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

i Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.

Methods to attain them: Registration, disclosure, remedies

Securities Regulation Summary 1.0 MAJOR THEMES IN THE COURSE ..........................................................................................1

1.1 Three Goals of Securities Regulation...................................................................................................... 1

1.2 Three Methods of Achieving these goals ................................................................................................ 2

1.2.1 Registration requirement ................................................................................................................. 2

1.2.2 Disclosure Requirement ................................................................................................................... 2

1.2.3 Remedies for Breach of Registration or Disclosure Requirements .............................................. 3

1.3 General Policy of the Course ................................................................................................................... 3

2.0 INTRODUCTORY CONCEPTS ...................................................................................................4

2.1 Purpose of Selling Securities .................................................................................................................... 4

2.2 Types of Securities .................................................................................................................................... 4

2.3 Securities Trading .................................................................................................................................... 4

2.3.1 Open Market in Capital ................................................................................................................... 4

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

2.4 Sources, History & Constitutional Division of Powers of Securities Regulation ................................ 6

2.4.1 Division of power .............................................................................................................................. 6

2.4.2 History of securities regulation ....................................................................................................... 6

2.4.3 Sources of Provincial Securities Regulation ................................................................................... 6

3.0 SEGMENT 1: GOING PUBLIC ....................................................................................................8

3.1 Introduction to Going Public ................................................................................................................... 8

3.1.1 General Rule– Securities Act, ss. 25 and 33 .................................................................................... 8

3.1.2 How Companies Go About Raising Capital ................................................................................... 8

3.1.3 Why Go Public? ................................................................................................................................ 8

3.1.4 Why do we regulate public offerings (3 objectives) ....................................................................... 9

3.2 The Prospectus Requirement: Does the Securities Act Apply? .......................................................... 10

3.2.1 What is a security? ......................................................................................................................... 10

3.2.2 What is a trade? Statutory Definition ...................................................................................... 16

3.2.3 What is a distribution? ................................................................................................................... 17

3.3 Prospectus Preparation .......................................................................................................................... 20

3.3.1 Prospectus General Rule ................................................................................................................ 21

3.4 Prospectus/ Distribution Process (After making decision to go public) ............................................ 25

3.4.1 Summary of Steps ........................................................................................................................... 25

3.4.2 Creating the Preliminary Prospectus: What must be included .................................................. 25

ii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


3.4.3 The Waiting Period, Vetting/ Comment Letter and Amendments ............................................ 28

3.4.4 Filing the Final and Obtaining a Receipt and Changes Post-Filing ........................................... 34

3.4.5 Closing & Any Post-Final Amendments ....................................................................................... 36

3.4.6 Consequences for Failure to Deliver/ File Prospectus (practically, none) ................................. 39

3.4.7 Failure to File (likely not needed) ................................................................................................. 40

3.4.8 Liability for Misrepresentation in a Prospectus .......................................................................... 40

3.4.9 Registration Requirement .............................................................................................................. 50

3.4.10 UW Agreement ............................................................................................................................... 50

3.4.11 Sample Prospectus .......................................................................................................................... 51

4.0 SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE ...........................53

4.1 Policy Behind Continuous Disclosure Regime – Merger Report (3 objectives) ................................ 53

4.2 PART I: Regular Disclosure .................................................................................................................. 53

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

4.2.2 Obligation to File Financial Statements ....................................................................................... 54

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

4.3.1 Statutory Provision: OSA, Part XVIII – Continuous Disclosure ............................................... 56

4.3.2 Material Change vs Material Fact ................................................................................................ 56

4.3.3 What must be filed with a material change (3 Report Options) ................................................. 58

4.4 PART III: Early Warning ..................................................................................................................... 60

4.4.1 STEPS: ............................................................................................................................................ 60

4.4.2 STATUTORY PROVISIONS ....................................................................................................... 60

4.5 PART IV: Insider Reporting ................................................................................................................. 61

4.5.1 Analysis: When do insider reporting rules apply? ...................................................................... 62


4.6 PART V: Insider Trading ...................................................................................................................... 63

4.6.1 Policy Discussion about Insider Trading / Tipping Prohibition ................................................. 63

4.6.2 Steps ................................................................................................................................................. 64

4.6.3 Statutory Provisions (OSA) ........................................................................................................... 65

4.6.4 Meaning of Generally Disclosed (Defence) ................................................................................... 67

4.6.5 Defences to Insider Trading / Tipping .......................................................................................... 68

4.6.6 Actions, Sanctions & Penalties for Insider Trading .................................................................... 71

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

5.1 Private Placement & Exemptions ......................................................................................................... 73

5.1.1 General Rule ................................................................................................................................... 73

iii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


5.1.2 Advantages & Objectives of Private Placement .......................................................................... 73

5.1.3 The Private Placement Exemptions .............................................................................................. 74

5.1.4 Offering Memorandum (and problems with it) ........................................................................... 77

5.1.5 Registration Requirement for Private Placement Exemptions .................................................. 79

5.2 Resale Rules ............................................................................................................................................ 79

5.2.1 General Rule: 2 Components of Resale Rules .............................................................................. 79

5.2.2 Resale Rules for Non-Control Persons ......................................................................................... 81

5.2.3 Resale Rules for Control Persons (Separate Regime) ................................................................. 83

6.0 SEGMENT 4: CONTROL TRANSACTIONS ...........................................................................87

6.1 Reasons for Takeover Bids .................................................................................................................... 87

6.1.1 Socially Useful Reasons for Takeover Bids .................................................................................. 87

6.1.2 Non-Socially Useful Reasons for Takeover Bids .......................................................................... 87

6.1.3 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them .... 87

6.2 Overview of How Takeover Bids Work ................................................................................................ 88

6.2.1 What is a takeover bid? ................................................................................................................. 90

6.2.2 Deemed Ownership ........................................................................................................................ 92

6.3 Mechanics of a Vendor Takeover Bid................................................................................................... 94

6.3.1 Takeover Bid Circular (Information) ........................................................................................... 94

6.3.2 Minimum Period of Bid (Time) ..................................................................................................... 95

6.3.3 Pro Rata (Equality) ........................................................................................................................ 96

6.3.4 Withdrawal and Change of Info or Variation in Terms (time and info) ................................... 96

6.3.5 Conditions (just investor protection) ............................................................................................ 97

6.3.6 Payment for Securities (investor protection generally) ............................................................... 98

6.3.7 No collateral agreements ................................................................................................................ 98

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

6.4.1 Section 95: Offeree Issuer’s Obligations ...................................................................................... 99

6.4.2 Legislative Goal Met ..................................................................................................................... 100

6.5 Pre & Post-Bid Integration .................................................................................................................. 100

6.5.1 Lock-up Agreements/ Tendering Agreements (Allowed) ......................................................... 100

6.5.2 Pre-Bid Integration ...................................................................................................................... 101

6.5.3 Post-Bid Integration ..................................................................................................................... 102

6.6 Exemption from Pre-Bid and Post-Bid Restrictions – EXEMPT Takeover Bids! ......................... 102

6.6.1 Private Agreement Exemption (s.100.1(1) of OSA, most important) ...................................... 103

6.6.2 S.100 – Normal Course Exemption – Don’t Exceed 5% in 12 Months .................................... 103

iv Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


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

6.8 Director’s Duties and Responsibilities in a Takeover Bid Situation – Defensive Tactics to Buy

Time 104

6.8.1 Fiduciary Duty in the Context of Takeover Bid ........................................................................ 104

6.8.2 Examples of Defensive Tactics..................................................................................................... 105

6.8.3 Defensive Tactic Rules - NP 62-202 ............................................................................................ 107

v Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


1.0 MAJOR THEMES IN THE COURSE ..........................................................................................1

1.1 Three Goals of Securities Regulation...................................................................................................... 1

3 purposes: 1) Protection of investing public; 2) Ensuring the Efficient Operation of Canadian Capital

Markets; 3) Increasing and Maintaining Public Confidence in Capital Markets / In the Persons and

Institutions Operating Them ................................................................................................................... 1

Found in s.1.1 of the OSA under the purposes of the act! The purposes of the Act are (a) to provide

protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and

efficient capital markets and confidence in capital markets ................................................................... 1

Another theme: NO SMART GUYS and NO CERTAINTY ................................................................. 1

1.2 Three Methods of Achieving these goals ................................................................................................ 2

1) Registration Requirement, 2) Disclosure Requirement, 3) Remedies for Breach of 1 and 2 ............. 2

1.2.1 Registration requirement ................................................................................................................. 2

POLICY: This helps ensure accountability, makes sure you are educated and policed fosters

confidence in the market, and the exceptions are to provide efficient markets for securities that are

considered to be very low-risk to the public. People will lose confidence if some whackos are selling

you securities. ......................................................................................................................................... 2

1.2.2 Disclosure Requirement ................................................................................................................... 2

To protect investing public, must make sure they have full, true and plain disclosure of all material

facts related to the company (adv/disadv, risks, contracts etc.) via a prospectus and continuous

disclosure ................................................................................................................................................ 2

POLICY: need to protect investors, OSA is consumer protection legislation and in order to do that,

we need to give you the information that you need to make an informed investment decision ............. 2

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

POLICY: Need to balance the objectives of the efficiency of capital markets (would be inefficient to

file a prospectus every time a company needs money) with the need to protect the public. .................. 2

1.2.2.2 Closed System & Resale Restrictions ............................................................................................. 3

When securities are acquired pursuant to one of the private placement exemptions and not pursuant to

a prospectus, the resale by the initial investors of these securities to other investors on the secondary

market is restricted and certain conditions must be satisfied prior to their resale. ................................. 3

Policy: Transparency is key to the process ............................................................................................. 3

1.2.3 Remedies for Breach of Registration or Disclosure Requirements .............................................. 3

Policy: investor protection and confidence in the market (fix something when it goes wrong) ............ 3

1.3 General Policy of the Course ................................................................................................................... 3

For the exam: 1) Know what the rules are; 2) Look at why they exist (why does the law regulate these

activities? What objectives is the rule trying to establish?); 3) THEN Challenge the rules ................... 3

2.0 INTRODUCTORY CONCEPTS ...................................................................................................4

2.1 Purpose of Selling Securities .................................................................................................................... 4

2.2 Types of Securities .................................................................................................................................... 4

vi Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


2.3 Securities Trading .................................................................................................................................... 4

2.3.1 Open Market in Capital ................................................................................................................... 4

Primary market (sale of securities to investors) and secondary market (investors exchange sec in

return for payment from another invested) together permits continued marketability / liquidity of

shares ...................................................................................................................................................... 4

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

2.4 Sources, History & Constitutional Division of Powers of Securities Regulation ................................ 6

2.4.1 Division of power .............................................................................................................................. 6

2.4.2 History of securities regulation ....................................................................................................... 6

2.4.3 Sources of Provincial Securities Regulation ................................................................................... 6

3.0 SEGMENT 1: GOING PUBLIC ....................................................................................................8

3.1 Introduction to Going Public ................................................................................................................... 8

3.1.1 General Rule– Securities Act, ss. 25 and 33 .................................................................................... 8

RULE: No person shall engage in or hold themselves out as engaging in the business of trading in a

security, without being registered, and if a trade constitutes a distribution, without preparing a

prospectus (Section 25 and 53, Ontario Securities Act). ........................................................................ 8

s.25 deals with not being able to engage in business of trading securities unless REGISTERED ......... 8

s.53 deals with not being able to issue securities without a prospectus.................................................. 8

3.1.2 How Companies Go About Raising Capital ................................................................................... 8

3 Ways: 1) Borrow, 2) Go Public (IPO – segment 1), 3) Private Placement of Securities (segment 3). 8

3.1.3 Why Go Public? ................................................................................................................................ 8

3.1.3.1 Advantages ..................................................................................................................................... 8

Advantages: 1) Raising Capital, 2) Future Growth, 3) Employee Incentives, 4) Enhanced corporate

image, 5) Acquisitions, 6) Shareholder Liquidity .................................................................................. 8

3.1.3.2 Potential Disadvantages (and to how to mitigate the risk) ............................................................ 9

Disadv: 1) Loss of confidentiality, 2) Reduced flexibility, 3) Managing share prices, 4) Reduced

control, 5) Loss of tax advantages, 6) High costs of going public (initial costs of IPO and ongoing

cont disclosure requirements) ................................................................................................................. 9

3.1.4 Why do we regulate public offerings (3 objectives) ....................................................................... 9

1) Protection of Investing Public, 2) Ensuring the Efficient Operation of Canadian Capital Markets, 3)

Increasing/ Maintaining Confidence in Public Markets & the People who Operate in Them ............... 9

3.2 The Prospectus Requirement: Does the Securities Act Apply? .......................................................... 10

Prospectus ONLY IF there is a TRADE in a SECURITY which constitutes a DISTRIBUTION. ...... 10

Recall General Rule: ss. 25, 53 of the SA: No person shall engage in or hold themselves out as

engaging in the business of trading in a security without being registered and if a trade is a

distribution, without preparing a prospectus ........................................................................................ 10

Analysis for Whether You Need to Issue Prospectus: .......................................................................... 10

vii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


1) Does transaction involve a security? If NO, SA does not apply. If so… ................................ 10

2) Is it a trade in a security? If NO, SA does not apply. If so… .................................................. 10

3) Does that trade in a security constitute a distribution? If NO, no Prospectus. But if yes… then

you must prepare a prospectus *unless one of private placement exemptions are available ............... 10

3.2.1 What is a security? ......................................................................................................................... 10

3.2.1.1 Statutory Definitions ..................................................................................................................... 10

LEGISLATION ACT 2006 - Interpretation ............................................................................................. 10

Section 64(1): an act shall be interpreted as being remedial and shall be given such large and liberal

interpretation and best ensures the attainment of the object ................................................................. 10

ONTARIO SECURITIES ACT – Interpretation & Definitions ............................................................... 10

S.1(1): “security” includes (NOT EXHAUSTIVE= broad def): (a) any document, instrument or

writing commonly known as a security, (b) any document constituting evidence of title to or interest

in the capital, assets, property, profits, earnings or royalties of any person or company,(n) any

investment contract ............................................................................................................................... 10

3.2.1.2 LESS COMMON SECURITIES .................................................................................................... 10

3.2.1.3 CATCH ALL PROVISIONS (Pacific Coast) ................................................................................. 11

3.2.1.4 How Case Law Has Defined a Security ........................................................................................ 11

Main Points: Definitions in the OSA are not mutually exclusive, but are catchalls - Securities

legislation is ‘remedial legislation; to be ‘construed broadly’ (SEC v CM Joiner Leasing & Pacific

Coast Coin Exchange) - Substance not form governs the interpretation of what is a security –it is

flexible, not static (Pacific Coast Coin Exchange) -The policy of securities legislation is ‘full and fair

disclosure’ with instruments regarded as securities.............................................................................. 11

SEC v. Glen T. Turner Enterprises Inc. (US, 1973) ................................................................................. 11

Ratio: s.1.1(a) definition that a security includes “any document, instrument or writing commonly

known as a security” means if known as such by the legal/ financial community, not common person.

.............................................................................................................................................................. 11

Implications: takes a broad def and makes it even broader! ................................................................. 11

Due to POLICY: most sec are technical in nature, not likely to be understood by anyone other than

legal/ financial community ................................................................................................................... 11

Ontario (Securities Commission) v. Brigadoon Scotch Distributors (1970 Ont. H.C.) ........................... 12

Ratio: Provides insight into s.1(1)(b): Securities only includes instruments intended as investments

and not instruments bought for other commercial purposes. ................................................................ 12

Test: Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in

value? Or is the investor investing through the piece of paper in the product? .................................... 12

Policy: The reason you’re defining this is to figure out if you need to issue a prospectus, so had to

narrow definition (otherwise, could be anything you’re selling) ......................................................... 12

SEC v. CM Joiner Leasing Corp. (USA).................................................................................................. 12

Ratio: Act will be construed broadly and in whatever way leads to it to promote the policy objective

of investor protection (Purposive approach to interpreting the meaning of “security”). Specifically,

viii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


interprets s.1(1)(n): an investment contract will be where people are investing in the potential for

something to generate profit and are purchasing expertise of someone else. ....................................... 12

Policy: Purposive approach to interpreting the meaning of “security” required to respond to new,

novel, uncommon or irregular devices. ................................................................................................ 12

SEC v. W.J. Howey Co. (USSC, 1946) – reasoning used by SCC in Pacific Coin ................................. 13

Ratio: Common enterprise test for identification of an “investment contract” and therefore, security.

Test requires: ........................................................................................................................................ 13

1) A contract, transaction or scheme whereby a person invests; 2) That the investment be in a

common enterprise; and 3) That the person is led to expect profits (or capital appreciation: see

Forman) solely from the efforts of a promoter or third party (pol obj: since it is them who controls

success/failure of enterprise) ................................................................................................................ 13

State of Hawaii v. Hawaii Market Center Inc. ......................................................................................... 14

Ratio: Risk Capital Test for identifying an investment contract (broader than Howey test to comply

with policy objectives). Test requires: a) The offeree furnish initial value; b) A portion of the initial

value is subjected to the risks of the enterprise; c) The furnishing of initial value is induced by

promises or representations leading to a reasonable expectation or understanding that a benefit above

initial value will accrue; and d) The offeree does not have the right to exercise practical and actual

control over the managerial decision of the enterprise. ........................................................................ 14

However, it is the policy and not the subsequently formed judicial test that is decisive. The primary

objective is to protect the investing public. Are investors relying on expertise/management—courts

have immense discretion. ..................................................................................................................... 14

Pacific Coast Coin Exchange of Canada v OSC (SCC, 1978) ................................................................. 14

Ratio: Broad, purposive approach should be used in interpreting meaning of word “security” (even

broader – s.1(1) is not exhaustive) it is legislative policy to replace the harshness of caveat emptor

in security related transactions and courts should seek to attain that goal even if tests carefully

formulated in prior cases prove ineffective and must continually be broadened in scope. It is the

policy and not the subsequently formulated judicial test that is decisive. ............................................ 14

*Accepts US definition for “investment contract” as a security .......................................................... 14

3.2.2 What is a trade? Statutory Definition ...................................................................................... 16

In order for general rule (Section 53(1) and 25 about being registered) to apply for a prospectus, there

has to be a trade in a security, so what is a trade? ................................................................................ 16

OSA, section 1(1): A “trade” includes “any sale or disposition (NOT A PURCHASE) of a security

for valuable consideration” AND includes “any act, advertisement, solicitation, conduct or

negotiation directly or indirectly in furtherance of” any of the activities described in the definition. 16

Policy: Overall, trade is broadly interpreted to promote the “greater good” –prevent ppl from

contracting/opting-out of securities regulation ..................................................................................... 16

3.2.2.1 TRADES ON BEHALF OF OTHERS ........................................................................................... 17

3.2.3 What is a distribution? ................................................................................................................... 17

Unless exemption is available… if trade is a distribution, need to issue prospectus............................ 17

ix Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Distribution (per s.1(1) definition: means (EXHAUSTIVE def) (a) trade in sec of an issuer that have

not been previously issued, (b) a trade by or on behalf of an issuer in previously issued securities of

that issuer that have been redeemed or purchased by or donated to that issuer, (c) a trade in previously

issued securities of an issuer from the holdings of any control person, (d +e) a trade by or on behalf of

an underwriter in securities (see full def below) .................................................................................. 17

Purpose: def determines whether or not there’s a requirement to prep prospectusThus, purpose is to

ensure those who are potentially going to invest in the corp have suff info with which to make an

informed investment decision ............................................................................................................... 17

3.2.3.1 Lastman’s 3 Main Branches of Distributions ............................................................................... 19

1) Securities that have not been previously issued (s.1(1)(a)), 2) Trades by Control persons

(s.1(1)(c)), 3) Sales of restricted sec held by exempt purchasers ......................................................... 19

3.2.3.2 Note: 3 Ways Securities can be distributed to the public ............................................................. 19

1) Direct issue and private placement; 2) Offer to Sell (Bought Deal / Offer to Sell/ Marketed

Offerings); 3) Best efforts underwriting ............................................................................................... 19

3.3 Prospectus Preparation .......................................................................................................................... 20

3.3.1 Prospectus General Rule ................................................................................................................ 21

*Governed by NI 41-101 general requirements and 44-101 for short-form prospectus. Two principle

requirements of a prospectus under OSA: ............................................................................................ 21

1) Prospectus must provide full, true and plain disclosure of all material facts (s. 56(1)) ................... 21

2) Must comply with the requirements of the Securities Act (including 56, 58, 59) -Includes OSA,

OSA regulation, OSC rules and the OSC director. ............................................................................... 21

Section 56: (1) Full, true and plain disclosure and complying with all requirements of Ontario

securities law; (2) Must also include any financial reports, statements or other docs required by the

Act or regulations ................................................................................................................................. 21

Section 58(1) Issuer Certificate (signed by CEO, CFO and two directors that aren’t CFO/CEO, and

any promoter of the issuer) – certifies prospectus is true ..................................................................... 21

Section 59(1) Underwriter certificate (signed by any/all UWs in a contractual relationship with the

issuer or selling securityholder distributing securities through the prospectus) – UW also certifies

prospectus is true .................................................................................................................................. 21

3.3.1.1 Misrepresentation ......................................................................................................................... 21

Misrepresentation- s.1(1): means (a) untrue statement of material fact, or (b) an omission to state a

material fact that is required to be stated or that is necessary to make a statement not misleading in

the light of the circumstances in which it was made. ........................................................................... 21

If there is a misrepresentation, you can sue everyone involved (corp, directors, officers, underwriters).

Very high bar – very diff to know if you’ve missed something. .......................................................... 21

Policy: Should tell everyone everything they need to know to make informed investment decisions . 21

3.3.1.2 Dual Functions of a Prospectus: Selling + Liability Document .................................................. 22

1) Selling Document: Sec Act ensures regulator’s mandate of investor protection by saying only

doc you can use to sell sec is the prospectus, can’t advertise in any meaningful way, can’t have fancy

brochures, billboards, etc. ..................................................................................................................... 22

x Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


2) Liability Document: Will need a lot of $, so client will want to be successful/shed the company

in its most favourable light. Thus, regulator makes sure there is sig liability associated with a misrep

(misstatement of a material fact/ omission) .......................................................................................... 22

Tension between 2 purposes (reckless selling v being too careful): You as a lawyer cannot allow

client to recklessly sell in light of the prospectus (they’ll get sued), but you also can’t go so far to

protect yourself/your client that you have a document that no one will buy securities with. ............... 22

3.3.1.3 National Instrument 51-102 – Policy on future oriented financial statements in the prospectus 22

Per NI 51-102: no prospectus ever has to put future oriented financial info in it. The choice is always

the business’ BUT (1) if you don’t put it in, you cannot talk about the future anywhere else; and (2) if

you do put it in your prospectus you have to comply with national instrument 51-102 for disclosure 22

Two types of data forming financial forecasts: (1) Forecast (written estimate of most probable result

of operations of a company for some pt in the future); (2) Projection (estimate of results that follow

any set of reasonable assumptions) ...................................................................................................... 23

Policy: Recognize tension between prospectus as selling document and prospectus as liability

document –do not err on EITHER side –don’t be too hard and don’t be too soft, just be right ........... 23

3.3.1.4 Full, True and Plain Disclosure of All Material Facts ................................................................ 24

Requirement for Full, true and plain disclosure: Section 56(1): A prospectus shall provide full, true

and plain disclosure of all material facts relating to the securities issued or proposed to be distributed

and shall comply with the requirements of Ontario securities law. ...................................................... 24

Definition of Material Fact: Section 1(1): Material Fact: When used in relation to securities issued or

proposed to be issued, means a fact that would reasonably be expected to have a significant effect on

the market price or value of the securities. ........................................................................................... 24

*note that a Material Fact and Material Change are different!!!!! ....................................................... 24

If a Material Change Occurs, Amendment Required – 57(1): If there is a MATERIAL CHANGE

after receipt is obtained for preliminary prospectus, and before receipt for final OR after receipt for

final is obtained but prior to completion of distribution, amendment must be filed as soon as is

practicable, and IN ANY EVENT, within TEN days of the change .................................................... 24

Danier Leather SCC ................................................................................................................................. 24

Implications: Example of how to deal with forward-looking info. A forecast DOES have an implied

representation of reasonableness, but that’s all –just has to be reasonable. ......................................... 24

A change in a material fact does NOT have to be disclosed following the filing of the prospectus

(only a material change) ....................................................................................................................... 24

3.3.1.5 Underwriters................................................................................................................................. 24

Have to do due diligence, and can still be found liable under s. 130(1) for misrepresentation (see

more on underwriters below), and also have a due diligence defence available to them. .................... 24

3.4 Prospectus/ Distribution Process (After making decision to go public) ............................................ 25

3.4.1 Summary of Steps ........................................................................................................................... 25

1. Complete prelim (certified, signed, red herring) (although requires material facts, does not require

price, maturity date, interest rate or dividend amount); ........................................................................ 25

xi Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


2. File with Administrator along with supporting docs (e.g. auditor’s comfort letter, tech reports,

consent letters, underwriting agreement, material contracts, resolution of BOD approving prelim,

financial statements); ............................................................................................................................ 25

3. Administrator gives receipt for the prelim if there has been substantial compliance with filing

requirements of the OSA and regulations (s.54-55) ............................................................................. 25

Waiting period begins: time between receipt for prelim and receipt for final (if anything material

changes during this period, make amendments) ................................................................................... 25

4. Print/Deliver the document to those who expressed interest ............................................................ 25

5. Staff vet the prospectus .................................................................................................................... 25

6. Staff provide a comment letter ......................................................................................................... 25

7. Clear up deficiencies, once they’re cleared… .................................................................................. 25

8. Final prospectus/supporting docs can be filed and a receipt obtained (at discretion of securities

commission whether it is in the public interest to do so – even if you met all requirements) .............. 25

It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can

begin ..................................................................................................................................................... 25

3.4.2 Creating the Preliminary Prospectus: What must be included .................................................. 25

See Form 41-101F1 or 44-101F1 for short-form, OSC rule 45-501. Long-Form Prospectus: very open

ended including all “material facts” (fact that sig affects market price/ value). ................................... 26

Preliminary prospectus provides specific items of disclosure and “full, true and plain disclosure of all

material facts”. Need to file it (s. 54(1)), and then you will get a receipt for it (s. 55)......................... 26

Section 54(2): a preliminary prospectus is exactly the same as a final except it can omit the price and

what the underwriters get paid and any matters dependent on price .................................................... 26

Policy: Can Exclude Pricing Information because: (1) It’s NOT FINAL, you’re not selling securities

pursuant to it; (2) Gives underwriters an opportunity to assess the market for demand so that they can

price it properly .................................................................................................................................... 26

National Instrument 41-101 (Form 41-101F1): General Prospectus Requirements ................................. 26

3.4.2.1 Certification Process .................................................................................................................... 27

FORM 41-101F1 AND OSA .................................................................................................................... 27

3.4.2.2 Filing with Administrator & Obtaining a Receipt for Prelim ...................................................... 28

First receive a preliminary receipt (if comply with all requirements –s.54; then per s.55- Director

SHALL issue receipt), then delivery the prelim to those who have expressed interest in buying

(solicited or not) per s.66 of OSA ......................................................................................................... 28

Section 66 of the OSA – Distribution of Preliminary Prospectus ............................................................ 28

3.4.3 The Waiting Period, Vetting/ Comment Letter and Amendments ............................................ 28

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

s.65(1) “Waiting period” defined: In this section,“waiting period” means the period prescribed by

regulation or, if no period is prescribed, the period between the Director’s issuance of a receipt for a

preliminary prospectus relating to the offering of a security and the Director’s issuance of a receipt

for the prospectus. ................................................................................................................................ 29

xii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


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

Policy: 3 reasons for waiting period: 1) review for deficiencies; 2) giving investors time to review; 3)

allowing for underwriter’s assessment of the market ........................................................................... 29

3.4.3.2 Vetting & Comment Letter ............................................................................................................ 29

3.4.3.3 Constrained selling activities during waiting period ................................................................... 30

Selling activities during the waiting period are constrained: You can only solicit expressions of

interest (s. 65) and deliver the preliminary prospectus (s. 66), and have to keep a list of whoever you

deliver it to (s. 67) in case you have to amend it. OSC can also stop any of these s. 65 “trading”

activities cease until a revised prelim is filed if the prelim ends up being defective (s. 68) ................ 30

OSA, Part XVI: Distribution Generally ................................................................................................... 30

3.4.3.4 Limitations on advertising during waiting period ........................................................................ 31

PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period .... 31

All you can do in terms of advertising during the waiting period is: IDENTIFY the securities, state

the price of the securities, and state the name/address of a person or company who you can buy them

from, and where you can get the prospectus......................................................................................... 31

OSC Test for Whether or not Advertising is Okay .................................................................................. 31

FACTUAL TEST in furtherance of a trade: OSC staff said in determining whether ads are

prohibited, would apply factual test based on whether advertising could reasonably considered to be

in furtherance of a trade no forecasts, no projections, no predictions ............................................ 31

3.4.3.5 Amendments if there are changes during the waiting period ....................................................... 32

If a material ADVERSE change occurs, you have to file an amendment ASAP or in any event within

10 days (s. 57(1)), and then send a notice to all investors under your s. 67 list (s. 57(3)). .................. 32

OSA – PART XV – Prospectus Distribution – Amendments on Material Change .................................. 32

3.4.4 Filing the Final and Obtaining a Receipt and Changes Post-Filing ........................................... 34

3.4.4.1 Final Receipt ................................................................................................................................ 34

OSA – Prospectus Distribution –Final Receipt (s.61) .............................................................................. 34

s.61: (1) Issuance of receipt – PUBLIC INTEREST: Subject to subsection (2) of this section and

subsection 63 (4), the Director shall issue a receipt for a prospectus filed under this Part unless it

appears to the Director that it is not in the public interest to do so. .................................................... 34

(2) Refusal of receipt: The Director shall not issue a receipt for a prospectus or an amendment to a

prospectus under the following conditions ........................................................................................... 34

(3) Hearing: The Director shall not refuse to issue a receipt under subsection (1) or (2) without giving

the person or company who filed the prospectus an opportunity to be heard ...................................... 35

Rivalda ...................................................................................................................................................... 35

Failed to issue receipt for a junior mining company offering b/c felt directors were too inexperienced,

even though they indicated and DISCLOSED that they were inexperienced ...................................... 35

Lake Forest Fund ...................................................................................................................................... 35

xiii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Failed to issue receipt because they did not like the disclosed fee structure, thought too much money

would go to the promoter. .................................................................................................................... 36

Deprenyl ................................................................................................................................................... 36

Decision: OSC wouldn’t issue a receipt for final prospectus because success depended on FDA

approval of a drug and thus too risky – company made this very clear on the face of the document

that drug was not permitted in Canada and needed FDA approval – finally OSC approved – ended up

getting FDA approval (but what would happen if no approval –see policy) ........................................ 36

POLICY (keep in mind these are outliers, and overall, he loves the OSC, decisions are typically

effective) ............................................................................................................................................... 36

- This is a paternalistic approach: why not just force them to give the information to the public, but

then LET THE PUBLIC DECIDE?...................................................................................................... 36

BUT COUNTER-ARGUMENT: Cost to society is that people will not invest markets if we don’t

protect its integrity and if people lose all their $ on risky investments ................................................ 36

3.4.5 Closing & Any Post-Final Amendments ....................................................................................... 36

3.4.5.1 Delivery of Prospectus & Inclusion of Purchaser’s Rights .......................................................... 37

OSA- Prospectus Distribution .................................................................................................................. 37

s.60: Statement of Purchaser rights: Every prospectus shall contain a statement of the rights given to a

purchaser by sections 71 (withdrawal rights) and 130 (right to sue for misrepresentation). ................ 37

Withdrawal Right Explanation & Examples (from class handout) .......................................................... 37

Effective Delivery – NP 11-201 (Delivery of Documents by Electronic Means) .................................... 38

3.4.5.2 Changes Post Filing of Final Prospectus (Any change must be reported in amendment) ........... 38

If there is a material change in affairs of company b/w final receipt and closing, you have to deliver

an amendment positive OR Negative change…But during waiting b/w receipt for prelim and

receipt for final, s. 57(1) says you only have to do an amendment for material adverse change (you

can for any change, if you want) .......................................................................................................... 38

OSA 57(1) again except this time, Any Change! Not Just Adverse! ....................................................... 38

3.4.5.3 Lapse of Prospectus ...................................................................................................................... 39

Distribution can continue for 12 months from date of receipt for the preliminary prospectus. After

this period, the prospectus is said to have lapsed (per s.62(1)) and no further distributions of the

security can be made without a renewal of the prospectus (per s.62(1.1)) ........................................... 39

Section 62(1) ............................................................................................................................................ 39

3.4.5.4 National Offerings (NI 11-202 Passport System) ......................................................................... 39

With national filings, there is a principal regulator (main rule for choice of PR is jurisdiction in which

issuer’s head office is located). If head office is in a location that isn’t in any of the jurisdictions of

potential principal regulators, then it’s the regulator in the jurisdiction with which the issuer has its

most substantial connection .................................................................................................................. 39

3.4.6 Consequences for Failure to Deliver/ File Prospectus (practically, none) ................................. 39

3.4.6.1 Failure to Deliver ......................................................................................................................... 39

xiv Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Penal, Admin and civil sanctions HOWEVER in reality, there are few penalties according to Lastman

.............................................................................................................................................................. 39

3.4.7 Failure to File (likely not needed) ................................................................................................. 40

3.4.8 Liability for Misrepresentation in a Prospectus .......................................................................... 40

3.4.8.1 Liability ........................................................................................................................................ 40

WHO IS LIABLE - Company, directors, selling security holders, officers who signed prospectus,

underwriters, and the experts all may be liable for a misrepresentation in the prospectus. Policy- have

everyone liable to give incentive to be careful. .................................................................................... 40

s.130: sets out liab, damages and defences for liab .............................................................................. 40

Recall: s.1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to

state material fact that is required to be stated or that is necessary to make a statement not misleading

in light of circumstances in which it was made. ................................................................................... 40

OSA, s.130: Liability for misrepresentation in prospectus....................................................................... 41

Section 1(1) Misrepresentation ................................................................................................................. 43

“misrepresentation” means, (a) an untrue statement of material fact, or (b) an omission to state a

material fact that is required to be stated or that is necessary to make a statement not misleading in

the light of the circumstances in which it was made; (“présentation inexacte des faits”) .................... 43

Kerr v. Danier (SCC, 2007), 157 .............................................................................................................. 43

Ratio: Only have to report material CHANGES post-filing, not material facts. A forecast can be the

subject of misrepresentation, P does not have to prove reliance, deemed ............................................ 43

3.4.8.2 Damages ....................................................................................................................................... 44

3.4.8.3 Defences ....................................................................................................................................... 45

s.130: Defences......................................................................................................................................... 45

1. Issuer OR security holder: “Strict” Liability (no Due Diligence Defence, tho, J&S Liability, has

options i or v above) ............................................................................................................................. 45

2. Experts (Joint and Several Liability, and only for expertised portions – has all defences from above

available + 1) ........................................................................................................................................ 46

3. NON-EXPERTS (e.g. Due Dilig defence for everyone except the issuer and selling securityholder

– e.g. Directors, officers) ...................................................................................................................... 46

Due Diligence: Standard of Reasonableness – s. 132 .............................................................................. 48

s.132: In determining what constitutes reasonable investigation or reasonable grounds for belief for

the purposes of sections 130 and 131, the standard of reasonableness shall be that required of a

prudent person in the circumstances of the particular case. ................................................................ 48

Escott v Barchris (USA, 1968), 163 ......................................................................................................... 48

Ratio: Attempts to define level of due diligence required, but really only says what is not acceptable

It does not matter whether you can read/ understand the prospectus; if you sign it, you are liable.48

There is an overriding obligation to the public and the capital markets. I need to have a reasonable

investigation to avoid a misrepresentation ........................................................................................... 48

xv Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Feit v. Leasco ........................................................................................................................................... 49

Ratio: Underwriters’ gatekeeper role therefore has obligation to challenge issuer’s disclosure and

go beyond automatic reliance on what issuer presents ......................................................................... 49

Standards for inside vs. outside directors inside directors expected to make more complete

investigation and have more extensive knowledge of facts than outside directors .............................. 49

YBM Magnex (OSC) ............................................................................................................................... 49

Standard of due diligenceshould be ongoing, but only to the extent of tying up lose ends.

Threshold of materiality must be considered in light of all facts available ..................................... 49

3.4.8.4 Limitation Period & Common Law Rights ................................................................................... 50

Jones v Deacon ......................................................................................................................................... 50

Implications: Why misrepresentations are all so scary, and why you need to take it seriouslyCourt

found that sale of securities is so fundamental to our law, that is NEVER statute-barred, and it forever

voidable at the instance of the purchaser .............................................................................................. 50

3.4.9 Registration Requirement .............................................................................................................. 50

Section 25 of the OSA so to satisfy, get an underwriter .................................................................. 50

3.4.10 UW Agreement ............................................................................................................................... 50

3.4.11 Sample Prospectus .......................................................................................................................... 51

4.0 SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE ...........................53

Five aspects of continuous disclosure: (1) Regular disclosure (quarterly/annually); (2) timely

disclosure (of material changes); (3) Early Warning (if buying up 10%- could signal takeover bid);

(4) Insider Reporting (allowed to trade, but we want to know what you’re doing); (5) Insider Trading

(to keep things fair, can’t do)................................................................................................................ 53

4.1 Policy Behind Continuous Disclosure Regime – Merger Report (3 objectives) ................................ 53

(1) Investor information; (2) accountability technique to encourage more eff management/ deterrent

to fraud; (3) Creates equality of opportunity for all investors in the marketplace (sellers & buyers); (4)

discourages transactions that don’t meet public scrutiny; (5) allows for disciplining of mgmt.

