its potential positive effect as an auction stimulator

Note: Regulators decide was not the proper forum – sent to court

Issuer Bids and Going Private TransactionsPolicy Considerations Reasons why this is an important topic in Canada

o Flight from public markets: cost increase since Sarbanes Oxleyo Hollowing out thesis: publicly traded companies being bought by

international interests and run in overall business interest of that international conglomerate rather local Canadian constituencies (employees, communities, SH)

Key regulatory concern: Protection for minority SH

Definitions

Issuer bid - OSA – s.89(1): issuer offers to acquire or redeem its securities except where: No valuable consideration is offered or paid step amalgamation, merger, reorganization or arrangement that requires approval of SH Securities are non-convertible debt securities

Insider bid - MI 61-101 – s.1.1: TB by issuer insider of offeree issuer, an associated or affiliated entity of an issuer insider or offeree issuer, (ppl in above groups within 12 months before TB) or joint actor with any of those persons Issuer Insider: directors or senior officers of the issuer, director or senior officer of a

person that is itself an issuer insider or a subsidiary of the issuer, or person that has beneficial ownership of securities of the issuer carrying more than 10% of voting rights (or holds 10% with people acting jointly and in concert)

o affiliated entities if one is the subsidiary entity of the other or if both are subsidiary entities of the same person

Related party transactions - MI 61 101- s.1.1: transaction between the issuer and related party of the issuer at time the transaction is agreed to Includes any ASSET transactions [see MI 61-101 for full list] Related Parties:

o Control person of the issuero A person of which the issuer is a control person o Person who has beneficial ownership or control and direction of securities

of issuer carrying more than 10% of voting rightso Director or senior officer of the issuer or any other person describedo General partner or a limited partnero Control Person: Person that beneficially owns more than 50% of securities

of any o/s class of equity securities of an affiliated entity

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Going private transactions: forcing out minority SH to make issuer a private entity

Business combination - MI 61-101 - s.1.1: amalgamation, arrangement, consolidation, amendment to the terms of a class of equity securities or any other transaction of the issuer, as a consequence of which the interest of a holder of an equity security of the issuer may be terminated without the holder's consent, regardless of whether the equity security is replaced with another security

Substantive RequirementsRequirements: (1) Disclosure (2) Independent Valuation (3) Minority Approval

Insider BidsRegulatory Concern: management in good position to know fair value of shares and conflict of interest of (act in interest for SH but also want lowest price as bidder)

Disclosure – MI 61-101 Disclosure of Offeror - s.2.2(1):

o Background to insider bido Previous valuations of made in last 24 months relating to issuer’s securitieso Any formal valuation exemption offeror is relying ono Disclosure required by OSC Rule 62-504F2 Issuer Bid Circular

Directors’ Circular – s.2.2(2):o Previous offers made in last 24 months relating to issuer’s securitieso Background to insider bid to the extent background has not been disclosed in

disclosure document for insider bido Discussion of review and approval process adopted by board and any special

committee, including any material disagreement between the board and the special committee

o Note may more relevant if insiders don’t include directors

Valuation – MI 61-101: Formal valuation required [s.2.3(1)] of securities to be acquired and any non-cash

consideration [s.6.3(1)] Valuator determined by independent committee [s.2.3(2)] Valuator must be INDEPENDENT of any interested parties [s.6.1(1)] Independence is a question of fact [s.6.1(2)] BUT express exclusions [s.6.1(3)]

o (a) associated or affiliated entity or issuer insider of the interested party,o (b) advisors to the interested party wrt transactiono (c) compensation gives valuator a financial incentive for conclusion or outcome

in transaction o (d) manager for soliciting dealer group o (e) external auditor of the issuer or of an interested party, unless the valuator will

not upon completion of the transaction and that fact is publicly disclosedo (f) material financial interest in the completion of the transaction

Valuation contain opinion re value or range of values rep. fair market value [s.6.4(1)] Valuator must be given access to relevant material information

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Exemptions from formal valuation requirements – Lack of Knowledge and representation – s.2.4: offeror (or joint actor w/ offeror) doesn’t have board or management representation of offeree within last 12 months and doesn’t have any knowledge of material info concerning issuer or its securities that has not been generally disclosed

