Segment I � Going Public

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Segment I � Going Public Powered By Docstoc
					                               Introduction and Course Overview

Course Focus: How can companies raise capital for their businesses AND what protections are
afforded to those who lend the money (the investors)?

                          A. Objectives Of Securities Regulation:
   1. Protection of the investing public – need public companies thus we need investors to
      have knowledge of what they are investing in
   2. Ensuring the efficient operation of the capital market – companies need to function
      and grow and become more competitive on a global scale
   3. Maintaining and increasing public confidence in the capital market and the people
      who operate/regulate them
      * tension btw 1 and 2. Regulators try to strike a balance btw these competing interests.

                          B. 3 Methods to Achieve These Objectives:
   1. Registration requirement - licensing market participants
      Why? ensures integrity – regulates min. educ’n, min. capital etc.
      Rule: You cannot trade in securities unless you are licenced. Before you play a role in
      raising money for a public company need to be registered under the Securities Act. If
      registered then they are monitored. If don’t behave properly then license is taken away
      Exceptions exist (a) if you are an institution who is regulated by some other body and (b)
      if the securities are so inherently safe that they require no registration (ie. CSBs: b/c they
      are 100% gov't backed the efficiency concerns outweigh protection needs)
               * exceptions reflect the tension between market efficiency and investor protection
               (“balancing”)

   2. Prospectus requirement - full disclosure to prospective investors
      Why? Protect investors by giving them sufficient info so they can decide whether they
      want to buy into a particular company. Providing public w/ info is best way to protect
      investors &  efficiency of mkt
      Rules: regulate quality, content, and dissemination of info. to investors by public
      companies
      Must disclose info “prospectus” and also forced to keep the info current, “ongoing
      disclosure obligation.” Document is static
      Exceptions exist where you can sell securities without a prospectus (a) where purchaser is
      sufficiently sophisticated that it is unnecessary to require company to go to expense of
      prospectus preparation (b) the info is made otherwise avail under some other statute (c)
      securities are so safe, i.e. Canada Savings bonds
              * exceptions are always premised on balancing objectives (look for underlying
              policy rationale)

   3. Remedies - civil and criminal remedies for breaches of the first 2 requirements

C. Prospectus Requirement
         No person shall trade in a security unless that person is registered and, if such trade is
         a distribution, unless a prospectus is filed in respect of those securities (s. 25 & s. 53).



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           General Rule: a company cannot distribute securities unless it files a prospectus.
          A prospectus is a comprehensive document designed to provide investors w/ "full,
           true and plain disclosure" about the co. and the securities being offered.
          If a company files a prospectus, it becomes a "reporting issuer" and is therefore
           subject to "continuous disclosure" obligations of the Securities Act (Ontario).
           Exceptions: Private Placement Exemptions based on (S.A.S) rationale –
           The normally stringent protection provided by the Act is unnecessary where:
1.         the purchaser is sufficiently sophisticated (ie. large sums of money being invested);
2.         the info. is otherwise readily available; or
3.         the securities are "safe".
                * exemptions are evidence of trade-off btw investor protection and the efficient
                mkt objectives of S.A.

The Closed System and Resale Restrictions
 General Rule: 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 is restricted and certain conditions must be satisfied prior to
   their resale. ie. The Act "closes in" on the second trade of these securities and demands
   certain info. regarding the securities to be in the public domain for a certain period of time
   before new investors can acquire them
 securities bought pursuant to a private placement exemption cannot be resold unless:
           1. issue a prospectus;
           2. sell pursuant to another private placement;
           3. comply w/ the resale rules (hold periods); or
           4. receive an exempting order from the OSC (next to impossible).

The Open Market
 There are two important functions of a capital market:
          1. primary mkt - the sale of securities by a co. to investors to raise capital for
              business; and
          2. secondary mkt - the resale of securities by investors to other investors (deals
              w/continuing marketability of those securities)
      * the better the secondary market functions, the better the primary (initial investment is
      more attractive if it has resale value). Both primary and secondary markets are essential
      to the open market.