(condemn/ commend) ........................................................................................................................... 53

National Policy 51-201: Disclosure Standards ......................................................................................... 53

Section 1.1 (1): “It is fundamental that everyone investing in securities have equal access to

information that may affect their investment decisions”. ..................................................................... 53

4.2 PART I: Regular Disclosure .................................................................................................................. 53

Reporting Issuers ONLY: Only reporting issuers are subject to continuous disclosure (as defined in

s.1(1) of OSA) ...................................................................................................................................... 53

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

Section 1(1) of the OSA: Reporting Issuer ............................................................................................... 54

4.2.2 Obligation to File Financial Statements ....................................................................................... 54

4.2.2.1 ANNUAL – Section 4.1 ................................................................................................................. 54

xvi Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Every company must prepare annual, audited comparative financial statements within 90 days of the

end of the fiscal year ............................................................................................................................. 54

4.2.2.2 INTERIM - Section 4.3(1) of NI 51-102 ....................................................................................... 54

An issuer must file cumulative, comparative financial reports for each interim period ending after it

became a reporting issuer, and 4.4(a)(i) the filing must be completed on or before the 45th day after

the end of the interim period in a non-foreign jurisdiction (must file every 3, 5, and 9 months) (note:

not audited) ........................................................................................................................................... 54

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

1. You must report material changes in your business, capital or operations (75(1)) .......................... 54

2. Report in one of three ways: 1) Full Reporting; 2) Incomplete Disclosure, 3) Confidential

Reporting (must apply to use this, and can only use if you meet conditions) ...................................... 55

To bring action for Failure by an issuer to make timely disclosure, must show: 1) Reporting issuer or

any other issuer with a real and substantial connection to the jurisdiction whose securities are publicly

traded, failed to make a timely disclosure; 2) The P acquired or disposed of a security of the issuer; 3)

Acquisition or disposal occurred between the time when a disclosure was required and before the

subsequent disclosure of the material change. ...................................................................................... 55

POLICY Tension: Investor Information + Protection VS. Efficient capital markets ........................... 55

4.3.1 Statutory Provision: OSA, Part XVIII – Continuous Disclosure ............................................... 56

s.75 (1) must report a material change; (2) within 10 days of change; (3) exception for confidentiality;

(4) keep reporting every 10 days; (5) requirement to disclose subsequently if someone purchases .... 56

4.3.2 Material Change vs Material Fact ................................................................................................ 56

Remember, 1(1): Material Change = change in business operations or capital of a company that

would reasonably be expected to have a significant effect on market price or value of the securities,

or a decision to implement a change referred to above by the board or senior management who

believe that confirmation by the board is probable .............................................................................. 56

Royal Trust Co v Campbeau .................................................................................................................... 57

Ratio: Difference in material change vs. material fact (example) only have to disclose material

changes, not material facts.................................................................................................................... 57

DANIER ................................................................................................................................................... 57

Also difficult to tell – whether a change in the weather and a subsequent crappy sales promotion of

leather goods is a material fact or a material change (TJ found it to be a material fact) ...................... 57

4.3.2.1 Materiality Standard from National Policy 51-201 ..................................................................... 57

Pezim v. British Columbia (1994, SCC) .................................................................................................. 57

Ratio: National Policy Statements/ Sec Commissions should be given deference wrt to determining

what constitutes a material change ....................................................................................................... 57

4.3.3 What must be filed with a material change (3 Report Options) ................................................. 58

4.3.3.1 Complete Public Disclosure ......................................................................................................... 58

1) File a press release per s.75 OSA, NI 51-201 s.2.1; 2) File a material change report (Form 51-

102F3) .................................................................................................................................................. 58

xvii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


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

Still Form 51-102F3. This is the same, except leave out a fact and persuade the commission (via

report) that a particular fact should not be disclosed. Here, only part of the material change is not

disclosed. Prof has never seen this used. .............................................................................................. 58

4.3.3.3 Confidential Disclosure / Reporting ............................................................................................. 58

s. 7.1(1) and (2) of National Instrument 51-102: Material Change Reports ............................................. 58

Do not have to follow usual procedure of disclosing material change (per s.7.1(1)) if, per s.7.1(2) it

would be (a) unduly detrimental or (b) as a right, and the reporting issuer immediately files Form 51-

102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for

non-disclosure....................................................................................................................................... 58

4.3.3.4 Best Practices Re: Disclosure (per NP 51-201) ........................................................................... 60

4.4 PART III: Early Warning ..................................................................................................................... 60

Purpose of Early Warning: potential sign of a takeover bid where people will offer premiums to share

price. If someone acquires a certain percent of the shares of a company, they have an obligation to

say so and what their intention is, so that the market is aware of what is going on. ............................ 60

4.4.1 STEPS: ............................................................................................................................................ 60

1. Have you bought shares that, together with what you already own, put you at an ownership

threshold of 10% (you can trade up to 9.9 without disclosure)? If yes (102.1(1)) ............................... 60

2. Do you want to buy more shares? If yes wait one business day before buying more

(s.102.1(3)) ........................................................................................................................................... 60


4.4.2.1 OSA S.102.1 – 10% Rule and 2% Rule ......................................................................................... 60

4.4.2.2 OSC RULE 62-504: Section 7.1 – Early Warning ....................................................................... 61

4.5 PART IV: Insider Reporting ................................................................................................................. 61

POLICY: we actually want insiders to have skin in the game (e.g. need escrow arrangements with an

IPO so they can’t sell right away - (61(2)(g) – director can refuse to issue receipt) ............................ 62

4.5.1 Analysis: When do insider reporting rules apply? ...................................................................... 62


4.5.2.1 OSA Section 1(1) Definitions: Insider .......................................................................................... 62

4.5.2.2 OSA Section 107 – Insider Reporting ........................................................................................... 63

4.5.2.3 NI 55-104 Insider Reporting Requirements (s.3.2 & s.3.3) & Exemptions AND Form 55-102F2 –

Insider Reporting .......................................................................................................................................... 63

4.6 PART V: Insider Trading ...................................................................................................................... 63

TWO PARTS: (1) Trading: You cannot sell with insider information and (2) Tipping: you cannot tell

anyone else about that information ....................................................................................................... 63

4.6.1 Policy Discussion about Insider Trading / Tipping Prohibition ................................................. 63

POLICY: maintain integrity of capital markets, provide fullest poss knowledge so that investor

confidence is maintained (want everyone to play) ............................................................................... 63

xviii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


4.6.2 Steps ................................................................................................................................................. 64

4.6.2.1 Trading ......................................................................................................................................... 64

1. Are you a person or company in a special relationship with a reporting issuer? ......................... 64

2. Are you trading (buying/selling)?................................................................................................. 64

3. Are you doing so with knowledge of a material fact OR change (covers both!) that has not been

generally disclosed? .............................................................................................................................. 64

4. If you are in a special relationship and traded with knowledge of a material fact OR change

(covers both!) that has not been generally disclosed, do you have a valid defence? (175 of regs) ...... 64

4.6.2.2 Tipping .......................................................................................................................................... 65

1. Are you a person or company in a special relationship with a reporting issuer? If not… ............ 65

2. Did you learn information from someone that you knew or ought to have known was in a special

relationship? (76(5)(e) – puts you in a special relationship) ................................................................ 65

3. Did you share a material fact or change that has not been generally disclosed with anyone else

not in the ordinary course of business? ................................................................................................ 65

4.6.3 Statutory Provisions (OSA) ........................................................................................................... 65

4.6.3.1 OSA – Section 76 – Trading Where Undisclosed Change/Tipping .............................................. 65

4.6.3.2 Insider Trading (OSA): s.76(1) .................................................................................................... 67

76(1): it is an offence for a person or a company in a special relationship with reporting issuer to

purchase or sell securities with knowledge of a material fact or material change that has not been

generally disclosed ............................................................................................................................... 67

4.6.3.3 Tipping (OSA s.76(2) +(3)) .......................................................................................................... 67

76(2) and (3): offence for reporting issuer or someone in a special relationship with reporting issuer

or any person proposing to make takeover bid prohibited from disclosing or giving other people

information with respect to a material fact/change that has not been generally disclosed except in the

necessary course of business ................................................................................................................ 67

Royal Trust Co v. CampbeauChanges v. facts: tipping covers both .................................................... 67

In this situation, even though they decided that knowing a major SH wouldn’t tender their shares was

not a material change, it was a material fact, and in that case, the Director told other SHs not to

tender, b/c the bid wouldn’t go ahead today, he’d be dead with these rules (due to tipping regs).

Telling people not or that they don’t have to tender to protect your job is not in the necessary course

of business, and you’re guilty of tipping ............................................................................................... 67

4.6.4 Meaning of Generally Disclosed (Defence) ................................................................................... 67

Question of fact- onus on D (accused of insider trading) to show you believe it was generally

disclosed ............................................................................................................................................... 67

Texas Gulf ................................................................................................................................................ 67

Info must be effectively disclosed: Before insiders may act on material information, must be

effectively disclosed in manner to ensure its availability to investing public. So basically, you cannot

disclose and trade on the information one minute later. ....................................................................... 68

National Sea ............................................................................................................................................. 68

xix Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Ratio: Two-part test for when you can trade as an insider: 1. Must be disseminated to the trading

public; and 2. The trading public must have had it in their possession for a period of time allowing

them to digest it in accordance with the nature/ complexity of the info (generally, wait one full

trading day after release of info) ........................................................................................................... 68

4.6.5 Defences to Insider Trading / Tipping .......................................................................................... 68

4.6.5.1 “Make Use of” Defence – no longer applicable .......................................................................... 68

4.6.5.2 “Protecting Integrity of the Info” (s.175 of Regs) ........................................................................ 69

If you take all reasonable precautions to protect integrity of info and someone else trades, not guilty

(only if reckless) ................................................................................................................................... 69

REGULATIONS, s.175............................................................................................................................ 69

4.6.5.3 Defence in Practice – Law Firms ................................................................................................. 70

4.6.5.4 Trading as an agent & you’ve given no advice (s.172((a) of Regs) ............................................. 70

If you trade as AGENT for another person pursuant to unsolicited order, and you gave NO advice,

you’re not guilty of insider trading ....................................................................................................... 70

4.6.5.5 Automatic Investment Plan (175(2)(b) of Regs) ........................................................................... 70

If automatic dividend reinvestment plan, not guilty of insider trading, even if you knew ................... 70

4.6.5.6 To fulfill legally binding agreement that happened before material info was known (s.175(2)(c)

of regs) 71

Defence b/c entered into legally binding contract BEFORE You had knowledge, then you

subsequently get knowledge, don’t have to breach contract (Policy rationale no uneven playing

field \– not making decisions w/ knowledge) ........................................................................................ 71

4.6.5.7 Trades between 2 People Who Both Know the Info (s.175(5) of Regs) ........................................ 71

Fine b/c both have same info, no one has advantage over someone else. Playing field still level. ...... 71

4.6.6 Actions, Sanctions & Penalties for Insider Trading .................................................................... 71

4.6.6.1 Penal sanctions – CRIMINAL ...................................................................................................... 71

Under s. 382.1 Criminal Code prohibits trading on basis of material info concerning an issuer that has

not been generally disclosed (similar to OSA s.76) ............................................................................. 71

Defenceinformation was given in the necessary course of business of the reporting issuer; a

defence where the giving of the information is necessary to effect the takeover, business combination

or acquisition; finally where the person reasonably believed the information had been generally

disclosed. .............................................................................................................................................. 71

4.6.6.2 Civil Actions ................................................................................................................................. 71

The Act provides for an action for damages against a person trading on inside information by the

person with whom the trade was made. ................................................................................................ 71

Tipping: The Act also provides for an action for damages against a person who informed another of

the inside information. .......................................................................................................................... 72

4.6.6.3 Administrative sanctions .............................................................................................................. 72

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

xx Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


5.1 Private Placement & Exemptions ......................................................................................................... 73

5.1.1 General Rule ................................................................................................................................... 73

General rule: no trading in security, unless you are registered. If it’s a distribution, without prospectus

or proper reliance on private placement exemption ............................................................................. 73

Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor

protection)............................................................................................................................................. 73

5.1.2 Advantages & Objectives of Private Placement .......................................................................... 73

*Exemptions found in NI 45-106 OR Rule 45-501 .............................................................................. 73

Adv: (1) Speed (No Prior Regulatory Review, like with prospectus, but still highly regulated!!); (2)

Confidentiality (almost always more confidential than prospectus) .................................................... 73

Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor

protection and efficient capital markets – this is at least what they’re TRYING to do, even if there are

inconsistencies ...................................................................................................................................... 73

All exemptions focus on :(1) identity of purchaser; (2) inherently safe securities; (3) Info already

available; (4) another superior policy objectives .................................................................................. 73

5.1.3 The Private Placement Exemptions .............................................................................................. 74

4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited

investor, min amount); 2) Limited offering exemptions (govt incentive sec, founder/control person/

family); 3) trades in sec of private companies; 4) Isolated trades (isolated distrib by issuer). ............. 74

5.1.3.1 Exemptions based on wealth/ sophistication of purchaser ........................................................... 74

5.1.3.2 Limited Offering Exemption ......................................................................................................... 75

5.1.3.3 Trades in Securities of Private Companies (s.2.4 of NI 45-106) .................................................. 76

R v. Pipegrass (AB CA) – Common Bonds Test ..................................................................................... 77

COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused, or

persons having common bonds of interest or associations, they are considered to be the public, if they

have common bonds, then not the public ............................................................................................. 77

IS A FINDING OF FACT the court must see if the sale transcended sales beyond private concern

.............................................................................................................................................................. 77

SEC v. Ralston Purina – “Need to know” test .......................................................................................... 77

Need to know test (Test of whether you’re selling to “the public” -in which case, can’t use priv issuer

exemption). TEST: Persons b/c of their sophistication or relationship with company who don’t need

protection of prospectus are not members of the public. Focus of inquiry is NEED of offerees for

protection afforded by the act. .............................................................................................................. 77

5.1.3.4 Isolated Trades (s.2.30 of NI 45-106)........................................................................................... 77

Distribution must be an isolated one that is not made (a) in the course of continued and successive

transactions of a like nature or (b) by a person whose usual business is trading in securities. ............ 77

5.1.3.5 Discretionary Ruling (74(1)) – not going to happen .................................................................... 77

Exemption order (1) Upon the application of an interested person or company, the Commission may

make the following rulings if the Commission is satisfied that to do so would not be prejudicial to the

xxi Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


public interest: 1. A ruling that any person or company is not subject to section 25; 2. A ruling that

any trade, intended trade, security, person or company is not subject to section 53. (2) can impose

conditions ............................................................................................................................................. 77

5.1.4 Offering Memorandum (and problems with it) ........................................................................... 77

5.1.4.1 What is an offering memorandum? .............................................................................................. 78

Rule 14-501 Definitions (s.1.1(2)) & OSA (s. 1(1); same as s.1.1(2)) (also see 5.6(2) of CP 45-501 for

what isn’t one) .......................................................................................................................................... 78

5.1.4.2 Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.5.3) & Deliver (s.5.4)

for rescission ................................................................................................................................................ 78

OSC RULE 45-501, s.5.3: you don’t have to deliver any document to AIs in connection with the

securities, but if you CHOOSE to issue them an offering memorandum, must contain a contractual

right of action saying you can sue us if there’s a misrepresentation (not only misstatement of material

fact, but also omission of MF) .............................................................................................................. 78

OSC RULE 45-501, s.5.4: Delivery of OMIf you do deliver it have to send copy of doc to

securities commission w/In 10 days of date of trade ............................................................................ 78

5.1.4.3 Liability under Offering Memorandum (s.130.1 of OSA) ............................................................. 78

s.130.1 (1) Liability for misrepresentation in offering memorandum where a misrep, the purchaser

has the following rights: 1) right of actions for damages against issuer and selling securityholder; 2)

right of rescission against person/ company; (2) Defence: not liable if purchaser knew of misrep ..... 78

5.1.5 Registration Requirement for Private Placement Exemptions .................................................. 79

5.1.5.1 NI 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (Also

section 25 of the OSA) .................................................................................................................................. 79

Business Trigger Test: if you are a market participant in the business of trading in securities, you

must be registered. If in business of trading securities, have to be registered ...................................... 79

5.2 Resale Rules ............................................................................................................................................ 79

5.2.1 General Rule: 2 Components of Resale Rules .............................................................................. 79

1) Resale rule for non-control persons: (a) all exemptions other than private issuer and (b) resale rules

for those acquiring sec through private issuer exemption; 2) Resale rules for control persons (not

connected to above rules) ..................................................................................................................... 79

Goals achieved by resale rules: Preventing back-door underwriting ................................................... 79

5.2.1.1 Ways of Reselling (Generally) ...................................................................................................... 80

1) If you can get the company to issue a prospectus and offer to sell YOUR securities pursuant to

that prospectus (secondary offering) .................................................................................................... 80

2) Rely on another private placement exemption: Sell to Another Purchaser Pursuant to Another

Exemption............................................................................................................................................. 80

3) Exemption order from OSC .......................................................................................................... 80

4) Satisfy Resale Rules – NI 45-102 ................................................................................................. 80

5.2.1.2 Def of Distribution is Important Here .......................................................................................... 80

5.2.2 Resale Rules for Non-Control Persons ......................................................................................... 81

xxii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


5.2.2.1 Resale rules for non-control person who acquired sec through a private placement exemption

other than the private issuer exemption ....................................................................................................... 81

NI 45-102: First Trades, Restricted Period and Seasoning Period ........................................................... 81

2.5 and 2.6 of NI 45-102: if you bought securities pursuant to a PPE, can sell them based on these

rules (will be deemed a distribution, UNLESS You satisfy the rules) ................................................. 81

Lastman’s Summary of Applicable Rules (Non-Control Persons, Exemptions Except Private Issuer

Exemption) ............................................................................................................................................... 81

1) Firstly, can sell shares that you bought pursuant to prospectus (as opposed to an exemption), as

long as you are NOT a control person .................................................................................................. 81

2) SECONDLY, if NOT purchased by prospectus, but an exemption Resale Rules for All

Exemptions EXCEPT the “Private Issuer” Exemption ........................................................................ 81

3) Resale Rules for All Exemptions Except the Private Issuer Exemption .......................................... 82

5.2.2.2 Resale Rules for a Non-Control Person who Acquired Sec through the Private Issuer Exemption

82

Lastman’s Summary of Rules: ................................................................................................................. 83

(a) The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta,

British Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer

in a jurisdiction of Canada at the time of the trade; (the re-sell) (b) The trade is not a control

distribution; (c) No market manipulation; (d) No extraordinary commission or consideration is paid

in respect of the trade; and (e) No grounds to believe issuer is in default. .......................................... 83

5.2.3 Resale Rules for Control Persons (Separate Regime) ................................................................. 83

5.2.3.1 Section 1(1) of the OSA – Control Person Definition – rebuttable, pure ? of fact ....................... 83

Definition of Control Person: S. 1(1) of OSA: Person who alone or in combination with others holds

a sufficient # of securities to MATERIALLY AFFECT CONTROL of the company (rebuttable

presumption & pure Q of fact – bright-line rule) ................................................................................. 83

5.2.3.2 Five Ways a Control Person Can Sell Stock (Lastman Summary) ............................................... 84

(a) The control person qualifies a prospectus for the sale of the subject securities .............................. 84

(b) An exemption order is obtained from the OSC (very rare!); .......................................................... 84

(c) The control person sells pursuant to another private placement exemption; .................................. 84

(d) The control person sells to another control person (also giving rise to resale rules, not freely

tradeable and will have to give a discount for that reason); or ............................................................. 84

(e) The control person sells pursuant to the advance notice route ........................................................ 84

5.2.3.3 Advance Notice Route ................................................................................................................... 85

5.2.3.4 No tacking with control persons ................................................................................................... 85

5.2.3.5 Resale Rules Class Examples (Handout) ...................................................................................... 85

6.0 SEGMENT 4: CONTROL TRANSACTIONS ...........................................................................87

6.1 Reasons for Takeover Bids .................................................................................................................... 87

xxiii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


PUBLIC POLICY: on the balance of things, legislators and regulators have decided that takeover

bids are a good thing for society If you’re not a reporting issuer in province of Ontario, not subject

to takeover bid rules ............................................................................................................................. 87

6.1.1 Socially Useful Reasons for Takeover Bids .................................................................................. 87

1) Move assets to their most desired uses; 2) Create synergies, 3) Force mgmt. to be efficient .......... 87

6.1.2 Non-Socially Useful Reasons for Takeover Bids .......................................................................... 87

1) Premium for acquirer; 2) empire building; 3) creating monopolies; 4) tax advantages ................... 87

6.1.3 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them .... 87

Kimber Report Rationale: To protect investors of offeree company.................................................... 87

Objective of protecting shareholders of offeree company is manifested in 3 ways in carrying out t/o

bid rules: 1) Information (inform investment decisions); 2) Time (i- for SH’s to think about it, ii- to

get opinion from mgmt., iii- to allow for an auction); 3) Equality ....................................................... 88

6.2 Overview of How Takeover Bids Work ................................................................................................ 88

Dealt with in Sections 89-105.1 of Securities Act. If you’re not a reporting issuer in province of

Ontario, not subject to takeover bid rules ............................................................................................. 88

2 Kinds of bids: 1) Exempt takeover bids; 2) vendor takeover bids .................................................... 88

Takover Bid: Generally speaking, a takeover bid is the acquisition of shares of a company (the

“target”) which, together with the shares already owned by the purchaser, will put the purchaser’s

shareholdings in the target over a certain threshold, generally 20%. ................................................... 89

Takeover bid circular: communicates details to shareholders – will describe the offer (the price,

numner of shares and any conditions) and is sent to all SHs ................................................................ 89

Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular, review it

and decide whether they want to sell (“tender”), a bid must be open for acceptance for at least 35

days. ...................................................................................................................................................... 89

SH right of withdrawal: The offeror can’t take-up the tendered shares for 35 days and the shareholder

can withdraw the shares at any time before the securities are taken up. .............................................. 89

Director’s Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons,

which are sent by target to all SHs ....................................................................................................... 89

Change in Terms of Offer – Extension of Tendering: If a term of the offer is changed (i.e., the offer

price increased), this must be communicated to all shareholders who are given an extra 10 days to

tender their shares. ................................................................................................................................ 89

Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking

them up, a shareholder can withdraw their shares if not paid for within 3 business days after having

been taken up. ....................................................................................................................................... 89

Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than

this number is tendered, the shares are taken-up pro-rata and not first come, first serve. .................... 89

SHs offered same consideration + no collateral agreements: All shareholders must be offered the

same consideration and no collateral agreements may be entered into. ............................................... 89

xxiv Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days

from the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid

integration). .......................................................................................................................................... 90

Post-Bid Integration Rules: An offeror can’t purchase shares of the target for 20 business days after

the termination of a bid, except pursuant to another circular bid or the exceptions ............................. 90

Exceptions to having to issue t/o bid circular: 1) 100.1 of OSA: can buy whatever as long as it’s from

5 people or less, and you don’t pay more than 115% of market price (realistically, can probably only

use this once, but don’t know); 2) 100 of OSA: can buy 5% on the open market every 12 months, at

market price. ......................................................................................................................................... 90

6.2.1 What is a takeover bid? ................................................................................................................. 90

6.2.1.1 OSA: Part XX: Takeover Bids and Issuer Bids, s.89(1) ............................................................... 90

6.2.1.2 OSA, s.102.2 - Acquisitions During a Bid By an Acquiror ........................................................... 91

6.2.1.3 Indirect Acquisition – s. 92 ........................................................................................................... 92

Russell Holdings (Treats) ......................................................................................................................... 92

Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one ......... 92

EXAMPLE OF NO SMART GUYS WITH TAKEOVERS if you’re going to buy a public

company/gain control of it through a private company, you have to issue a takeover bid circular ..... 92

6.2.2 Deemed Ownership ........................................................................................................................ 92

You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover

bid (i.e. options) .................................................................................................................................... 92

6.2.2.1 Sections 89(5) and 90(1) .............................................................................................................. 92

6.2.2.2 Sample problems – “Sunlor” ....................................................................................................... 93

6.3 Mechanics of a Vendor Takeover Bid................................................................................................... 94

6.3.1 Takeover Bid Circular (Information) ........................................................................................... 94

General Rule: If I what I own + what I buy is over 20, can’t do it without a takeover bid. If you want

to own or control 20% or more of the securities of a reporting issuer, you can only do so by takeover

bid circular (unless an exemption is available) .................................................................................... 94

6.3.1.1 Section 94.1(1) and Form 62-504F1: Making a Formal Bid ....................................................... 94

6.3.1.2 Legislative goal met ...................................................................................................................... 95

6.3.2 Minimum Period of Bid (Time) ..................................................................................................... 95

The takeover bid circular must be open for at least 35 clear calendar days in order to give people time

to assess, give management an opportunity to give their opinion, and give other bidders the

chance/right to mount a competing bid (auction) ................................................................................. 95

6.3.2.1 s.98: Bid Mechanics ..................................................................................................................... 95

6.3.2.2 Legislative Goal Met .................................................................................................................... 95

6.3.3 Pro Rata (Equality) ........................................................................................................................ 96

6.3.3.1 Section 97.2: Consideration ......................................................................................................... 96

xxv Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


s.97.2(1) If a formal bid is made, all holders of the same class of securities shall be offered identical

consideration. ....................................................................................................................................... 96


6.3.4 Withdrawal and Change of Info or Variation in Terms (time and info) ................................... 96

6.3.4.1 Section 98.1: Withdrawal of securities ......................................................................................... 96

6.3.4.2 Section 94.3: Change in Information ........................................................................................... 96

6.3.4.3 Section 94.4: Variation of Terms .................................................................................................. 97


6.3.5 Conditions (just investor protection) ............................................................................................ 97

6.3.5.1 Section 97.3: Financing Arrangements ........................................................................................ 97


6.3.6 Payment for Securities (investor protection generally) ............................................................... 98

Earliest of: a) You have to take up and pay for them within 10 days after expiry of the bid; OR b)

Once you’ve taken them up, you have 3 days; OR c) For securities deposited AFTER the date on

which the offeror first takes them up have to be paid for by the offeror within 10 days after deposit . 98

6.3.6.1 Section 98.3: Obligation to Take Up and Pay for Deposited Securities ...................................... 98


6.3.7 No collateral agreements ................................................................................................................ 98

6.3.7.1 Section 97.1 .................................................................................................................................. 98


Test for whether or not collateral agreements are ok ............................................................................... 99

May apply to the OSC to ask them if a certain agreement is okay (s.104(2)) (Why do you need it?

*diff of INTENTION): (a) are you inducing that person to sell you their stock? (not okay) OR (b) do

you need them and their expertise or are doing it for a legitimate business purpose that had nothing to

do with whether or not that person owned shares? (okay) ................................................................... 99

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

6.4.1 Section 95: Offeree Issuer’s Obligations ...................................................................................... 99

6.4.2 Legislative Goal Met ..................................................................................................................... 100

6.5 Pre & Post-Bid Integration .................................................................................................................. 100

6.5.1 Lock-up Agreements/ Tendering Agreements (Allowed) ......................................................... 100

93.1(1) of the OSA says you can’t enter into any agreement to enter shares while bid is outstanding

(in a private agreement) ...................................................................................................................... 100

6.5.1.1 Section 2.1(2) of Rule 62-504 ..................................................................................................... 100

However, Section 2.1(2) of Rule 62-504 (Take Over Bids and Issuer Bids) says I can enter into a

lock-up agreement with you whereby the shareholder and offeror making bid will contract to

effect that shareholder will tender his shares to a formal TOB made by the offeror made in

accordance with proper terms/conditions of her bid........................................................................... 100

xxvi Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


6.5.1.2 Section 93.1: Restrictions on acquisitions during formal take-over bid .................................... 101

6.5.1.3 OSC RULE 62-504: TAKE OVER BIDS AND ISSUER BIDS .................................................... 101

Per s.2.1(2): Subsection 93.1(1) of the Act does not apply to an agreement between a security holder

and the offeror to the effect that the security holder will, in accordance with the terms and conditions

of a formal take-over bid, deposit the security holder’s securities under the bid. .............................. 101

6.5.1.4 Legislative goal is STILL met ..................................................................................................... 101

6.5.2 Pre-Bid Integration ...................................................................................................................... 101

6.5.2.1 Section 93.2(1): Restrictions on Acquisitions Before Formal Take-Over Bid ........................... 102

6.5.2.2 Legislative Goal Met .................................................................................................................. 102

6.5.3 Post-Bid Integration ..................................................................................................................... 102

6.5.3.1 Section 93.3 ................................................................................................................................ 102

6.6 Exemption from Pre-Bid and Post-Bid Restrictions – EXEMPT Takeover Bids! ......................... 102

6.6.1 Private Agreement Exemption (s.100.1(1) of OSA, most important) ...................................... 103

6.6.2 S.100 – Normal Course Exemption – Don’t Exceed 5% in 12 Months .................................... 103

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

Canadian Tire (1986, OSC) .................................................................................................................... 103

Ratio: Coattail provision, despite not countering statute or case law, was not allowed to go through as

it would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public

interest). Found that collateral agreement rule only applies in the context of a t/o bid (since this was

not a takeover bid, collateral agreements did not apply) .................................................................... 104

6.8 Director’s Duties and Responsibilities in a Takeover Bid Situation – Defensive Tactics to Buy

Time 104

Policy for defensive: you can do w/e you want to fight bid, but if you deprive SH of choice, you’re

dead (prob b/c conflict of interest between directors interests and SH’s interests). It’s good to have

them, because you maximize value of the enterprise. ........................................................................ 104

6.8.1 Fiduciary Duty in the Context of Takeover Bid ........................................................................ 104

6.8.1.1 NP 62-202: Tactics that will come under scrutiny ..................................................................... 105

6.8.1.2 Duty to Maximize SH Value........................................................................................................ 105

6.8.2 Examples of Defensive Tactics..................................................................................................... 105

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

Example of defensive tactics – bought a pig farm to make company unattractive to bidder (too

extreme, but case was before sec law) ................................................................................................ 105

Labatts (just an example) ........................................................................................................................ 105

Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab); after

this case brought in law re: defensive tactics (however, board did it’s job to buy time and eventual

had a preferable bidder) ...................................................................................................................... 106

Max Milk and Beckers ........................................................................................................................... 106

xxvii Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


Example of attempt by Max Milk to find a white knight ................................................................... 106

6.8.2.1 Due Diligence – can restrict access ........................................................................................... 106

Sun Media and TorStar ........................................................................................................................... 106

Example where info was not made available to bidder. Also in this case, complained to competition

bureau. Worked out since delay led to higher bid. ............................................................................. 106

Second Cup ............................................................................................................................................. 106

Example of poison pill- not actually used, just threatened to give opp to talk ................................... 106

6.8.2.2 Golden Parachutes – all legal. ................................................................................................... 107

6.8.2.3 Poison Pills ................................................................................................................................. 107

6.8.3 Defensive Tactic Rules - NP 62-202 ............................................................................................ 107

6.8.3.1 NP 62-202 ................................................................................................................................... 107

Main Principles:1) takeover bids are a good thing; 2) primary objective of t/o bid legislation is

protection of bona fide interests of SHs of target company; 3) second purpose/ objective: create a reg

framework where bids can happen in an open and even-handed manner; 4) Regulators believe it is

inappropriate to specify a code of conduct for directors b/c that code runs risk of being insuff in some

cases and excessive in others; 5) SH approval desirable (BUT this is unrealistic); 6) administrators

believe that unrestricted options produce most desirable results in t/o bids and are reluctant to

intervene in contested bids; 9) although auctions are best and don’t want to intervene, administrator

will punish you if your action is to deprive SHs of opp/ rt to respond to a bid; 10) cannot come to

administrator to get prior approval for defensive tactic ...................................................................... 107

6.8.3.2 Case Law .................................................................................................................................... 108

Teck Corp v Miller (BC SC) – Best Interests Test ................................................................................. 108

Ratio: Best interests test: need to act in best interests of SH“The directors must act in good faith.

Then there must be reasonable grounds for their belief. If they say that they believe there will be

substantial damage to the company’s interests, then there must be reasonable grounds for that believe.

If there are not, that will justify a finding that the directors were actuated by an improper purpose”.

............................................................................................................................................................ 108

Producers Pipelines (Sask CA) – Proportionality Test ........................................................................... 108

Ratio: Canadian law does not conflict with the business judgment rule. ........................................... 108

In takeover situations, directors will often be in a conflict. In implementing a poison pill, the directors

“must be able to establish that (a) in good faith they perceived a threat to the corporation, (b) they

acted after proper investigation, and (c) the means adopted to oppose the takeover were reasonable in

relationship to the threat posed” ......................................................................................................... 108

1 Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence.


1.0 MAJOR THEMES IN THE COURSE

1.1 Three Goals of Securities Regulation

3 purposes: 1) Protection of investing public; 2) Ensuring the Efficient Operation of Canadian Capital

Markets; 3) Increasing and Maintaining Public Confidence in Capital Markets / In the Persons and

Institutions Operating Them

Found in s.1.1 of the OSA under the purposes of the act! The purposes of the Act are (a) to provide

protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient

capital markets and confidence in capital markets

Recall Danier case: The securities act is remedial legislation and is to be given a broad interpretation (Pezim). It

protects investors from risks of an unregulated market, and by it assurance of fair dealing and by the promotion

of the integrity and efficiency of the capital markets it enhances the pool of capital available to entrepreneurs.

The act supplants the buyer beware mindset of the common law with compelled disclosure of relevant

information… at the same time, recognizes burden it places on issuers and Part XV sets limits on what is required

to be disclosed…(para 32) – Binnie J

1. Protection of investing public

a. Should not protect public against loss, but ensure that public has knowledge needed to make a

decision about the company – assurance that its losses are genuine economic losses (correct

pricing via prospectus)

b. Very high level consumer protection legislation

2. Ensuring the Efficient Operation of Canadian Capital Markets

a. Ensure capital markets facilitate mobility and transferability of financial resources and provide

facilities for continuing valuation of financial assets

b. Achieved through a free and open securities market with regulator correcting for market failure

i. More info prevents problem of adverse selection in the market (drive out high quality

securities, leaving only low quality securities which would be a misallocation of financial

resources)

3. Increasing and Maintaining Public Confidence in Capital Markets/In the Persons and Institutions

Operating in Them

a. Investors will be WTP more for new issues of securities in primary market if confident they will

be able to sell securities fairly on secondary market (want to know its fair, you can make money!)

b. With investors paying more for new issues, more savings would be channelled into investment,

thereby improving allocation of financial resources (see goal #2)

c. Creating confidence in market, adverse selection is overcome – of assured of accuracy of info,

investors WTP more, therefore, higher qual securities more likely to survive

*However, reg must not be at excessive cost (therefore, tension between protecting investing public and eff

capital markets)

Another theme: NO SMART GUYS and NO CERTAINTY

Certainty in almost every circumstance is a bad thing, takes away judgment judgment is what we need to

make the right decisions

The Securities Act don’t care what act actually says, care what it ought to say or intended to say. Don’t care

about geniuses that spend lives devising schemes to get around SA. Securities regulators or courts say you’re



smart, but who cares… if you’ve done something you think outsmarts securities act, they’ll shut the door on

you = no smart guys.

1.2 Three Methods of Achieving these goals

1) Registration Requirement, 2) Disclosure Requirement, 3) Remedies for Breach of 1 and 2

1.2.1 Registration requirement

Licence people in the business you cannot trade in securities unless you’re licensed (underwriters)

There are exceptions, e.g. can sell Canada Savings Bonds without registering (b/c it wouldn’t make sense

in the context to register; b/c they are so safe – unlikely Govt of Can will default)

POLICY: This helps ensure accountability, makes sure you are educated and policed fosters confidence

in the market, and the exceptions are to provide efficient markets for securities that are considered to be

very low-risk to the public. People will lose confidence if some whackos are selling you securities.

1.2.2 Disclosure Requirement

To protect investing public, must make sure they have full, true and plain disclosure of all material facts

related to the company (adv/disadv, risks, contracts etc.) via a prospectus and continuous disclosure

Note: there is an adv to being an investor in a public company the asset is easily liquidated, but must

have info to do so

To provide info:

o 1) Prospectus: comprehensive disclosure document - tells investor what they need to know to

make an informed decision

Also creates a cause of action for misrepresentations and omissions in a prospectus

o 2) Continuous disclosure: once a company goes public, the company has continuing disclosure/

reporting obligations which requires the company must keep information current. Continuous

disclosure has 4 parts:

1) Regular Financial Reporting

2) Timely Disclosure (for material issues must file press release and amendment to

prospectus)

3) Insider Reporting (insiders must disclose when they buy/ sell shares to prevent insider

trading)

4) Early Warning (at a certain level of ownership in shares, need to tell the world how

many you own and your intentions)

POLICY: need to protect investors, OSA is consumer protection legislation and in order to do that, we

need to give you the information that you need to make an informed investment decision

1.2.2.1 Exceptions to the Disclosure Rule

(i) the purchaser is sufficiently sophisticated (wealthy/ well resourced); (Private Placement)

(ii) the information is otherwise readily available; or

(iii) the securities are "safe" (Canada Savings Bonds)

POLICY: Need to balance the objectives of the efficiency of capital markets (would be inefficient to file a

prospectus every time a company needs money) with the need to protect the public.



1.2.2.2 Closed System & Resale Restrictions

When securities are acquired pursuant to one of the private placement exemptions and not pursuant to a

prospectus, the resale by the initial investors of these securities to other investors on the secondary market

is restricted and certain conditions must be satisfied prior to their resale.

Conditions that must be satisfied prior to resale:

1. You issue a prospectus;

2. You sell pursuant to another private placement exemption;

3. You comply with the resale rules; or

4. You receive an exempting order from the Ontario Securities Commission

Policy: Transparency is key to the process

1.2.3 Remedies for Breach of Registration or Disclosure Requirements

If you don’t satisfy the requirements, there are remedies for the investor against you for breaches of these

obligations

Remedies can be civil, criminal, or administrative (more detail below)

Policy: investor protection and confidence in the market (fix something when it goes wrong)

Now just a bunch of rules that play into one of these three objectives.

Note: will also look at take-over bids

Overall protect shareholders of target company and make sure there is a level playing field

o Make sure they have enough info to make an investment decision

o Give them suff time to make that decision

o Protect against company doing bad things

1.3 General Policy of the Course

For the exam: 1) Know what the rules are; 2) Look at why they exist (why does the law regulate these

activities? What objectives is the rule trying to establish?); 3) THEN Challenge the rules

Always keep in mind that he wants you to answer WHY it is that you’re doing what you’re doing

WHY does the law regulate this particular activity? (will mostly have to do with achieving the three

above goals/dealing with tensions among those goals)

Securities reg is nothing more than sophisticated consumer protection legislation with the consumer

being investors.

o The Securities Act is really a policy document where intention is the most important thing.

o The rules that the SA sets out are intended to be appropriate in the circumstances in which they

are employed.

3 types of policy statements”

o OSC Policy info about how the Ontario Securities Commission will decide

o Uniform Act provinces of BC, Alberta, Saskatchewan, Manitioba and ON

o National all of the SCs get together and say how they’re going to use their discretion



2.0 INTRODUCTORY CONCEPTS

2.1 Purpose of Selling Securities

Securities are primarily sold to raise funds for investment, e.g. the launching of a business venture/

expanding existing venture (private company goes public becomes a reporting issuer)

o To purchase assets that will be used to produce goods/services for which there is a demand

sufficient to generate profits comparable to that of other investment opportunities of similar risk.

2.2 Types of Securities

Two main types of securities

Debt: Funds can be borrowed, offering interest payments and principal repayment

o Includes trade credit (e.g. ST accounts payable), short-term bank loan (e.g. line of credit), long-

term bank loan (e.g. with security interest – property and/or adherence to ratio tests that may

indicate risk of bankruptcy), commercial paper (obligation to pay specified amount at specified

date), bonds (evidence of indebtedness secured by an asset of borrower), debenture (unsecured

evidence of indebtedness)

o Other characteristics of bonds/ debentures:

Call feature: allows borrower to repurchase bond after specified date for specified price

(usually prem to face amount/ par value)

Sinking fund: indenture may provide for a fund built up each year to redeem some

portion of bonds before maturity or to meet the obligations to pay at maturity

Convertible: right to convert bonds into shares

Warrant: right to buy securities from issuer for exercise/striking price during a specified

period

Equity: rights to share in the distribution of the profits and the proceeds remaining after the sale of the

assets of the business and payment of amounts borrowed.

o Common Shares: most frequent bundle of rights in a company that includes the following rights

i. Right to vote (on important matters - e.g. election of directors, how company will be

managed etc.)

ii. Right to dividends (not obligation – corp can decide to declare dividends to which each

common share has a right a share in $ or in stocks where there is a stock dividend)

iii. Liquidation right: entitled to share pro rata in any proceeds of liquidation (to the extent

proceeds remain after satisfaction of other claims)

o Preferred Shares: given preference wrt distrib of dividends and proceeds of liquidation (usually

non-voting). May carry the following special features:

i. Cumulative: if div are not declared or are not suff to pay full amount of annual preferred

div on preferred shares, amount unpaid carries over to the next year (usually preferred

shares are cumulative)

ii. Participating: participate in div beyond the specified preferred amount (preferred amount

+ included in common share amount left over)

iii. Redemption/Call provision: if shares are redeemable by the company (to facilitate

financing of company at specified price)

iv. Retraction rights: permits shareholder to tender share to co and co has to buy it back at

specified price

2.3 Securities Trading

2.3.1 Open Market in Capital

Primary market (sale of securities to investors) and secondary market (investors exchange sec in return for

payment from another invested) together permits continued marketability / liquidity of shares

Crucial term, two parts together constituting “open market in capital”



o Primary market: sale of securities to investors. The money flows through from investors to the

company (have benefit of liquidity)

o Secondary market: investors exchange securities in return for payment from another invested

(issuer not generally involved)

Permits continued marketability/ liquidity of shares: For investors to realize on their

investment, they must be able to sell among themselves on various exchanges (e.g. TSX)

Simplifications for trading

o Brokers: Takes orders from buyers/sellers, locates buyers/sellers for clients and executes trades

on behalf of clients.

o Stock exchange: Trading involves 1) communication between buyer and seller; 2) exchange upon

agreement. A stock exchange facilitates both elements, saving the client time/money and

increasing the likelihood that security will be sold (for sellers). Issuers want securities to be

traded on exchange b/c it increases their securities’ value and therefore, the amount of capital

they can raise

i. Buyers can find sellers and sellers can find buyers (brokers meet in a specified place –

either real or online)

ii. When asking and bid price correspond, there would be an offer, acceptance and

consideration (money to be paid in return for shares). Payment would occur and the

ownership would change hands (bearer form – less used to prevent theft; or registered

form with name of owner on certificate and on books of company with endorsements)

o Clearing agency: created to simplify transfers between brokers by tracking obligations and

notifying brokers of their net obligation

o Broker inventories: reduce amount of issuances and re-issuances (instead of performing full

transfer for every transaction, brokers would record in their books who the beneficial owners of

securities were)

o Nominee owners: as brokers began to hold too many securities, nominee owners name and

securities registered to them – bookkeeping entries keep track of who the beneficial owners are

o Securities Depository corporations: represent a single nominee owner (and sometimes performe

clearing role (e.g. Canadian Depository for Securities Ltd – CDS)

o Computerized stock exchanges and trading: Increases transaction speed AND further facilitates

communications.

2.3.2 Private Trades

Private trade: Trades without using brokers or a stock exchange – take place directly between the buyer

and the seller

Upstairs market: involves trades by large, institutional investors buying or selling in large volumes

Over-the-Counter Trades: when issuers are unable to meeting listing requirements of a formal stock

exchange they may trade over-the-counter, with the assistance of a broker

o used for bonds/debentures too b/c 1) large denominations, 2) nature of investment – longer time

horizons, 3) held in large Q by institutional investors

Other trades:

o Alternative trading systems: less restrictive listing requirements, and largely automated

o Margin trading: Broker loans funds to clients to purchase securities

Restrictions exist regarding 1) the % that the client must pay and 2) to maintain a

particular % if the value of the security changes.

o Short selling: Investor sells securities that he/she doesn’t own and takes on a contractual

obligation to supply the shares in return for payment by the person purchasing the securities.