Issuer BidsDisclosure – MI 61-101 – s.3.2: Background Prior valuation of securities that has been done in the last 24 months Any other offers for the securities in the last 24 months Discussion of review and approval process adopted by board and any special committee,

including any material disagreement between the board and the special committee Statement of intention of every interested party to accept or not accept bid (if known after

reasonable inquiry) Description of effect of bid on voting interest in the issuer of every interested party Disclosure of reliance on any evaluation exemption

Interested Party: issuer and any control person of issuer or person reasonably expected to be control person on successful completion of issuer bid

Valuation Requirement – MI 61-101 – s.3.3(2) BOD or independent committee of the board shall determine valuator [s.3.3(2)] Same requirements as insider bids [s.6.1] Exemptions for valuation –s.3.4:

o Bid for securities that aren’t equity securities and aren’t readily convertible into equity securities

o Liquid market and reasonable to conclude that will be market for holders who did not tender following bid that is not materially less liquid

Related Party TransactionsNOTE: Controversial - transactions don’t relate to trading of securities

Disclosure – MI 61-101 Material Change Report – s.5.2:

o Purpose and effect of transactiono Interests of every interested and related party and effect on their percentage of

securitieso Discussion of review and approval process adopted by board and any special

committee, including any material disagreement between the board and the special committee unless included in another document

o Summary of any formal valuation obtained for transaction unless valuation is included in its entirely in change report or other disclosure

o Prior valuation wrt issuer that relates to subject matter of transaction within last 24 months

o Material terms of agreements relating to transaction entered into by issuer or related party of the issuer w/ any interested party

o Formal valuation and minority approval exemptions

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Interested party: party to the transaction (unless only party in capacity as security holder affected security holders and is treated identical to other SH) OR someone entitled to receive a collateral benefit or payment or distribution as a consequence of the transaction

Information Circular if Minority Approval Requirement – s.5.3:o Description of backgroundo Prior valuations within last 24 monthso Other offers received within previous 24 months (whatever is the subject matter

of the transaction)o Discussion of review and approval process by BOD or any special committee and

any material disagreement between BOD and SCo Reliance on formal valuation exemption o Number of votes excluded for minority approval (b/c related parties) and

disclosure of those security holders and their holdingso Form 62-504F2 of OSC Rule 62-504 Issuer Bid Circular

Valuation - MI 65-101 - s.5.4: Similar requirements as above Exemptions for valuation requirement – s.5.5:

o FMV of transaction is less than 25% of market capitalization o Transaction in the ordinary course of business and approved by BOD

[note: hard to see if more than 25% will still be in ordinary course]

Minority Approval Requirement – MI 65-101: Obtained from all classes of affected securities, voting separately [s.8.1(1)] Excluded votes: issuer, interested parties, related parties of interested parties, or joint

actors with above are excluded [s.8.1(2)] Exemptions from minority approval requirement – s.5.7: FMV of transaction not

more than 25% of market capitalization

Sears Canada [2006/OSC]Facts: Sears Holdings offer to SH of Sears (insider bid) with view to taking Sears private→ support agreements entered into w/ some minority SH in that they will support a vote for going private transaction (requirement for majority of minority approval in going private transaction) → terms of bid changed to deal w/ tax concerns of specific SH so they would enter into agreement

Issue 1: Did the support agreements constitute collateral benefits? constituted a collateral benefit not made available to other minority shareholders Support agreements will not necessarily constitute a collateral benefit– what is

problematic is giving further inducements to enter into those agreements

Issue 2: Was there adequate disclosure of agreements? Disclosure not made at the appropriate time (when the agreements were entered into)

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Not adequate: didn’t disclose who SH were and the nature of the tax savings these SH would get in the restructuring of the bid

Re Sterling Centrecorp [2007/OSC]Facts: Insider bid by management of Sterling → entered into support agreements with some minority SH to ensure 2nd step (going private transaction) would be successful

Issue: Did the existence of support agreements constitute a benefit to those SH and did it turn those SH into joint actors with the insider?