Broker can facilitate this trade by loaning the investor the securities.



NOTE: Major investors in Canadian Securities Market include banks, trust companies, credit

unions/caisses populaire, life insurance companies, pension funds, investment funds (mutual

funds/investment companies), and individuals (to a lesser extent).

2.4 Sources, History & Constitutional Division of Powers of Securities Regulation

2.4.1 Division of power

Provinces have enacted securities acts under their power to legislate wrt “property and civil rights”-

includes dealings in prop, contracts, and reg of business, trades and professions

o Provincial laws upheld even where there is some overlapping, but not conflicting, federal law

o sometimes prov securities laws do not apply to federal companies

Federal government could justify regulating securities under the trade and commerce power (may be

necessary due to globalization)

2.4.2 History of securities regulation

Securities reg (regulating brokers, requiring prospectus disclosures, etc.) is a rel recent phenomenon,

beginning in mid 19th century (ON first jurisdiction to adopt English Directors Liability Act in 1891; 1920

fraud protection acts, prospectus disclosures in 1947)

o Modern Can securities reg = derived from Kimber Report, 1965 (addressed insider trading,

takeover bids and ongoing disclosure requirements) and Merger Report, 1970 (led to “closed

system” statute with emphasis on ongoing disclosure for the purposes of secondary market

trading)

o Interprovincial cooperation has also been an important part of securities reg, although there is no

national regulator yet

2.4.3 Sources of Provincial Securities Regulation

1) Securities Law & Related Sources

a. Provincial and Territorial Securities Acts

b. Provincial regulations and rules: originally security acts give extensive powers to Lieutenant

Governor in Council to make regs. Now, securities commissions also have power to make rules

and regs, subject to procedural requirements

i. Procedural requirements include: commission must publicize proposed rule and accept

comments for 90 days; if commission makes material changes to rule must publish

amended rule and give further period for comment; when finalized, rule goes to Minister

who can accept/ reject/ return rule to commission for further consideration

c. National and multi-lateral instruments: developed cooperatively and agreed to by all securities

administrators across country (no binding legal effect, but can be adopted in each jurisdiction).

i. when some but not all of Can Securities Administrators is sue an instrument, it is a

multilaterial instrument

d. Policy statements: issued by securities administrators in Can and indicate how they interpret the

legislation, regs or rules and provide guidance to market participants in complying with

legislation, regs and rules

i. National policy statements: issued jointly by Can Securities Administrators

e. Notices and Accounting Communiqués: released by securities commission and contain info of

interest to those who deal with regs on a regular basis

f. Memoranda of Understanding: between diff securities administrators in Can or abroad

g. Decisions & rulings

h. Blanket orders: securities commissions can issue orders (usually sought and provided on a case-

by-case basis)- in ON this is no longer allowed (must instead pass a rule)

i. Bulletins, Websites and Canadian Securities Administrators Communiqués



j. International Organization of Securities Commissions: review major reg issues, promote

development and improvement of efficiency of emerging securities markets by establishing

principles and min standards, prepare training and facilitate exchange of info/ expertise

2) Self-regulatory bodies

a. Stock exchanges: pass by-laws and rules to govern qualifications and continued fitness of

members for membership in exchange, set out requirements for listing of securities of issuers and

conditions to be met by listed issuers to maintain their listing, and govern manner in which

trading is conducted

i. Will also issue policy statements

b. Other self-regulatory orgs: Investment Dealers Association of Canada, Canadian Securities

Institute, Institute of Chartered Financial Analysts (have tests etc.)

c. Securities Commission Review: have power to review and make decisions wrt a by-law, rule or

other reg instrument made by a self-regulatory org or stock exchange

3) Commission and Administrators: Commissions are 2 tiered structures

a. Panel of commissioners: makes orders and rulings and acts as an appeal tribunal from decisions

of administrator; also formulates policies and makes recommendations to govt for changes in

legislation/regs

b. Admin agency headed by chief admin officer: exercises admin functions assigned to administrator

under applicable act and implements decisions/directives of commission



3.0 SEGMENT 1: GOING PUBLIC

3.1 Introduction to Going Public

3.1.1 General Rule– Securities Act, ss. 25 and 33

RULE: No person shall engage in or hold themselves out as engaging in the business of trading in a security,

without being registered, and if a trade constitutes a distribution, without preparing a prospectus (Section

25 and 53, Ontario Securities Act).

s.25 deals with not being able to engage in business of trading securities unless REGISTERED

s.53 deals with not being able to issue securities without a prospectus

3.1.2 How Companies Go About Raising Capital

3 Ways: 1) Borrow, 2) Go Public (IPO – segment 1), 3) Private Placement of Securities (segment 3)

1) Borrow: Can go to an FI and borrow it, but might be expensive, might not be able to get it

2) Go Public (IPO): first segment of course

3) Private Placement of Securities: third segment

3.1.3 Why Go Public?

If a client wants to take a private company public, if you’re worth anything as a lawyer, then you won’t

just take instructions, but provide advice and guidance.

Lots of advantages/disadvantages of going public, have to address those with your client.

Ex. Four Seasons Hotels

Used to be a private company, decided it wanted to be a public one for very bad reasons

Went public and was a miserable public company. So miserable that it ultimately decided it had to go

private again

A few years later, went public again for the right reasons, then it became what it is today one of the

finest hotel companies in the world (then went private again but only b/c paid lots of $)

3.1.3.1 Advantages

Advantages: 1) Raising Capital, 2) Future Growth, 3) Employee Incentives, 4) Enhanced corporate image,

5) Acquisitions, 6) Shareholder Liquidity

1. Raising Capital: In the primary offering the principle reason to go public is to raise capital to meet the

company’s growth and operating objectives

2. Future Growth: An equity offering allows the company to:

a. Borrow additional capital on more favorable terms

b. Issue additional equity on the market

c. Raise future capital from current shareholders via rights offerings

3. Employee Incentives: Can use stock options as compensation when your public (more attractive to

employees b/c stocks become more liquid and provides independent valuation mechanism)

4. Enhanced Corporate Image: Increased public profile (become better known to customers, suppliers and

other stakeholders)

5. Acquisitions: Cash generated by going public may enable a company to undertake successful M&A. Can

expand using stock as a form of currency without depleting cash or taking on debt.

6. Shareholder Liquidity: Instead of holding shares subject to the escrow requirements and control block

sale restrictions, public investors enjoy increased liquidity allowing for easy diversification by selling

parts of the company (constant indication of value due to share price)



3.1.3.2 Potential Disadvantages (and to how to mitigate the risk)

Disadv: 1) Loss of confidentiality, 2) Reduced flexibility, 3) Managing share prices, 4) Reduced control, 5)

Loss of tax advantages, 6) High costs of going public (initial costs of IPO and ongoing cont disclosure

requirements)

1. Loss of Confidentiality: Significant disclosure (prospectus) and continuing disclosure requirements may

prejudice the companies’ position as the information is available to all competitors

2. Reduced Flexibility: Owner-manager undertakes a responsibility to the public, which imposes fiduciary

duties. There is lost flexibility as approval from outside directors is needed to make certain decisions

a. Ex. Need a shareholder meeting in order to approve a large acquisition which takes 60 days, thus,

the opportunity may be lost to a faster moving private company.

3. Managing Share Prices: Public companies are scrutinized on a quarter by quarter basis, this creates an

incentive to manage share prices in a way that can compromises long term profitability.

4. Reduced Control: A public offering may dilute the owners control to the point that they lose controlling

power of the company which may open the company to unfriendly takeover bids.

5. Loss of Tax Advantages: Public companies are not entitled to small business deduction and other tax

advantages

6. High Cost of Going Public

a. Initial costs: underwriter’s commission (5-7% of gross offering proceeds), non-commission costs

(1-3% of gross offering, which includes: prof fees of lawyers, accountants etc., listing fees,

promotional expense, printing, translation in QC)

i. Green Shoe (over-allot the issue by granting the right to buy more of the issue for a set

period.

ii. Broker warrants (right to buy at a set price for a year): This rights provide the

underwriters with a continued stake, but also have a dampening effect on the market.

b. Ongoing costs: continuing disclosure requirements, manage the board, accounting and lawyers

fees that make up governance, filings of material changes

3.1.4 Why do we regulate public offerings (3 objectives)

1) Protection of Investing Public, 2) Ensuring the Efficient Operation of Canadian Capital Markets, 3)

Increasing/ Maintaining Confidence in Public Markets & the People who Operate in Them

Why do we think it’s so important to regulate public offerings vs. letting the market take care of itself?

Objectives of regulation: Everything in the Securities Act (SA) is designed to deal with one of three

objectives (can be conflicting, have to balance)

1) Protection of Investing Public: Impose a lot of rules to make sure these people are protected

2) Make sure Markets Work – efficient operation: rules to ensure the system works

a. There is no point having a market if nobody plays.

b. Can’t just protect the investing public b/c there is nothing to protect if not investing (need to

balance these goals)

3) Increasing/Maintaining Confidence in Public Capital markets and People who Operate in Them:

Neither of the above two points matter if there’s no confidence in it.

Everything we talk about will come down to one of those three objectives*exam

**and remember methods used to achieve the objectives (Securities Act is just a bunch of rules that play

into one or more of these three objectives).



3.2 The Prospectus Requirement: Does the Securities Act Apply?

Prospectus ONLY IF there is a TRADE in a SECURITY which constitutes a DISTRIBUTION.

Recall General Rule: ss. 25, 53 of the SA: No person shall engage in or hold themselves out as engaging in

the business of trading in a security without being registered and if a trade is a distribution, without

preparing a prospectus

Analysis for Whether You Need to Issue Prospectus:

1) Does transaction involve a security? If NO, SA does not apply. If so…

2) Is it a trade in a security? If NO, SA does not apply. If so…

3) Does that trade in a security constitute a distribution? If NO, no Prospectus. But if yes… then

you must prepare a prospectus *unless one of private placement exemptions are available

The definitions are key to this analysis!

Remember why you care: b/c fundamental question is… I want to do something, do I need to prep a

prospectus to do that? (to engage in activity I’m proposing)

3.2.1 What is a security?

3.2.1.1 Statutory Definitions

LEGISLATION ACT 2006 - Interpretation

Section 64(1): an act shall be interpreted as being remedial and shall be given such large and liberal

interpretation and best ensures the attainment of the object

POLICY: To understand a statute, have to understand what it’s trying to do because we’re going to give

it a broad enough interpretation to have it achieve what we wanted it to do

The courts have gone to incredible lengths to make sure that happens.

ONTARIO SECURITIES ACT – Interpretation & Definitions

S.1(1): “security” includes (NOT EXHAUSTIVE= broad def): (a) any document, instrument or writing

commonly known as a security, (b) any document constituting evidence of title to or interest in the capital,

assets, property, profits, earnings or royalties of any person or company,(n) any investment contract

Very broad definition Covers common types of securities, as well as other less common items – thus,

contains items capable on taking a broad meaning and is non-exclusive.

s.1(1): “security” includes (NOT EXHAUSTIVE)

(a) any document,

instrument or

writing commonly

known as a

security,

COMMON TYPES OF SECURITIES

A “security” includes “any bond, debenture, note or other evidence of

indebtedness, share, stock, unit, unit certificate, participation certificate,

certificate of share or interest, preorganization certificate or subscription

(OSA s. 1(1) “security” (e)).

Also, “any document constituting evidence of an option, subscription, or

other interest in or to a security”.

Also includes “any instrument or writing commonly known as a security”.

Both US and Canadian case law have made it clear that “commonly known”

refers to known in the legal/financial community – a sophisticated legal expert

(not common to lay person)

(b) any document

constituting

evidence of title to

or interest in the

capital, assets,

3.2.1.2 LESS COMMON SECURITIES

Definition sets out a number of specific items all of which would normally

involve an initial payment that would be used to produce some future returns

(e.g. investment contract)



property, profits,

earnings or

royalties of any

person or

company,

Too broad a definition (so a receipt for the purchase of a hockey stick could

theoretically constitute a security, because it is evidence of an interest in

property)

Courts have had to narrow this definition, so only instruments intended as

investments are securities and not instruments bought and sold for other

commercial purposes (ex: title to a car is property, not security) (test: is the ind

investing in the piece of paper OR are they investing through the piece of paper

in a product)

Look to see whether the person is expecting an increase in value – if yes,

security

(n) any

investment contract,

3.2.1.3 CATCH ALL PROVISIONS (Pacific Coast)

Definition is case in open-ended terms

o Included items listed—thus non-exhaustive.

o Includes “a document evidencing title to or an interest in the capital,

assets, property profits, earnings or royalties of a person”.

o “a profit sharing agreement or certificate” and

o “an investment contract”.

These are sufficiently broad/vague that interpretations have not gone outside

the listed items.

Hotly litigated because it is ambiguous

We determine if a particular instrument is a security by asking whether or not the

person invested on the premise that the other person’s expertise would create

profit (in these situations, need full disclosure of relevant info)

3.2.1.4 How Case Law Has Defined a Security

Main Points: Definitions in the OSA are not mutually exclusive, but are catchalls

- Securities legislation is ‘remedial legislation; to be ‘construed broadly’ (SEC v CM Joiner Leasing &

Pacific Coast Coin Exchange)

- Substance not form governs the interpretation of what is a security –it is flexible, not static (Pacific Coast

Coin Exchange)

-The policy of securities legislation is ‘full and fair disclosure’ with instruments regarded as securities

Something will be considered a security if: 1. It falls clearly under one of the definitions of the OSA

2. If can fit under one of the broad definitions and policy considerations demand coverage

SEC v. Glen T. Turner Enterprises Inc. (US, 1973)

Ratio: s.1.1(a) definition that a security includes “any document, instrument or writing commonly known as

a security” means if known as such by the legal/ financial community, not common person.

Implications: takes a broad def and makes it even broader!

Due to POLICY: most sec are technical in nature, not likely to be understood by anyone other than legal/

financial community

Reasons: interprets US law similar to OSA s.1(1)(a) that provides a security includes: (a) Any document,

instrument or writing commonly known as a security.

“Commonly Known As” does not mean commonly known as security to ordinary people on the street. If

commonly known as a security to most sophisticated security lawyer in the country, it’s commonly

known as a security



o “The court doubts that Congress intended that in order to qualify under these general categories, a

transaction must be commonly known to the man in the street as a security. Most securities are

rather technical in nature and not likely to be understood except by the legal or financial

community. It is sufficient that an offering be considered as a legal matter to be a security,

regardless of the popular perception of it”

Supported by Can courts

Ontario (Securities Commission) v. Brigadoon Scotch Distributors (1970 Ont. H.C.)

Ratio: Provides insight into s.1(1)(b): Securities only includes instruments intended as investments and not

instruments bought for other commercial purposes.

Test: Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in

value? Or is the investor investing through the piece of paper in the product?

Policy: The reason you’re defining this is to figure out if you need to issue a prospectus, so had to narrow

definition (otherwise, could be anything you’re selling)

Reasons:

Recall: s.1(1)(b) Any document constituting evidence of, title to, or interest in the capital, assets,

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

o Case interprets section: def of security doesn’t include documents of title bought/ sold for

purposes other than investment

o Basically if you’re buying something and you get a receipt for it, that receipt does not

constitute a security unless you’re planning on selling it in order to make an investment off of

it

Test for whether or not a title document is a security:

o Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate

in value? Or is the investor investing through the piece of paper in the product?

E.g. go to store that ages scotch. Buy a bottle, age for 5 yrs, give you doc evidencing

you own it. If my intention is to buy the bottle of scotch, that piece of paper is not a

security. If my intention is to sell that piece of paper evidencing that I own that bottle

at a higher price in the future, then that piece of paper is a security.

Policy: There’s no incentive of investor protection by covering something like the receipt for the shampoo I

bought at the store as securities.

(c) If you enter into an investment contract, that’s a security

No one has any idea what an investment contract means, but some American cases, and then SCC case adopting

American reasoning…

SEC v. CM Joiner Leasing Corp. (USA)

Ratio: Act will be construed broadly and in whatever way leads to it to promote the policy objective of

investor protection (Purposive approach to interpreting the meaning of “security”). Specifically, interprets

s.1(1)(n): an investment contract will be where people are investing in the potential for something to

generate profit and are purchasing expertise of someone else.

Policy: Purposive approach to interpreting the meaning of “security” required to respond to new, novel,

uncommon or irregular devices.



Facts: SEC sought injunction against CM with respect to assignment of leases. Anthony acquires leases in Texas,

transferred a substantial portion to Joiner Corp., and engaged in sales campaign where they tried to assign leases

in land in parcels of 5-20 acres with the promise the Joiner would drill a test well to test the oil producing

potential of the land. Transaction was set up so that it was arguably only a sale in land.

Decision: the court found that it was not just a sale of an interest in property, but the sale of the prospect of

gaining from the exploration exercise. The transaction “had all the evils inherent in the securities transactions

which it was the aim of the Securities Act to end”

Reasoning:

Although set-up to be a lease in land, the definition of a security uses very general terms and can

encompass this transaction.

o Decision based on POLICY:

The Act must be able to respond to new, novel, uncommon or irregular devices.

Interpret the definition broadly to meet the purpose of the Act – it should not be

subverted by new instruments designed to avoid the application of the Act or frustrate its

purpose.

Ultimately, investors likely needed more info on scheme administration etc.

through a prospectus

If investors are investing in the potential for the item/ doc to generate profit, and are purchasing the

EXPERTISE of someone else, tends to be read like an investment contract means that looking at OSA

objectives, the investors could have BENEFITED from OR NEEDED info that would be in a prospectus

o In this case, investors would have needed information on oil/gas potential of the land, structure

of C.M. Joiner Corp., background on the individuals, their interests in the plan, how the plan

would be administered, etc. For such small investments, a prospectus made sense.

**note: next two cases are only important b/c reasoning is later adopted by SCC in Pacific Coin Exchange

SEC v. W.J. Howey Co. (USSC, 1946) – reasoning used by SCC in Pacific Coin

Ratio: Common enterprise test for identification of an “investment contract” and therefore, security. Test

requires:

1) A contract, transaction or scheme whereby a person invests;

2) That the investment be in a common enterprise; and

3) That the person is led to expect profits (or capital appreciation: see Forman) solely from the efforts of a

promoter or third party (pol obj: since it is them who controls success/failure of enterprise)

Facts: Howey Co. and Howey-in-the-Hills Service Inc. were under common ownership. Howey Co. owned

orange groves in Florida and a hotel. Groves were for sale and sold in plots of 1 acre each. Buyers advised that

land needed to be serviced, recommended Howey-in-the-Hills Service Inc. Buyers would derive profit from

orange groves manages by HHS Service Inc. Buyers told that 20% returns had occurred but that they could expect

10%.

Decision: Investment contract this was more than just a sale of fee simple interests in land. The transfer of land

was merely a convenient way of allocating the profits of the enterprise. Again, these investors would have

benefitted from some information regarding their decision to buy and put the land under management.

Reasons:

Common enterprise test: contract or transaction where a person invests in something that is a common

enterprise that is expected to lead to a profit for the investor, and this profit will be derived solely from

the efforts of a promoter or third party – key is that someone else controls success/failure of the enterprise

and that’s why you would want that information



State of Hawaii v. Hawaii Market Center Inc.

Ratio: Risk Capital Test for identifying an investment contract (broader than Howey test to comply with

policy objectives). Test requires:

a) The offeree furnish initial value;

b) A portion of the initial value is subjected to the risks of the enterprise;

c) The furnishing of initial value is induced by promises or representations leading to a reasonable

expectation or understanding that a benefit above initial value will accrue; and

d) The offeree does not have the right to exercise practical and actual control over the managerial decision

of the enterprise.

However, it is the policy and not the subsequently formed judicial test that is decisive. The primary

objective is to protect the investing public. Are investors relying on expertise/management—courts have

immense discretion.

Facts: A store where only members can shop. The capital for the store was raised by the sale of founding

memberships. Costs was $320-$820. Earn returns by selling other memberships and by commissions. Securities

Commission of Hawaii sought an injunction against the sale of these memberships on the basis that they

constituted “investment contracts” and thus constituted securities. Hawaii Market Center argued that members had

some control over their potential return, and did not rely “solely” on others as required by Howey.

Held: The court said the problem with the Howey test was its narrow focus on the mechanical test of “solely”.

This results in losing sight of the need to interpret investment contract broadly.

Reasons: The RISK CAPITAL TEST for identifying an investment contract should be used as it is broader

than Howey test (thereby, meeting broad securities def) to comply with policy objectives

Here, the premium paid for sewing machine was initial value. Ability to recoup investment depended on

the success of the store. Fixed fees and commissions were expected benefits. Investor did not have

practical and actual control over the investment of the capital or the management of the store, and thus no

way to his/her investment.

in the end, we don’t care so much about the judicial test, more about the policy of protecting the investing

public who is relying on someone’s expertise/management (with both cases).

Pacific Coast Coin Exchange of Canada v OSC (SCC, 1978)

Ratio: Broad, purposive approach should be used in interpreting meaning of word “security” (even

broader – s.1(1) is not exhaustive) it is legislative policy to replace the harshness of caveat emptor in

security related transactions and courts should seek to attain that goal even if tests carefully formulated in

prior cases prove ineffective and must continually be broadened in scope. It is the policy and not the

subsequently formulated judicial test that is decisive.

*Accepts US definition for “investment contract” as a security

Facts: PCCE was in business of selling bags of silver coins. Two ways to buy from PC: (a) pay 100% $ in cash

and receive bag of silver coins, or (b) you could buy bags of coins on margin through current account commodity

agreement

Margin: you buy it, own it, but you don’t get it until you pay the rest of the balance you owe (e.g. if bag

is $100 on Day 1, Give $35 on Day 1, and in 5 yrs, give $65, get back an investment contract on Day 1,

and get the bag of silver when you pay off balance)

Almost everyone bought silver on margin. PC after receiving $35 did not keep silver in reserve for the

person b/c they wouldn’t make $ doing that. Instead, hedged: have an obligation in 5 yrs to deliver 500

bags of silver enter in futures contract w/ $35 payments, make $ b/c going to decide when the right



time to buy bags in silver is 5 yrs from now e.g. if worth $100 today, when it’s worth $90, buy 500

bags and make a profit on $10

Crucial to solvency of PC was ability to properly hedge. They didn’t. All customers come forward with

$65 asking for their silver that’s increased dramatically, and they obviously don’t have it. Customers sue

saying that they should have had a prospectus. D said they weren’t securities, they were selling silver.

Issue: whether the “current account commodity agreements” constituted an “investment contract” as defined in

s.1(1)(n) of the Securities Act, i.e. whether they were a “security”

Held: SCC held 8-1 that the contracts were “investment contracts”, and since it was a trade that amounted to a

distribution with no prospectus, the investors were entitled to their money back. Must fulfill the statutory purpose

of compelling full and fair disclosure relative to the issuance of instruments that fall within the concept of a

security

Analysis/ Implications: Majority examined tests from two US cases (Howey and Hawaii), concludes that a

broader approach is required than even these tests, and goes on to adopt a more realistic test in light of underlying

objectives of the Act.

It also determined the following:

1. Appropriate for Canadian courts to consider US jurisprudence b/c i) def of security is similar, ii) both

defs refer to an investment contract, ii) purpose of legislation was the same and iv) dearth of Can authority

2. Expanded the concept behind the Howey test so that it would not be constrained by narrow

interpretations of the words “common enterprise” or “solely”.

Under Howey test, the third part requires “that the person is led to expect profits…SOLEY from the

from the efforts of a promoter/third-party: following this rationale would have caused case to fail.

HOWEVER, SCC reasoned that the Q is whether the efforts of the third party are undeniably

significant for the success/ failure of the enterprise

Under the 2nd requirement in Howey, require the investment to be a COMMON ENTERPRISE:

Court found significant managerial efforts were made by D (promoter) and that the actions of this

promoter lies in the commonality – between investor and promoter; there is no need for enterprise to

be common to the investors between themselves

3. Broad purposive approach should be used in interpreting the meaning of the word “security”: This

case is a blank cheque to call anything a security as long as it satisfies the underlying policy of the

Legislation.

Case indicates that courts will go to great lengths to ensure that the investor has the information he

needs to make an informed investment.

Must appreciate economic realities,

o “Such remedial legislation must be construed broadly, read in context of economic

realities to which it is addressed, substance not form is the focus. Any definition must

permit fulfillment of statutory purpose of compelling full and fair disclosure. What will

fall within the definition of a security is flexible rather than static… capable of adaptation

to meet countless and variable schemes to those that seek use of $ of others on promise of

profits”

Dissent: Laskin reasoned that the source of the buyers’ risk was not the quality of the management brought to the

project by PCCE, but the market risk inherent in the price of silver. The only difference between buying silver

from PCCE and buying on the open market was concern over the solvency of PCCE. As such, there is no



difference between this and commercial contracts where bankruptcy can lead to non-performance. This is

extending the definition of security too far.

Policy Notes:

IF PURCHASING EXPERTISE, PURCHASING A SECURITY: Every time you invest in something

where your expectation of profit is based on the expertise of someone else, the courts will go to whatever

length they need to go to find that that’s a security

o Remember what you’re trying to do: if you’re investing in something to make a profit from it, and

you’re relying on someone else’s expertise, you’re buying that expertise and therefore someone

is required to give me a prospectus telling me everything that I need to know.

o The key difference between buying a product vs. buying something to profit from that someone

else is managing is that in the latter cases the profit is not only risky, but the risk is largely

determined by the management of others. Because of this reliance on expertise, to earn a profit

there are 100 questions that need to be asked about the skill and risk before you give them the

money.

o In order to protect the public and to foster confidence in capital markets these people need to have

the protection of a prospectus

Here, PC was not selling bags of silver, were selling expertise in knowing how to hedge it

for a profit. Buying MANAGEMENT EXPERTISE, which is a security.

This is the only way they can force prospectus/disclosure and to ensure that protection of

investing public happens.

Policy: Basically, the court will find anything to be a security, so long as it fits into the definition – the

reason for this relates back to the three objectives, but mainly investor protection

o Joiner, Howey, Hawaii, and Pacific Coast suggest courts will take a purposive approach if it is

the type of transaction to which securities regulation was intended to be directed.

o We care about the investing public because we need confidence in capital markets and efficient

capital markets (companies will not survive without the public’s $)

3.2.2 What is a trade? Statutory Definition

In order for general rule (Section 53(1) and 25 about being registered) to apply for a prospectus, there has

to be a trade in a security, so what is a trade?

OSA, section 1(1): A “trade” includes “any sale or disposition (NOT A PURCHASE) of a security for

valuable consideration” AND includes “any act, advertisement, solicitation, conduct or negotiation directly or

indirectly in furtherance of” any of the activities described in the definition.

Policy: Overall, trade is broadly interpreted to promote the “greater good” –prevent ppl from

contracting/opting-out of securities regulation

“trade” or “trading” includes (NOT EXHAUSTIVE):

(a) any sale or disposition of a

security for valuable

consideration, whether the terms

of payment be on margin,

instalment or otherwise, but does

not include a purchase of a

security or, except as provided in

clause (d) a transfer, pledge or

VALUABLE CONSIDERATION

A trade is a sale of a security for a consideration

o E.g. orange tracts – sold security for money, it’s a trade. PC

– silver - Sold investment contracts for money.

Incl margin trading & covers primary and secondary markets. (Note

that gifts would probably not be trades, because there is no valuable

consideration)

EXCLUDED is the PURCHASE of a security.



encumbrance of securities for the

purpose of giving collateral for a

debt made in good faith,

Why? Again, doing all this to see if you have to issue prospectus.

Not doing it so that purchaser files prospectus before giving you the

cash. So of course purchase can’t be a trade, only determining if it’s

a trade is to find out if seller has to prep prospectus, purchaser is

being protected/giving cash.

At least with respect to the distributions of securities, it is the

vendor that is the object of regulation and it is the purchaser

that the legislation is intended to protect.

Using securities as collateral is excluded because the SA was never

meant to restrict the ability of security holders to use their equity as

loan collateral

(b) any participation as a trader in

any transaction in a security

through the facilities of any

exchange or quotation and trade

reporting system

3.2.2.1 TRADES ON BEHALF OF OTHERS

Such persons are required to register. A “trade” is defined to include

participation as a trader in a transaction in a securities…on the floor

or through the facilities of an exchange

*Exam Example:

X offers to sell to Y and Z, but only Z buys. There are 3 trades! The

offer to Y, the offer to Z, and the sale to Z

“Trade” is a key term in determining the application of the securities

act. Remember: prospectus requirement is activated when there is a

trade in a security which constitutes a distribution.

(e) any act, advertisement,

solicitation, conduct or

negotiation directly or indirectly

in furtherance of any of the

foregoing; (“operation”)

PRE-SALE ACTIVITIES: TRADE INCLUDES ANY ACT,

ADVERTISEMENT OR SOLICITATION IN FURTHERANCE OF THE

FOREGOING (OF A “TRADE”)

Isn’t only when you sell it, but when you TRY to sell securities

May involve pre-sale activities, which can involve pressure

tactics/subtle misrepresentations. Risk that this will influence buyers

who rely on pre-sale activities/pressure.

POLICY: Securities Act Is PROACTIVE legislation, NOT

REACTIVE

o SA is proactive, is saying we want to stop bad things from

happening before they happen b/c protection of investing

public/maintaining confidence in the markets is so

fundamental to our system that we want to avoid it

happening at all costs

o If you try to sell securities you must create a prospectus, you

can’t wait until you actually sell them. This is consistent

with the purposive approach of the courts.

3.2.3 What is a distribution?

Unless exemption is available… if trade is a distribution, need to issue prospectus

Distribution (per s.1(1) definition: means (EXHAUSTIVE def) (a) trade in sec of an issuer that have not

been previously issued, (b) a trade by or on behalf of an issuer in previously issued securities of that issuer

that have been redeemed or purchased by or donated to that issuer, (c) a trade in previously issued

securities of an issuer from the holdings of any control person, (d +e) a trade by or on behalf of an

underwriter in securities (see full def below)

Purpose: def determines whether or not there’s a requirement to prep prospectusThus, purpose is to

ensure those who are potentially going to invest in the corp have suff info with which to make an informed

investment decision



If a trade in a security constitutes a distribution, the issuer is required to assemble, publicly file and

distribute to all buyers and informational document known as a prospectus (both a preliminary and final

prospectus), unless the transaction complies with one of the 4 valid Private Placement Exemptions for a

sale of securities without a prospectus.

s.1(1) of the Securities Act: “distribution”, where used in relation to trading in securities, means (EXHAUSTIVE

def):

(a) a trade in securities of an issuer that have not been

previously issued,

A prospectus is required where the security is issued for the first time

by the company

Covers Treasury Shares owned by the company that have not

been issued to the public

Does not cover secondary trades, b/c when those securities were

issued initially they were subject to the prospectus requirement.

POLICY: issuers have greater access to information than

buyers, so this is a distribution to which a prospectus is attached

(b) a trade by or on behalf of an issuer in previously issued

securities of that issuer that have been redeemed or

purchased by or donated to that issuer,

Prospectus is required for the primary market, and the secondary

market is protected by the continuous disclosure obligations and

previous prospectus on record

This covers treasury shares (shares that are not outstanding =

held onto by the board to be issued at a future time if the

Directors decide to) that are owned by the company that have not

yet been issued to the public.

In Canada, these distributions are rare because other corporate

statutes prohibit corporations from reselling these types of

securities.

(c) a trade in previously issued securities of an issuer from

the holdings of any control person,

TRADES BY CONTROL PERSON

Any person, company or combination of persons or companies

holding a sufficient number of any securities of that issuer to

affect materially the control of that issuer

Trade by a control person will often require a prospectus

regarding 1) the amount of securities sold and 2) the effect of the

sale on the control of the issuer.

A person or combination of persons holding more than 20

percent of the issuer’s outstanding voting securities is deemed to

materially affect the control of that issuer

(d) a trade by or on behalf of an underwriter in securities

which were acquired by that underwriter, acting as

underwriter, prior to the 15th day of September, 1979 if

those securities continued on that date to be owned by or

for that underwriter, so acting,

(e) a trade by or on behalf of an underwriter in securities

which were acquired by that underwriter, acting as

underwriter, within eighteen months after the 15th day of

September, 1979, if the trade took place during that

eighteen months, and

(f) any trade that is a distribution under the regulations,

and on and after the 15th day of March, 1981, includes a

distribution as referred to in subsections 72 (4), (5), (6)

and (7), and also includes any transaction or series of

transactions involving a purchase and sale or a repurchase

and resale in the course of or incidental to a distribution

and “distribute”, “distributed” and “distributing” have a

corresponding meaning; (“placement”, “placer”, “placé”)



POLICY:

The meaning of distribution follows from the policy of the OSA: protecting members of the investing public by

ensuring that buyers receive full disclosure of all material facts relating to a given security before purchasing

that security. The definition is exhaustive, but includes protection for where there are trades in securities in

which the asymmetry between the buyer and the seller is likely to be at its greatest, with the buyers having the

greatest risk of being taken advantage of.

3.2.3.1 Lastman’s 3 Main Branches of Distributions

1) Securities that have not been previously issued (s.1(1)(a)), 2) Trades by Control persons (s.1(1)(c)), 3)

Sales of restricted sec held by exempt purchasers

(1) Securities that have not been previously issued

Section 1(1) of OSA, under Distribution – subsection (a). Prospectus needed for the primary market.

Policy: Focus on primary market (i.e. corporate issuer and not investors) because issuer will always have

better info than the purchasers thus, should have to issue a prospectus.

o Don’t want you to file prospectus when you’re selling amongst yourselves.

(2) Trades by control persons

Section 1(1) of OSA, under Distribution – subsection (c). A “control person” is defined as a person or

group who has sufficient control over voting rights to materially affect the control of the issuer. A holding

of 20% is deemed, in the absence of evidence to the contrary, to be sufficient to materially affect the

control of an issuer. (A Q of Law)

Policy: Sales by persons in a position of control are considered to be distributions because it means the

person may have better knowledge of the issuer and an ability to alter the value of the issuer/securities

o Anyone who holds a sufficient number of securities to “affect materially the control of that

issuer” is assumed potentially to have privileged access to information concerning the issuer of

the securities)

o People who fall within this part of the definition of distribution are “control persons”. A sale by a

control person is deemed to be a distribution to which the prospectus requirement attaches

(usually require control person to produce a prospectus in order to provide information about the

amount of securities sold and the effect of the sale on the control of the issuer).

(3) Sales of Restricted Securities Held by Exempt Purchasers

Deemed distribution on resale: when someone has purchased securities by way of an exemption and then

wants to resell them, have to do so with a prospectus

Policy: This prevents backdoor underwriting

o The subsequent sales of securities that were previously exempt from the prospectus requirement

are considered to be distributions and thus trigger the prospectus requirement.

3.2.3.2 Note: 3 Ways Securities can be distributed to the public

1) Direct issue and private placement; 2) Offer to Sell (Bought Deal / Offer to Sell/ Marketed Offerings); 3)

Best efforts underwriting

1) Direct issue (And Private Placement)

a. Direct Issue: Issuer sells the securities itself, without the service of an investment banker or dealer

(direct contact b/w investor and company).



i. This only works with a small number of investors, and the issuer will usually know the

purchaser intimately (often through a rights offering to existing shareholders)

b. Private Placement: Another form of direct issue. Securities are sold to institutional investors (e.g.

bond issues)

i. Often arranged through a broker who is NOT an agent of the issuer, usually. Once broker

has put issuer in touch with Institutional investor buyers, issuer deals directly with/issues

securities to the institutional investors.

2) Offer to sell (Bought Deal/Offer to Sell/Marketed Offerings) * most common way to sell to public

a. Bought Deal/Offer to Sell: the issuer sells the securities to an underwriter. The underwriter then

resells the securities to investors. The underwriter thus finds buyers.

i. Risk allocation

1. In a bought deal: underwriter makes the commitment to purchase in advance,

before the prospectus. A bought deal (firm underwriting) thus avoids the risk for

issuer of significant market fluctuations during the period in which the prospectus

is being prepared. (Issuers tend to lack expertise re: price fluctuations) this

underwriting/insurance aspect is good for the issuer, because of their lack of

expertise, the price might be much lower than expected, so good if the

underwriter buys in advance… however…

2. Market risk can be shared through a “market out clause”. This says that if

certain events occur, such as a material change in the affairs of the issuer, cease

trade order, then the underwriter may not be obliged to buy at the specified price.

3. Note: Standby underwriting: underwriter provides a partial insurance by

agreeing to stand ready to take up all or some portion of an issue that cannot be

sold at a certain price

b. Marketed Offering: underwriter will not commit to buy the securities until price is set after

marketing the offering to prospective buyers. Commitment to buy is made after prospectus is

cleared with securities regulators.

3) Best Efforts Underwriting

a. Same as above, except I-banker doesn’t agree to buy securities unconditionally for re-sale.

i. UW agrees to act as an agent in selling the shares for the best price it can get. Agree to

use ‘best efforts’ to sell securities on company’s behalf – less risky, but lower

commission.

ii. Agrees to pass proceeds to issuer, net of commission. UW is not an UW in strict sense of

the word, by agreeing to give its best efforts, UW is not providing any insurance wrt risk

of fluctuations in market price

3.3 Prospectus Preparation

In general, prospectus gives investors full and plain disclosure of all material facts – what the investors want to

know. This may include:

What does your company DO? How does it make its money? (e.g. Cineplex makes it money on popcorn,

not movies)

Who is the CEO/ BOD?

What are your financial statements – assets, liabilities, any lawsuits?

What interest in the company am I buying? - # of shares, rights (to vote, to receive dividends, etc.)

What is the capital structure?



What will the investment be used for?

What is the underwriter agreement?

How much are you paying senior executives?

What are the material contracts? Intellectual property?

Future projections?

*see that all of this is included in NI 41-101

3.3.1 Prospectus General Rule

*Governed by NI 41-101 general requirements and 44-101 for short-form prospectus. Two principle

requirements of a prospectus under OSA:

1) Prospectus must provide full, true and plain disclosure of all material facts (s. 56(1))

Not just a question of covering what is on a list, securities lawyers must decide what else needs to be

included in order to meet this requirement, technical fulfillment of the statue is not sufficient – must not

be misleading

2) Must comply with the requirements of the Securities Act (including 56, 58, 59) -Includes OSA, OSA

regulation, OSC rules and the OSC director.

Section 56: (1) Full, true and plain disclosure and complying with all requirements of Ontario securities

law; (2) Must also include any financial reports, statements or other docs required by the Act or

regulations

Section 58(1) Issuer Certificate (signed by CEO, CFO and two directors that aren’t CFO/CEO, and any

promoter of the issuer) – certifies prospectus is true

Section 59(1) Underwriter certificate (signed by any/all UWs in a contractual relationship with the issuer or

selling securityholder distributing securities through the prospectus) – UW also certifies prospectus is true

A prospectus is a document that must be given to persons to whom securities are distributed. It is the document

that is intended to provide information relevant to assessing the value of the securities.

Note: can have 2 days to change your mind in securities law

3.3.1.1 Misrepresentation

Misrepresentation- s.1(1): means (a) untrue statement of material fact, or (b) an omission to state a

material fact that is required to be stated or that is necessary to make a statement not misleading in the

light of the circumstances in which it was made.

If there is a misrepresentation, you can sue everyone involved (corp, directors, officers, underwriters). Very

high bar – very diff to know if you’ve missed something.

Policy: Should tell everyone everything they need to know to make informed investment decisions

Recall when a prospectus is required

i. Does the transaction involve a “security”?

ii. Does the transaction involve a “trade”?

iii. Does the “trade” in the “security” constitute a “distribution”?



Rule (s. 53 of the OSA): “No person or company shall trade in a security on his, her or its own account or on

behalf of any other person or company where such a trade would be a distribution of such security, unless a

preliminary prospectus and a prospectus have been filed and receipts therefore obtained from the Director”.

3.3.1.2 Dual Functions of a Prospectus: Selling + Liability Document

1) Selling Document: Sec Act ensures regulator’s mandate of investor protection by saying only

doc you can use to sell sec is the prospectus, can’t advertise in any meaningful way, can’t have

fancy brochures, billboards, etc.

2) Liability Document: Will need a lot of $, so client will want to be successful/shed the company in

its most favourable light. Thus, regulator makes sure there is sig liability associated with a

misrep (misstatement of a material fact/ omission)

Tension between 2 purposes (reckless selling v being too careful): You as a lawyer cannot allow client to

recklessly sell in light of the prospectus (they’ll get sued), but you also can’t go so far to protect

yourself/your client that you have a document that no one will buy securities with.

Obviously natural tension b/w the prospectus as a selling doc and prospectus as a liability document

o *Practice Note: Lawyers often spend too much time protecting themselves: You can’t legislate

every eventuality, if you try, you won’t have a deal or you’ll have an unworkable document, or

both

o What makes it challenging is not rules/what has to go in it, but how you properly strike that

balance b/w assisting your client in prepping a document that is sufficiently comfortable to sell

the securities and sufficiently comfortable to protect your client against liability (Judgment call)

Biggest ex of this tension (and of liability for both sides) is financial forecasts (see below)

3.3.1.3 National Instrument 51-102 – Policy on future oriented financial statements in the prospectus

Per NI 51-102: no prospectus ever has to put future oriented financial info in it. The choice is always the

business’ BUT (1) if you don’t put it in, you cannot talk about the future anywhere else; and (2) if you do

put it in your prospectus you have to comply with national instrument 51-102 for disclosure

Steps per NI 51-102:

1. Company should not be disclosing forward-looking information unless it has a reasonable basis for that

information

2. A company must disclose in its prospectus that the information is forward-looking (this is a forecast),

must caution users that actual results may vary, and identify material risks that could cause it to vary

3. Forecast in prospectus has to state material facts/assumptions that were used in making the forecast

4. Has to identify the method the company will use to update that forward looking information

a. As time passes, that forward looking info comes to be, if it’s off, has to be updated must

review it regularly for changes.

5. A prospectus forecast must be updated between preliminary prospectus and final prospectus

History:

Prior to 1982, OSC said none of us can predict the future and it’s too dangerous to let companies try, and

investors will be hurt (outlawed) Example of regulator “being a bad lawyer” (overly cautious)

Investors were unhappy Protecting so much that you’re making us vulnerable, we want to know what

the company thinks about the future since that’s the purpose of us buying the securities (taking away an

important fact that we need to make an educated investment decision, so let us at least see what company

thinks)

Come out with provisions in National Instrument 51-102 for financial forecasts



Financial Forecasts:

Two types of data forming financial forecasts: (1) Forecast (written estimate of most probable result of

operations of a company for some pt in the future); (2) Projection (estimate of results that follow any set of

reasonable assumptions)

(1) Forecast: Written estimate of the most probable result of operations of a company for some point in the

future

e.g. four seasons hotel – how it’s going to do in 2013 (making assumptions) if you assume that interest

rates next year could be anywhere between 2 and 4%, but most probably, they’ll be 3%, use 3.

(2) Projection: Estimate of results that follow any set of reasonable assumptions –the assumptions always have to

be reasonable but unlike a forecast they have to be the most probable, they just have to be reasonable.

Reasonableness is left up to reader. (e.g. int rates could be b/w 1-3%, I use 3)

The only time you can use a projection vs. forecast is if it’s unreasonable to require you to do a forecast

Only where issuer is engaged in business w/ less than 24 months relevant operating history and must

be accompanied by cautionary note about potential variance.

Difference is in assumptions:

In a forecast, company is bound to use what it believes to be the MOST PROBABLE assumptions

With Projection, always has to be REASONABLE, but the reasonableness of those assumptions are left

to the reader (in projection, shifted to reader, they can assess reasonableness/probability)

Policy Notes:

Policy: Recognize tension between prospectus as selling document and prospectus as liability document –do

not err on EITHER side –don’t be too hard and don’t be too soft, just be right

Tension: Need to include some information about future (make it attractive to investors), but not share

too much to reduce likelihood of liab for misrepresentation (including omissions)

o The Form does not tell you that you need to put in financial forecasts, it’s optional. But if you put

in forecasts, you have to comply with the law (National Policy 48). (and will probably want one,

makes it more likely to sell if you can forecast good results)

Practice note: Just have to be right , but hard to do this –hard to harness your client because client can

legitimately believe that the future for the business is great but you need to educate client that the

marketplace understands the liability attached and understands that people are going to be more cautious

in their predictions of the future then they would be if wasn’t projection process. They also understand

what this is, and that there ought to be some discipline on the sale process.

Credibility: Companies shouldn’t spend their whole lives worried about being sued, but even so,

credibility in the market place is extremely important

o You don’t get a second chance to make a first impression – so don’t be cavalier (even if you’re

bullet proofed against being sued) – people are investing, they remember what it says, if it’s

accurate = increases your credibility. If it’s wrong, hurts you. You won’t recover if you miss

every quarter and keep updating your forecast BE CAUTIOUS ABOUT PREPARATION

Find a happy medium: It’s better to under-reach future financial performance then to oversell and

perform short of the future numbers.

o But also don’t want to be too negative, or no one will buy securities.

Note on FOFI (from text)

The information in a prospectus generally consists of verifiable existing facts.

Although future-oriented information may be quite valuable to investors attempting to assess potential

future cash flows from a security, predictions about the future may be prone to abuse (and therefore, this

is regulated protecting investors)



Might include information about prospective results of operations, financial position, or changes in

financial position based on assumptions about future economic conditions and courses of action taken by

the issuer

Note on proving unreasonableness: hard to prove that the information constituted misrepresentation

later, since it would require showing that assumptions on which it was based were unreasonable at the

time they were made there is scope for overly optimistic projections)

3.3.1.4 Full, True and Plain Disclosure of All Material Facts

Requirement for Full, true and plain disclosure: Section 56(1): A prospectus shall provide full, true and

plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall

comply with the requirements of Ontario securities law.

Definition of Material Fact: Section 1(1): Material Fact: When used in relation to securities issued or

proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the

market price or value of the securities.

*note that a Material Fact and Material Change are different!!!!!

If a Material Change Occurs, Amendment Required – 57(1): If there is a MATERIAL CHANGE after

receipt is obtained for preliminary prospectus, and before receipt for final OR after receipt for final is

obtained but prior to completion of distribution, amendment must be filed as soon as is practicable, and IN

ANY EVENT, within TEN days of the change

Danier Leather SCC

Implications: Example of how to deal with forward-looking info. A forecast DOES have an implied

representation of reasonableness, but that’s all –just has to be reasonable.

A change in a material fact does NOT have to be disclosed following the filing of the prospectus (only a

material change)

Facts: lawsuit to SCC as to reasonableness of a forecast in a prospectus, but does not happen very often under

prospectuses b/c (a) class action lawsuits are new here, (b) we’re less litigious than US, and (c) in order to sue

under prospectus, have to know that you have one, find misrep, find lawyer, etc.

Reasons:

If a material FACT occurs following the filing of the final prospectus that is NOT a material CHANGE,

there is no obligation to update purchasers (only have to update if there’s a MATERIAL CHANGE in

business, operations or capital of the issuer.

3.3.1.5 Underwriters

Have to do due diligence, and can still be found liable under s. 130(1) for misrepresentation (see more on

underwriters below), and also have a due diligence defence available to them.

Case: BarChris (US)

Will often have distributions assisted by underwriters:

1. Underwriting Agreement: issuer enters into an agreement with the underwriter, which sets out the terms of

their arrangement (obligations of underwriter, various covenants/representations of the issuer, conditions

pertaining to the underwriter’s obligations/rights, and rights of termination (including a market out clause)

2. Syndicated Underwriting: for larger issues, because there may be substantial risk associated with the issue,

underwriters may choose to reduce risk by syndicating it with other underwriters wiling to join the underwriting

of the issue (other firms might become obligated to buy some portion of the issue, for example)



3.4 Prospectus/ Distribution Process (After making decision to go public)

1. Have to create the prospectus hire a lawyer, accountant, and registrant underwriter to sell securities on your

behalf (underwriter also hires lawyer), management team, and start the process

Is not just up to the client what goes in the prospectus, it’s for public/investor to decide what needs to be

in there you as the UW can’t just say you followed client’s instructions if they don’t allow you to read

a k, do due diligence, etc. Integrity of capital markets dictates that this must be highly regulated.

2. Put all of the correct things in the prospectus (NI 41-101 and Rule 45-501)

3. Ensure it contains full, true and plain disclosure of all material facts related to the securities issued or proposed

to be distributed, and comply with requirements of Ontario Securities Law (Section 56(1)) (FTPD is a judgment

call)

4. Vet the Preliminary Prospectus (forward looking information, underwriter does due diligence, etc.)

5. Certify the prospectus (issuer certificate under Section 58 and underwriter certificate under Section 59)

6. File Preliminary Prospectus and get a receipt, then deliver it.

7. Waiting Period

8. Comment Letter and Clearing Period

9. Respond to deficiencies/file final prospectus (administrator can refuse receipt on broader grounds than for the

prelim)

10. Distribution

11. If there is a misrepresentation in the prospectus, there is liability for it

3.4.1 Summary of Steps

1. Complete prelim (certified, signed, red herring) (although requires material facts, does not require price,

maturity date, interest rate or dividend amount);

2. File with Administrator along with supporting docs (e.g. auditor’s comfort letter, tech reports, consent

letters, underwriting agreement, material contracts, resolution of BOD approving prelim, financial statements);

3. Administrator gives receipt for the prelim if there has been substantial compliance with filing

requirements of the OSA and regulations (s.54-55)

Section 54: prelim must be in compliance with all requirements of ON Securities law, respecting

form/content, and

Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little discretion with

giving receipt for prelim as long as it appears to have all the things required)

Waiting period begins: time between receipt for prelim and receipt for final (if anything material changes

during this period, make amendments)

Limits on advertising during this time (policy to protect public)

4. Print/Deliver the document to those who expressed interest

5. Staff vet the prospectus

Vetting is not a passing on the merits of the securities offered, nor is it a representation that it contains

full disclosure it is a determination of:

o (a) whether the required items of disclosure have been provided and

o (b) whether there are any gaps in the information that are apparent from the material filed (can

take several weeks)

6. Staff provide a comment letter

7. Clear up deficiencies, once they’re cleared…

8. Final prospectus/supporting docs can be filed and a receipt obtained (at discretion of securities

commission whether it is in the public interest to do so – even if you met all requirements)

It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin

3.4.2 Creating the Preliminary Prospectus: What must be included



See Form 41-101F1 or 44-101F1 for short-form, OSC rule 45-501. Long-Form Prospectus: very open ended

including all “material facts” (fact that sig affects market price/ value).

List of factors that it must include are on p. 112 of the text or look at ToC for 41-101F1. Includes 1) # and

types of securities offered under prospectus, 2) method of distrib, 3) use of proceeds of issuance, 4) name

and structure of corp, 5) description of issuer’s business, 5) financial statements of issuer

Preliminary prospectus provides specific items of disclosure and “full, true and plain disclosure of all

material facts”. Need to file it (s. 54(1)), and then you will get a receipt for it (s. 55)

Section 54 of the OSA – Preliminary Prospectus Requirements (And Excluded Info)

(1) Preliminary prospectus: A preliminary prospectus shall substantially comply with the requirements

of Ontario securities law respecting the form and content of a prospectus, except that the report or reports

of the auditor or accountant required by the regulations need not be included.

(2) Idem: A preliminary prospectus may exclude information with respect to the price to the underwriter

and offering price of any securities and other matters dependent upon or relating to such prices.

o **Also note s.60: Statement of rights – every prospectus shall contain a statement of rights

given to a purchaser by s.71 and 130

Section 55: Receipt for Preliminary Prospectus: The Director shall issue a receipt for a preliminary prospectus

forthwith upon the filing thereof.

Section 54(2): a preliminary prospectus is exactly the same as a final except it can omit the price and what

the underwriters get paid and any matters dependent on price

It need not contain information about the offering price or anything else relating to or dependent on the

price (things like price, maturity date, interest rate, dividend amt, etc. are often not included things

affected by market conditions that may change b/w filing of prelim and filing of final prospectus)

Policy: Can Exclude Pricing Information because: (1) It’s NOT FINAL, you’re not selling securities

pursuant to it; (2) Gives underwriters an opportunity to assess the market for demand so that they can

price it properly

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

Section Description Page

Item 1.1:

Required

Statement

(Lies)

Both prelim and final prospectus (in SA is the phrase prelim, not final, is just prospectus)

must contain on the outside front cover a statement that says, no securities commission

or regulatory authority has in any way passed upon the merits of this offer.

Is actually kind of a lie (b/c sec comm will have looked at it), but… POLICY: Letting public know that no securities commission has blessed this (but not

completely true, but want to make sure that no one’s buying this based on comfort that a

securities commission has reviewed it).

1185

1.2:

Prelim

prospectus

disclosure

(Red

Herring)

Every preliminary prospectus must have a statement printed in red ink and in italics at

the top, front cover, saying that this is a PRELIMINARY prospectus, Information is

incomplete, and no one can buy securities from this doc until a final receipt is obtained

This is removed in final prospectus

1185

*Remember that preliminary is NOT a draft document! Liability + credibility



Can be held liable for it (even though you can’t sell sec under it)

If it’s wrong have to make amendments to it (when you say it was wrong, people lose faith in you, you

lose credibility (don’t get a 2nd chance to make a 1st impression)

Therefore, do not treat the document causally

3.4.2.1 Certification Process

When all parties are done preparing this prelim prospectus, identified all risk/explained business, put in red

herring, hasn’t passed upon merits, financial forecast, complied with law, certification process begins…

FORM 41-101F1 AND OSA


37.2 AND

58(1) of

OSA:

Issuer

Certificate

**ALSO NOTE CORRESPONDING 58(1) OF OSA

Every preliminary prospectus shall contain a statement signed by the CFO, CEO,

and two other directors, certifying that the prelim prospectus constitutes full, plain

and true disclosure of all material facts. (the instrument says “except in Ontario…

but have OSA to cover it)

Issuer has an obligation to be RIGHT (they have more access to information)

Notes:

At the end of EVERY prelim and final prospectus, statement that certifies by these

people that foregoing in document constitutes full disclosure, and they sign it (have

to do so via securities act regulations)

1123

Item 37.3

AND 59(1)

of OSA:

Underwrite

r Certificate

…**ALSO NOTE CORRESPONDING 59(1) OF OSA… …

Underwriter certifies: To the best of their knowledge, information and belief, the

document constitutes full, true and plain disclosure of all material facts relating to

the securities being offered.

They have an obligation to be careful/ responsible, but NOT an obligation to be

right!!

POLICY:

Additional protection for investor, that the underwriter feels comfortable saying that

(directors, officers, lawyers, underwriters all have to be comfortable signing this)

should show that they’ve done their due diligence

Notes: Why different requirement for UWs?

b/c company ought to know everything about itself feeds perfectly into

investor protection but also need capital markets that work if underwriters

are liable for ANY misrep for prospectus for any co they’re involved in they are

not going to play wouldn’t have efficient capital market

Have to put some bumper guard on the underwriter’s liability (to the best of their

knowledge/belief, not that it IS true)

Defences: have obligation to be responsible/careful, but not an obligation to be

right (company has an obligation to be RIGHT (directors are personally liable)

Difference is b/c it’s practical, balances is the best regulators can achieve b/w

investor protection and efficient capital markets

1124



Why certify? b/c of liability for misrepresentation

Under s. 130(1) of the OSA: if there is a misrepresentation in that prospectus (omission or misstatement)

the company has STRICT liability

For Issuer: Only defence is that purchaser purchased with knowledge of the misrep. Doesn’t matter

if they intended to make a mistake, were careful, if there’s a misrep in that doc you didn’t know about and

onus is on company to show that you know about it (almost impossible), then they’re liable. Underwriter

has a due diligence defence o Huge obligation. But just $. If Innocent misrep and one of them has to lose money, it ought to be

the company over you. More culpable than you are.

3.4.2.2 Filing with Administrator & Obtaining a Receipt for Prelim

First receive a preliminary receipt (if comply with all requirements –s.54; then per s.55- Director SHALL

issue receipt), then delivery the prelim to those who have expressed interest in buying (solicited or not) per

s.66 of OSA

A. Preliminary Receipt:

1) Complete prelim (certified, signed, red herring)

2) File with Administrator along with supporting docs

3) Administrator gives receipt for the prelim if there has been substantial compliance with filing

requirements of the OSA and regulations

a. Section 54: prelim must be in compliance with all requirements of ON Securities law, respecting

form/content, and

b. Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little

discretion with giving receipt for prelim as long as it appears to have all the things required)

4) waiting period begins + delivery

a. It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities

can begin

B. Delivery of Prelim to those who have expressed interest in buying (solicited or not)

You must deliver the preliminary prospectus to all those who have expressed an interest in purchasing

(whether you’ve solicited their interest or not – so even if unsolicited)

Section 66 of the OSA – Distribution of Preliminary Prospectus

S.66: Any dealer distributing a security to which section 65 applies shall, in addition to the requirements

of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without

solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary

prospectus.

3.4.3 The Waiting Period, Vetting/ Comment Letter and Amendments

At this point, there’s a trade in a security that constitutes a distribution, filed a preliminary prospectus,

obtained a receipt, then waiting period begins.

The preliminary prospectus is the sole document containing representations about the security during the

waiting period. It gives potential investors time to consider the features of an investment.

Interval of time b/w when you get receipt for PPr when you get started gathering interest

Securities cannot be sold until the final prospectus is filed and a receipt is obtained.

Can be 3-4 weeks or longer



Section 65 of the OSA – Waiting period

s.65(1) “Waiting period” defined: In this section,“waiting period” means the period prescribed by

regulation or, if no period is prescribed, the period between the Director’s issuance of a receipt for a

preliminary prospectus relating to the offering of a security and the Director’s issuance of a receipt for the

prospectus.

(2) Distribution of material during waiting period: Despite section 53, but subject to Part XIII, it is

permissible during the waiting period,

o (a) communicate re: price and such, IF it has name of place where they can get prelim: to

distribute a notice, circular, advertisement or letter to or otherwise communicate with any person

or company identifying the security proposed to be issued, stating the price thereof, if then

determined, the name and address of a person or company from whom purchases of the security

may be made and containing such further information as may be permitted or required by the

regulations, if every such notice, circular, advertisement, letter or other communication states the

name and address of a person or company from whom a preliminary prospectus may be obtained;

o (b) distribute prelim: to distribute a preliminary prospectus; and

o (c) soicit expressions of interest, IF a copy is then forwarded: to solicit expressions of interest

from a prospective purchaser if, prior to such solicitation or forthwith after the prospective

purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is

forwarded to him, her or it.

3.4.3.1 Purpose of the Waiting Period

Policy: 3 reasons for waiting period: 1) review for deficiencies; 2) giving investors time to review; 3)

allowing for underwriter’s assessment of the market

1) Deficiencies

a. When you deliver that PPr to the Securities Commission, they assign some accountant/lawyer to

your prospectus and they review that document to list deficiencies you have to fix before you get

a receipt for the final Prospectus (this is the lie – by saying they haven’t passed on merits, the

OSC, lawyers, etc. go through and give a list of deficiencies)

1) Investors have time to Review

a. No point giving investors information if you don’t give them time to digest it.

b. No fast sales-person tactics, impulse buying, instead, lots of time to read it.

2) Underwriter’s Assessment of the Market

a. underwriter that’s going to sell them and be responsible for the sale has to assess the market, need

time for company to deliver copies of Ppr to the investors, then communicate to underwriter to

determine demand and therefore price

3.4.3.2 Vetting & Comment Letter

When vetting is complete, a “comment letter” or “deficiency letter” will be provided.

Conflicts Between Issuer and Securities Commission

Accountant/lawyer at SC will issue the comment letter issuer may not agree with deficiencies, can

cause tensions. You can challenge the deficiencies.

Example: Pictures: OSC freaks out about pictures b/c don’t want it to be too flashy/salesman-ish. (e.g.

pictures of chef in the prospectus for Four Seasons not selling chefs are you selling hockey, or

Stanley cups?)

POLICY: You’re going to lose if you challenge the comments they’re protecting the investing public.



3.4.3.3 Constrained selling activities during waiting period

Selling activities during the waiting period are constrained: You can only solicit expressions of interest (s.

65) and deliver the preliminary prospectus (s. 66), and have to keep a list of whoever you deliver it to (s. 67)

in case you have to amend it. OSC can also stop any of these s. 65 “trading” activities cease until a revised

prelim is filed if the prelim ends up being defective (s. 68)

All you CAN DO is: advertise that there IS a security, the price, and where you can get a copy of the prospectus

(NI 41-101)

POLICY: Selling during the waiting period is constrained. The reason is that it would defeat the purpose of a

prospectus with statutory liability for misrepresentation if selling were allowed. If representations were allowed

prior to a final prospectus, the investor would not be protected by statutory liability for false representations.

OSA, Part XVI: Distribution Generally

Sections 65, 66 and 67


65(2)(a)-(c):

Waiting

Period

(2) Distribution of material during waiting period

Despite section 53, but subject to Part XIII, it is permissible during the waiting

period,

(a) to distribute a notice, circular, advertisement or letter to or otherwise

communicate with any person or company identifying the security proposed to be

issued, stating the price thereof, if then determined, the name and address of a

person or company from whom purchases of the security may be made and

containing such further information as may be permitted or required by the

regulations, if every such notice, circular, advertisement, letter or other

communication states the name and address of a person or company from whom a

preliminary prospectus may be obtained;

(b) to distribute a preliminary prospectus; and

(c) to solicit expressions of interest from a prospective purchaser if, prior to such

solicitation or forthwith after the prospective purchaser indicates an interest in

purchasing the security, a copy of the preliminary prospectus is forwarded to him,

her or it.

Notes:

Can have some advertising, identifying security, price, where it can be bought, and

can give out prelim prospectus (41-101)

.

66:

Distribution

of Prelim

Prospectus

Distribution of preliminary prospectus

Any dealer distributing a security to which section 65 applies shall, in addition to

the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to

each prospective purchaser who, without solicitation, indicates an interest in

purchasing the security and requests a copy of such preliminary prospectus.

.

67:

Distribution

List

Any dealer distributing a security to which section 65 applies shall maintain a

record of the names and addresses of all persons and companies to whom the

preliminary prospectus has been forwarded.

Why?

In case there is a material change, so everyone who got a copy of the prelim can

get a copy of the amendment

.



68:

Defective

Prelim

Prospectus

Defective preliminary prospectus

Where it appears to the Director that a preliminary prospectus is defective in that it

does not substantially comply with the requirements of Ontario securities law as to

form and content, the Director may, without giving notice, order that the trading

permitted by subsection 65 (2) in the security to which the preliminary prospectus

relates shall cease until a revised preliminary prospectus satisfactory to the

Director is filed and forwarded to each recipient of the defective preliminary

prospectus according to the record maintained under section 67.

.

3.4.3.4 Limitations on advertising during waiting period

POLICY:

If you allow advertising, it circumvents the role of the prospectus if you can advertise with glossy brochures

with high lights and no low lights, you’ve circumvented the whole process because investors never get to read the

risks via final prospectus

PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period

All you can do in terms of advertising during the waiting period is: IDENTIFY the securities, state the

price of the securities, and state the name/address of a person or company who you can buy them from, and

where you can get the prospectus.

OSC Test for Whether or not Advertising is Okay

FACTUAL TEST in furtherance of a trade: OSC staff said in determining whether ads are prohibited, would

apply factual test based on whether advertising could reasonably considered to be in furtherance of a trade no

forecasts, no projections, no predictions

OSC will look at why you’re advertising: normal corporate image advertising is acceptable, but acting

in furtherance of a sale in securities will result in penalties (because it’s a TRADE without a prospectus)

This creates bizarre results

EXAMPLES

Eg. Sharon, Lois and Bram goes public interviewed the elephant (No - Advertising during waiting

period, can’t sell securities pursuant to the elephant)

E.g. Canwest Global goes public in waiting period, 6:00 news, put their leading story to say guess

what, we’re going public. SC says you can’t do that, advertising during waiting period (CTV’s gonna play

it at the same time, SC – too bad)

E.g. The Brick goes public, does that mean during 6 weeks of waiting period, can’t put ads on TV of

no payment until 2078 corporate image advertising is okay, but can’t use that to promote sale of

securities.

Does this make sense?

E.g. in UK, no restrictions on advertising during waiting period BP for instance.

OSC Argument: o b/c capital markets are so fundamental to our operation as a country – can’t allow system to be

governed by slick advertising, has to be governed by real integrity (need a legitimate, credible

capital markets system that ppl can rely on)

o We can’t police the advertising, impossible, so have to make these rules to ensure that integrity of

capital markets is paramount

Other Side:



o POLICY: All we’re doing is excluding the 99% of people benefitting from these transactions.

The 1% that has a broker and has access and knowledge and gets prospectuses/isn’t normal,

gets the profit from the stuff and the entire public doesn’t. People make lots of $ off public offerings “we’re going to protect you so much that we

deny you access to the capital markets, b/c as a normal person, won’t even know it exists

(protecting you from big profit don’t advertise so people don’t know about them)”

Legal Fiction how can you advertise a preliminary prospectus is available if you can’t

advertise? you don’t, and you don’t get to play/participate!

They’re saying if you’re not rich, you’re not smart enough to figure out the risks of the

market

o Countering the huge risk argument once it’s on the TSX, you can go buy them. Don’t have

to be sophisticated, just have to be sophisticated when it first goes public for $6

*good question – should you be able to advertise them in a flashy way? *Exam

o Can just advertise the prospectus, maybe not the actual sale of it, say we’re gonna sell it, here’s

where you can get a prospectus, and you should

o I think it’s elitist to assume people won’t understand it. Would need some protections, but none of

us understood this until we heard it in this course

o Dumb b/c whole reason for prospectus fiction is to protect the investors (the big investors don’t

need the protection, will hire lawyers/accountants to do protect themselves)

o Note: Perhaps this will change with social media/ internet – ppl will engage in uncontrolled

advertising

3.4.3.5 Amendments if there are changes during the waiting period

Because there’s a period of time b/w receipt for prelim and final prospectus, obviously there’s a risk that there

will be a change in the business (e.g. fire, new k)

If a material ADVERSE change occurs, you have to file an amendment ASAP or in any event within 10

days (s. 57(1)), and then send a notice to all investors under your s. 67 list (s. 57(3)).

OSA – PART XV – Prospectus Distribution – Amendments on Material Change

Sections 1(1), 57(1) and (3)


1(1):

Material

Change

“material change”,

(a) when used in relation to an issuer other than an investment fund, means,

(i) a change in the business, operations or capital of the issuer that would reasonably

be expected to have a significant effect on the market price or value of any of the

securities of the issuer, or

(ii) a decision to implement a change referred to in sub-clause (i) made by the board of

directors or other persons acting in a similar capacity or by senior management of the

issuer who believe that confirmation of the decision by the board of directors or such

other persons acting in a similar capacity is probable, and [… investment blabla]

.

57(1):

Amendment

to

Preliminary

on Material

Change

(1) Where a material adverse change occurs after a receipt is obtained for a

preliminary prospectus filed in accordance with subsection 53 (1) and before the

receipt for the prospectus is obtained or, where a material change occurs after the

receipt for the prospectus is obtained but prior to the completion of the distribution

under such prospectus, an amendment to such preliminary prospectus or prospectus, as

the case may be, shall be filed as soon as practicable and in any event within ten days

after the change occurs.

[…]

(3) Notice of amendment

.



An amendment to a preliminary prospectus referred to in subsection (1) shall, forthwith

after it has been filed, be forwarded to each recipient of the preliminary prospectus

according to the record maintained under section 67.

***NOTE:

B/w prelim and final, only ADVERSE changes must be reported. B/w filing final and

end of distribution, ANY CHANGE must be reported (adverse/not)

Reason for difference: more important for investors to know about neg than

pos things. HOWEVER, in the time btwn final prospectus and closing there is

no other time to correct (must send amendment)



3.4.4 Filing the Final and Obtaining a Receipt and Changes Post-Filing

3.4.4.1 Final Receipt

This is when the OSC moves away from regulating disclosure and the quality of it, and ACTUALLY goes on

to regulate the MERITS of the offering

This section gives them a mandate to review the offering. The Commission (lawyers and accountants) has the

authority to say no to the public offering, even if you’ve disclosed everything. Even if investors are fully

informed, the Commission has the authority to say no.

POLICY:

May not be a good thing for them to be refusing a receipt for the reasons typically used (e.g. because the

company is too new, venture is too risky, etc.)

HOWEVER.. overall: Lastman is comforted by this provision, in that an objective third party is looking

after the efficiency/integrity of the capital markets (someone with a greater interest than individual

investors who think they know better)

See after case examples below:

OSA – Prospectus Distribution –Final Receipt (s.61)

s.61: (1) Issuance of receipt – PUBLIC INTEREST: Subject to subsection (2) of this section and subsection

63 (4), the Director shall issue a receipt for a prospectus filed under this Part unless it appears to the Director that

it is not in the public interest to do so.

(2) Refusal of receipt: The Director shall not issue a receipt for a prospectus or an amendment to a prospectus

under the following conditions

(a) the prospectus or any document required to be filed with it,

(i) does not comply in any substantial respect with any of the requirements of this Act or the regulations,

(ii) contains any statement, promise, estimate or forward-looking information that is misleading, false or

deceptive, or

(iii) contains a misrepresentation;

(b) an unconscionable consideration has been paid or given or is intended to be paid or given for any services or

promotional purposes or for the acquisition of property;

Note: Clear statutory authority to eval prospectus on its merits (discretion of commission at play)

(c) the aggregate of, (i) the proceeds from the sale of the securities under the prospectus that are to be paid into the

treasury of the issuer, and (ii) the other resources of the issuer, is insufficient to accomplish the purpose of the

issue stated in the prospectus;

Have to include “use of proceeds” in prospectus, what you’re doing with $ and where it’s going, basically

have to show that you have financing so that there’s less risk to the investor’s $ and they can make an

appropriately informed decision

(d) the issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of

the financial condition of,

(i) the issuer,



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

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

or control persons;

(e) the business of the issuer may not be conducted with integrity and in the best interests of the security holders

of the issuer because of the past conduct of,

(i) the issuer,

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

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

or control persons;

o Notes: *so on that past exam, could mention that they may not ISSUE a receipt if they’re

concerned about this (even if it’s just a rumour)

o *POLICY: is WAY beyond disclosure, is about regulating the merits of the offering, are not

going to allow you access to the public markets if unhappy with your director or whoever’s

conduct. Balance b/w investor protection/ confidence in the market and efficiency of the market

(want to have IPOs, but not if it sacrifices investor protection and confidence)

(f) unacceptable professional discretion: a person or company that has prepared or certified any part of the

prospectus, or that is named as having prepared or certified a report or valuation used in connection with the

prospectus, is not acceptable; (same kind of deal, if they’re unhappy with an expert)

(g) an escrow or pooling agreement in the form that the Director considers necessary or advisable with respect to

the securities has not been entered into; or

Note NP 46-201: Escrow for Initial Public Offerings:

o Remember IPO is first time that company is going public with shares (doesn’t apply to more

mature companies returning to the market). Therefore, worried that all the investors will give the

company their money, then the company will bail, sell all their shares in the secondary market

and peace out. That doesn’t sound good.

o Therefore, have to enter into satisfactory escrow arrangement that provides that you are not

entitled to sell more than 1/3rd of your shares every year for the first 3 years (termed escrow

agreement). Balance of risk b/w new owners/old owners to ensure that you’re not buying into

something where the founders don’t have any skin in the game

(h) adequate arrangements have not been made for the holding in trust of the proceeds payable to the issuer from

the sale of the securities pending the distribution of the securities.

(3) Hearing: The Director shall not refuse to issue a receipt under subsection (1) or (2) without giving the

person or company who filed the prospectus an opportunity to be heard

CASE EXAMPLES OF OSC REFUSAL

Rivalda

Failed to issue receipt for a junior mining company offering b/c felt directors were too inexperienced, even

though they indicated and DISCLOSED that they were inexperienced

Lake Forest Fund



Failed to issue receipt because they did not like the disclosed fee structure, thought too much money would

go to the promoter.

Deprenyl

Facts: Parkinson’s sufferer goes to US and finds a drug that helps the symptoms- therapy for late stage

Parkinson’s. He took it and felt better. Decided to come back to Canada and form a private company (Deprenyl).

Files Prelim prospectus to raise $ to get FDA approval. Was obvious in doc that they might never get approval,

and then your $ is lost.

Decision: OSC wouldn’t issue a receipt for final prospectus because success depended on FDA approval of

a drug and thus too risky – company made this very clear on the face of the document that drug was not

permitted in Canada and needed FDA approval – finally OSC approved – ended up getting FDA approval

(but what would happen if no approval –see policy)

POLICY NOTES

POLICY (keep in mind these are outliers, and overall, he loves the OSC, decisions are typically effective)

- This is a paternalistic approach: why not just force them to give the information to the public, but then

LET THE PUBLIC DECIDE?

Seems hard/sketchy in a situation where you have lawyers/accountants at the OSC telling people suffering

from late stage Parkinson’s that they can’t get access to this great drug because the OSC thinks it’s too

risky (even though disclosure is all there)

BUT COUNTER-ARGUMENT: Cost to society is that people will not invest markets if we don’t protect its

integrity and if people lose all their $ on risky investments

need to take steps to protect the economy, even against people who think they know better. We need to

protect our capital markets b/c if they suck, investors will go elsewhere and then we’re bankrupt.

His take on OSC:

Confident to have fate held in reasonable hands of reasonable people making decisions in the interest of

the public good

o As long as they’re acting in the best interests of the public (which they do), then decisions are

almost always right o Decisions made by people that are thoughtful/caring, which comforts him as opposed to arbitrary

code.

At the end of the day, not trying to protect one investor (not that myopic), but protect integrity of

capital markets (sometimes means companies can’t go public, or can’t bring beneficial drugs to

market, then that’s a price worth paying to protect integrity of capital markets b/c without that, we

don’t have anything, no company can go public, no drug can come to market, etc. if we don’t have

confidence in those markets) (cost-benefit analysis to keep markets efficient)

3.4.5 Closing & Any Post-Final Amendments

Assuming you’ve made all the changes, finally deliver prospectus to anyone who asked/anyone we

want to sell it to, no section 61 problems, take out red herring, put in price/matters dependent on price,

sign underwriting agreement, get receipt for final prospectus which finally gives you right to sell

securities, now get ready to close



Closing is really nothing more than collection of cheques. Want to issue share certificates in these

denominations to these people, sign a bunch of doc, deliver cheques, certificates distributed, something

occurs, then the company is a reporting issuer under laws of Ontario

3.4.5.1 Delivery of Prospectus & Inclusion of Purchaser’s Rights

Final prospectus must be delivered to everyone (except to those whose 2 day cooling off period has

expired)

o A dealer upon receiving an order or subscription for a security offered in a distribution must send

the purchaser a copy of the prospectus before or within two business days of entering into a

written confirmation of sale of the security

o Further, the purchaser has a two-day cooling off period to change their mind

OSA- Prospectus Distribution

s.60: Statement of Purchaser rights: Every prospectus shall contain a statement of the rights given to a

purchaser by sections 71 (withdrawal rights) and 130 (right to sue for misrepresentation).

Section 71 (1) Obligation to deliver prospectus: A dealer not acting as agent of the purchaser who

receives an order or subscription for a security offered in a distribution to which subsection 53 (1) or

section 62 is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to

the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into

an agreement of purchase and sale resulting from the order or subscription or not later than midnight on

the second day, exclusive of Saturdays, Sundays and holidays, after entering into such agreement. R.S.O.

1990, c. S.5, s. 71 (1).

(2) Withdrawal from purchase (2 day cooling off period): An agreement of purchase and sale referred

to in subsection (1) is not binding upon the purchaser, if the dealer from whom the purchaser purchases

the security receives written or telegraphic notice evidencing the intention of the purchaser not to be

bound by the agreement of purchase and sale not later than midnight on the second day, exclusive of

Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any

amendment to the prospectus.

o NOTE:You want to deliver the prospectus as quickly as possible after entering into the agmt of

purchase and sale b/c they have this two day period to change their minds

o POLICY: The cooling off period gives purchasers an opportunity to have time with the final

prospectus (for every offering, not just IPOs

Withdrawal Right Explanation & Examples (from class handout)

When does the cooling off period?

Scenario A: if you agreed to buy 6 days ago and received the prospectus todayDay 3

Scenario B: if there was a fire 6 days ago, then you agreed to buy 4 days ago, received prospectus today

and amendment delivered on 2nd dayDay 4 (b/c that’s when you received info)

Scenario C: if you agreed to buy 4 days ago, you received prospectus today, but a fire occurs on day two

and amendment delivered on day 12 Day 14 since buyer has not had 48 hour with all info until Day 12

Scenario D: if you agree to buy 4 days ago, receive prospectus today, a fire occurs on day 2, amendment

delivered on Day 6, a strike occurs on day 12 and amendment delivered on day 16 Day 8 b/c it is 48

hours after the provision of the latest information – recall can’t give you more than 48 hours so strike is

just tough luck

Scenario E:

o Day 1: Prospectus Delivery;

o Day 2: I say I’ll buy and do;

o Day 6: fire occurs;

o Day 8: Amendment filed;

o ANSWER: On Day 4: I am bound.



As long as you’ve had 48 hours with all the information, you are bound. Whereas if the fire occurred on day 3, and the amendment comes out on day 6, I’m not

bound until Day 8 because I didn’t have all the information until Day 6. it matters

WHEN the CHANGE happened, and WHEN I became AWARE of the change

Effective Delivery – NP 11-201 (Delivery of Documents by Electronic Means)

NP 11-201: allows the prospectus to be delivered electronically if four components are met for

satisfactory delivery: o I) Notice: recipient of document should receive notice that the doc has been or will be sent

electronically

o II) Easy Access: recipient should have easy access to the document

o III) Evidence that doc has been delivered: deliverer has to have evidence that doc was

delivered or otherwise made available to the recipient

o IV) Must not be different: the doc received by the recipient must not be different than the doc

delivered

First 3 can be satisfied if informed consent of recipient is obtained, and fourth

deliverers are supposed to take proper steps to ensure that the docs arrive at their

destination in an unaltered form

See liability under s.130 (below) = second statutory right

3.4.5.2 Changes Post Filing of Final Prospectus (Any change must be reported in amendment)

Closing: If you have to raise $200m, haven’t been able to enter into binding agreements of purchase and

sale. Send prospectus, get printed, send copies, collect cheques, then go to company, sign papers,

exchange cheques for certificates and close, but that takes a long time (let’s say 3 weeks)

But company doesn’t stand still for those 3 weeks sign contracts, strike, fire, etc. things can

change

If there is a material change in affairs of company b/w final receipt and closing, you have to deliver an

amendment positive OR Negative change…But during waiting b/w receipt for prelim and receipt for

final, s. 57(1) says you only have to do an amendment for material adverse change (you can for any change,

if you want)

OSA 57(1) again except this time, Any Change! Not Just Adverse!

(1) Where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in

accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material

change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under

such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed

as soon as practicable and in any event within ten days after the change occurs.

POLICY BEHIND DIFFERENCE:Why would you have to do amendment for MAE during waiting, but

positive or negative has to be disclosed?

During waiting period o If negative We don’t know if people will read the whole thing again at the final stages, so if

something negative happens, want to bring it to your attention

o But if it’s positive, don’t mind b/c it’ll be picked up in the final prospectus

o We’re more worried about negative things than positive things, b/c they can disclose positive if

they wish (and probably would to induce sales)

After receipt for final prospectus

o There is no document IN BETWEEN the final prospectus and the continuous disclosure regime

that kicks in AFTER they become a reporting issuer (nothing to keep the file complete during

closing) need something to make sure information is always picked up



o B/w receipt and closing, only thing to make sure it’s entirely complete, demand there’s an

amendment for positive or negative change Otherwise, there could be a gap.

3.4.5.3 Lapse of Prospectus

Distribution can continue for 12 months from date of receipt for the preliminary prospectus. After this period,

the prospectus is said to have lapsed (per s.62(1)) and no further distributions of the security can be made

without a renewal of the prospectus (per s.62(1.1))

Section 62(1)

s.62(1) Refiling of prospectus: “lapse date” means, with reference to a security that is being distributed under

subsection 53 (1) or this section, the date that is 12 months after the date of the most recent prospectus relating to

the security.

(1.1) Same: No distribution of a security to which subsection 53 (1) applies shall continue after the lapse date,

unless a new prospectus that complies with this Part is filed and a receipt for the new prospectus is obtained from

the Director.

3.4.5.4 National Offerings (NI 11-202 Passport System)

With national filings, there is a principal regulator (main rule for choice of PR is jurisdiction in which

issuer’s head office is located). If head office is in a location that isn’t in any of the jurisdictions of potential

principal regulators, then it’s the regulator in the jurisdiction with which the issuer has its most substantial

connection

Procedure:

o Issuer files prelim prospectus and supporting material with regulator in each province where

securities are to be distributed. Issues a decision document if satisfied (the PR), which serves as a

receipt for the prelim.

o The non-principal regulators have to use best efforts to advise PR within 5 days if they have any

material concerns that would cause them to opt out

o If they have no material concerns, indicate on SEDAR filing status screen that they’re ready to

receive final prospectus. When comments have been dealt with, principal jdiction can issue

MRRS decision document that operates as a receipt for the final prospectus on behalf of PR and

NPRs that have not opted out

3.4.6 Consequences for Failure to Deliver/ File Prospectus (practically, none)

3.4.6.1 Failure to Deliver

Penal, Admin and civil sanctions HOWEVER in reality, there are few penalties according to Lastman

1. Penal Sanctions

Failure to deliver a prospectus may expose the dealer (who would act as principal or agent) to a penal

sanction of fine or imprisonment.