Analysis: Joint actors can’t be included in majority of the minority approval Signing support agreement does not necessarily change SH into joint actor Must have role in planning, structuring or promoting transaction to be joint actor or

receiving of different consideration or interest Only the CEO was considered joint actor

Enforcement and Public Interest ConsiderationsInvestigation and Examination Powers – OSA Part V1

Investigation Order – s.11(1): may appoint one or more persons to make such investigation as it considers expedient for: Due administration of securities law regulation of capital markets in Ontario OR To assist in regulation of capital markets in another jurisdiction NOTE : Cross-border co-operation: not ultra vires the provinces - in order to have

jurisdictions help them enforce Ontario law, have to help them [Global Securities]

Examination of documents Inspection – s.13(3):  Can enter business premises of any person/company named in

order during business hours and inspect any documents or other things used in the business and relate to matters specified in order (except those maintained by a lawyer in respect of his or her client’s affairs)

Right to Examine – s.11(4): person appointed to investigate may examine any documents or other things, whether they are in possession or control of the person or company being investigated or any other person or company

Deloitte & Touche LLP v. OSC [2003/SCC] can disclose documents collected by 3rd parties to respondents in action if relevant to their defence

Issue: whether the OSC acted unlawfully in finding that it was in the public interest to disclosure documents collected from Deloitte to respondent Philip Deloitte argument: OSC should carefully examine docs and only give docs that were

necessary for the OSC to make its case instead of disclosing everything o OSC rejects – not reasonable to examine each of the documents – don’t

know which things respondent will consider useful in its defence

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Documents might have considerable relevance to the defence of Philip

Power to Compel Testimony Search Power – s.13(1): power to compel testimony or the production of documents

o Search power doesn’t extend to search of private residences [s.13(9)] Disclosure to Police – s.17(7): Can’t disclose testimony compelled under s.13(1) to

police of person responsible for enforcement of criminal law in Canada or another country

Testimony, documents, or reports produced under investigation or examination order are for exclusive use of OSC and should not be disclosed in any other proceeding [s.16(2)] EXCEPT where OSC concludes that disclosure is in the public interest [s.17(1)]

R v. Jarvis [2002/SCC] where predominant purpose of investigation shifts into criminal realm, compelled testimony predominate can no longer be used and no more investigation activities

Issue: To what extent can testimony be used in subsequent matter? Where purpose of investigation has shifted from a general investigation of matter to

investigation that is specifically directed at laying criminal charges, compelled testimony can no longer be used and there can be no more activities (no new testimony and ceasing of documents)

Charter rights need to be considered

Criminal Enforcement

Criminal Code: ss.380-384, s.400Note: almost no CC actions have been taken wrt securities issues, but indicators that feds want to take initiative (i.e. IMETs and offence for insider trading)

380(1): indictable offence to defraud public or any person of property, money, or valuable security, or any service 5,000

380(2): offence of affecting public market price of stocks/shares with an intent to defraud 382: offence to fraudulently manipulate stock exchange transactions by engaging in various

strategies to “create a false or misleading appearance of active public trading” 400: indictable offence to make, circulate, or publish a prospectus…that knows is false in a

material particular with intent to induce someone to become a shareholder or partner or to deceive or defraud members, shareholders or creditors

382.1(1) – indictable offence for insider trading 382.1(2) – tipping treated less seriously

Aggravating circumstances re sentencing: Value of fraud exceeded 1M Offence has potential to adversely affect stability of Canadian economy Offence involved large number of victims Offender took advantage of high regard in community

Establishment of Integrated Market Enforcement Teams (IMETs):

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Composition: RCMP officers who are more trained/specialized in area of securities infractions, accountants and regulatory staff

o Shows federal gov’t wants to take initiative

Quasi-Criminal Powers in OSA

General Offences – s.122: liable of max fine of 5 M and/or 5 years less a day for…o Statements to regulatory authorities that are misleading or untrue or does not

state a fact that is required to be stated or that is necessary to make the statement not misleading

o statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take-over bid circular, issuer bid circular or other document required to be filed

o Contravention of securities law

Specific sanctions for breach of s.76 – s.122(4): minimum fine equal to the profit made or the loss avoided and a maximum of 5M or amount equal to triple profit made or loss avoided

R. v. Harper [2003/Ont.CA] TJ: in demonstrating sanction that should be imposed, prosecutors need to show how

failure to disclose and trading on this information had an effect on stock price CA: Just need to show that profit was made/loss avoided because of insider trading –

don’t need to who how price itself was affect by failure to disclose of material information

New OSA s.126.1 o Creates offence of engaging in fraud or market manipulation (this is in

addition to fraud in CC) so now lower burden – but there is requirement that “person or company can’t engage directly or indirectly …. That person or company knows or reasonably ought to know…..”