2. Administrative Sanctions

Imposed by securities commission or administrator

Can include cease trade orders, reprimand or sanction, denial of exemptions, an order directing

compliance, restriction on registration.

3. Civil Sanctions

Where the prospectus is not delivered as required, the purchaser has a right of action for (1) rescission

(undoing the contract from the beginning) or (2) damages against the dealer who failed to deliver the

prospectus.



This is subject to a limitation periods

o OSA 138(a): 180 days after the date of the transaction that gave rise to the cause of action

o In any action other than rescission: 138(b): the earlier of (i) 180 days after P first had knowledge

of the facts giving rise to the cause of action or (ii) three years after the date of the transaction that

gave rise to the cause of action

3.4.7 Failure to File (likely not needed)

Penal, administrative, and civil sanctions.

1. Penal Sanctions

Failure to file a prospectus where required, or distributing a security without having obtained a receipt for a

prospectus as required can lead to penal sanction of a fine or imprisonment.

2. Administrative Sanctions

Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to

denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer

of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 8-

8.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrant’s

registration

3. Civil Sanctions

Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to

denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer

of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 8-

8.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrant’s

registration

3.4.8 Liability for Misrepresentation in a Prospectus

3.4.8.1 Liability

WHO IS LIABLE - Company, directors, selling security holders, officers who signed prospectus,

underwriters, and the experts all may be liable for a misrepresentation in the prospectus. Policy- have

everyone liable to give incentive to be careful.

Selling Securityholders:

o (a) have to get company to agree to sell your shares under prospectus

o (b) understand that you’re liable for misrepresentation under that prospectus

POLICY: Why have everyone liable? To give incentive to be careful. Underwriters/Directors/Selling

Secholders will be more careful if they’re going to be liable, Directors will actually read it.

o Prob – may have made it harder for high quality directors to serve on boards of public companies

as they are worried about liability therefore, less competitive companies

s.130: sets out liab, damages and defences for liab

Recall: s.1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to state

material fact that is required to be stated or that is necessary to make a statement not misleading in light of

circumstances in which it was made.

Can be liable for not amending the prospectus to reflect a material change, but not for failing to report

material FACT (Danier)

Option of Claims for Purchaser Upon Misrepresentation:



o (i) CONTRACTUAL CLAIMS: Rescission (get money back)

o (ii) DAMAGES: statutory rights under 130 of OSA 130(10): “these statutory rights are in

addition to and not in derogation of any rights at common law”

Plaintiff must show: (a) purchase of the security offered under the prospectus, (b) that

the purchase was made during the period of the distribution and (c) that there was a

“misrepresentation” in the prospectus.

If they establish this, subject to some defences: plaintiff is entitled to rescission or

damages

o (iii) TORT: (a) fraudulent misrepresentation (b) negligent misrepresentation (Hedley Byrne,

Queen v. Cognos p. 153) Fraudulent misrep: D made false statement knowingly or without belief in its truth or

was recklessly careless whether it be true or false & P relied on the statement to his

detriment

Negligent misrepresentation: Duty of Care based on a special relationship between

representor and representee; rep was untrue, inaccurate or misleading; representor acted

negligently in making misrep; representee relied, in a reasonable manner, on the misrep;

AND reliance was detrimental (damages resulted)

Establishing a Claim for Damages for Misrepresentation:

In a document:

i. Issuer is either

A. Reporting issuer

B. Any other issuer with a real and substantial connection to the jurisdiction any securities of which

are publicly traded.

ii. Disclosure “document” contains a “misrepresentation” (which includes both misstatements and

omissions) and

iii. The P “acquired or disposed of” a security during the period in which the document was released and

before the time the misrepresentation was corrected.

OSA, s.130: Liability for misrepresentation in prospectus

(1) Liability for misrepresentation in prospectus: Where a prospectus, together with any amendment to the

prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during

the period of distribution or during distribution to the public has, without regard to whether the purchaser relied

on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

(b) each underwriter of the securities who is required to sign the certificate required by section 59;

(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;

(d) every person or company whose consent to disclosure of information in the prospectus has been filed

pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that

have been made by them; and

(e) every person or company who signed the prospectus or the amendment to the prospectus other than

the persons or companies included in clauses (a) to (d),

or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or

from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against

such person, company or underwriter, in which case the purchaser shall have no right of action for

damages against such person, company or underwriter.

(2) Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER – STRICT LIABILITY (+

under (7) showing that the diminution in value wasn’t from misrep)



No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased

the securities with knowledge of the misrepresentation.

(3) Idem: No person or company, other than the issuer or selling security holder, is liable under subsection (1) if

he, she or it proves,

(a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or

consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice

that it was so filed;

(b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the

purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the

prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such

withdrawal and the reason therefor;

(c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be

made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or

statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there

had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did

not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from

the report, opinion or statement of the expert;

(d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be

made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her

or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to

failure to represent fairly his, her or its report, opinion or statement as an expert,

(i) the person or company had, after reasonable investigation, reasonable grounds to believe and did

believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or

its report, opinion or statement, or

(ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly

represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the

Commission and gave reasonable general notice that such use had been made and that he, she or it would

not be responsible for that part of the prospectus or the amendment to the prospectus; or

(e) that, with respect to a false statement purporting to be a statement made by an official person or

contained in what purports to be a copy of or extract from a public official document, it was a correct and

fair representation of the statement or copy of or extract from the document, and he, she or it had

reasonable grounds to believe and did believe that the statement was true.

(4) Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR

EXPERT PORTION: No person or company, other than the issuer or selling security holder, is liable under

subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be

made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its

own report, opinion or statement as an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there

had been no misrepresentation; or

(b) believed there had been a misrepresentation.



(5) Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company,

other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the

prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not

purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there

had been no misrepresentation; or


o Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had

reasonable grounds for that belief (3) you conducted investigation to verify that

(6) Limitation re underwriters: No underwriter is liable for more than the total public offering price represented

by the portion of the distribution underwritten by the underwriter.

(7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In an action

for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the

defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation

relied upon.

(8) Joint and several liability: All or any one or more of the persons or companies specified in subsection (1) are

jointly and severally liable, and every person or company who becomes liable to make any payment under this

section may recover a contribution from any person or company who, if sued separately, would have been liable

to make the same payment provided that the court may deny the right to recover such contribution where, in all

the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be just and

equitable.

(9) Limitation re amount recoverable: In no case shall the amount recoverable under this section exceed the

price at which the securities were offered to the public.

(10) No derogation of rights: The right of action for rescission or damages conferred by this section is in

addition to and without derogation from any other right the purchaser may have at law.

Section 1(1) Misrepresentation

“misrepresentation” means, (a) an untrue statement of material fact, or (b) an omission to state a material

fact that is required to be stated or that is necessary to make a statement not misleading in the light of the

circumstances in which it was made; (“présentation inexacte des faits”)

Kerr v. Danier (SCC, 2007), 157

Ratio: Only have to report material CHANGES post-filing, not material facts. A forecast can be the subject

of misrepresentation, P does not have to prove reliance, deemed

Facts: Danier began distributing shares under a final prospectus in 1998. Sold for $11.25/share. Forecast of sales

(FOFI) contained a warning that “there is no guarantee that such Forecast will be achieved in whole or in part”.

After prelim, but before final, had a sale that didn’t go great. Did an internal (not required) review of the numbers,

and realized they were lagging behind. Chose not to issue press release, because they believed target would be

met by the end of the quarter. Then had a Victoria Day sales promotion, and it did not go well. After final, but

before end of distribution, Q4 revenues were lower than forecast. Issued a revised forecast to the OSC. They then

issued a press release/material change report and the stock price went down on the date of the announcement.

Actual revenues were not that far off of estimate by the end of the year. Danier’s shareholders that lost $ sued to



get back $ they lost, and said that it was a misrepresentation for Danier not to include the initial information about

lagging behind (saying it was necessary to make the forecast not misleading under (b) of the misrep definition

Decision: In December 2005: ON CA: reversed trial decision. Don’t have to do an amendment for material fact

(trial judge didn’t give suff deference to business judgment rule – fact that directors were wrong wasn’t the issue).

Leave given to SCC. In 2007: SCC: dismissed the appeal, upheld ON CA’s decision.

In May 2004, ON TJ held that Danier and its officers were liable for statutory misrep in prospectus

relating to an earning’s forecastpoor revenue was a material FACT that Danier was required to

disclose.

Implications:

Issuers do not have an obligation to update prospectus to reflect material facts, only material

changes: Issuers do not have an obligation to update a prospectus to reflect material facts after filing and

do not have civil liability for failing to do so. To impose civil liability where an issuer has complied with

the Act would be contrary to the securities legislative framework. Need only to report material changes,

not material facts.

Purchasers do not have to prove reliance, reliance is deemed if it was misrep at time of purchase:

The plaintiff does not have to prove reliance. Instead, the plaintiff is deemed to have relied on the

misrepresentation if it was a misrepresentation at the time of the purchase. It also may apply to

secondary market purchases as well, since securities are offered under the prospectus during the period

of distribution.

o **HE SAYS SCC APPLIES BJR, and says they won’t interfere with business judgment, but they

actually don’t they disagree that the BJR applies (only part of ON CA judgment they don’t

uphold) (they actually say that business judgment has nothing to do with disclosure you’re

obligated to provide certain disclosure and you cannot “business judgment” your way out of that.

The business judgment rule does NOT apply to limit statutory disclosure obligations if an

obligation to make disclosure otherwise exists.

o Also note: and “include an omission to make a statement not misleading” is meant to capture

“half-truths.”

3.4.8.2 Damages

UNDER STATUTORY ACTION: Purchaser would claim diminution of security as a result of misleading

nature

Section 130(7): Defence of showing that SH loss was not from misrepresentation: defendant is not

liable for all or portions of damage if diminution is not the result of the misrepresentation, but onus is on

D to prove (almost impossible)

Section 130(2): also not liable if you show they knew about the misrep

Section 130(9): Can only recover what was spent: the most you can recover is what you spent (what

securities were offered to public for), no opportunity costs

Section 130(6): Proportionate for Underwriters: if more than one, underwriter only responsible for

portion underwritten by them (total public offering price of their part)

Section 130(1)(d): Experts only liable for Expertised Portion: experts only responsible for expertised

portion (so if giving tax opinion, then only liable for that)

o Would have to show under 130(4) that you did your due diligence

o Joint and Several Liability if you ARE liable under expert portion



Section 130(8): J&S Liability: all defendants jointly and severally liable for the whole, but they can seek

contribution from each other unless the court denies that right to contribution (if not “just & equitable”)

POLICY:

(1) Investor protection: : will be more careful if you’re fully liable (also with J&S liability you’re liable so

shouldn’t put the burden on the plaintiff to sue different people to get the $)

Between two innocent people (expert and buyer, one has to lose money, going to be expert, you can get

it back from them)

(2) but also need efficient capital markets which is why we have defences

Absent defences, who is going to play?

How are we going to get underwriters to sell securities if they’ll be liable for any misrep in any

prospectus for hundreds of millions of dollars when they only make 2 million? (if they don’t play, we

don‘t need investor protection b/c no one’s selling securities)

3.4.8.3 Defences

POLICY –Why do we have defences?

Defences are rooted in the concept of efficient capital markets – you cannot be leaning so hard toward

investor protection that it doesn’t work. Can’t hold them to absolute standard, b/c won’t play but if

you say you have an obligation to be CAREFUL that sounds reasonable (due diligence is so that

someone will be CAREFUL)

*It’s hard to get good directors when we over-regulate everything to death, hard to balance

Defences

Defendants can avoid liability by showing that:

i. The person purchasing the securities had knowledge of the misrepresentation.

ii. He or she did not consent to the filing of the prospectus or that consent was withdrawn, with

reasonable general notice of the withdrawal and the reason for it, prior to the purchase of the

securities by the purchaser.

iii. The statement was not made by him or her and her or she had no reason to believe, and did not

believe, that it was a misrepresentation.

iv. He or she conducted a reasonable investigation to produce reasonable grounds for a belief that there

was no misrepresentation and he or she did not believe there had been a misrepresentation: due

diligence defence. v. the depreciation in the value of the security was not caused by the misrepresentation.

s.130: Defences

1. Issuer OR security holder: “Strict” Liability (no Due Diligence Defence, tho, J&S Liability, has options i

or v above)

Even if innocent mistake in misrep, who should suffer b/c of it? Issuer, not investor, you should have

known everything, investor has cleaner hands than you, unless they knew, you had all info

Thus, the issuer/selling securityholder only has two defences (both extremely hard to prove) and NO due

diligence:

o Section 130(2) and (7)

(2) Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER –

STRICT LIABILITY (+ under (7) showing that the diminution in value wasn’t from

misrep)

No person or company is liable under subsection (1) if he, she or it proves that

the purchaser purchased the securities with knowledge of the misrepresentation.



(7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to

prove)

In an action for damages pursuant to subsection (1), the defendant is not liable for

all or any portion of such damages that the defendant proves do not represent the

depreciation in value of the security as a result of the misrepresentation relied

upon.

2. Experts (Joint and Several Liability, and only for expertised portions – has all defences from above

available + 1)

Experts are only liable for expertised portions, have a defence for DD, diminution in value, the “they

knew”, did not consent, and statement not made by them (failure to fairly rep opinion)

o s. 130 (2) Again – showing they knew.

o (3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some

stuff for experts about those portions) – “reasonable grounds” – see below or above.

(a) that the prospectus or the amendment to the prospectus was filed without his, her or its

knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith

gave reasonable general notice that it was so filed;

(c) that, with respect to any part of the prospectus or the amendment to the prospectus

purporting to be made on the authority of an expert or purporting to be a copy of or an

extract from a report, opinion or statement of an expert, he, she or it had no reasonable

grounds to believe and did not believe that there had been a misrepresentation or that

such part of the prospectus or the amendment to the prospectus did not fairly represent

the report, opinion or statement of the expert or was not a fair copy of or extract from the

report, opinion or statement of the expert;

o (4) Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER

FOR EXPERT PORTION: No person or company, other than the issuer or selling security

holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment

to the prospectus purporting to be made on his, her or its own authority as an expert or

purporting to be a copy of or an extract from his, her or its own report, opinion or statement as

an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a

belief that there had been no misrepresentation; or


Notes: Thus, have to show (1) you believed there was no misrepresentation, (2)

you had reasonable grounds for that belief (3) you conducted investigation to

verify that

o (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In

an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion

of such damages that the defendant proves do not represent the depreciation in value of the

security as a result of the misrepresentation relied upon.

3. NON-EXPERTS (e.g. Due Dilig defence for everyone except the issuer and selling securityholder – e.g.

Directors, officers)

Have defences that purchaser knew, due diligence, and depreciation not from misrep and also have separate

defences for their liability of the EXPERTISED portions

S.130 (2) that the purchaser knew



(3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for

experts about those portions) – “reasonable grounds”: No person or company, other than the issuer or

selling security holder, is liable under subsection (1) if he, she or it proves,

o (a) that the prospectus or the amendment to the prospectus was filed without his, her or its

knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave

reasonable general notice that it was so filed;

o (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by

the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to

the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of

such withdrawal and the reason therefor;

o (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting

to be made on the authority of an expert or purporting to be a copy of or an extract from a report,

opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not

believe that there had been a misrepresentation or that such part of the prospectus or the

amendment to the prospectus did not fairly represent the report, opinion or statement of the expert

or was not a fair copy of or extract from the report, opinion or statement of the expert;

o (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting

to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract

from his, her or its own report, opinion or statement as an expert but that contains a

misrepresentation attributable to failure to represent fairly his, her or its report, opinion or

statement as an expert,

(i) the person or company had, after reasonable investigation, reasonable grounds to

believe and did believe that such part of the prospectus or the amendment to the

prospectus fairly represented his, her or its report, opinion or statement, or

(ii) on becoming aware that such part of the prospectus or the amendment to the

prospectus did not fairly represent his, her or its report, opinion or statement as an expert,

he, she or it forthwith advised the Commission and gave reasonable general notice that

such use had been made and that he, she or it would not be responsible for that part of the

prospectus or the amendment to the prospectus; or

o (e) that, with respect to a false statement purporting to be a statement made by an official person

or contained in what purports to be a copy of or extract from a public official document, it was a

correct and fair representation of the statement or copy of or extract from the document, and he,

she or it had reasonable grounds to believe and did believe that the statement was true.

(5) Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company,

other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of

the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert

and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he,

she or it,

o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief

that there had been no misrepresentation; or

o (b) believed there had been a misrepresentation.

Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had

reasonable grounds for that belief (3) you conducted investigation to verify that

(7) depreciation wasn’t b/c of misrep

DUE DILIGENCE DEFENCE



Due Diligence: Standard of Reasonableness – s. 132

s.132: In determining what constitutes reasonable investigation or reasonable grounds for belief for the

purposes of sections 130 and 131, the standard of reasonableness shall be that required of a prudent person in

the circumstances of the particular case.

POLICY and Client Info: due diligence is a judgment call:

Difficult to tell your client what a “reasonable investigation” actually means, and there is little guidance

in the OSA

Difficult to balance efficient markets and investor protection, this is the best we have. Just tell client

there’s an obligation to be careful (not necessary to be right) and you’ll be judged in hindsight, so keep

that in mind.

Escott v Barchris (USA, 1968), 163

Ratio: Attempts to define level of due diligence required, but really only says what is not acceptable It

does not matter whether you can read/ understand the prospectus; if you sign it, you are liable.

There is an overriding obligation to the public and the capital markets. I need to have a reasonable

investigation to avoid a misrepresentation

Facts: BarChris was a construction company building bowling alleys. Alleys forced to shut, industry overbuilt. In

the middle of financial troubles, BarChris sold debentures containing several misrepresentations in the registration

statement and prospectus. Customer failures in payments were understated, company failed to state it was

operating bowling alleys.

Decision:

Company liable, strict liability. Can only evade liability if they prove purchaser purchased with

knowledge of misrepresentation. They could not, so liable.

Treasurer, CFO: liable. No evidence of due diligence. You cannot simply rely on experts, you need to

do your level of due diligence.

President and Vice president found liable. Irrelevant whether they knew what they were signing; ought

to know the facts, if not, liable.

Lead underwriter found liable—relied on its legal counsel to do the investigation. Lead underwriter not

excused on the basis that it relied on its legal counsel. Underwriters need to make reasonable efforts to

verify the data submitted to them.

Auditors also liable. Should have known BarChris was operating a bowling alley.

Outside director (lawyer): liable. Knew about some of the contracts that were not enforceable, and did

not investigate others. Cannot simply ask management if prospectus is accurate—you cannot simply rely

on management, founders, or anyone else to found a due diligence defence. Need a reasonable

investigation of your own.

Counsel: young lawyer, liable. Seniority does not matter. Know your obligations and investigate.

Implications:

What is not acceptable for due diligence: This case doesn’t actually define due diligence. It simply

establishes what is not acceptable (only a guideline).

o No better way to say be careful than to be careful, and no way to define it other than be careful in

that particular set of facts with that particular company.

o POLICY: Integrity of capital markets needs you to be careful



It does not matter whether you can read/ understand the prospectus. If you sign it, you are liable: In

this case, applied to President/VP. Even if you have limited education and cannot read or understand the

prospectus, but you sign it, you will be liable if there is a misrepresentation

o McLean J. noted that “a check of matters easily verifiable [would not be] unreasonable”. Appears

to have imposed a higher standard on directors who are also company counsel.

o Underwriters argued they were entitled to rely on statements of officers of company. McLean

noted that the purpose of making underwriters liable was investor protection. If they were allowed

to escape liability on the basis of officers’ statements, “then the inclusion of underwriters among

those liable…affords the investors no additional protection”.

Feit v. Leasco

Ratio: Underwriters’ gatekeeper role therefore has obligation to challenge issuer’s disclosure and go

beyond automatic reliance on what issuer presents

Standards for inside vs. outside directors inside directors expected to make more complete investigation

and have more extensive knowledge of facts than outside directors

Facts: Takeover of Reliance Insurance by Leaseco. Leasco offered shares and warrants in exchange for shares of

Reliance. Registration statement failed to disclose amount of Reliances’ “surplus surplus” which consisted of

liquid assets of an insurance company which were available for use in non-regulated enterprises. An action was

brought against Leaseco and its directors.

Decision: Court, reiterated the views of McLean J. in BarChris, noting that “a completely independent and

duplicate investigation is not required…[but] the defendants were expected to examine those documents

which were readily available”.

Implications:

Different directors may be held to different standards for due diligence:

o Inside Directors vs. Outside: “Inside directors with intimate knowledge of corporate

affairs…will be expected to make a more complete investigation and have more extensive

knowledge of facts supporting or contradicting inclusions in the registration statements than

outside directors”.

o Underwriter “Gatekeeper”: The underwriter “is a gatekeeper of the public interest” and

therefore also has an obligation to challenge the issuer’s disclosure and go beyond automatically

reliance on what the issuer presents

YBM Magnex (OSC)

Standard of due diligenceshould be ongoing, but only to the extent of tying up lose ends. Threshold of

materiality must be considered in light of all facts available

Facts: YBM issued a prospectus noting, in its discussion of risk factors, the risk of doing business in Eastern

Europe, but did not mention specific investigations against its directors for criminal behaviour over there.

Decision: Commission held that YBM failed to disclose that it was “subject to unique risks”.

Implications:

Threshold for materiality – in light of all facts available: Materiality must also be considered in light

of all the facts available to the persons responsible for the assessment, exercise of judgment and

reasonable diligence.



Due diligence should not be ongoing , only tying up loose ends: Due diligence should be ongoing

following the filing of a preliminary prospectus, but only to the extent that “the remaining work only

consists of tying up loose ends” When further significant investigations are required, this is not the proper

process. A course of conduct must be completed before an underwriter can affirm that to the best of its

knowledge, information and belief, the document contains full, true and plain disclosure.

3.4.8.4 Limitation Period & Common Law Rights

Statutory civil right is in addition to and not in derogation of any other right. This preserves the

common law rights of action which may be of value given limitation periods.

For example, rescission is limited to 180 days from the date of the transaction, BUT LIABILITY

FOR MISREP UNDER STATUTE HAS NO BAR!!!!!!

Jones v Deacon

Implications: Why misrepresentations are all so scary, and why you need to take it seriouslyCourt found

that sale of securities is so fundamental to our law, that is NEVER statute-barred, and it forever voidable at

the instance of the purchaser

Facts: Deacon Hodgson was an investment dealer. In 1980, created private company called Bachova investments

to invest in oil business. Offered or sale shares of Bachova without a prospectus, without properly relying on a

private placement exemption. Hodgson Bought the shares in 1982, and in 1986… Jones was charged with fraud in

Australia (the buyer). As part of that fraud case, which has nothing to do with bachova investment, Cam Deacon

was ordered to fly down to Australia to testify against Jones (completely unrelated). As part of Cam’s testimony,

Jones was put in prison in Australia, 4 yrs after he bought securities. Jones in Australia, pissed, nothing to do.

Buys securities act. Looks at investment 4 years ago, realizes that investment in Bachova was against the rules.

Cam never gave me prospectus, and never properly relied on exemption, I want my $ back. From prison,

brought action against Hodgson in Ontario.

Three year limitation: Was no prospectus, no proper compliance on exemption but 3 year statute of

limitations period. Deacon said ha ha, too bad, statute barred. Jones I don’t think this is ever statute

barred

Decision: court found that the sale of securities (our general rule that no person shall trade w/o being registered,

distrib w/o prospectus, etc.) is so fundamental to our law, that it is never statute-barred, and it is forever voidable

at the instance of the purchaser right now this is the law! (never been appealed)

Implications:

Sale of securities is never statute barred!!!: When you combine fact that there is no statute bar and

these exemptions are so flaky, want to cry b/c it’s real money. Whether you’re liable or not b/c you told

them I don’t know, doesn’t help client relations if you lose.

3.4.9 Registration Requirement

Section 25 of the OSA so to satisfy, get an underwriter

3.4.10 UW Agreement

UW purchase from corp in exchange for a fee (for resale to public). Contemplated that it’ll be executed

with final prospectus.

o Prior to signing, no binding agreement.

o Filing in different jurisdictions, dates in which final needs to be filed so they can get securities

into hands of buyers (and “out” clauses for underwriters)



o Certificates of accuracy of prospectus, but this is not a substitute for due diligence, must

independently verify if you’re the UWs

o When copies of prospectus are to be delievered and how many copies (quickly b/c of cooling off,

otherwise UWs are exposed to contingencies of market, want to be exposed for as little time as

possible)

o Underwriter only distrib sec where there is a receipt for a final prospectus

Other: Notify of material change, reps and warranties, indemnification (obligation to file amendment

asap and at most w/in 10 days of material change)

o Re: indemnification: if there is a misrep in prospectus, company will indemnify the directors,

employees and agents against liab (likely will not uphold as would not ensure ppl to take; Never

tested in Can, but US cts consistently said indemnity provisions not enforceable – contrary to

public policy – BUT if acting for underwriters incl anyways – can’t hurt)

Problem with company indemnification (Policy): The underwriter has no incentive to properly do

their due diligence if they know the company is good for it. You’ve contracted out of the obligation to do

proper due diligence

o Hasn’t been challenged in Canada, in the US, they’re not enforceable.

o Although never tested in Canada, he thinks Canadian courts would say the same thing

o Legal fiction in mature companies doing IPOs (not start ups, though)

Contribution: Interesting, says if the UW gets sued for misrep and they go after them for the whole

thing, the UW has a right to go back to the company for its share of that misrep

o Have a right to seek contribution of company for what you’re not responsible for (UWs

responsible for part underwritten by them)

o s. 130(8): of securities act – you can get contribution unless court denies you that right

(contractually providing for right to contribution)

o Policy: Protect investors by holding as many people responsible as possible –contribution

makes sure everyone has to be worried about it, not just the person with the deepest pocket encourages more people to be more careful, which is what the legislation is meant to do

Termination: Market Out: UW can terminate agreement, means people are scared (unclear when it can

be relied upon – not if market simply having a bad wk OR blip)

3.4.11 Sample Prospectus

o See 44-101F1. o Warning at the top: No securities commission has passed upon the merits (have to

o Tells you whether it is a new issue OR secondary offering (Note: if this was a prelim

prospectus would have a red herring at top)

o How much $ to UWs/company

o Risk factors

o Summary (b/c every prospectus must have a summary)

o Everything about company that is material, including: business of company, use of proceeds

(must disclose what you will do with money), financial forecast and warnings, financial

statements (capital, principal shareholders, directors/officers), UW agreement details (market

out clause: obligations of UW can be terminated), escrow arrangements (to balance risks

between new and old shareholders), Material contracts (and risks), AND legal proceedings,

certificate of company (strict liab), certificate of underwriters (gives rise to due diligence

defence)

o Obligations of UW may be terminated at their discretion based on their assessment of state of financial

markets (market out clause), purchaser’s stat rights, remedy for rescission/damage, certificates





4.0 SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE

Five aspects of continuous disclosure: (1) Regular disclosure (quarterly/annually); (2) timely disclosure (of

material changes); (3) Early Warning (if buying up 10%- could signal takeover bid); (4) Insider Reporting

(allowed to trade, but we want to know what you’re doing); (5) Insider Trading (to keep things fair, can’t

do)

Want to make sure investors are protected and a fundamental tenet of that Is disclosure Companies change,

and people are still trading on secondary market, the info from prospectus goes stale (to ensure ppl buy on

primary market, must maintain efficiency of secondary market)

4.1 Policy Behind Continuous Disclosure Regime – Merger Report (3 objectives)

(1) Investor information; (2) accountability technique to encourage more eff management/ deterrent to

fraud; (3) Creates equality of opportunity for all investors in the marketplace (sellers & buyers); (4)

discourages transactions that don’t meet public scrutiny; (5) allows for disciplining of mgmt. (condemn/

commend)

(1) Investor Information: Give investors ability to determine whether they want to buy/sell or not, what price

ought to be AND ensure this info remains current

(2) Accountability technique to encourage more eff management /deterrent to fraud: a) Should have to let

investors know info so they can make educated decisions; (b) Creation of free, open securities markets, requires

that there be free/open publicity, competing judgments of buyer/seller reflects just price, establishes true market

value

(3) Creates equality of opportunity for all investors in the marketplace (sellers and buyers): According to

OSC, if you have to disclose everything this leads to an Efficient Market - confidence necessary to run efficient

capital markets (object is to make avail at all times, info investor needs)

(4) Discourages transactions that don’t meet public scrutiny: sunlight is the best disinfectant

(5) Allows for disciplining of management (condemn or commend)

National Policy 51-201: Disclosure Standards

Section 1.1 (1): “It is fundamental that everyone investing in securities have equal access to information that

may affect their investment decisions”.

Competing concerns

Cost of disclosure can be high.

Too much information can lead to overload. Excessive disclosure can raise the cost of obtaining significant

information.

In some instances, disclosure may deter productive activity.

4.2 PART I: Regular Disclosure

Reporting Issuers ONLY: Only reporting issuers are subject to continuous disclosure (as defined in s.1(1)

of OSA)

Reasoning: the securities of reporting issuers are traded in markets in which some potential investors will need

to know the information that must be disclosed.

o Thus, reporting v. non-reporting distinguishes between issuers whose securities are sold to those

presumed to need to know and those who do not.



o Key feature of a reporting issuer is that it is an issuer that has issued securities under a prospectus in the

province.

4.2.1 Application to Reporting Issuers

Section 1(1) of the OSA: Reporting Issuer

“reporting issuer” means an issuer,

(a) that has issued voting securities on or after the 1st day of May, 1967 in respect of which a prospectus

was filed and a receipt therefor obtained under a predecessor of this Act or in respect of which a

securities exchange take-over bid circular was filed under a predecessor of this Act,

(b) that has filed a prospectus and for which the Director has issued a receipt under this Act,

(b.1) that has filed a securities exchange take-over bid circular under this Act before December 14, 1999,

(c) any of whose securities have been at any time since the 15th day of September, 1979 listed and posted

for trading on any exchange in Ontario recognized by the Commission, regardless of when such listing

and posting for trading commenced,

(d) to which the Business Corporations Act applies and which, for the purposes of that Act, is offering its

securities to the public,

(e) that is the company whose existence continues following the exchange of securities of a company by

or for the account of such company with another company or the holders of the securities of that other

company in connection with,

o (i) a statutory amalgamation or arrangement, or

o (ii) a statutory procedure under which one company takes title to the assets of the other company

that in turn loses its existence by operation of law, or under which the existing companies merge

into a new company, where one of the amalgamating or merged companies or the continuing

company has been a reporting issuer for at least twelve months, or

(f) that is designated as a reporting issuer in an order made under subsection 1 (11); (“émetteur assujetti”)

4.2.2 Obligation to File Financial Statements

4.2.2.1 ANNUAL – Section 4.1

Every company must prepare annual, audited comparative financial statements within 90 days of the end

of the fiscal year

4.2.2.2 INTERIM - Section 4.3(1) of NI 51-102

An issuer must file cumulative, comparative financial reports for each interim period ending after it

became a reporting issuer, and 4.4(a)(i) the filing must be completed on or before the 45th day after the end

of the interim period in a non-foreign jurisdiction (must file every 3, 5, and 9 months) (note: not audited)

Section 80 of the OSA: exemptions in particular circumstances from financial requirements (we don’t

need to know them)

4.3 PART II: Timely Disclosure (of changes)

Section 75 of the SA in conjunction with NP 51-201

Irregular and unpredictable intervals. A fire, a flood, a strike, a new product, a contract. That information

has to get into the market place.

Steps:

1. You must report material changes in your business, capital or operations (75(1))



Timing: You must report them at the right time (not too early, not too late)

o Difficult to determine b/c hard to determine on the margin

o Don’t want to disclose b/c it can be really harmful (e.g. Financial Post – would have to disclose

its losses which could reduce its advertising revenues). HOWEVER, if it is a material change,

you have no choice.

o Also NP 51-201 indicates that disclosure must be factual and balanced (must disclose

unfavourable news just as quickly as favourable news)

Internal Changes or External if Impacting Differently: Material and internal, unless the external

change (e.g. war in another country) affects your business, capital, operations in a way that it does not

affect others (per NP 51-201)

CHANGES not FACTS and should be MATERIAL: o Definition in 1(1): Affects business, capital or operations

o Examples in NP 51-201, 4.3NP 51-201 recommends: Erring on the side of materiality and

disclose (although keeping in mind risk of premature disclosure)

Actual AND Proposed Changes: Definition of Material Change in 1(1) and NP 51-201

o Actual: things that have occurred (e.g. judgment against you, fire)

o Proposed: (a) when board decides to do something (BEFORE they’ve actually done it)

(why: fact decision is made is the info they want to get into the marketplace so that

market is efficient, works, and is trading with best possible information)

(b) when management decides to do something and they believe BoD approval is

probable.

2. Report in one of three ways: 1) Full Reporting; 2) Incomplete Disclosure, 3) Confidential Reporting

(must apply to use this, and can only use if you meet conditions)

Conditions for confidential reporting: o (a) unduly detrimental to disclose; or

o (b) as of right if mgmt makes a decision that is likely to be approved by board and no one is

trading with the info, and then must disclose once it’s approved/or if it leaks

To bring action for Failure by an issuer to make timely disclosure, must show: 1) Reporting issuer or any

other issuer with a real and substantial connection to the jurisdiction whose securities are publicly traded,

failed to make a timely disclosure; 2) The P acquired or disposed of a security of the issuer; 3) Acquisition

or disposal occurred between the time when a disclosure was required and before the subsequent disclosure

of the material change.

POLICY:

Equal Access to Information and proper valuation: Intended to provide investors with up-to-date

information which is equal to the access enjoyed by insiders and proper valuation results.

Tension: BUT HARD TO DECIDE WHEN YOU SHOULD DISCLOSE

POLICY Tension: Investor Information + Protection VS. Efficient capital markets

Efficient Capital Markets (don’t want premature or late disclosure, both are bad)

(a) Confidentiality/ Privacy issues: You cannot have a proper negotiation if public companies need to

disclose that they’re in talks (lets the person buying negotiate a lower price b/c you look stupid if you don’t

end up selling) - you cannot disclose every time you get a sense something material might happen (no one

will sell or buy ever)

o e.g. Steve Jobs being ill – hard to draw line and decide when appropriate to disclose (it is relevant and

material to company HOWEVER we are talking about someone who deserves privacy)

(b) Regulators Afraid of premature disclosure: do not want you to manipulate the market (e.g. say you’re

buying at a premium just so price will go up).

o also rumours: if premature disclosue happens, you are in trouble – disappointed investor expectations



They just want you reporting MATERIAL CHANGE UPON ITS OCCURRENCE, no sooner, no later and

they’ll decide in hindsight.

Spectrum at what point in these discussions is disclosure required?

4.3.1 Statutory Provision: OSA, Part XVIII – Continuous Disclosure

s.75 (1) must report a material change; (2) within 10 days of change; (3) exception for confidentiality; (4)

keep reporting every 10 days; (5) requirement to disclose subsequently if someone purchases

S.75(1): What you must report - material change: Subject to subsection (3), where a material change

occurs in the affairs of a reporting issuer, it shall forthwith issue and file a news release authorized by a senior

officer disclosing the nature and substance of the change.

(2) Report of material change: Subject to subsection (3), the reporting issuer shall file a report of such

material change in accordance with the regulations as soon as practicable and in any event within ten days of

the date on which the change occurs.

(3) Exception – Confidentiality: A reporting issuer may, instead of complying with subsection (1), promptly

file with the Commission the report required under subsection (2), marked as confidential, and its written

reasons for doing so if,

o (a) the reporting issuer reasonably believes that a disclosure required under subsections (1) and (2)

would be unduly detrimental to its interests; or

o (b) the material change consists of a decision made by the senior management of the reporting issuer

to implement a change and the senior management,

(i) believes that confirmation by the board of directors of the decision to implement the

change is probable, and

(ii) has no reason to believe that any person or company with knowledge of the material

change has purchased or sold the reporting issuer’s securities or traded a related derivative.

(4) Idem – keep reporting every 10 days: Where a report has been filed with the Commission under

subsection (3), the reporting issuer shall advise the Commission in writing where it believes the report should

continue to remain confidential within ten days of the date of filing of the initial report and every ten days

thereafter until the material change is generally disclosed in the manner referred to in subsection (1) or, if the

material change consists of a decision of the type referred to in clause (3) (b), until that decision has been

rejected by the board of directors of the issuer.

(5) Requirement to disclose subsequently - if someone purchases, have to disclose: A reporting issuer that

has filed a report under subsection (3) shall promptly disclose the material change in the manner referred to in

subsection (1) if the reporting issuer becomes aware or has reasonable grounds to believe that a person or

company having knowledge of the material change is purchasing or selling securities of the reporting issuer or

trading a related derivative.

4.3.2 Material Change vs Material Fact

Remember, 1(1): Material Change = change in business operations or capital of a company that would

reasonably be expected to have a significant effect on market price or value of the securities, or a decision to

implement a change referred to above by the board or senior management who believe that confirmation by the

board is probable

This definition distinguishes the following:

o a) Internal vs external changes: Limited to internal changes (business operations or capital of

company), unless that external change impacts your business in a way that is more fundamental

than rest of the world (then you have an obligation to disclose)



E.g. fact that government passes law such that cigarettes can no longer be sold at

drugstores is material for Shoppers’ Drug Mart.

o b) Actual vs proposed: Definition in 1(1) of Material Change covers both – actual, and

proposed by directors OR proposed by managers who believe that approval of directors is

probable

Proposed: decision to make change, triggers the disclosure makes sense since you are

trying to get info to marketplace in time for it to be useful to marketplace.

Note: it is likely that when mgmt. has decided, you can likely see that on a balance of

probabilities it will be accepted by the board

o c) Material change vs fact: Obligation to disclose material CHANGES, not facts

Lines get blurred b/w material facts/changes all the time difficult to determine

Royal Trust Co v Campbeau

Ratio: Difference in material change vs. material fact (example) only have to disclose material changes,

not material facts

Facts: Campbeau going to make bid for Royal Trust Co based on getting 2/3 SH approval, stock was going to go

way up in price. Standard Trust Co realized that those holding lots of votes were not going to tender to bid, and

Campbell bid was going to fail. When it failed, Campbeau complained, saying directors told people that they

knew 40% of shares would not tender to the bid, had obligation to disclose that had they done that, I wouldn’t

have spent all this $ on this bid

Decision: No, the fact that shareholders won’t tender to the bid, that is a MATERIAL FACT, not a material

CHANGE (doesn’t affect operations/business of the company) no obligation under s. 75 to disclose material

fact

DANIER

Also difficult to tell – whether a change in the weather and a subsequent crappy sales promotion of leather

goods is a material fact or a material change (TJ found it to be a material fact)

4.3.2.1 Materiality Standard from National Policy 51-201

Pezim v. British Columbia (1994, SCC)

Ratio: National Policy Statements/ Sec Commissions should be given deference wrt to determining what

constitutes a material change

Per Iacobucci: “the Commission’s policy-making role is limited. By that I mean that their policies cannot be

elevated to the status of law”. However, Iacobucci J: also noted that considerable deference should be accorded

to the securities commission in determining what constitutes a “material change” because this is within the

expertise of the commission

What Must be Reported?

“Material change” in issuer’s business. NP 51-201, 4.3

o Changes in corp structure (changes in controlling share ownership, major reorgs/ M&A; take-over

bids)

o Changes in capital structure (sale of additional sec; planned repurchases of sec; planned stock splits/

consolidation/ share exchange/ stock dividend; changes in dividend payments/ policies; poss initiation

of proxy fight; material modification in rights of sec holders)

o Changes in financial results (sig increase/ decrease in earnings; unexpected changes in financial

results; shifts in financial circumstances – cash flow red; changes in value/ composition of corp’s

assets)



o Changes in business and operations (development that affects corp’s resources, tech, products or

markets; sig change in capital investment plans; major labour disputes; sig new/ losses of contracts;

changes to BOD; developments in material legal proceedings; de-listing of corp’s sec)

o Acquisitions and dispositions

o Changes in credit arrangements

4.2(2) of Policy encourages issuers to err on the side of disclosing the information if there is any doubt.

4.3.3 What must be filed with a material change (3 Report Options)

4.3.3.1 Complete Public Disclosure

1) File a press release per s.75 OSA, NI 51-201 s.2.1; 2) File a material change report (Form 51-102F3)

1) File a press release immediately disclosing the nature and substance of the change

o NP 51-201, 2.1: “A company's press release should contain enough detail to enable the media and

investors to understand the substance and importance of the change it is disclosing. Avoid

including unnecessary details, exaggerated reports or promotional commentary”.

o Obligation: to be factual and balanced (BUT no more said by Securities Commission)

2) File a material change report (Form 51-102F3) disclosing in greater detail the nature and substance

of the change, within 10 days of the change.

o Example: a fire occurs. It is material. File press release immediately. File material change report

within 10 days.

4.3.3.2 Incomplete Public Disclosure

Still Form 51-102F3. This is the same, except leave out a fact and persuade the commission (via report) that

a particular fact should not be disclosed. Here, only part of the material change is not disclosed. Prof has

never seen this used.

4.3.3.3 Confidential Disclosure / Reporting

s. 7.1(1) and (2) of National Instrument 51-102: Material Change Reports

Do not have to follow usual procedure of disclosing material change (per s.7.1(1)) if, per s.7.1(2) it would be

(a) unduly detrimental or (b) as a right, and the reporting issuer immediately files Form 51-102F3 Material

Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure

Statute (OSA s.7.1(1)) Description

S.7.1(1) Publication of Material Change:

Subject to subsection (2), if a material

change occurs in the affairs of a reporting

issuer, the reporting issuer must

(a) immediately issue and file a

news release authorized by an

executive officer disclosing the

nature and substance of the change;

and

(b) as soon as practicable, and in

any event within 10 days of the

date on which the change occurs,

file a Form 51-102F3 Material

Change Report with respect to the

material change.




(2) Subsection (1) does not apply if,

(a) Unduly Detrimental: in the opinion of

the reporting issuer, and if that opinion is

arrived at in a reasonable manner, the

disclosure required by subsection (1) would

be unduly detrimental to the interests of the

reporting issuer; or

2.2 of NP 51-201: Comparative: Detriment outweighing benefits of

disclosure (undue economic detriment). Might happen where disclosure

would interfere with a company’s pursuit of a specific objective or strategy,

with ongoing negotiations, or ability to complete a transaction. If that harm

outweighs the general benefits to the market of immediate disclosure, then

withholding disclosure is justified.

WHY THIS IS A PROBLEM: You are admitting that it’s material and

discloseable, and you’re obligated to disclose: so if your request is denied,

you’re screwed and you have to disclose. You’ve removed any judgment from

you or your client. This hardly ever applies, so may as well stay away from it.

POLICY Tensions: o Investor protection: should be able to assume all material changes

have been published and can be pissed about making inv decision

w/o that info vs

o Efficient Markets/Having People Play: There are circumstances

where disclosure may be unduly detrimental, doing long-term harm

to all investors potentially, making commission surrogate for

investors

Basically, just keep in mind that application of this is difficult (of whether it’s a

material material change) e.g. the Harold Ballard heart condition – disclosable or

not?

(b) As of right: the material change consists

of a decision to implement a change made

by senior management of the reporting

issuer who believe that confirmation of the

decision by the board of directors is

probable, and senior management of the

reporting issuer has no reason to believe

that persons with knowledge of the material

change have made use of that knowledge in

purchasing or selling securities of the

reporting issuer,

Where senior management has decided to do something, will give you

confidential disclosure as of right until board has approved it and when they

have, you’re into regular disclosure

Why do they allow a material change not to be reported to the world yet?

Preserve right of directors to make decisions: Forces directors to do it, if

you’ve announced it, taking decision away from the directors

o BUT HAVE TO DISCLOSE WHEN:

(a) board has approved decision

or as punishment when: (b) if you let it leak and people

are trading with it No sympathy b/c should have protected info, b/w innocent

parties, have to protect investors in marketplace. Have to let

them know that no one is trading with that knowledge.

The point of this confidential disclosure request to the commission (vs

just not disclosing if you decide it is confidential):

o So that commission knows insiders aren’t trading, they can

monitor the stock, make sure people aren’t trading with the

information

o If regulator sees trading, corp has to disclose fact – seems to have

looked

Tension b/w investor protection and efficient capital markets: don’t want

people using info to exploit, but don’t want to create situation where

management can pre-empt board and this is the compromise.

Once approved by board, under obligation to disclose issue press release

and file material change report

and the reporting issuer immediately files

Form 51-102F3 Material Change Report

marked so to indicate it is confidential as

well as written reasons for non-disclosure

Must advise commission every 10 days until disclosed

If board says no – therefore, nothing to release

o and the reporting issuer immediately files the report required under

paragraph (1)(b) marked so as to indicate that it is confidential,

together with written reasons for non-disclosure.

Material change in affairs of company but you do not file a press release or a

report, and you seek a confidential ruling from the securities commission




saying this has happened, but I can’t disclose it for this reason

4.3.3.4 Best Practices Re: Disclosure (per NP 51-201)

1) Establish a corp disclosure policy and oversee its implementation

2) Have board/ audit committee review disclosure

3) Authorize limited # of company spokespersons

4) Adopt a “no comment” policy to rumours otherwise inconsistent response may be interpreted as

tipping

4.4 PART III: Early Warning

Purpose of Early Warning: potential sign of a takeover bid where people will offer premiums to share

price. If someone acquires a certain percent of the shares of a company, they have an obligation to say so

and what their intention is, so that the market is aware of what is going on.

Give advance notice to the world that someone is accumulating stock because it might be relevant to

your investment decision

The most important thing: increases potential for competing bids, and allows management time to

engage in defensive tactics, if necessary

4.4.1 STEPS:

1. Have you bought shares that, together with what you already own, put you at an ownership

threshold of 10% (you can trade up to 9.9 without disclosure)? If yes (102.1(1))

a. PRESS RELEASE: Disclose that you bought them, how much you have, and your

intentions by issuing and filing a press release, identifying the person/extent of their control

over the voting securities (7.1 of Rule 62-504)

i. even if there are 4 ppl with different amounts (under 10%), sec act holds the entire group

as one - no wise guys!

b. FILE A REPORT: giving the details as soon as is practicable (also 7.1)

c. **ALSO REMEMBER (and see below): HAVE TO FULFILL INSIDER REPORTING

TOO!!!

2. Do you want to buy more shares? If yes wait one business day before buying more (s.102.1(3))

a. Freeze: you must WAIT ONE BUSINESS DAY before buying more (102.1(3)) (give market

time to digest and incentive to get info out faster – efficient markets)

b. If 2% more in proportion of securities of that class of voting securities, have to do it again

(102.1(2))

i. Every additional 2% up to 20: triggers same obligation to file press release, file report

ASAP, 1 business day freeze after you’ve filed report, continues to 20%, then TOB rules

ii. If you want control: if you own 9%, you should buy whatever the next biggest block is

if you want to acquire control so you get as much as possible w/o reporting again

1. Can’t go to prepare your sellers (e.g. get someone to sell to one seller) so that you

can buy the max amount in one trade

2. If you have 2 who own separate securities agree to vote together (and don’t buy

additional shares), this doesn’t trigger any obligation

4.4.2 STATUTORY PROVISIONS

4.4.2.1 OSA S.102.1 – 10% Rule and 2% Rule



S.102.1(1): 10 per cent rule: Every acquiror (someone buying securities w/o making formal bid) who

acquires beneficial ownership of, or the power to exercise control or direction over, voting or equity

securities of any class of a reporting issuer or securities convertible into voting or equity securities of any

class of a reporting issuer that, when added to the acquiror’s securities of that class, would constitute 10

per cent or more of the outstanding securities of that class, shall disclose the acquisition in the manner

and form required by regulation.

(2) Same, further 2 per cent rule: An acquiror who is required to make disclosure under subsection (1)

shall make further disclosure in the manner and form required by regulation each time any of the

following events occur:

o 1. The acquiror or any person or company acting jointly or in concert with the acquiror acquires

beneficial ownership of, or the power to exercise control or direction over,

i. an additional 2 per cent or more of the outstanding securities of the class to which the

disclosure required under subsection (1) relates, or

ii. securities convertible into an additional 2 per cent or more of the outstanding

securities referred to in subparagraph i.

o 2. There is a change in any material fact in the disclosure required under paragraph 1 or under

subsection (1).

(3) Period when acquisitions prohibited – ONE BUSINESS DAY FREEZE: During the period

beginning on the occurrence of an event in respect of which disclosure is required to be made under this

section and ending on the expiry of one business day after the date that the disclosure is made, the

acquiror required to make the disclosure or any person or company acting jointly or in concert with the

acquiror shall not acquire or offer to acquire beneficial ownership of any securities of the class in

respect of which the disclosure is made or any securities convertible into securities of that class.

o POLICY: to allow market to digest information

(4) Exemption – FREEZE does not apply to person with 20% (because they have different rules):

Subsection (3) does not apply to an acquiror who has beneficial ownership of, or the power to exercise

control or direction over, securities that, together with the acquiror’s securities of that class, constitute 20

per cent or more of the outstanding securities of that class.

Note: Section 102.2: if someone announces a takeover bid, there is a second obligation under early

warning. If someone else acquires 5% or more, that person has to (1) put out a press release (before

opening of trading next day) and (2) disclose every 2% thereafter.

o Applies until 20% acquired

4.4.2.2 OSC RULE 62-504: Section 7.1 – Early Warning

s. 7.1 Early warning: An acquiror under subsections 102.1(1) or (2) of the Act shall,

(a) promptly issue and file a news release containing the information required by section 3.1 of National

Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues;

and

(b) within 2 business days from the day of the acquisition, file a report containing the information

required by section 3.1 of National Instrument 62-103 The Early Warning System and Related Take-Over

Bid and Insider Reporting Issues.

4.5 PART IV: Insider Reporting



Insider: big shareholders, managers, directors people that have information

POLICY: we actually want insiders to have skin in the game (e.g. need escrow arrangements with an IPO

so they can’t sell right away - (61(2)(g) – director can refuse to issue receipt)

They should be able to buy and sell, but not when it’s based on information not available to the

public. Therefore, if you’re an insider and you’re buying or selling, that’s fine if you tell everyone.

Why do insiders have to disclose? Because investors want to know if insiders are trading (if they don’t

believe in company, why should you?); ultimately increases confidence in sec market

4.5.1 Analysis: When do insider reporting rules apply?

Are you an insider of a reporting issuer? If yes, o Insider: 1(1): Director or officer of reporting issuer, (b) director or officer of a person or

company that is an insider or a subsidiary of the RI, (c) someone who (i) owns 10% of the voting

shares (excluding underwriters), (d) a RI that has purchased, redeemed or otherwise acquired a

security of its own issue for as long as it holds it, (e) designated as an insider under ss 11

Comply with proper disclosure: o File a report within 5 days of becoming one: to disclose any ownership and any interest in, or

right or obligation associated with, a related financial instrument, and make any other disclosure

required by the regulations (price you bought/sold them at) (107(1) and 3.2 of NI 55-104)

Have to say (a) im an insider, (b) how you’re an insider, (c) file a report within 10

days of becoming one indicating that you bought/sold, the price, quantity and date

o If you already are one, have to file report within 10 (5? In NI 55-104 and Lastman) days of

change in your holdings: Also have to disclose if there is any change in your ownership (107(2))

Have to say (a) im an insider, (b) how you’re an insider, (c) file a report within 10

days of becoming one indicating that you bought/sold, the price, quantity and date

4.5.2 STATUTORY PROVISIONS

4.5.2.1 OSA Section 1(1) Definitions: Insider

“insider” means,

(a) a director or officer of a reporting issuer,

(b) a director or officer of a person or company that is itself an insider or subsidiary of a reporting

issuer,

(c) a person or company that has,

o (i) beneficial ownership of, or control or direction over, directly or indirectly, securities of a

reporting issuer carrying 10 per cent or more of the voting rights attached to all the reporting

issuer’s outstanding voting securities, excluding, for the purpose of the calculation of the

percentage held, any securities held by the person or company as underwriter in the course of

a distribution, or

o (ii) a combination of beneficial ownership of, and control or direction over, directly or

indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights

attached to all the reporting issuer’s outstanding voting securities, excluding, for the purpose

of the calculation of the percentage held, any securities held by the person or company as

underwriter in the course of a distribution,

(d) a reporting issuer that has purchased, redeemed or otherwise acquired a security of its own issue,

for so long as it continues to hold that security,

(e) a person or company designated as an insider in an order made under subsection (11),



(f) a person or company that is in a class of persons or companies designated under subparagraph 40 v

of subsection 143 (1); (“initié”)

4.5.2.2 OSA Section 107 – Insider Reporting

(1) Insider reporting

Within 10 days of becoming an insider or within such other time period as may be prescribed, a person or

company who becomes an insider of a reporting issuer, other than a mutual fund, shall file a report

disclosing, in the prescribed manner and form, any direct or indirect beneficial ownership of or control

or direction over securities of the reporting issuer and any interest in, or right or obligation associated

with, a related financial instrument and the insider shall make such other disclosure as may be required

by the regulations.

(2) Same

Within 10 days, or within such other time period as may be prescribed, of any change in the direct or

indirect beneficial ownership of, or control or direction over, securities of the reporting issuer or any

interest in, or right or obligation associated with, a related financial instrument, an insider of a reporting

issuer, other than a mutual fund, shall file a report disclosing, in the prescribed manner and form, such

change and the insider shall make such other disclosure as may be required by the regulations.

4.5.2.3 NI 55-104 Insider Reporting Requirements (s.3.2 & s.3.3) & Exemptions AND Form 55-102F2 –

Insider Reporting

Sections 3.2 and 3.3:

3.2: have to fill out a report within 10 days of becoming an insider disclosing (a) beneficial ownership of,

control or direction over securities and (b) interest in or blabla same as sec act above.

3.3: same as 107(2) above – except it’s FIVE days after a change in ownership you have to file report

Form 55-102F2: Form to fill out for insider reporting

4.6 PART V: Insider Trading

TWO PARTS: (1) Trading: You cannot sell with insider information and (2) Tipping: you cannot tell

anyone else about that information

4.6.1 Policy Discussion about Insider Trading / Tipping Prohibition

Why do we have the rules? (why can’t you trade with info not generally disclosed?) Kimber Report

POLICY: maintain integrity of capital markets, provide fullest poss knowledge so that investor confidence

is maintained (want everyone to play)

“Not improper for insider to buy/sell securities in their own company…generally accepted that it’s

beneficial to have officers/directors purchase, as they thereby acquire direct financial interest in welfare of

co. Impossible to justify proposition that investment so made can’t be realized or liquidated merely bc

investor is insider. BUT improper for insider to use confidential info acquired by virtue of his position as

insider to make profits by trading in securities of company. Should be free/open market with prices

thereon based on fullest possible knowledge of all material facts among traders. Anything that puts

that into question reduces confidence in the market place and is therefore a matter of public concern”

Why doesn’t this work?

Not many successful prosecutions out of millions of trades, hard to monitor.



Regulators should just be honest: there is no way to stop insider trading. 6 people at OSC. Millions of

people trading. You as an investor should not rely on the fact that there is a level playing field

false sense of confidence.

Options?

Abolish Insider Trading laws, Let the industry/market regulate itself. o Opposite argument: these rules still serve a massive deterrent effect (just b/c people do bad

things doesn’t mean you shouldn’t regulate that activity)

o Maybe: give liability to CEOs who don’t monitor it, giving DD defence

o Or have both.

Manager or directors will police execs better than securities regulators, or else people won’t want to buy

your stuff, bad reputation

o NBA Example – commissioner cares b/c if people don’t have confidence in integrity of the

market, they aren’t going to play (did a lot more than the police to prevent fixing games). If true,

Apple has a better chance of stopping insider trading than the securities commission These

people have better chance of controlling b/c their career depends on integrity of their company

or game

4.6.2 Steps

4.6.2.1 Trading

1. Are you a person or company in a special relationship with a reporting issuer?

a. Special relationship: (a) insider, affiliate or associate of: the reporting issuer, a person

proposing to make a takeover bid, person proposing to become part of a reorganization, amalg,

etc.; (b) a person (or co) engaging in or proposing to engage in business on behalf of reporting

issuer or a person described in abc, (c) director, officer, employee of reporting issuer or of person

making takeover bid, reorganizing, or engaged in business, (d) person or co who learned of mat

fact or change while they were person in abc, or (e) person or co who learns info from any other

person described in the section (in a special rel/ship) and knows or reasonably ought to have

known that the person they learned it from was in a special relationship

2. Are you trading (buying/selling)?

3. Are you doing so with knowledge of a material fact OR change (covers both!) that has not been

generally disclosed?

a. Generally disclosed: question of fact

i. Reverse Onus: Onus on defendant to show that they believed it was generally disclosed

(76(4))

ii. Cannot disclose and then trade right away, must be effective disclosure (Texas Gulf)

iii. When market knows and has had time to digest (“reasonableness”) (National Sea)

iv. Safe rule is one trading day (National Sea)

4. If you are in a special relationship and traded with knowledge of a material fact OR change (covers

both!) that has not been generally disclosed, do you have a valid defence? (175 of regs)

a. That it was generally disclosed (or that you reasonably believed it was) (76(4))

b. *if you’re deemed to have knowledge b/c you’re an employee, partner, directors, etc. in a

company that had the information, can show that you protected integrity of the information

(REGS 175)

c. If you’re trading as an agent (broker) for someone else (and you DID NOT give the info out

to that principal) (175(2)(a))

d. If they were purchased as part of an automatic reinvestment plan (175(2)(b))

e. If they were traded b/w two people who both knew the information (175(2)(c))



4.6.2.2 Tipping

1. Are you a person or company in a special relationship with a reporting issuer? If not…

a. See def of special relationship above

2. Did you learn information from someone that you knew or ought to have known was in a special

relationship? (76(5)(e) – puts you in a special relationship)

3. Did you share a material fact or change that has not been generally disclosed with anyone else not

in the ordinary course of business?

a. Material fact or change

b. Generally disclosed

c. Not in the ordinary course of business

4.6.3 Statutory Provisions (OSA)

4.6.3.1 OSA – Section 76 – Trading Where Undisclosed Change/Tipping

(1) Trading where undisclosed change: No person or company in a special relationship with a reporting

issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or

material change with respect to the reporting issuer that has not been generally disclosed.

(2) Tipping: No reporting issuer and no person or company in a special relationship with a reporting

issuer shall inform, other than in the necessary course of business, another person or company of a

material fact or material change with respect to the reporting issuer before the material fact or material

change has been generally disclosed.

(3) Idem: No person or company that proposes,

o (a) to make a take-over bid, as defined in Part XX, for the securities of a reporting issuer;

o (b) to become a party to a reorganization, amalgamation, merger, arrangement or similar business

combination with a reporting issuer; or

o (c) to acquire a substantial portion of the property of a reporting issuer,

shall inform another person or company of a material fact or material change with respect to the

reporting issuer before the material fact or material change has been generally disclosed except where

the information is given in the necessary course of business to effect the take-over bid, business

combination or acquisition.

(4) Defence- reasonably believing it was generally disclosed: No person or company shall be found to

have contravened subsection (1), (2) or (3) if the person or company proves that the person or company

reasonably believed that the material fact or material change had been generally disclosed.

(5) Definition: For the purposes of this section,“person or company in a special relationship with a

reporting issuer” means,

o (a) a person or company that is an insider, affiliate or associate of,

(i) the reporting issuer,

(ii) a person or company that is proposing to make a take-over bid, as defined in Part XX,

for the securities of the reporting issuer, or

(iii) a person or company that is proposing to become a party to a reorganization,

amalgamation, merger or arrangement or similar business combination with the reporting

issuer or to acquire a substantial portion of its property,

Notes: Takeover Bids: Insiders of the company making the takeover bid are in a

special relationship (like directors/officers), but the company itself can still trade

shares why?

o Policy objective saying it’s a good thing to allow people to make

takeover bids (balancing of investor protection and efficient capital



markets), and the only realistic way to do that is to buy shares to

complete the transaction, to defray their costs. ought not be insider

trading b/c something else we want to protect don’t want the insider

directors (or from other company) to prosper from it, there’s no policy

justification for that. So want to allow take-over-bids, but not enrich

directors/officers.

If you are the bidding company and you go to the company you want to sell –

must agree nothing will be told in mtg that is not public info (otherwise would

put in a special relationship)

o (b) a person or company that is engaging in or proposes to engage in any business or professional

activity with or on behalf of the reporting issuer or with or on behalf of a person or company

described in sub-clause (a) (ii) or (iii),

Note: catches lawyers here

o (c) a person who is a director, officer or employee of the reporting issuer or of a person or

company described in subclause (a) (ii) or (iii) or clause (b),

o (d) a person or company that learned of the material fact or material change with respect to the

reporting issuer while the person or company was a person or company described in clause (a),

(b) or (c),

Note: e.g. if I WAS a lawyer, learned something they’re going to do, then they fire you,

can’t trade.

o (e) a person or company that learns of a material fact or material change with respect to the issuer

from any other person or company described in this subsection, including a person or company

described in this clause, and knows or ought reasonably to have known that the other person or

company is a person or company in such a relationship; (“personne ou compagnie ayant des

rapports particuliers avec un émetteur assujetti”)

Note: Deliberately vague, b/c a code is either insuff or excessive

Recall: “reporting issuer” includes an issuer that has a real and substantial connection to

Ontario and whose securities are listed and posted for trading on the TSX Venture

Exchange. (“émetteur assujetti”)

(6) Idem: For the purpose of subsection (1), a security of the reporting issuer shall be deemed to include,

o (a) a put, call, option or other right or obligation to purchase or sell securities of the reporting

issuer;

o (b) a security, the market price of which varies materially with the market price of the securities

of the issuer; or

o (c) a related derivative.

**note definitions of associate, affiliate, and insider in 1(1)

MISSING A CATEGORY: Tippees who don’t know or ought to know that the person they got the info

from was in a special relationship!! persons who learn of information from a person in a special relationship

and knows or ought to know that the person was in a special relationship are people in a special relationship, but

misses those people who don’t know or ought to know

*on an exam: look for hints that the person knows or ought to have known: (e.g. if taxi driver tells

you to buy RIM, fine, you don’t know or ought to know. If his last name is same of CEO of RIM, more of

an issue)



4.6.3.2 Insider Trading (OSA): s.76(1)

76(1): it is an offence for a person or a company in a special relationship with reporting issuer to purchase

or sell securities with knowledge of a material fact or material change that has not been generally disclosed

See 76(4) for Definition of Special Relationship

THE ONLY ONES WHO CAN BE CHARGED are those in a special relationship with reporting issuer

4.6.3.3 Tipping (OSA s.76(2) +(3))

76(2) and (3): offence for reporting issuer or someone in a special relationship with reporting issuer or any

person proposing to make takeover bid prohibited from disclosing or giving other people information

with respect to a material fact/change that has not been generally disclosed except in the necessary course of

business

Relevant that this applies to both an undisclosed material FACT and CHANGE

o If you’re in a special relationship with RI and you have info not in public domain, you can’t

tell anyone that, except in regular course of business until it’s generally disclosed

Note: the Phrase is actually a Misnomer: Tipping is not trading don’t even have to trade. What is

definition of trade? SALE OF SECURITY doesn’t include a purchase

POLICY: Level Playing Field: We’re trying to avoid people with knowledge from using that knowledge

to detriment of market b/c not a level playing field!

NECESSARY COURSE OF BUSINESS:

o Is a question of FACT (depends on the circumstances) –

Easy example: If I’m a company and I want to make a takeover bid for RIM, I have to

call a lawyer to help me make a takeover bid for RIM, I’m TIPPING, but in the necessary

course of business b/c I can’t do it without a lawyer. Have to hire a banker, I need $100m,

tell them why

Other cases of necessary course of business mentioned by NP 51-201, dealings with

vendors/ suppliers; employees and officers, legal counsel, parties to negotiation, labour

unions and industry assoc, govt agencies and credit rating agencies

However, would not incl analysts. Also must make sure the receiver of info does not

given info to anyone else

Royal Trust Co v. CampbeauChanges v. facts: tipping covers both

In this situation, even though they decided that knowing a major SH wouldn’t tender their shares was not a

material change, it was a material fact, and in that case, the Director told other SHs not to tender, b/c the

bid wouldn’t go ahead today, he’d be dead with these rules (due to tipping regs). Telling people not or

that they don’t have to tender to protect your job is not in the necessary course of business, and you’re guilty of

tipping

Whenever you give an informational adv that is considered tipping

4.6.4 Meaning of Generally Disclosed (Defence)

Question of fact- onus on D (accused of insider trading) to show you believe it was generally disclosed

When is it satisfactory general disclosure? When is it generally disclosed? Question of fact.

o Onus on the defendant being accused of insider trading to show that you believe it was generally

disclosed (reverse onus)

o Market knows, and has had time to digest it. How long is that? Whatever’s Reasonable.

o NP 51-201 indicates that corp can meet “generally disclosed” defence by (a) news release, (b)

announcement through press conference (although it is good to disclose on company website, this

is not enough)

Texas Gulf



Facts: TG puts out press release, and immediately, insiders bought up huge quantities of shares. Releasing a news

release and then trading right away is not appropriate. Investors reading the news release is only one step in the

process for complying with regulatory objective of allowing all investors to make an informed investment

decision. Even assuming the contents of the release could be instantaneously acted upon, still should have waited

until it could reasonably have been expected to appear in broad circulation.

Info must be effectively disclosed: Before insiders may act on material information, must be effectively

disclosed in manner to ensure its availability to investing public. So basically, you cannot disclose and trade

on the information one minute later.

National Sea

Ratio: Two-part test for when you can trade as an insider: 1. Must be disseminated to the trading public;

and 2. The trading public must have had it in their possession for a period of time allowing them to digest it

in accordance with the nature/ complexity of the info (generally, wait one full trading day after release of info)

Facts: Insiders bought a bunch of shares once it was on the wire. Said you still have to wait.

Reasons:

Two part test for when you can trade as an insider and one day general rule:

o 1. Must be disseminated to the trading public; and

o 2. The trading public must have had it in their possession for a period of time allowing them to

digest it in accordance with the nature/complexity of the information

Thus, insiders are NOT free to trade as soon as press release is on Dow Jones News

Wire need to give it enough time to be effectively disclosed

No Firm rule re: interval, BUT a safe working rule: should wait a minimum of one full trading day after

release of information

Factors to consider in length of time:

o a. nature/complexity of information

o b. nature of market for stock

o c. place of company’s operations vs. place of disseminating info thru news release

Policy Notes:

Reverse Policy issue: *my argument: doesn’t really create equal playing field, b/c now the public gets to

buy it before you do, whoever has their ear to the ground and is monitoring the Dow Jones, for instance.

Bright line tests don’t work you cannot legislate integrity

4.6.5 Defences to Insider Trading / Tipping

4.6.5.1 “Make Use of” Defence – no longer applicable

Used to be a defence in Canada saying that you had info, but didn’t MAKE USE OF IT (I would

have bought it anyways)

o E.g. Martha Stewart knew it, but made decision to trade before I knew this (found guilty of

lying about insider trading, not guilty OF Insider trading)

Made it impossible to convict anyone or find them liable for insider trading (to prove that they USED that

knowledge to buy the securities, not just that they bought it)

o People in securities market not happy can’t have an efficient market if you have such severe

consequences and a broad rule



o In response to that: created another defence under OSA- now only requires that person

“has knowledge” of a material fact that has not been disclosed (although Crim Code insider

trading provision, s.182.1, requires that accused sold sec “knowingly using insider info” –

therefore, may hamper effectiveness of provision)

4.6.5.2 “Protecting Integrity of the Info” (s.175 of Regs)

If you take all reasonable precautions to protect integrity of info and someone else trades, not guilty (only if

reckless)

Under agency law: partner is deemed to know what partners now (when in reality, you don’t)

o Thus, if you take all reasonable precautions to protect integrity of that information and someone

else trades, not guilty, but if you’re reckless and they’re still not sure, rather take $ from you than

investor

o Policy considerations to protect shareholders

Rule:

If you’re a person in a special relationship, you buy/sell securities with knowledge of material

change/fact that hasn’t been generally disclosed, you’re NOT guilty of insider trading if ALL of the

following conditions are met:

o (a) only reason you’re deemed to have knowledge is bc info was known to one of your officers,

directors, partners or employees

o (b) decision to buy/sell was made by someone who did not have ACTUAL knowledge of the

information

o (c) no advice was given by person who had actual knowledge to person who made decision to

trade

o (d) appropriate mechanism (wall) was in place to prevent flow of information from person who

had actual knowledge to person who made decision to trade

o firm or business took reasonable precautions to protect the integrity of that information

REGULATIONS, s.175

s. 175(1) A person or company that purchases or sells securities of a reporting issuer with knowledge of a

material fact or material change with respect to the reporting issuer that has not been generally disclosed

is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act, where the

person or company proves that,

o (a) no director, officer, partner, employee or agent of the person or company who made or

participated in making the decision to purchase or sell the securities of the reporting issuer had

actual knowledge of the material fact or material change; and

o (b) no advice was given with respect to the purchase or sale of the securities to the director,

officer, partner, employee or agent of the person or company who made or participated in making

the decision to purchase or sell the securities by a director, partner, officer, employee or agent of

the person or company who had actual knowledge of the material fact or the material change,

o but this exemption is not available to an individual who had actual knowledge of the material fact

or change.

(2) AGENTS/INVESTMENT PLANS/FULFILLING CONTRACTS: A person or company that

purchases or sells securities of a reporting issuer with knowledge of a material fact or material change

with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1)

of the Act and from liability under section 134 of the Act, where the person or company proves that,

o (a) the purchase or sale was entered into as agent of another person or company pursuant to a

specific unsolicited order from that other person or company to purchase or sell;



o (b) the purchase or sale was made pursuant to participation in an automatic dividend

reinvestment plan, share purchase plan or other similar automatic plan that was entered into by

the person or company prior to the acquisition of knowledge of the material fact or material

change; or

o (c) the purchase or sale was made to fulfil a legally binding obligation entered into by the person

or company prior to the acquisition of knowledge of the material fact or material change.

(3) In determining whether a person or company has sustained the burden of proof under subsection (1), it

shall be relevant whether and to what extent the person or company has implemented and maintained

reasonable policies and procedures to prevent contraventions of subsection 76 (1) of the Act by persons

making or influencing investment decisions on its behalf and to prevent transmission of information

concerning a material fact or material change contrary to subsection 76 (2) or (3) of the Act.

(4) A person or company who purchases or sells a security of a reporting issuer as agent or trustee for a

person or company who is exempt from subsection 76 (1) of the Act and from liability under section 134

of the Act by reason of clause (2) (b) or (c), is also exempt from subsection 76 (1) of the Act and from

liability under section 134 of the Act.

(5) A person or company is exempt from subsections 76 (1), (2) and (3) of the Act where the person or

company proves that such person or company reasonably believed that,

o (a) the other party to a purchase or sale of securities; or

o (b) the person or company informed of the material fact or material change,

o as the case may be, had knowledge of the material fact or material change.

4.6.5.3 Defence in Practice – Law Firms

Protect themselves against inadvertent trade – they all have rules on insider trading.

o Restricted List: Some say, every time you have transaction involving public company that is

material, you have an obligation to phone a designated person and put that company on a

restricted list so that someone in the law firm knows that people in that law firm cannot buy/sell

shares b/c “we have knowledge of…”

o Either way, trying to stop inadvertent/unintended insider trading claim. Integrity of

information is protected (so you can use the defence)

o In investment banks: Geographic separation b/w traders/investment bankers doing the deal, so

bankers can’t get access to broker’s information (doesn’t work in law firm)

4.6.5.4 Trading as an agent & you’ve given no advice (s.172((a) of Regs)

If you trade as AGENT for another person pursuant to unsolicited order, and you gave NO advice, you’re

not guilty of insider trading

I phone my broker, say buy apple. My broker knows that apple is about to make a massive announcement.

What should my broker do? o Not say anything. If broker tells me I can’t do that trade, I’ve learned something. In absence of

defence, if my broker executes that trade, he’s guilty of insider trading. He shouldn’t be. So

there’s a defence.

4.6.5.5 Automatic Investment Plan (175(2)(b) of Regs)

If automatic dividend reinvestment plan, not guilty of insider trading, even if you knew

Example: Disney: automatic dividend reinvestment plan: don’t want to send you cheques every

quarter for .05 if you own 1 share accumulate dividends for you, when it reaches price of a share, we

buy you one



If you know someone is going to bid for Disney and they automatically buy you a share pursuant to

Automatic Dividend Reinvestment Plan, you’re not guilty of insider trading, even if you knew. They’re

doing it for you w/o you asking

4.6.5.6 To fulfill legally binding agreement that happened before material info was known (s.175(2)(c) of regs)

Defence b/c entered into legally binding contract BEFORE You had knowledge, then you subsequently get

knowledge, don’t have to breach contract (Policy rationale no uneven playing field \– not making decisions

w/ knowledge)

E.g. Enter into legally binding agreement that on Halloween, you’ll buy 100 shares of apple from me, we

both know nothing. Then I get insider info that stock is going down. Halloween comes, what should law

be? OKAY

What if I have an option, then I learn information? No, b/c option not a legally binding contract.

4.6.5.7 Trades between 2 People Who Both Know the Info (s.175(5) of Regs)

Fine b/c both have same info, no one has advantage over someone else. Playing field still level.

NOTE: insider trading isn’t designed to create equal opportunities or be fair in every circumstance

can’t do everything

4.6.6 Actions, Sanctions & Penalties for Insider Trading

4.6.6.1 Penal sanctions – CRIMINAL

Under s. 382.1 Criminal Code prohibits trading on basis of material info concerning an issuer that has not

been generally disclosed (similar to OSA s.76)

Conviction for insider trading: Prosecution must prove:

i. Accused was in a “special relationship”

ii. Accused purchased or sold securities of the reporting issuer

iii. Accused made the purchase or sale with knowledge of a “material fact” or “material change”

concerning the affairs of the reporting issuer; AND

iv. That the material fact or material change had not been generally disclosed.

Conviction for tipping/informing:

i. Accused person was in a special relationship with reporting issuer

ii. Accused informed another person of a material fact or material change with respect to the reporting

issuer.

iii. Accused informed another person of the material fact or material change before it was generally

disclosed.

*also note: that unlike OSA, Crim Code does not cover tippees of tippees

*also makes no distinction between reporting issuers and non-reporting issuers (who would not have to disclose

insider trading under OSA)

Defenceinformation was given in the necessary course of business of the reporting issuer; a defence where

the giving of the information is necessary to effect the takeover, business combination or acquisition; finally

where the person reasonably believed the information had been generally disclosed.

4.6.6.2 Civil Actions

The Act provides for an action for damages against a person trading on inside information by the person

with whom the trade was made.

P must show:

i. D was in “special relationship” with RI



ii. D purchased or sold securities of RI

iii. D made purchase or sale with knowledge of a material fact or change

iv. Material fact or change had not been generally disclosed.

Tipping: The Act also provides for an action for damages against a person who informed another of the

inside information.

P must prove:

i. D is RI was in “special relationship” with issuer

ii. D informed another person of material information

iii. Information was given before material information generally disclosed.

Actions by or on Behalf of the Reporting Issuer

Issuer can bring action against insider. Issuer must show that the person was an “insider”, “affiliate” or

“associate” of the issuer, that the person bought or sold with knowledge of material information, or

informed, and that they did so before the information was generally disclosed.

The Securities Commission can bring an application for leave to bring an action in the name of and on

behalf of the issuer to enforce the duty to account if the issuer does not.

4.6.6.3 Administrative sanctions

i. Cease trade orders

ii. Removal of exemptions

iii. Prohibitions from acting as a director or officer

iv. Administrative penalty

v. Insider reporting.

*subject to defences above



5.0 SEGMENT 3: THE CLOSED SYSTEM:

5.1 Private Placement & Exemptions

5.1.1 General Rule

General rule: no trading in security, unless you are registered. If it’s a distribution, without prospectus or

proper reliance on private placement exemption

Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor protection)

Two Requirements

Disclosure requirement – satisfied by prospectus, comprehensive disclosure document

Registration requirement – satisfied by underwriter selling securities

Tension b/w Investor Protection vs. Efficient Capital Markets

In third segment, see tension b/w investor protection (do a prospectus) and efficient capital markets (not every

company can feasibly do a prospectus)

Allows sale of securities to public without time, trouble and expense of using a prospectus through private

placement exemptions

The Concept of the Closed System

Securities will only be allowed to trade outside of this closed system if that trading is supported by adequate

continuous disclosure.

o Trading within the closed market: Secondary market trading within closed market can only occur

in reliance on an exemption. Exemption available only where purchasers do not need to know

prospectus information

o Trading outside the closed market:

(i) Prospectus Disclosure Followed by Continuous Disclosure. Need to provide adequate

information to the investing public. Provide a prospectus, continuous disclosure.

(ii) Resale Restrictions: allow a person who purchased under an exemption to sell to

members of the investing public as long as certain conditions concerning adequate disclosure

are met. Purpose to protect investors by (1) access to information to those who care to gather

it; (2) information for professional investment advice; (3) base of information to sophisticated

investors whose trading causes market price to reflect underlying value. This requires a

“seasoning period”: the period of time to allow a build-up of information.

5.1.2 Advantages & Objectives of Private Placement

*Exemptions found in NI 45-106 OR Rule 45-501

Adv: (1) Speed (No Prior Regulatory Review, like with prospectus, but still highly regulated!!); (2)

Confidentiality (almost always more confidential than prospectus)

Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor protection and

efficient capital markets – this is at least what they’re TRYING to do, even if there are inconsistencies

No flexibility on these exemptions so be very careful

All exemptions focus on :(1) identity of purchaser; (2) inherently safe securities; (3) Info already available;

(4) another superior policy objectives

(1) Identity of Purchaser: Purchaser is so sufficiently sophisticated or wealthy that they do not need the

protections of the securities act. E.g. Bank you’ll protect yourself, hiring lawyers, accountants, advisors



(2) Inherently Safe Securities: Securities are so inherently safe that to need OSA to get involved is stupid (e.g.

Canada Savings Bonds not worried that if you buy these, govnt will default on obligation to pay)

(3) Information already Available: Information already available in a different form, so to require it again is

stupid

(4) Another Superior Policy Objective: Some other policy objective trumping investor protection to some

extent. E.g. Trying to promote investment in oil/gas, gold, electric cars, etc. trying to do something that, from a

policy perspective, is important enough to give exemption even if it detracts a bit from investor protection

5.1.3 The Private Placement Exemptions

4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited investor,

min amount); 2) Limited offering exemptions (govt incentive sec, founder/control person/ family); 3) trades in

sec of private companies; 4) Isolated trades (isolated distrib by issuer).

*also random: discretionary ruling under 74(1) of OSA – never going to happen!

5.1.3.1 Exemptions based on wealth/ sophistication of purchaser

POLICY: sophisticated investors can take care of themselves, don’t need protection of securities act

Includes:

o A) Accredited investor exemption (s.2.3 of NI 45-106) Can use it as many times as you want, to as many purchasers, as long as you’re selling to

Accreditor Investors no disclosure required

s 1.1 of Definitions: banks, pension funds, insurance companies, someone recognized as

OSC as AI, and rich people (see definition on p. 1476)

Rich people: Those individually or with a spouse own financial assets of

aggregate realizable value before taxes of $1m, or those whose net income

reaches $200,000, or combined w/ spouse exceeded $300,000, reasonable

expectation of exceeding that in current year, or those who individually or spouse

have net assets of at least $5m

*Note problem with offering memorandum (don’t have to, but if you do…): What you have

delivered is then deemed to be an offering memorandum and if so, it will have a

contractual right of action if there is a misstatement / omission.

o B) Minimum Amount Exemption (Section 2.10 of NI 45-106): (1) You can sell securities without a prospectus, as long as a (a) purchaser purchases as

principal, (b) has an aggregate acquisition cost of not less than $150,000 paid in cash at

the time of the trade, and (c) it’s from only one issuer (at $150,000 – incentive to be

careful)

Note: (2): corporation could buy like this, but NOT if you only set it up just to use the

exemption, (NSGs)

They want to know that you have enough $ that you’ll protect yourself (if

you could drop this much money at one time, then will take precautions

themselves)

*SAME ISSUE WITH OFFERING MEMORANDUM and practical reality that

no one will invest $150,000 a pop with you without getting information, then

must have contractual right of action

o If you got 30 people to raise the $150,000 (even if you created a corp to

do so)– would NOT allow- no wise guys! This circumvents the rationale

that you have the money and will protect yourself



o If another (legitimate) corp bought $150K of securities, that’s ok. B/C it

was created for a legitimate purpose and not to circumvent the spirit of

the legislation

NOTE: securities is an area of law that doesn’t allow for certainty, only trying to

promote right vs wrong

5.1.3.2 Limited Offering Exemption

(A) Government-incentive security exemption (s.2.1 of OSC Rule 45-501, p. 1561):

o Policy behind the exemption is different: government has said that they want to promote

activity in the oil/gas industry, gold business w/e, in order to create activity that’s good for the

country, going to make it easier for companies to sell securities by designating them as

government incentive securities so they can sell them easier (has to do with nature of

company/business the govnt is trying to promote)

o Unlike other exemptions where regulators feel good b/c nature of investor made investor

protection more likely/unnecessary, here, dealing with naked purchaser (not differentiating

purchasers, differentiating activity) Therefore are more severe on the preconditions to use

b/c have to protect purchase

o STEPS:

First, need to have government-incentive security (designated by regulators as being 1,

from time to time)

Preconditions to use:

(a) Can only solicit 75 people, can only sell to 50, each of whom must

purchase as principal

o Have to be smart, can’t solicit more than 75, so be careful who you

solicit (# OMs from 1-75) must be careful b/c if you get caught soliciting

76, it’s over, you can’t fix that.