NOTE: Criminal burden of proof on OSC BUT strict liability (NO Mens Rea) Rankin: courts are prepared to overturn convictions based on undue inferences being

made on evidence Felderhof: inability of OSC to demonstrate that he was personally responsible for

decision to release misleading information and couldn’t demonstrate that F had in his possession material information when he engaged in the trading of securities

Challenge in proving actus reus of offence

Civil Enforcement: OSA s.128 Application to court – s.128(1): Commission can apply to court for declaration that

person has not complied w/ securities law Orders – s.128(3): wide range of orders that court can make, including…

o Order for complianceo Order that person or company submit to review

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o Order rescinding any transactiono Order requiring person or company to company to make restitution o Order prohibiting person from acting as directors/officer

Note : OSC uses s.128 to when there is non-compliance with an order of OSC US Securities Commission often look for monetary penalties from the courts

Public Interest Enforcement Powers Commission can make orders in the public interest under s.127(1)

Administrative hearing before tribunal SPPA and OSC Rules of Practice Civil burden of proof Arguably becoming more like a court process b/c of procedural motions by lawyers

Is a breach of the OSA required?

Re Canadian Tire Corp. [1987/OSCB] securities commissions can exercise public interest powers where there is no breach of securities lawFacts: TB → Class A non-voting shares had attribute that where bid made for majority of voting shares, entire class of non-voting shares would convert to voting (coat-tail provision) → structured bid to avoid triggering it - transaction b/w dealers and family for 49% of voting shares w/ consideration constitution a 400% premium over market price

Analysis: Abusive transaction: within law but had effect of freezing class A SH out while they

provided most of the money Transaction did not confirm to spirit of TB rules – contrary to public interest TEST for regulator interference in absence of breach:

o Clear abuse of the markets, not just unfairness & must raise public interest issue

o Must raise public interest issue Controversial – uncertainty for market participants in how to conduct themselves

MUST BE BREACH for certain orders – “if person or company has not complied with Ontario securities law”: Administrative penalty of not more than $1 million for each failure to comply Disgorge to the Commission any amounts obtained as a result of the non-compliance

Enforcement Action against LawyersWilder v. OSC [2000/Div.Ct]Facts: OSC sought to reprimand lawyer for making misleading statements to regulators that YBM had obtained a “series of favourable due diligence results”

Analysis: Some orders specific “market participant” while others specify “person or company”

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Order that “person or company’ can be reprimanded – applies to lawyers acting in professional capacity

Court rejects argument that s.127(1) should be interpreted not to apply to lawyers acting in their professional capacity

Does not usurp jurisdiction of law society –public interest being protected by regulators is different from law society (maintain integrity of law profession v. maintaining integrity of OSC procedures)

NOTE: CSA disclosure of enforcement activity –majority of matters end in settlement

Philosophies of Sanctioning

Abestos [2001/SCC] error to focus only on fair treatment of investors (also mandate to promote efficiency) – sanctioning should be protective and preventative not punitiveFacts: TB structured so didn’t have to make follow up offer to other shareholder (rule that if paid more than 15% premium had to make follow up offer) → minority sought cease trade on basis that it was spirit of TB regime that they share in premium

Analysis: OSC: not within purview of public interest they protect (public interest in integrity of

ON capital markets and protection of ON investors) – insufficient connection to ON SCC: error to focus only on fair treatment of investors - regulatory statutory mandate

is also promoting efficiency of capital markets Implication: OSC intervenes not achieve efficiency (not efficient to intervene in

transaction largely taking place outside of Ontario) Protective and preventive in making their decisions rather than being punitive OSC

decision was reasonable: took a range of factors in to account, gave weight to factors appropriately, and reached correct conclusion

Re Cartaway Resources Corp. [2004/SCC] general deterrence is basis for making order General deterrence is a basis for making an order Bentham: achieve deterrence by being more punitive than you otherwise would be to

change cost-benefit calculation (assumption that market players are rational) Underlying assumption: market players are rational actors Condon: doesn’t like decision

Donnini v. OSC [2003/SCJ] JR - look to see reasonableness of OSC - deference 15-year restriction on trading reduced to 4 years – but reinstated by Ontario CA Worried that sanction was high b/c he refused to settle: everyone is entitled to have

case against them made out and shouldn’t be penalized for choosing to defend 15 year penalty re-instated by CA OSC decision making and factors that it considered was reasonable Condon: can impose lengthier bank than deprivation of liberty in criminal

Compare above cases to Kerr v. Danier: bright line, literal approach to interpreting statute and narrow view of need to achieve investor protection

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