(b) Must give an offering memorandum with certain info (see p. 1561), but

things like officers/directors, identifying promoters, giving particulars of

qualifications, etc.

(c) Before you can enter into agreement with someone, must provide them

with substantially same information that a prospectus would provide

o They’re “scared,” need to “dress the naked purchaser” and do that by

wrapping them in something that sounds/looks/feels like a prospectus

(although doesn’t have to be reviewed by the regulator it is very similar)

o AND (ii) Purchaser has to be executive officer or director, spouse or

child of those, or (i) person by virtue of net worth/investment

experience is able to properly evaluate investment. These are the

only people you can solicit/send info to.

o Have to Put rep in document: you are a person who by virtue of net

worth/investment experience is able to properly evaluate the investment

(might not be enough)

o Losing sight of policy for exemptions, moving more toward investor

protection: Need to raise $ for businesses, if you make them prep

document like a prospectus, then it’s basically the same

(d) Cannot advertise in connection with this exemption

o if you did, you would be soliciting to more than 75 people

o Regulators freaked out by advertising if you do that, no one will

read prospectus/OM, whatever, should show low lights if highlights, etc.

(e) Cannot use this exemption more than once in any calendar year!



o NOTE: *There is nothing wrong with combining exemptions i.e.

raising some money with $150k exemption and $500k with govt

incentive-exemption. Need to be smart about this though- first ask ppl if

they are an accredited investor before govt-exemption (b/c govt

exemption one is ltd to 75 ppl and once per yr while other is unltd)

(B) Founder, Control Person and Family Exception

o Prospectus requirement doesn’t apply if you Purchase as principal and you are:

a founder of company (who alone or with others, started business)

an affiliate of the founder of the issuer

a spouse, parent, brother, sister, grandparent, grandchild or child of an executive officer,

director or founder of the issuer, or

a person that is a control person of the issuer

5.1.3.3 Trades in Securities of Private Companies (s.2.4 of NI 45-106)

To help companies in their early stages, it’s how they get going

Have to satisfy two things to rely on exemption:

(1) Private Company

Look at articles of incorp to see if there are these 3 things:

o (i) Restriction on transfer of shares: no one can buy/sell shares of company unless they get

authorization from board transferring shares from A-B;

o (ii) Number of shareholders in company (exclusive of employees/former employees) cannot

exceed 50

o (iii) Restriction has to say that only a certain IDENTITY of person can buy your shares (can’t

distribute shares to public)

(2) Specific identity as a purchaser

In third part of the articles.

Who you can sell to: (see p. 1482 – s.2.4(2))

o (a) a director, officer, employee, founder or control person of the issuer

o (b) a director, officer or employee of an affiliate of the issuer

o (c) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive

officer, founder or control person of the issuer

o (e) a close personal friend of the director, exec officer, founder or CP (knows someone well

enough that they trust them; must be direct)

o (f) a close business associate of director, exec officer, founder or CP (ind who has had suff prior

bus dealings; direct)

o (g) a spouse….etc….of selling security holder or selling security holder’s spouse

o (h) securityholder of the issuer

o (i) an accredited investor […]

o (L) *A person who is not the public

Policy: Stupid for good intentions- worried about protecting purchaser. Want efficient capital market to

allow private companies to raise money from people that aren’t members of public, but you don’t know

members of public are

o These categories are very diff to qualify/ define if it is found that you are not one of the

permitted purchasers, it has a large econ impact (can’t be used again)

WHO IS THE PUBLIC? A Question of Fact – Case Law

Two Tests: 1) common bonds AND 2) “need to know”



R v. Pipegrass (AB CA) – Common Bonds Test

COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused, or persons

having common bonds of interest or associations, they are considered to be the public, if they have common

bonds, then not the public

IS A FINDING OF FACT the court must see if the sale transcended sales beyond private concern

Facts: Promoter sought 50k by soliciting farmers with whom there was a previous business dealing.

Issue: Were these 5 people “the public”? – YES.

Decision: Constitutes a distrib to the public

Reasons:

Private corp can’t seek to sell securities – it is clear that it is imposs to define what is meant by the term,

“offer for sale to the public”; differs in each instance.

SEC v. Ralston Purina – “Need to know” test

Need to know test (Test of whether you’re selling to “the public” -in which case, can’t use priv issuer

exemption). TEST: Persons b/c of their sophistication or relationship with company who don’t need protection

of prospectus are not members of the public. Focus of inquiry is NEED of offerees for protection afforded by

the act.

Facts: Company did NOT SOLICIT ANYONE, but offered shares to employees. Among those who bought were

several production employees, a clerk, bakeshop foreman, electrician, secretary. Etc.

US Ct Decision: common bonds test is dumb, it’s “need to know” test. Employees aren’t necessarily going to

qualify as not being the public and therefore being able to sell to them under the exemption. Some will (e.g. exec

officers), and some will not. Employees here did not have access to the info that a prospectus would provide.

Implications:

The exemption is for those for whom there is no practical need for application of the prospectus. So

should turn on whether the class of persons affected needs protection of the act. Those who are able to

fend for themselves = not a public offering.

**BOTTOM LINE: Not sure which test applies, but it’s like what a security is if they think that

the act ought to apply, it will. If the court or regulators think that they need the protection, or they

don’t, they’ll act accordingly.

5.1.3.4 Isolated Trades (s.2.30 of NI 45-106)

Distribution must be an isolated one that is not made (a) in the course of continued and successive

transactions of a like nature or (b) by a person whose usual business is trading in securities.

Very rarely used (prob not on exam)

5.1.3.5 Discretionary Ruling (74(1)) – not going to happen

Exemption order (1) Upon the application of an interested person or company, the Commission may make the

following rulings if the Commission is satisfied that to do so would not be prejudicial to the public interest: 1. A

ruling that any person or company is not subject to section 25; 2. A ruling that any trade, intended trade, security,

person or company is not subject to section 53. (2) can impose conditions

5.1.4 Offering Memorandum (and problems with it)



Some and at least one of the exemptions gives legal obligation on company to deliver document that meets

definition of offering memorandum (looks/acts like a prospectus)

5.1.4.1 What is an offering memorandum?

Rule 14-501 Definitions (s.1.1(2)) & OSA (s. 1(1); same as s.1.1(2)) (also see 5.6(2) of CP 45-

501 for what isn’t one)

Offering memorandum: a document prepared by a seller of securities which describes the business and affairs

of the company in order to provide the prospective purchasers (investors) with sufficient information as to whether

they want to make an investment

Not sure what it is, and no statutory authority to clarify, just know you need truth and no omissions, sounds like

full, true and plain disclosure Thus offering memo is no less complicated than a prospectus

All the guidance we have:

o (a) as long and short as necessary,

o (b) can’t be ambiguous,

o (c) needs statutory right of action

Not every doc is an offering memorandum: per s.5.6(2) of CP 45-501 if you provide a term sheet

JUST setting out the deal, that’s not an OM

o Again, practical import of that is zero no one lets you sell securities just by laying out deal

5.1.4.2 Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.5.3) & Deliver (s.5.4) for

rescission

OSC RULE 45-501, s.5.3: you don’t have to deliver any document to AIs in connection with the securities, but if

you CHOOSE to issue them an offering memorandum, must contain a contractual right of action saying

you can sue us if there’s a misrepresentation (not only misstatement of material fact, but also omission of MF)

Exemptions Should technically be fast, but problem: (Inv prot v. eff cap mark):

If you give an OM, have an obligation to be accurate and include everything

OSC RULE 45-501, s.5.4: Delivery of OMIf you do deliver it have to send copy of doc to securities

commission w/In 10 days of date of trade

Tension and Critique: if you give NO information, that’s cool, but if you do, we’ll call it an OM and it

has to give all info you need to know

o Problem in Practice: Try to make it easy, but now we’ve made it very difficult. Not likely

anyone will give you $ without information, so you end up being in prospectus territory

(“looks/costs like one”)

o Actually a huge burden: have to (a) tell the truth and (b) not omit anything (which forces

you to think about what you don’t know)

5.1.4.3 Liability under Offering Memorandum (s.130.1 of OSA)

s.130.1 (1) Liability for misrepresentation in offering memorandum where a misrep, the purchaser has the

following rights: 1) right of actions for damages against issuer and selling securityholder; 2) right of rescission

against person/ company; (2) Defence: not liable if purchaser knew of misrep

(1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security

offered by the offering memorandum during the period of distribution has, without regard to whether the

purchaser relied on the misrepresentation, the following rights:

o 1. The purchaser has a right of action for damages against the issuer and a selling security holder

on whose behalf the distribution is made.



o 2. If the purchaser purchased the security from a person or company referred to in paragraph 1,

the purchaser may elect to exercise a right of rescission against the person or company. If the

purchaser exercises this right, the purchaser ceases to have a right of action for damages against

the person or company.

(2) Defence: No person or company is liable under subsection (1) if he, she or it proves that the purchaser

purchased the securities with knowledge of the misrepresentation.

(3) Limitation in action for damages: In an action for damages pursuant to subsection (1), the defendant

is not liable for all or any portion of the damages that the defendant proves do not represent the

depreciation in value of the security as a result of the misrepresentation relied upon.

*if including a forecast, must still comply with NI 51-102, or else takes you out of the exemption

5.1.5 Registration Requirement for Private Placement Exemptions

5.1.5.1 NI 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (Also section

25 of the OSA)

Business Trigger Test: if you are a market participant in the business of trading in securities, you must be

registered. If in business of trading securities, have to be registered

Used to be exemptions from registration, but then people behaved badly.

Thus… b/c it was putting integrity of marketplace into question: now have universal registration

system

If you’re in business of trading in securities, have to be registered

Always need to use a registrant!!

o And instead of entering in UW agreement, enter into agency agreement looks like UW

agreement, except almost always “using best efforts” to sell securities on your behalf

5.2 Resale Rules

5.2.1 General Rule: 2 Components of Resale Rules

1) Resale rule for non-control persons: (a) all exemptions other than private issuer and (b) resale rules for

those acquiring sec through private issuer exemption; 2) Resale rules for control persons (not connected to

above rules)

Resale Rules for Control Persons:

Buying pursuant to an exemption vs. Prospectus: Advantage of having a prospectus freely tradeable

shares, the reporting issuer would be subject to a continuous disclosure regime, so investors presumably

have all of the information they need

Key Question: How do we sell securities that we bought pursuant to a private placement

exemption?****Remember this is what we’re doing/trying to figure out

POLICY: Tension b/w efficient capital market + investor protection, you do have to be able to sell them

at some point or no one will want them, but you can’t go out and do it right away because that would be

“back-door”

Goals achieved by resale rules: Preventing back-door underwriting

Whereby you can sell pursuant to an exemption with no prospectus, and then that person can go sell straight away

to secondary market purchasers bad b/c the secondary purchaser may not have the information it needs to make

an informed decision (can’t circumvent purpose of the statute)



5.2.1.1 Ways of Reselling (Generally)

1) If you can get the company to issue a prospectus and offer to sell YOUR securities pursuant to that

prospectus (secondary offering)

e.g. prospectus – offering and secondary offering. If you can get company to do a secondary offering of

YOUR securities, you can immediately sell them pursuant to that prospectus

Problems:

o 1. Unless you’re a significant person in company, co won’t do that for you

o 2. Have to pay proportionate share of expenses of public offering; and

o 3. Liability for selling securityholder is basically the same as issuer (unless you can prove that

person purchased with knowledge of misrep, you’re liable for misrep)

2) Rely on another private placement exemption: Sell to Another Purchaser Pursuant to Another

Exemption

If there’s a policy saying I can sell them to you for $150,000 that same policy would say that I should also

be able to sell them to someone else for $150,000 (underlying policy obj is still met)

o e.g. if you bought pursuant to the AI exemption, can sell it to another AI, or pursuant to group of

25, can sell among that group, or with government incentive, can sell among the 50

Problems: *Hard to find people that fit these exemptions:

o 1. Hard to re-sell b/c of restrictions: The purchaser you’re selling to will probably have

problems re-selling (restrictions), so you may not find a willing buyer

e.g. offering a security the purchaser can’t sell for a while vs. offering one they can sell

tomorrow the one that has less risk is more attractive and that’s the one you can sell

immediately

o 2. Discount: If you’re the re-purchaser and you can’t sell it, but you’re still inclined to buy the

sec, will want a discount. You as the re-seller have to sell securities at a discount, so they’re not

worth as much. Two securities exactly the same aren’t worth as much if you can’t re-sell

immediately.

o 3. Commitment to file prospectus during a certain period of time so I can re-sell eventually:

essentially have to contract that you WILL file a prospectus eventually so that shares can be re-

sold huge penalty if you don’t do it

o 4. Might want an offering memorandum to have information anyway: huge time/expense,

similar to a prospectus

3) Exemption order from OSC

Lastman: forget about it, zero for life.

4) Satisfy Resale Rules – NI 45-102

Talking about regulation of second trades of securities sold under an exemption

5.2.1.2 Def of Distribution is Important Here

RECALL Definition of distribution: Section 1(1) of OSA if it’s a trade In a security that amts to distribution

you have to issue prospectus UNLESS an exemption applies

3 branches:

o 1) Trade in sec that haven’t been previously issued (need prospectus)

o 2) Sec you obtained pursuant to a private placement exemption –unless another PPE is avail

b/c trying to sell sec you acquired through PPE, that’s a distribution requiring prospectus

unless another PPE is available

Recall this was noted previously in def of distribution

o 3) How control person sells

Why does this matter? *POLICY: for second and third branch: The only way to stop people from selling

securities without prospectus is to call it a distribution. So sales by a control person OR sales by someone who



acquired the securities pursuant to a PPE are DEEMED TO BE A DISTRIBUTION unless certain rules are

satisfied!

5.2.2 Resale Rules for Non-Control Persons

5.2.2.1 Resale rules for non-control person who acquired sec through a private placement exemption other

than the private issuer exemption

*Exam resale rules question: analysis:

Ask two questions:

o (a) who are you? if not a control person, throw that away and just use (b)

o (b) how did you acquire securities?

If by prospectus, go sell.

If PPE, which exemption?

If Private issuer: have to wait until they become a reporting issuer, then you can

sell right away. Otherwise, you can never sell again, OR have to sell pursuant to

another PPE

If any other exemption: hold it for 4 months, then sell.

If control person: also have to know answer to first question meet both sets of resale rules.

NI 45-102: First Trades, Restricted Period and Seasoning Period

2.5 and 2.6 of NI 45-102: if you bought securities pursuant to a PPE, can sell them based on these rules (will

be deemed a distribution, UNLESS You satisfy the rules)

if you’re not a control person, and you bought securities pursuant to a PPE OTHER THAN THE PRIVATE

ISSUER EXEMPTION, you can ONLY re-sell them in these circumstances (or issue a prospectus, as per 2.7

below)

Lastman’s Summary of Applicable Rules (Non-Control Persons, Exemptions Except Private Issuer

Exemption)

1) Firstly, can sell shares that you bought pursuant to prospectus (as opposed to an exemption), as long as

you are NOT a control person

RULE: Securities Acquired pursuant to a prospectus are freely tradeable unless the seller is a “control

person”

RATIONALE: Information is available in the marketplace to allow investors to make an informed

investment decision and ongoing continuous disclosure obligations ensure that the information remains

current. Other policy considerations prevent control persons from selling securities, even if acquired

pursuant to a prospectus.

2) SECONDLY, if NOT purchased by prospectus, but an exemption Resale Rules for All Exemptions

EXCEPT the “Private Issuer” Exemption

Rule for sales of sec acquired pursuant to PPE: If securities are acquired pursuant to a private placement

exemption, the seller cannot resell them unless:

o (a) a prospectus is filed wrt trade of subject securities,

o (b) seller relies on another PPE, or in government incentive securities exemption, the sale is to a

member of the, original 50 purchasers,

o (c) an exemption order is obtained from OSC (very rare), or

o (d) resale rules referred to below are satisfied (set out in instrument 45-102)

RATIONALE FOR THIS: The private placement exemptions permit the issuance of securities without

the concomitant/related obligation to provide complete disclosure to investors and without the continuous

disclosure obligations. The Act permits these transactions because either:

(i) The sophistication of the purchaser or his or her knowledge of the business and affairs of the issuer

reduces the need for prospectus-like disclosure; or



(ii) The legislators are trying to address some more important policy objective.

However, in order to ensure that there are not subsequent sales of securities to persons who need

the protection offered by a prospectus, the Act has to regulate the second trade following a PPE in

such securities until such a time as the protections afforded by a prospectus are available.

3) Resale Rules for All Exemptions Except the Private Issuer Exemption

Rule: THIS IS 2.5 OF NI 45-102: If securities are acquired pursuant to a private placement exemption,

the seller cannot re-sell them unless:

o A) The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months

immediately preceding the trade (i.e., the date of the resale of the security)

2.7: unless the issuer became a reporting issuer after the distribution date (i.e. the

date of the original private placement) by filing a prospectus in Alberta, British

Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting

issuer in a jurisdiction at the time of the trade (the time that the original purchaser is re-

selling), in which case the 4 month seasoning period does NOT apply;

Can sell day after

IF co NEVER becomes a reporting issuer and you cannot find another exemption, you

can never re-sell those securities

also reason why you would put conditions on purchase of PPE (would want them

to become a reporting issuer)

o B) At least 4 months have elapsed from the distribution date (the “Restricted Period”);

“distribution date” = date of the original private placement (PPE)

Rationale is to give people time to digest the info before dumping the securities into the

market

o C) Legend: The share certificate of the resale securities must include the prescribed legend

setting out the restriction on transfer; (or if there is no certificate, a written notice

containing such restriction must be provided) Share certificate received on the PPE will have a legend that says there is a hold on the

stock

o D) The trade is not a control distribution;

Person reselling the security cannot be a control person

o E) No market manipulation;

Nobody prepared the market for this event by artificially inflating or decreasing the value

(or advertising)

o F) No extraordinary commission or consideration is paid in respect of the trade; and

o G) The seller has no grounds to believe the issuer is in default of any securities law

***ALL RULES MUST BE SATISFIED

Side notes:

just b/c you file prospectus, doesn’t mean you can issue new sec all the time. Any time you issue new

securities, have to do PPE or file prospectus

so reasons why you’d do PPE: don’t want to file prospectus, OR the company is private

5.2.2.2 Resale Rules for a Non-Control Person who Acquired Sec through the Private Issuer Exemption

Only difference b/w this and the other exemptions: there is no 4 month hold under private issuer exemption (he

can’t tell us why) **only a seasoning period, no restricted (rules from 2.6 apply – seasoning period)

Rationale: not really a concern that they’ll be selling to people who need prospectus-information b/c if the

issuer remains a private issuer, it will not be a reporting issuer and will not meet the requirement to be a



reporting issuer (seasoning) of the resale rule. A subsequent trade by a person who purchased under the

exemption will be a distribution unless the person sells to another person who qualifies under the private issuer

exemption (so we’re not concerned), or the company becomes a reporting issuer, then purchaser can re-sell

right away (b/c issuer is one at the time of that trade 2.7 of 45-102 and that information is out in the

public domain now) (this is what can’t really be explained)

Lastman’s Summary of Rules:

(a) The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta, British

Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a

jurisdiction of Canada at the time of the trade; (the re-sell)

(b) The trade is not a control distribution;

(c) No market manipulation;

(d) No extraordinary commission or consideration is paid in respect of the trade; and

(e) No grounds to believe issuer is in default.

5.2.3 Resale Rules for Control Persons (Separate Regime)

Analysis:

Is this a control person selling shares that they acquired IN ANY WAY (e.g. by prospectus or PPE)? – so

basically, is it a control person?

Different set of resale rules if person selling securities is a control person

Ask:

1. Who are you? If control person (if not control person, go back to rules above)

2. How did you acquire them (exemption or otherwise)?

o DOES NOT MATTER!! STILL HAVE TO SELL ACCORDING TO THESE RULES (and

follow the insider reporting rules probably)

Prospectus, OSC Exemption, another PPE, another control person

PROBABLY will go advance notice route

Shares freely tradeable, to as many people as you want, any denomination

5.2.3.1 Section 1(1) of the OSA – Control Person Definition – rebuttable, pure ? of fact

Definition of Control Person: S. 1(1) of OSA: Person who alone or in combination with others holds a

sufficient # of securities to MATERIALLY AFFECT CONTROL of the company (rebuttable presumption

& pure Q of fact – bright-line rule)

Per s.1(1) of OSA, “control person” means,

o (a) a person or company who holds a sufficient number of the voting rights attached to all

outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a

person or company holds more than 20 per cent of the voting rights attached to all outstanding

voting securities of an issuer, the person or company is deemed, in the absence of evidence to the

contrary, to hold a sufficient number of the voting rights to affect materially the control of the

issuer, or

o (b) each person or company in a combination of persons or companies, acting in concert by

virtue of an agreement, arrangement, commitment or understanding, which holds in total a

sufficient number of the voting rights attached to all outstanding voting securities of an issuer to

affect materially the control of the issuer, and, if a combination of persons or companies holds



more than 20 per cent of the voting rights attached to all outstanding voting securities of an

issuer, the combination of persons or companies is deemed, in the absence of evidence to the

contrary, to hold a sufficient number of the voting rights to affect materially the control of the

issuer; (“personne qui a le contrôle”)

Main determinantif you materially affect control!

In absence of evidence to the contrary, you are deemed to be a control person if

you hold more than 20% of outstanding voting shares of company, so you can

hold more than 20% and not be control person maybe, less than 20% and be a

control person, this is a rebuttable presumption

And this is a pure question of fact

Doesn’t always make sense, but this is the bright-line rule

5.2.3.2 Five Ways a Control Person Can Sell Stock (Lastman Summary)

No matter how a control person acquires securities (even if by prospectus and would otherwise by freely tradeable

if they weren’t a control person or by PPE and if they weren’t a control person, would have to follow the PPE

resale rules), they cannot be resold unless:

(a) The control person qualifies a prospectus for the sale of the subject securities

(get the company to qualify wrt your securities) – same issues, have to get the company to do it, very

expensive, and potentially serious liability consequences

(b) An exemption order is obtained from the OSC (very rare!);

(c) The control person sells pursuant to another private placement exemption;

Which gives rise to resale rules and same issues as before – discount, forces secondary buyer to have a

hold period – not attractive to seller (b/c you have to sell at a discount & might not find a buyer)

(d) The control person sells to another control person (also giving rise to resale rules, not freely tradeable

and will have to give a discount for that reason); or

(e) The control person sells pursuant to the advance notice route

By relying on this, control persons can sell in any denominations to anyone they want, and shares are

freely tradeable in the buyer’s hands

Want world to know that it’s a control person selling their shares (and # of shares)

Before you can sell them, have to tell world you’re selling your shares

Says as long as you (a) give advance notice to OSC and stock exchange and make public statement that

you’re a control person and want to sell shares for next 30 days (and can be extended), you can sell

them in any denom, to anyone you want in the mkt (and stock in the purchaser’s hands is freely tradeable)

o BUT… can only do this if…

(1) Company must be reporting issuer

(2) You must have held for 4 months (can’t get better treatment than anyone else)

(3) No market manipulation

RATIONALE:

o Reason for protecting against resale of control persons has nothing to do with policy obj behind

reselling those acquired pursuant to PPE

o Here, Securities Act believes you have an unfair advantage: you have more information about the

company. If I control the company, I might have access to information that you don’t have.

o The policy behind regulating trading by control persons is to prevent abuses by such persons of

their access to material information concerning the affairs of an issuer where that information

has not generally been disclosed

Critique/Rationale: o double protection: might seem kind of dumb b/c already have insider trading rules but it’s

safer if control people can’t SELL STOCK without meeting certain conditions this is why we



have these rules IN ADDITION to how they ACQUIRE STOCK (controlling it from both ends,

selling/purchasing)

Again, REMEMBER*** Distribution:

***Only way to stop people from selling securities without prospectus is to call it a distribution (to stop, PPE

resale is a distribution and sales by control person is distribution if certain conditions are not met in

definition of distribution, third branch)

If you’re a control person and you don’t want to issue a prospectus, you don’t want to be subject to resale

rules, and you can’t get an order from OSC Go advance notice route

5.2.3.3 Advance Notice Route

Issuer would Do this because: Can issue freely tradeable shares instead of having the person who’s

purchasing them from you be stuck with the resale rules (hold periods and other bad things about it), and

avoid having to discount your shares b/c they’re subject to those rules

Rationale behind reg of trading by control persons: The policy behind regulating trading by control

persons is to prevent abuses by such persons of their access to material information concerning the affairs

of an issuer where that information has not been generally disclosed

Conditions for Advance Notice Rule:

(a) The issuer is and has been a reporting issuer in Alberta, British Columbia, Nova Scotia,

Ontario, Quebec or Saskatchewan for the 4 months immediately preceding the trade (i.e., the

date of the resale of the security) unless the issuer became a reporting issuer after the

distribution date (i.e., the date of the original private placement) by filing a prospectus in

Alberta, British Columbia, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting

issuer in a jurisdiction of Canada at the time of the trade, in which case the 4 month seasoning

period does NOT apply;

(b) The control person has held the securities for at least 4 months;

(c) No market manipulation;

(d) No extraordinary commission or consideration is paid in respect of the trade; and

(e) No grounds to believe issuer is in default.

5.2.3.4 No tacking with control persons

**Also note with tacking:

If I buy pursuant to AI exemption and hold for 2 months, then I sell them to a control person, when can

control person sell them? If control person wasn’t a control person, could sell two months later b/c of tacking.

But control person have to hold for 4 months, no tacking for control persons b/c no relationship b/w two

resale rules

5.2.3.5 Resale Rules Class Examples (Handout)

1) Private placement of securities of a reporting issuer pursuant to the accredited investor exemption on Jan

1, 2010. When can purchaser resell? 4 months

a. company is a reporting issuer, so they need a hold period 4 months from the date of the trade

2) Private placement of sec of a private issuer pursuant to the private issuer exemption on Jan 1, 2010

private issuer becomes a reporting issuer on Feb 1, 2010 by filing a prospectus in ON. When can

purchaser resell? 1 day

a. only exemption that doesn’t have a hold period is when you become a reporting issuer



3) Private placement of security of a private issuer pursuant to the accredited investor exemption on Jan 1,

2010- private issuer becomes a reporting issuer on Feb 1, 2010 by filing a prospectus in ON. When can

the purchaser resell? May 1

a. Since can only sell the later of: i) 4 months from the date of the private placement, or ii) date the

company becomes a reporting issuer

4) Private placement of sec of a reporting issuer pursuant to the accredited investor exemption on Jan 1,

2010 to Bob Bob sells sec to Melissa pursuant to the accredited investor exemption on April 1, 2010.

When can Melissa resell? May 1

a. tacking is permitted – it doesn’t matter that the sec since changed hands, May 1 would still be 4

months after the AI exemption was used

b. Melissa acquired sec that had a 4-month hold period originally. HOWEVER, by the time, she

bought them 3 months had already gone by. Since the 4-month hold period is attached to the

security, and not the holder, there is still only 1-month hold period left.

c. Note: Bob would have never been able to sell to Melissa if she was not accredited investor OR

paid $150k



6.0 SEGMENT 4: CONTROL TRANSACTIONS

Takeover: change in control over mgmt. of the issuer/ firm can be friendly (approach target mgmt.) OR hostile

(more frequent, by force)

Battle for control and to manage assets

Takeover bid: general offer to shareholders to purchase shares of a part issuer, which results in offeror obtaining

suff shares to control the target

6.1 Reasons for Takeover Bids

PUBLIC POLICY: on the balance of things, legislators and regulators have decided that takeover bids are

a good thing for society If you’re not a reporting issuer in province of Ontario, not subject to takeover

bid rules

6.1.1 Socially Useful Reasons for Takeover Bids

1) Move assets to their most desired uses; 2) Create synergies, 3) Force mgmt. to be efficient

(1) Moves assets to their most desired uses: Move assets together, become more valuable than they are apart

(2) Creates synergies: B/c ACC owns leafs + raptors is a way more efficient building than if it only owned one

of them

(3) Forces management to be efficient: Threat of being taken over forces management to behave properly

6.1.2 Non-Socially Useful Reasons for Takeover Bids

1) Premium for acquirer; 2) empire building; 3) creating monopolies; 4) tax advantages

(1) Premium for themselves: IF buying companies under-value, taking premium for themselves which doesn’t

help anyone

(2) Empire building: Combine assets with no synergies (at one time, Labatt owned TSN, beer, food, etc. – didn’t

make bus sense)

(3) Creates Monopolies: If no price pressure, just keep charging more

w/ takeover bids: people often argue it’s a monopoly and that we should stop it (e.g. Star trying to take

over Sun Media showed that advertisement in Toronto was cheaper than in SK so much

competition for advertising in Toronto, keeps prices down, if TorStar bought Sun Media, prices would go

up)

(4) Tax Advantages: Not helpful for anyone if this is the reason you’re doing it

6.1.3 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them

Kimber Report Rationale: To protect investors of offeree company

Traditional reason given for why we legislate/regulate takeover bids, is they want to protect interests of

target SHs (the SHs of the company being taken over)

Make an informed decision on whether they want to sell you their shares or not

o Per Kimber Report: “Primary objective of any recommendations for legislation wrt takeover bid

transactions would be protection of the interests of the SHs of the offeree company (the company

being acquired)… SHs should have made available to them sufficient updated information to

allow them to come to a reasonable decision about the desirability of a bid for their shares… but

also balance: ensure recommendations would not unduly impede potential bidders or put them at

commercially disadvantageous position or in a hostile situation with offeree company”



Objective of protecting shareholders of offeree company is manifested in 3 ways in carrying out t/o bid

rules: 1) Information (inform investment decisions); 2) Time (i- for SH’s to think about it, ii- to get opinion

from mgmt., iii- to allow for an auction); 3) Equality

**on exam, whenever talking about the regulation of takeover bids, always mention what objective is being

carried out with that rule (info, time or equality)

*Exam: are rules here to provide time, information, or equality? If you can’t find somewhere to put it,

you don’t understand d the rule (from here to end of course)

How objective of protecting SHs is manifested in t/o bid rules:

1) Information (Inform Investment Decisions): Designed to give target SHs sufficient information to

make an informed decision to whether they want to tender their shares

2) Time a. Time for SHs to think about it

i. There is no point in giving people information if we don’t give people time to digest it

ii. IF you want them to tender shares to a takeover bid, give them time to think about it

b. Time to get an opinion from management: Also gives management time to inform SHs of what

they think (good or bad idea, good or bad price)

c. Time also allows for an auction: Best thing it could happen for regulators (and SH), come in and

push it to highest price available, means market is efficient and someone doesn’t get deal at a

bargain (so more people will play)

i. Time to give another bidder to come forward

ii. When company is in play, this is their chance to get it, so need time for bidders

3) Equality: All SHs of target company/offeree must be treated the same. Manifested in regs as follows:

a. Have to take shares from everyone who tenders, pro rata***

i. I can buy 50% or 100% of company. Not first come first serve or choose which ones you

want to buy, you have to take 50% of everyone’s shares!

b. All SHs whose shares you’re buying have to get identical consideration

i. Can’t enter into agreements giving some people higher premiums than others (or have

diff types of consideration e.g. cash v shares)

6.2 Overview of How Takeover Bids Work

Dealt with in Sections 89-105.1 of Securities Act. If you’re not a reporting issuer in province of Ontario, not

subject to takeover bid rules

2 Kinds of bids: 1) Exempt takeover bids; 2) vendor takeover bids

Two Kinds of Bids:

(1) Exempt Takeover Bids (Next section.)

(2) Vendor Takeover bids

If I own no shares of a public company, I can buy as many as I want from wherever, whoever, I don’t

have to tell anyone anything.

When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20.

When I hit 20%, in takeover bid regime.

Overview of Process:

A. Definition



Takover Bid: Generally speaking, a takeover bid is the acquisition of shares of a company (the “target”)

which, together with the shares already owned by the purchaser, will put the purchaser’s shareholdings in

the target over a certain threshold, generally 20%.

B. Policy/Object of Legislation

The object of takeover bid legislation is to ensure that shareholders and the investing public receive

sufficient information about the terms of the bid and that all shareholders are treated alike.

C. Takeover Bid Circular

Takeover bid circular: communicates details to shareholders – will describe the offer (the price, numner of

shares and any conditions) and is sent to all SHs

D. Bid Open for 35 Days

Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular, review it and

decide whether they want to sell (“tender”), a bid must be open for acceptance for at least 35 days.

E. Shareholder Right of Withdrawal

SH right of withdrawal: The offeror can’t take-up the tendered shares for 35 days and the shareholder can

withdraw the shares at any time before the securities are taken up.

This allows shares which have been tendered to be withdrawn if the shareholder changes his/her mind

(which generally occurs when a higher offer is made).

F. Director’s Circular of Recommendations

Director’s Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons, which

are sent by target to all SHs

Shareholders in deciding whether to tender would generally consider the advice of directors of the target.

For this reason, a Directors Circular must be sent out

G. Change in Terms of Offer – Extension of Tendering

Change in Terms of Offer – Extension of Tendering: If a term of the offer is changed (i.e., the offer price

increased), this must be communicated to all shareholders who are given an extra 10 days to tender their

shares.

Most changes (other than an increase in price or the waiver of a condition) allow a shareholder to

withdraw tendered shares for 10 days.

H. Withdrawal if no Payment

Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking them

up, a shareholder can withdraw their shares if not paid for within 3 business days after having been taken

up.

I. Shares are Taken up Pro Rata

Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than this

number is tendered, the shares are taken-up pro-rata and not first come, first serve.

This ensures shareholders are not pressured to tender early (and can therefore review all pertinent information)

and are treated equally.

J. SHs offered Same Consideration and No Collateral Agmts

SHs offered same consideration + no collateral agreements: All shareholders must be offered the same

consideration and no collateral agreements may be entered into.



This ensures that a higher price per share is not paid for larger blocks or for shares tendered early. If, after

shares have been taken up, the offer price is increased, all shareholders, including those whose shares

have already been taken up, are entitled to the higher price.

K. Pre-Bid Integration Rules

Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days from

the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid integration).

An offeror must offer to buy from the public the highest percentage of shares at the highest price acquired in

that 90 day period

L. Post-Bid Integration Rules

Post-Bid Integration Rules: An offeror can’t purchase shares of the target for 20 business days after the

termination of a bid, except pursuant to another circular bid or the exceptions

M. Exceptions to having to issue a takeover bid circular

Exceptions to having to issue t/o bid circular: 1) 100.1 of OSA: can buy whatever as long as it’s from 5

people or less, and you don’t pay more than 115% of market price (realistically, can probably only use this

once, but don’t know); 2) 100 of OSA: can buy 5% on the open market every 12 months, at market price.

6.2.1 What is a takeover bid?

6.2.1.1 OSA: Part XX: Takeover Bids and Issuer Bids, s.89(1)

s.89(1) Takeover Bid: Means an offer to acquire outstanding voting or equity securities of a class made

to one or more persons or companies, any of whom is in Ontario or whose last address on the books is in

Ontario, where the securities subject to the offer to acquire, together with the offeror’s securities,

constitute in the aggregate 20% or more of the outstanding securities of that class

(this is the important part.. but continues…) (of securities at the date of the offer to acquire but does not

include an offer to acquire if the offer to acquire is a step in an amalgamation, merger, reorganization or

arrangement that requires approval in a vote of security holders).

o Interpretation of Rules:

If what you own, together with what you’re about to by, is 20% or more - that is a

takeover bid! You can’t do that unless you make the same offer to all SHs pursuant to a

takeover bid circular

E.g. if I own 14%, and I want to buy 7%, what I own w/ what I want to buy is

over 20, have to do takeover bid and give same consideration to everyone

Offer to Acquire: means an offer to purchase, or a solicitation of an offer to sell, or an

acceptance of an offer to sell

Indirect Acquisition: defined in s. 92: includes a direct or indirect offer to acquire or the

direct/indirect acquisition of securities, e.g. treats (see below)

Offeror’s Securities: includes securities controlled, beneficially owned, or deemed by s.

90(1) to be beneficially owned by an offeror or persons acting jointly or in concert with

the Offeror therefore includes securities you own and anyone you’re acting jointly or

in concert with So A can’t buy 10, B buy 10, and C buy 10 without issuing a circular

and then say hah! We have 30% and we now control you

*note: for options, deemed owned if exercisable in the next 60 days** see exam

Q handout



6.2.1.2 OSA, s.102.2 - Acquisitions During a Bid By an Acquiror

s.102.2(1): Acquisitions during a bid by an acquiror, 5 per cent rule: If, after a formal bid has been

made for voting or equity securities of a reporting issuer and before the expiry of the bid, an acquiror

acquires beneficial ownership of, or the power to exercise control or direction over, securities of the class

subject to the bid which, when added to the acquiror’s securities of that class, constitute 5 per cent or

more of the outstanding securities of that class, the acquiror shall disclose the acquisition in the manner

and form required by regulation.

(2) Same, further 2 per cent rule: An acquiror who is required to make disclosure under subsection (1)

shall make further disclosure in the manner and form required by regulation each time the acquiror or any

person or company acting jointly or in concert with the acquiror acquires beneficial ownership of, or the

power to exercise control or direction over, an additional 2 per cent or more of the outstanding securities

of the class to which the disclosure required under subsection (1) relates.

**ALSO SEE 7.2 of RULE 62-504: this person has to follow the format for disclosure

POLICY: Why do you need to do this?

Because there will have to be a PREMIUM on the shares you’re purchasing that put you into a

control position

o E.g. If I own 51% of shares of public company, or any company, and you own 49%... I decide I

want to pay a dividend, you decide we shouldn’t. Let’s vote, you vote no, I vote yes, I win. I will

always win vote (ignoring special resolution), even though I only own 2% more than you.

o If I say I’ll sell you 2% of company, if you thought about it, you’d pay me a lot more for that 2%

than what it’s actually worth, with that 2% comes control and control is valuable b/c then you

set direction of company

o If shares worth $100, company worth that, if every share is worth $1 and there are 100

outstanding, you’ll pay me more than $2 for those shares

Premium you’re prepared to pay to get control of this company

So trick: (Achieving Equality Goal)

Securities act says as long as you own control, you can exercise it. But b/c you’re public company and

you’ve invited everyone else into the game, the price you pay for doing that is that when you go to sell

control to someone else, that premium you’re going to get for control does not belong to YOU, it belongs

to the whole company and you have to share that evenly with the rest of the company

o You can get that $1 for your shares, but if you’re getting $1.50, the extra .50 is the premium for

control and has to be shared with all SHs. Only way you can sell it is if person buying it agrees to

buy it at same price/same percentage from all other SHs (they don’t all have to tender to it, but

those that do will get a share in the premium)

o Note: this is very diff than other aspects of society, where owner gets all of premium

o Instead of 51-49, they say 20 20% is stupid bright line test (effective control at 20%, BUT this

doesn’t work in all fact scenarios)

Have to make offers to all SHs on same terms

*Problem with 20% Bright Line Test:

Someone might already own 70% of the company, but then they want to buy another 20%. They

ALREADY HAVE CONTROL, so there won’t be a PREMIUM PAID for those extra shares, but they

still have to take part in the takeover bid regime. This is where bright line test breaks down.



6.2.1.3 Indirect Acquisition – s. 92

Section 92: Application to direct and indirect offers: For the purposes of this Part, a reference to an

offer to acquire or to the acquisition or ownership of securities or to control or direction over securities

includes a direct or indirect offer to acquire or the direct or indirect acquisition or ownership of securities,

or the direct or indirect control or direction over securities, as the case may be.

Russell Holdings (Treats)

Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one

EXAMPLE OF NO SMART GUYS WITH TAKEOVERS if you’re going to buy a public company/gain

control of it through a private company, you have to issue a takeover bid circular

Facts: Russell Holdings, private company, holds 60% of treats, a public company. 5 SGs own Russell holdings.

Smart Guy came and said, treats is trading at 10/share, I don’t want to buy all shares at $20 a share to gain control

because that’s a lot. Takeover bids don’t apply to private companies (they don’t have to share premium with

anyone else who might own piece of it). Don’t want to pay SHs $, therefore, offered the owners of the private

company that OWNS Treats $25 a share for their ownership in Russell Holdings. Then “Smart Guy” controlled

Treats through that private company. SGs got a huge premium, treats SH got nothing and control changed hands

Two things happen:

(1) OSC said damn, no law stopping it (t/o bids don’t apply to private companies), but stopped it anyway.

(2) s. 92 introduced by OSCno one in universe knows what this means. Other than know that you can’t do that

above situation.

Note: Sec commission knew about this, b/c of need to report after ownership of more than 10% of shares (insider

rules)

Why did he go after the Russell holding shares? strategic – Smart Guy could have bought shares from

all shareholders of Treats pro rata (maybe for same price) BUT b/c it would be pro rata, Russell would

only be able to sell a fractional amount of its shares (wouldn’t want to do that)

Policy Notes:

Cannot indirectly acquire a company without issuing a t/o bid circular: So if they were going to take

over the private company, buy public through private, have to make a takeover bid

Bad Facts make Bad Law: That’s what happens when entire sec act is 92stupid people do stupid things,

end up with stupid legislation; Dumbest section in.

6.2.2 Deemed Ownership

You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover bid

(i.e. options)

6.2.2.1 Sections 89(5) and 90(1)

89(5) Deemed convertible securities: For the purposes of this Part,

o (a) a security shall be deemed to be convertible into a security of another class if, whether or not

on conditions, it is or may be convertible into or exchangeable for, or if it carries the right or

obligation to acquire, a security of the other class, whether of the same or another issuer; and



o (b) a security that is convertible into a security of another class shall be deemed to be convertible

into a security or securities of each class into which the second-mentioned security may be

converted, either directly or through securities of one or more other classes of securities that are

themselves convertible.

90(1): Deemed beneficial ownership***

o For the purposes of this Part, in determining the beneficial ownership of securities of an offeror or

of any person or company acting jointly or in concert with the offeror, at any given date, the

offeror or the person or company shall be deemed to have acquired and to be the beneficial

owner of a security, including an unissued security, if the offeror or the person or company is the

beneficial owner of a security convertible into the security within 60 days following that date or

has a right or obligation permitting or requiring the offeror or the person or company, whether or

not on conditions, to acquire beneficial ownership of the security within 60 days, by a single

transaction or a series of linked transactions.

6.2.2.2 Sample problems – “Sunlor”

What matters:

Order of Purchase

Who Purchasing From

Question 1: If on Day 1, I own 10%, on Day 4, I have an option from the company to purchase 9% of shares

exercisable at any time, and on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a

takeover bid?

Yes Own 10%, deemed to own 9% that I can exercise from company (will be outstanding if I buy

them), and then I buy 2% = puts me over 20. I bought the portion that put me over 20% and the portion

that gives me control (so paying a premium for these) on the open market (I bought 2% of

OUTSTANDING shares, which puts me over 20% total ownership) I have to issue a takeover bid

circular to all SHs to treat them equally and not give a premium to the SH from whom bought that last 2

on the open market

Question 2: On Day 1, I own 10%, on Day 4, I have option to purchase 9% from an individual, exercisable at any

time, and then on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a takeover bid?

Yes still exercisable at any time, deemed 19%, and the 2% puts me over.

Question 3: Day 1, I own 10%. Day 4, I have option from an individual to purchase 9% of common shares

exercisable in 6 months. Then on day 6, I consider buying 2% on open market.

(a) Is the acquisition of 2% a takeover bid?

o No because I only own 12% and that’s all I’m deemed to own (I can’t exercise option in the

next 60 days)

b) When I exercise the option for 9%, is it a takeover bid?

o Yes I own 12% after buying on market, and the 9% of outstanding shares from the person puts

me over.

Question 4: Own 10% on day 1, option from company to purchase 9% in six months, on day 6 I consider buying

2% on open market.

(a) Is acquisition of 2% a takeover bid?

o No, again, I only own 12% with the option to take the 9 in six months.

(b) When I exercise option for 9% is it a takeover bid?

o No because if I’ve bought 2% on open market, I now own 12%. I’m then purchasing shares

from the COMPANY, meaning that I’m not buying outstanding shares that put me over the 20%



(so not being unfair to SHs by offering a premium to some SHs over others for control, it’s going

to the company, which really means it’s going to the SHs)

o The whole purpose for takeover bid legislation is that when you buy control at a premium it

belongs to ALL shareholders because, in theory, they helped to create value

o POLICY: premiums are to be shared by all shareholders equally; therefore, if there are not

premiums resulting from the proposed transaction (i.e. option being exercised from the company)

there is no problem

Thus, control can be sold by the company and its not a problem b/c the value of that

control goes to the company and indirectly to all shareholders

Only when you’re buying outstanding (already issued) shares from other SHs would you

be giving a bigger premium to those SHs this does exactly what the takeover bid

legislation is designed to do

ALSO, ORDER: you bought the part that put you over 20 on the open market, order matters… what you pay

for first 49 shares isn’t what you pay for 50 and 51 and 20 is new 50

6.3 Mechanics of a Vendor Takeover Bid

**remember each of these is achieving one of three things in order to achieve the overall objective of

protecting SHs of the target company: (a) time, (b) information to SHs and (c) equality

*Two types:

(1) Vendor Takeover Bid and

o If I own no shares of a public company, I can buy as many as I want from wherever, whoever, I

don’t have to tell anyone anything.

o When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20.

o When I hit 20%, in takeover bid regime.

(2) Exempt Takeover Bid (see rules below, 100 and 100.1 of OSA)

The following mechanics are for a vendor takeover bid.

6.3.1 Takeover Bid Circular (Information)

General Rule: If I what I own + what I buy is over 20, can’t do it without a takeover bid. If you want to own

or control 20% or more of the securities of a reporting issuer, you can only do so by takeover bid circular

(unless an exemption is available)

6.3.1.1 Section 94.1(1) and Form 62-504F1: Making a Formal Bid

Section 94.1(1): Deliver doc to all securityholders, publish advertisement in a newspaper, then

immediately file takeover bid circular with everybody

94.1 (1) Commencement of formal t/o bid: An offeror shall commence a formal take-over bid,

o (a) by publishing an advertisement containing a brief summary of the bid in at least one major

daily newspaper of general and regular paid circulation in Ontario; or

o (b) by sending the bid to the security holders described in section 94 (all securityholders, all

holders of class of securities subject to the bid who are in Ontario)

Form 62-504F1: The Circular: Must contain information set out in Form 62-504F1 tells you what

has to go in t/o bid circular, mandates information like a prospectus: objective is to give people sufficient

information to make an informed decision

http://www.e-laws.gov.on.ca/html/statutes/french/elaws_statutes_90s05_f.htm#s94p1s1



o Information in takeover bid circular includes: name of offeror and issuer; ownership and trading

by offeror; method/time of pmt for shares; source of funds to be used for pmt; whether offeror

intends to purchase shares subject to the bid in the mkt; info indicating a material change in the

offeree issuer since last interim/ annual financial statements; material facts rel to offeree issuer;

appropriate prospectus info if offer is a share exchange offer

6.3.1.2 Legislative goal met

*Protect SHs by providing Information and Time

(1) Information

Provides information to assist the offeree SH in deciding whether of offer share or hold shares in hopes of

(i) sharing in gain accruing post-takeover or (ii) getting a subsequent competing offer.

Takeover Bid Circular provides information similar to a prospectus and provides information relating to

the bid.

(2) Time: Allows them time to review what’s in the circular

6.3.2 Minimum Period of Bid (Time)

The takeover bid circular must be open for at least 35 clear calendar days in order to give people time to

assess, give management an opportunity to give their opinion, and give other bidders the chance/right to

mount a competing bid (auction)

6.3.2.1 s.98: Bid Mechanics

(1) Minimum deposit period: An offeror shall allow securities to be deposited under a formal bid for at least 35

days from the date of the bid.

Interpretation:May be open longer than 35 days

(2) Prohibition on Take Up: An offeror shall not take up securities deposited under a formal bid until the

expiration of 35 days from the date of the bid.

6.3.2.2 Legislative Goal Met

Protect SHs by providing Time

Note: Bidders have interest in doing transaction as quickly as poss; and company and shareholders want

more time (for reasons below)

Provides time for:

(a) Shareholders: to assess the merits of the bid and decide whether or not to tender shares (and can take them

back w/in 35 days)

(b) Management: to make recommendations and try to maybe attract others

(c) Other Potential Bidders: To create an auction and entice a White Knight

To create auctions (by allowing other people to make competing bids),

To make sure that the company is purchased for the best price (makes market efficient, don’t want anyone

to get it at a large discount, should reflect actual value as much as possible)

Need to find a white knight (the person you actually want to buy it)



In practice: company wants it to be as long as possible (so they can find higher bidders), purchaser wants

it shorter to buy it at cheapest price (tensions in practice happen here)

6.3.3 Pro Rata (Equality)

First-come, first-serve offers are NOT ALLOWED

IF more shares are tendered than requested, they MUST be taken up on a PRO RATA basis (e.g. buy

75% of each SH’s tendered holdings to get to your desired amount)

6.3.3.1 Section 97.2: Consideration

s.97.2(1) If a formal bid is made, all holders of the same class of securities shall be offered identical

consideration.


Protect SHs by ensuring equality among them and providing time

Provides:

(1) Equality: treated equally, no SH is benefitting more from a premium than another

(2) Time to review/no pressure: Gives the SH time to review the transaction and all of the pertinent information

to ensure an informed decision because they are NOT PRESSURED TO BID EARLY (since it’s not first come,

first serve)

6.3.4 Withdrawal and Change of Info or Variation in Terms (time and info)

Shares cannot be taken up for 35 days and shares deposited within the 35 day period can be withdrawn at

any time prior to the end of the 35 day period.

If there is a variation in the bid, the withdrawal right is extended by 10 days unless the shares have

already been taken up (35 days has passed) or the variation is simply an increase in the consideration

offered or a waiver of a condition.

6.3.4.1 Section 98.1: Withdrawal of securities

(1) A security holder may withdraw securities deposited under a formal bid,

o (a) at any time before the securities have been taken up by the offeror;

o (b) at any time before the expiration of 10 days from the date of a notice of change under section

94.3 or a notice of variation under section 94.4; or

o (c) if the securities have not been paid for by the offeror within three business days after the

securities have been taken up.

6.3.4.2 Section 94.3: Change in Information

(1) If, before the expiry of a formal bid or after the expiry of a bid but before the expiry of all rights to

withdraw the securities deposited under the bid, a change has occurred in the information contained in the

bid circular or any notice of change or notice of variation that would reasonably be expected to affect the

decision of the security holders of the offeree issuer to accept or reject the bid, the offeror shall promptly

o (a) issue and file a news release; and

o (b) send a notice of the change to every person or company to whom the bid was required to be

sent and whose securities were not taken up before the date of the change.



6.3.4.3 Section 94.4: Variation of Terms

(1) If there is a variation in the terms of a formal bid, including any extension of the period during which

securities may be deposited under the bid, and whether or not that variation results from the exercise of

any right contained in the bid, the offeror shall promptly issue and file a news release and send a notice of

variation to every person or company to whom the bid was required to be sent and whose securities were

not taken up before the date of the variation.


Protect SHs by providing time and information (and payment)

(1) Gives Time for SHs to Wait and See if there is a Higher Bid:

Everyone tenders on last day anyway, bc they’re waiting to see if there is a higher one

(2) After Amendment, gives time to assess information:

10 day w/d right, as long as shares haven’t already been taken up

(3) Encourages Company to Pay

6.3.5 Conditions (just investor protection)

You can attach any condition you want to your bid, except financing

Best to have AS FEW CONDITIONS as possible on the offeror’s bid: sounds good to attach

conditions to a bid and protect themselves (e.g. being able to get out of it), but at end of the day, you want

to win. Best way to win is to have as clean a bid as possible. If you have conditions attached, makes it less

attractive, opportunities for others to beat you (although sometimes you need conditions e.g.

conditional upon me getting 2/3rds of shares, Competition Act approval, CRTC approval, etc. (e.g. Astral

BCE BCE made bid to buy Astral, conditional on CRTC approval, CRTC turned it down)

Biggest difference b/w Canada and US

One condition you CANNOT do in Canada is making your bid subj to financing

o In US: I can say “I want to make bid for 100% of apple, and hope I find the $”

o In Canada: can’t make takeover bid unless you can reasonably show that you can come up with

$

POLICY: Cant put company into chaos and then not be able to complete it

$$ Problem:

Very expensive, when you need standby loan from bank for $1b, charge you a shit ton of interest to have

it there for you (to give you right to be able to call It if you need it) why there are fewer takeover bids

in Canada

6.3.5.1 Section 97.3: Financing Arrangements

(1) If a formal bid provides that the consideration for the securities deposited under the bid is to be paid in

cash or partly in cash, the offeror shall make adequate arrangements before the bid to ensure that the

required funds are available to make full payment for the securities that the offeror has offered to

acquire.




Investor protection: Doesn’t really reach one of 3 obj, but does protect investors, you have to be able to

complete the bid, can’t put everything in complete chaos and then not go through with it b/c you couldn’t get

financing

6.3.6 Payment for Securities (investor protection generally)

Earliest of: a) You have to take up and pay for them within 10 days after expiry of the bid; OR

b) Once you’ve taken them up, you have 3 days; OR

c) For securities deposited AFTER the date on which the offeror first takes them up have to be paid for by

the offeror within 10 days after deposit

6.3.6.1 Section 98.3: Obligation to Take Up and Pay for Deposited Securities

(1) If all the terms and conditions of a formal bid have been complied with or waived, the offeror shall

take up and pay for securities deposited under the bid not later than 10 days after the expiry of the bid or

at the time required by subsection (2) or (3), whichever is earliest.

(2) Same: An offeror shall pay for any securities taken up under a formal bid as soon as possible, and in

any event not later than three business days after the securities deposited under the bid are taken up.

(3) Same: Securities deposited under a formal bid subsequent to the date on which the offeror first takes

up securities deposited under the bid shall be taken up and paid for by the offeror not later than 10 days

after the deposit of the securities.


investor protection: Doesn’t really reach one of 3 obj, but does protect investors, have to make sure they get paid

within a reasonable time after tendering their shares (protecting their reasonable expectations)

6.3.7 No collateral agreements

You cannot enter into a collateral agmt with anyone

6.3.7.1 Section 97.1

Prohibition against collateral agreements: If a person or company makes or intends to make a formal

bid, the person or company or any person or company acting jointly or in concert with that person or

company shall not enter into any collateral agreement, commitment or understanding that has the effect,

directly or indirectly, of providing a security holder of the offeree issuer with consideration of greater

value than that offered to the other security holders of the same class of securities.

(2) Exception, employment benefit arrangements: Subsection (1) does not apply to such employment

compensation arrangements, severance arrangements or other employment benefit arrangements as may

be specified by regulation.


Equality : Ensures that all shareholders are getting an equal share of the premium for their securities and you

can’t go making agreements that allow you to circumvent this rule by providing extra consideration to other

people under the table for their shares

How do you determine if you’re entering into an agreement that provides a security holder of the offeree issuer



with consideration of greater value than that offered to the other security holders of the same class of securities

vs. one that is allowed?

E.g. I want to buy Canadian tire and 30% of those shares owned by dealers of CT. Dealers pay 6%

royalty for right to carry on dealership. If I go to dealers, say I’m going to make takeover bid for CT, and

I’m going to pay everyone $50 a share. If I’m successful, you should know, I’m going to cut your royalty

from 6% to 3% (good for dealer). Want to retain dealers.

E.g. 2: If I want to buy apple, give everyone $750 for their shares. Go to CEO and say, if I’m successful

in acquiring, I’m raising your compensation from 50m a year to 150m. Should I be able to do that?

Depends on the reason (intention). See test below.

Test for whether or not collateral agreements are ok

May apply to the OSC to ask them if a certain agreement is okay (s.104(2)) (Why do you need it? *diff of

INTENTION):

(a) are you inducing that person to sell you their stock? (not okay) OR

(b) do you need them and their expertise or are doing it for a legitimate business purpose that had nothing

to do with whether or not that person owned shares? (okay)

If I’m trying to maintain them and their expertise for the best interests of the corporation and I’m

dropping all of this $ and think that they’d better be sticking around if I’m going to spend that much, then

it’s fine. If I’m doing it to induce them to tender their shares and I’m finding a way to get their shares

without directly paying them more money, then not okay. I’m giving someone else a benefit that I’m not

giving to the other SHs

6.4 Post-Bid: Directors’ Circular (Response)

The directors of the target company have an obligation to deliver a director’s circular to all their

shareholders within 15 days from the date of the bid

o They must tell SHs that they recommend that the shareholders accept the bid, reject the bid, make

no recommendation at all, or say that they’ll let them know at a later time, and give their reasons

for any of these decisions

o If within the 15 day period you aren’t ready to give your reasons, you can do it later in a second

document as long as it is 7 days BEFORE the expiry of the bid

As SHs, you are entitled to know what your directors/managers think of this bid!

o *and keep in mind that directors don’t always act in the company’s best interest b/c it conflicts

with their own interests

6.4.1 Section 95: Offeree Issuer’s Obligations

(1) Duty to Prepare and Send Directors’ Circular: If a formal take-over bid has been made, the board

of directors of the offeree issuer shall prepare and send, not later than 15 days after the date of the bid, a

directors’ circular to every person or company to whom the bid was required to be sent.

(2) Duty to Evaluate and Advise: The board of directors of the offeree issuer shall evaluate the terms of

a formal take-over bid and, in the directors’ circular,

o (a) shall recommend to security holders that they accept or reject the bid and give reasons for the

recommendation;

o (b) shall advise security holders that the board is unable to make, or is not making, a

recommendation and state the reasons for being unable to make a recommendation or for not

making a recommendation; or

o (c) shall advise security holders that the board is considering whether to make a recommendation

to accept or reject the bid, shall state the reasons for not making a recommendation in the



directors’ circular and may advise security holders that they should not deposit their securities

under the bid until they receive further communication from the board in accordance with clause

(a) or (b).

(3) Further Communication: If clause (2) (c) applies, the board of directors shall communicate to

security holders a recommendation or the decision that it is unable to make, or is not making, a

recommendation, together with the reasons for the recommendation or the decision, at least seven days

before the scheduled expiry of the period during which securities may be deposited under the bid.

6.4.2 Legislative Goal Met

Information and time

(1) Shareholders are entitled to know what the directors think: gives them sufficient information, considering

they may have less knowledge than the individuals working on the inside

(2) Have enough time to make an informed decision: If they’re going to give a recommendation (or not give

one), they have to let the SHs know of their decision with enough time for the SHs to make an informed decision

about tendering

6.5 Pre & Post-Bid Integration

6.5.1 Lock-up Agreements/ Tendering Agreements (Allowed)

93.1(1) of the OSA says you can’t enter into any agreement to enter shares while bid is outstanding (in a

private agreement)

6.5.1.1 Section 2.1(2) of Rule 62-504

However, Section 2.1(2) of Rule 62-504 (Take Over Bids and Issuer Bids) says I can enter into a lock-up

agreement with you whereby the shareholder and offeror making bid will contract to effect that

shareholder will tender his shares to a formal TOB made by the offeror made in accordance with proper

terms/conditions of her bid

You can negotiate this, it’s a contract

For instance, in the clause it may state that the SH is not obligated to tender to the original bidder at a certain

price if a higher bidder comes along BUT then the SH must give the original bidder a % of the profits. If there

is NO such clause in the LU agreement, then the SH is stuck.

o E.g. you’re a big SH and I say I’m thinking of making bid at $20 a share, but I will only make

that bid if you agree that you’ll tender to it. Then negotiate (you can add whatever conditions you

want, have it irrevocable where they cannot withdraw the tender and tender to a higher competing

bid, or not, probably would though)

Why would a big SH do that?

The large shareholder would encumber themselves like this in order to ensure the bid happens and their

shares get bought

If they said no, not doing it for $20 a share… two choices, sit with share at $10 or agree to lockup

agreement, and make sure they get the $20 bid (the premium)

NOTE!!! – and see below chart for legislative goals

still have to comply with the terms and conditions of a takeover bid (e.g. taking up shares pro rata),

nothing untoward going on, there is no extra consideration or premium going to the SH who is a part of

the lock up agmt



o Pre-bid integration only protects little guys (doesn’t matter that previous purchases were for less)

Ex. Say 60 D before offer to buy all shares of A (at $9/share); 45 D before offer to buy all of B’s shares (at

$12/share). Then take-over bid (might be prejudicial to other parties). Therefore, take-over bid must be for highest

price and highest % you purchased in the previous 90 day period.

Thus to legitimize these transaction would have to buy for $12 and 100% (higher payment and higher %

than before – note: therefore, should not buy up 100% of A first)

6.5.1.2 Section 93.1: Restrictions on acquisitions during formal take-over bid

An offeror shall not offer to acquire, or make or enter into an agreement, commitment or understanding to acquire

beneficial ownership of any securities of the class that are subject to a formal take-over bid or securities

convertible into securities of that class otherwise than under the bid on and from the day of the announcement of

the offeror’s intention to make the bid until the expiry of the bid.

6.5.1.3 OSC RULE 62-504: TAKE OVER BIDS AND ISSUER BIDS

Per s.2.1(2): Subsection 93.1(1) of the Act does not apply to an agreement between a security holder and the

offeror to the effect that the security holder will, in accordance with the terms and conditions of a formal

take-over bid, deposit the security holder’s securities under the bid.

Interpretation: So this means they will deposit their securities in accordance with the usual bidding rules!

6.5.1.4 Legislative goal is STILL met

Promote TOB, Equality and Information – policy as to why this is allowed

(1) Equality: all SHs are being treated equally: b/c all SHs being treated equally, big SH not getting more

money than little SH

(2) Information: This is not secret (it will be disclosed in the takeover circular)

(3) Promotes TOB: Is not a collateral agmt b/c SHs still treated equally, however lock-ups help to allay the

expense of TOBs to offerors b/c it lowers the risk of the bid failing and are thus in accordance with the intention of the

Act to promote TOBs

6.5.2 Pre-Bid Integration

Pre-Bid Integration: Only applies to private agreements, you can do this on the open market if you want

b/c it’s random

E.g. If I know I’ll make a takeover bid tomorrow, I own no shares of a public company. B owns 19% of

shares. Ill buy all your shares at $50 a share, stock trading at $10, you buy them. Nothing to stop that, 0-

19, early warning, insider reporting, but nothing stopping it. Tomorrow, I make bid for the rest of the

company at $20 a share = … no.

o OSA 93.2(1): when you make a formal t/o bid, going to look BACK 90 days from the date of

your takeover bid. If in that 90 day period, you bought shares by way of private agreement from

anybody, your t/o bid has to be for the highest price and highest percentage of shares you bought

in that 90 day period. (if 91 days?)

o 90 days is a stupid bright line test, no significance. Can do it at 91 and you’re a-okay.

E.g. 40 days before, I buy 100% of A’s shares at $10, B I buy 50% of their shares at $12

at day 30. My bid has to be for 100% of shares of company at $12



6.5.2.1 Section 93.2(1): Restrictions on Acquisitions Before Formal Take-Over Bid

s.93.2(1): Restrictions on Acquisitions before Formal Take-Over Bid: If, within the period of 90 days

immediately preceding a formal take-over bid, an offeror acquired beneficial ownership of securities of the class

subject to the bid in a transaction not generally available on identical terms to holders of that class of securities,

(private agmt ONLY)

(a) the offeror shall offer,

o (i) consideration for securities deposited under the bid at least equal to and in the same form as

the highest consideration that was paid on a per security basis under any such prior transaction,

or

o (ii) at least the cash equivalent of that consideration; and

(b) the offeror shall offer to acquire under the bid that percentage of the securities of the class subject to

the bid that is at least equal to the highest percentage that the number of securities acquired from a seller

in any such prior transaction was of the total number of securities of that class beneficially owned by that

seller at the time of that prior transaction.

(2) Exception **once again, the rule in (1) ONLY APPLIES TO PRIVATE AGMTS!!: Subsection (1) does not

apply to trades effected in the normal course on a published market if the trades satisfy such conditions as may be

specified by regulation.


Equality: Ensures that certain shareholders are not being paid a premium that other SHs are not getting the

advantage of, just b/c it was done in a roundabout way prior to the formal bid

6.5.3 Post-Bid Integration

Same as above in that this only applies to private agmts, not trades on market

E.g. If you have takeover bid outstanding, you’re a big SH. You don’t want to tender at $20 a share and I

need your shares. I say don’t worry, let me buy everyone else’s at $20, then buy yours a day after I close

by bid by priv agreement at $25 a share (or do a new bid)

o Obviously can’t do this o Section 93.3(1): if you have t/o bid outstanding, you cannot enter into any agmt with anyone else

to buy their shares at a different price, or make a takeover bid at a higher price for at least 20

trading days after the expiry of the bid

6.5.3.1 Section 93.3

s.93.3(1) Restrictions on acquisitions after formal bid: During the period beginning with the expiry of

a formal bid and ending at the end of the 20th business day after that, whether or not any securities are

taken up under the bid, an offeror shall not acquire or offer to acquire beneficial ownership of securities of

the class that was subject to the bid except by way of a transaction that is generally available to holders of

that class of securities on identical terms. **MUST BE ON IDENTICAL TERMS TO THE BID AND

OPEN TO EVERYONE!!

(2) Exception **again only applies to PRIVATE agmts: Subsection (1) does not apply to trades effected

in the normal course on a published market if the trades satisfy such conditions as may be specified by

regulation.

6.6 Exemption from Pre-Bid and Post-Bid Restrictions – EXEMPT Takeover Bids!



Sometimes can take over 100% without doing t/o bid circular

6.6.1 Private Agreement Exemption (s.100.1(1) of OSA, most important)

S.100.1(1): Takeover bid exempt from rules (requirement to do t/o bid circular to all SHs) if you’re going

to buy from 5 or fewer people and the price you’re going to pay, including commissions, does not exceed

115% of the market price at the date of the takeover bid (or if no public listing, then what they think

would be 115%)

o market price: defined as 20 day avg closing price (20 days preceding your bid) your

purchase from your 5 people can’t be for more than 115% above that market price

o Can OFFER to more than 5, but can only buy from 5

o * Remember, you cannot act jointly. You cannot prepare your seller to fit within the 5 or

fewer exemption

POLICY: why have this exemption?

TOB: we don’t care who owns it or controls it, we care if you’re selling it at a premium, that doesn’t

belong to you, belongs to all shareholders. But if premium is small enough and they define 15% as de

minimis, then all it is is whether you control company it or I control it, and who cares? So 15% is

insignificant. They only care if there’s a big enough premium that it should be shared b/w everyone, all

SHs (if it’s small, it doesn’t matter). If control person wants to sell it for under 15% premium, not really a

control premium (theory)

Overall: efficiency of capital markets, want big SHs to be able to extract themselves from companies, if

they want to extract from without a big premium, then cool

6.6.2 S.100 – Normal Course Exemption – Don’t Exceed 5% in 12 Months

Even though what you own together with what you buy will come out to more than 20, we’ll exempt you

from takeover bid requirements if you buy no more than 5% of shares in any 12 month period and price

you pay does not exceed market price

If market is dumb enough to let you keep doing it, then fine we don’t care, not at a premium

Ex. Exam Q: A(2%); B(4%)H(3%)

Always get to 19.9% with fewest purchasers poss (enter with 5/fewer sellers) – therefore, own most

amount without triggering T/o bid

6.7 Voting & Non-Voting Shares

I need to raise money, but I don’t want to lose control; thus, issue shares in classes, some voting, some not. I can

issue equity without losing control. Investors are satisfied because they just want your expertise, don’t want to

own the company.

Problem: investor does not have a problem with founder controlling the company, but there would be a huge

issue if controlling SH can sell shares at a PREMIUM that investors have no right to participate in.

Solution - Canada Decides…

(a) IF you want to create restricted voting shares, have to get a majority of the minority vote

(b) Have to call them restricted voting shares and

(c) COATTAIL Provision: if someone makes a takeover bid for my shares, then my shares

become exactly like yours and we all get one vote, i.e. a bidder cannot attain control without

making the same offer to all SHs.

Canadian Tire (1986, OSC)



Ratio: Coattail provision, despite not countering statute or case law, was not allowed to go through as it

would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public interest).

Found that collateral agreement rule only applies in the context of a t/o bid (since this was not a takeover

bid, collateral agreements did not apply)

Facts: Dealers of Canadian Tire formed a company, made an offer to purchase 49% of voting shares of Canadian

Tire from Controlling SH (at a price of 160.24/share, when the stock was at $16/share= a massive premium for

the voting shares of Canadian Tire!) As evidence of good faith, 30 million dollar irrevocable deposit. Dealers

already owned 17.4% of the voting shares. If they were successful in their offer, they would own 66.66% of the

voting shares.

Coattail says in the event an offer is made and a majority of the voting shares have been tendered,

each non-voting share shall be entitled to 1 vote. (Thus, we won’t get a premium you won’t get –

protected in event of TOB). On that promise to SHs, they agreed to take back non-voting shares and

give the family voting shares.

Coattail was triggered by an offer. Dealers read the coattail, and said look at this. If we make an offer for

49% of the voting shares, it doesn’t trigger the coattail, we only have to buy from Controlling Family, and

we get control of Canadian Tire (we already own 17%), and we can shut out the rest of the public. So they

do it. The non-voting SHs go apoplectic.

Decision: OSC says nothing in this coattail stops this transaction. There is nothing in the case law that would stop

the dealers. Nothing in the statute stops this transaction. No law, not precedent, no contract stopping this. I have

no way of stopping the transaction. But they stopped it anyway – cease trade.

Counter Argument: Can we not rely on the commercial world for certainty? The law is the law, there is

a valid contract! (arbitrary!)

Collateral Agreement Rule Only Applies in the Context of a Takeover Bid

This is not a takeover bid, therefore collateral benefits do not apply; everyone would get the same price; 30

million was merely a deposit. It was not a premium. Collateral benefits only apply to takeover bids; this isn’t a

takeover bid because the OSC said it isn’t a takeover bid. Once the OSC said no takeover bid, no takeover bid

and collateral agreements don’t apply.

Now, if there is a takeover bid, (a legit one), the DEPOSIT will be deducted from the same price, and everyone

gets the same price. It is simply a contract between dealers and Billes family, irrevocable.

Now diff classes of shares and coattail provisions are much rarer

6.8 Director’s Duties and Responsibilities in a Takeover Bid Situation – Defensive Tactics to Buy Time

Policy for defensive: you can do w/e you want to fight bid, but if you deprive SH of choice, you’re dead

(prob b/c conflict of interest between directors interests and SH’s interests). It’s good to have them, because

you maximize value of the enterprise.

6.8.1 Fiduciary Duty in the Context of Takeover Bid

Traditionally, directors’ actions evaluated under the “business judgment rule” (Smith v. Van

Gorkom) and have fiduciary duties of care/loyalty under CBCA

However, in the context of defensive measures, a more stringent view emerges. Directors must show:



(a) They have reasonable grounds, based upon good faith and reasonable investigation, to believe that the

takeover threat is harmful to the enterprise; and

(b) Actions taken in response to the threat are reasonable or “proportionate” in relation to the threat posed.

o This is Intended to address the potential conflict of interest between management and SHs

(that directors will just act in their own best interests in a TOB situation to entrench

themselves)

6.8.1.1 NP 62-202: Tactics that will come under scrutiny

Tactics that will come under scrutiny include:

a. Issuance of grant on, option, or purchase of outstanding securities of target

b. Sale or acquisition of asset of a material amount

c. Entering into a contract other than in the normal course of business.

6.8.1.2 Duty to Maximize SH Value

Competing goals of the directors: immediate maximization of SH value and pursuing the long-term best

interests of the corporation.

6.8.2 Examples of Defensive Tactics

Issue new shares

Seek a “white knight”

Issuer bid for own shares

“Crown Jewel”: sell of asset coveted by bidder. Or, grant option to third party to purchase “jewel” at low

price if hostile bid succeeds

Bust-up fee with white knight: if white knight’s bid is unsuccessful, target must pay a significant sum to

white knight (i.e. substantial debt on hand for successful bidder—less valuable company)

Delay the bid: commence litigation seeking an injunction until litigation is resolved, i.e. competition

laws, poison pill (see below)

Regulation tends to encourage defensive tactics. It also facilitate white knight defences.

Union Enterprise (Unicorp Tender) (Example)

Example of defensive tactics – bought a pig farm to make company unattractive to bidder (too extreme, but

case was before sec law)

Facts: Union enterprises was a massive utility company in Canada. Then a little nobody company, Unicorp makes

hostile bid for union enterprises. Directors don’t like that, they get lots of perks, fight goes on for months. Costing

Unicorp millions, union enterprises to fight it. Looks like unicorp is going to win. And Union Enterprise comes up

with a smart idea. Decide they need a pig farm. Find two people that own one worth $10m, say “we’re going to

pay you $80m for your pig farm, but won’t give you cash, will give you new shares of Union Enterprises.” If you

do that, will expect you not to tender your shares to the unicorp bid. Makes bid at least $80m more expensive b/c

new shares out there they have to buy. Also makes it hard b/c those 80m shares won’t be tendered to the bid, and

if you win bid and buy union enterprises, you get a utility AND a pig farm!

They do the deal. Scorched earth – make it so unattractive bidder won’t want the company anymore. Unicorp

still buys union enterprises, somehow was allowed to happen. Before they had defensive tactics.

Labatts (just an example)



Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab); after this case

brought in law re: defensive tactics (however, board did it’s job to buy time and eventual had a preferable

bidder)

Facts: Labatts was controlled by Brascan, owned 40-50% of Labatt. Had big fight with CEO of Labatt. Rumour

they’d be taken over (Labatt), so everyone wanted it, they owned beer company, TSN, Toronto blue jays, food,

etc.. For months, speculation someone was going to make a takeover bid for Labatts.

So they decided poison pill turned down by SHs, so evidence it would absolutely be in play. Had some

time (unusual) to prep for takeover bid (it’s usually by surprise). Saw stupid provision in income tax act

– if we turn TSN from a corporation into a partnership, then we can trigger $150m tax liability on a

change of control of Labatts. If someone acquires control of Labatts, will pay $150m of tax for nothing,

if we change from corp to partnership, but only triggered if someone gains control. So changed it, didn’t

tell anyone.

Then Onex makes hostile t/o bid at huge premium to market. Everyone thought it was over, Labatts done.

Time is $ for takeover bids, Labatts wants white knight, Onyx wants it to go quickly. Onyx sees change,

goes nuts suing board, suing directors, everyone. (after defensive tactics introduced)

Onex Argument: “these guys are crooks b/c they entrenched themselves, denied SHs right to decide if they want

to take our bid or not by creating an artificial $150m tax liability for no reason” This actually levelled the

playing field, and allowed Onex and Labatt to talk about it (Onex realized it would be long and drawn out if they

didn’t talk to the board). But then someone else came and bought it from Belgium (COMPANY DID THEIR

JOB, THEY BOUGHT TIME)

Max Milk and Beckers

Example of attempt by Max Milk to find a white knight

Facts: fierce rivals for years. Couche-Tard made an offer to buy Max Milk, then made a deal with Beckers (paid a

lot). Sold shares on condition that they wouldn’t tender them to Couche-Tard. 2 years later Couche-Tard bought

both!

6.8.2.1 Due Diligence – can restrict access

Want to find white knight. Example of making info available to all bidders except you.

Every time bid is made on hostile basis, everyone gets access except original bidder. And when OG bidder

sues all directors, never heard of success

Sun Media and TorStar

Example where info was not made available to bidder. Also in this case, complained to competition bureau.

Worked out since delay led to higher bid.

Facts: Sun Media went to competition bureau to buy itself time to think about TorStar bid.

If in the same industry, might complain to anti-competition bureau and maybe a better bid comes along. But

keep in mind you can’t fix this one!!

SH of Sun Media and TorStar angry – took decision out of their hands! However, directors insulated b/c they

bought time – then Quebecor made a higher bid! So it worked out.

Second Cup

Example of poison pill- not actually used, just threatened to give opp to talk

Facts: Owned partially by Cara. Made bid to own rest of company. Existing directors put in a poison pill (once

x% acquired then every SH, gets ability to buy shares)



NO ONE has ever actually triggered a poison pill – just threatened often to give an opp to talk

6.8.2.2 Golden Parachutes – all legal.

Temptation to offer everyone a huge severance in case they get taken over b/c it’s the acquiror’s money.

This is LEGAL.

Policy argument is: important to behave in best interests of SHs, so if they give you that golden

parachute, relieving you of any personal concerns of losing your job, so you can just act BIC

6.8.2.3 Poison Pills

“Rights Plan” - Put provision in articles of corp saying “if someone acquires more than 20% of shares of this

company, every SH of this company automatically [except person owning 20%] gets the right to buy 10 more

shares at a penny”

Makes the company impossible to buy b/c there are 10X as many shares that everyone acquires for a penny,

so astronomical price.

Almost every company subj to poison pill threatens to sue, every single company says don’t push us or we’ll

exercise our rights plan, every company fighting takeover bid is afraid of implementing it, no company in

history of world has ever executed a rights plan.

Again, levels the playing field:

tells acquirer just relax. Talk to us. Because we need to talk. If you think you’ll dictate terms, we have a

weapon. It buys time, it levels the playing field, and it creates a bit of leverage for there to be a

negotiation

o SEC COMM CAN LIFT IT!!, but rarely would. (e.g. Cara for Second Cup)

o Don’t lift it usually b/c think it creates opportunity for someone to come in at a higher price b/c

that’s what they want.

6.8.3 Defensive Tactic Rules - NP 62-202

Rules developed after Unicorp: Needed to have a system that’s conscientious and fair to determine what

defensive tactics are ok in the context of a TOB

6.8.3.1 NP 62-202

Main Principles:1) takeover bids are a good thing; 2) primary objective of t/o bid legislation is protection of

bona fide interests of SHs of target company; 3) second purpose/ objective: create a reg framework where

bids can happen in an open and even-handed manner; 4) Regulators believe it is inappropriate to specify a

code of conduct for directors b/c that code runs risk of being insuff in some cases and excessive in others; 5) SH

approval desirable (BUT this is unrealistic); 6) administrators believe that unrestricted options produce most

desirable results in t/o bids and are reluctant to intervene in contested bids; 9) although auctions are best and

don’t want to intervene, administrator will punish you if your action is to deprive SHs of opp/ rt to respond to

a bid; 10) cannot come to administrator to get prior approval for defensive tactic

(1) Takeover Bids are a Good Thing : Media try to paint good/bad guys, there are just people that want to make

$.

(a) discipline on management (to make sure they do a good job)

(b) reallocation of resources to their most effective uses

But we recognize that there’s a possibility that interests of management/board of target might differ from

its SHs. Management and board might take certain steps to defeat that bid, either b/c they think it’s best

for the company to do so/want a higher offer (good), or to entrench themselves (bad)



(2) Primary objective of takeover bid legislation is protection of bona fide interests of SHs of target

company

(3) Second purpose/objective: create a regulatory framework where bids can happen in an open and even-

handed manner (shouldn’t favour management or offeror should put SHs in a position to make a fully

informed decision)

Concerned that certain defensive tactics employed by board may frustrate a fair bid and deny SHs the

right to make the choice Directors MIND the store, they don’t own it.

(4) We, the regulators, believe is it inappropriate to specify a code of conduct for directors of a target

company b/c that code runs risk of being insufficient in some cases and excessive in others

Uncertain, they’ll review tactics in hindsight. IF they’re abusive to SHs (denies them rt to make choice),

“we’ll kill you”

(5) SH Approval (unrealistic)

If you’re worried, get SH approval of your defensive tactic, if they say it’s okay, it’s okay. That sounds

okay, but taking meeting of SH takes 60 days min, the game is over, takeover bids are fast – unrealistic in

almost every case.

(6)***most significant point they’re going to make: administrators believe that unrestricted options

produce most desirable results in takeover bids, and are reluctant to intervene in contested bids

They want an auction! get as many bidders as possible, get price as high as possible for SHs

**why it might be okay to engage in these tactics: have time to get other bidders.

(9) although that’s the case and auctions are best results/we don’t want to intervene, we really are going to

kill you if results of your action is to deprive SHs of opportunity/right to respond to a bid***

Difficult b/c forgetting bad intentions, if you don’t engage in DTs, might get a bad bid. But if you do, bid

you don’t want might walk, and no white knight will come in looks like you’ve denied SHs right to

make a decision

**blabla about not being worried about protecting yourself as a lawyer, do best for your client.

o When it turns out properly, SHs get more. If you’re legitimately pursuing higher offer or better

deal for SHs and a risk it might turn out badly, but measured risk that makes sense

(10) don’t think you can come to us and get prior approval for defensive tactic

Do whatever you think you have to do, we’ll tell you if you’re right or wrong with benefit of hindsight

later, won’t bless your transaction

6.8.3.2 Case Law

Teck Corp v Miller (BC SC) – Best Interests Test

Ratio: Best interests test: need to act in best interests of SH“The directors must act in good faith. Then there

must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the

company’s interests, then there must be reasonable grounds for that believe. If there are not, that will justify a

finding that the directors were actuated by an improper purpose”.

Producers Pipelines (Sask CA) – Proportionality Test

Ratio: Canadian law does not conflict with the business judgment rule.

In takeover situations, directors will often be in a conflict. In implementing a poison pill, the directors

“must be able to establish that (a) in good faith they perceived a threat to the corporation, (b) they acted

after proper investigation, and (c) the means adopted to oppose the takeover were reasonable in

relationship to the threat posed”

Defensive tactics that result in shareholders being deprived of the ability to respond to a takeover bid or to

a competing bid are unacceptable