D. Continuous Disclosure (5 Aspects)
1. Regular financial disclosure, s. 78 - companies must provide investors and the public w/
       financial info. on a regular basis;
2. Timely disclosure, s. 75 - when there is a material change in the company, it must be
       immediately disclosed and filed;
3. Insider reporting, s. 107 - "insiders" who trade in securities can only do so w/out using
       undisclosed info and then must report those trades through "insider trading reports" (filed
       w/in 10 days after transaction occurred);




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4. Insider trading, s. 76 - persons w/ specific confidential info. about a co. cannot benefit from
       that info. by trading in securities using undisclosed facts; and
5. Early warning system, s. 101 - when a party acquires 10% or more of a public company,
       they must announce this and state their intentions before they can buy more shares (i.e.
       warns of accumulation and possibility of take-over)

*Special Rule s. 102: If there is a takeover bid outstanding, anyone w/ 5% must give notice to
the market so that all potential takeover competition is known to shareholders.

E. Takeover Bids
 The term "takeover bid" is defined under s. 89(1) of the OSA (p. ___of summary).
 Policy Behind Regulating Takeover Bids:
          1. equal treatment of all shareholders;
          2. ensuring that adequate info. is available to enable shareholders to make an
             informed decision; and
          3. providing shareholders w/ adequate time to make an informed decision (ie. 21
             calendar days). This rule prevents forced or impulse selling.
NOTES:
 Always relate provisions back to policy
 How do companies raise money for their businesses and what protection is provided to those
   investors
 Objectives of securities regulation: consumer protection legislation, consumer is the
   investor




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                          SEGMENT I: GOING PUBLIC
________________________________________________________________________

Making the decision to go public
A lawyer needs to tell their client of the pros and cons of a company going public

3 Ways a company can raise capital:
1. borrow money (bank loans);
2. become a public company and sell securities to the public by way of prospectus*; and
3. sell securities through a private placement (must satisfy one of the prospectus exemptions).
* When a company opts to go public, it makes the decision to share its interest and info w/ public
   domain…motivation?

Advantages of going public:
1. Raising Capital - You get money for cost efficient funds…i.e. for research and development
2. Future Growth - Helps facilitate future growth (can then borrow more money from i.e.
   banks and can also sell more shares to the public b/c more security)
3. Employee Incentives - Can provide incentives to employees that you could not before i.e.
   shares and options in the company – can hire better employees
4. Corporate image can be enhanced – prestige, people who you
5. New currency - now have cash and your own stock to buy other stocks – issue shares of
   your company in exchange
6. Have liquidity – tangible measure of your success – can sell part or all of your investment

Disadvantages of going public:
1. Loss of confidentiality – disclosure document, prospectus – competitive disadvantage
   competitors can now find out all your business – must disclose all good and bad information
2. Reduced flexibility – now have shareholders to worry about, fiduciary duties, meetings, etc.
3. Managing Share Prices - Look at the wrong things - now managing your shares and not
   your company (worried about stock price) – company will not grow b/c worried about
   shareholders if there is a dip in the stock
4. Reduces Control – if I lose securities, someone might throw me out
5. Expensive to be a public company: initial cost of prospectus which is expensive and ongoing
   disclosure obligations (i.e. public relations persons)

The Scope of Securities Regulation and the Prospectus Requirement




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            The rules will change, but the policies won’t – so remember the policy…
                               Every single rule comes down to…

Reasons for Regulating Public Offerings (3 objectives)
1.        protection of the investing public: there is no caveat emptor. The legislation is
          proactive and seeks to prevent problems before they arise.
2.        ensuring efficient capital markets: we need an efficient, operational capital market
          if we are to have a successful economy and encourage people to invest. However,
          there is a delicate balance to be struck – if requirements are overly onerous,
          companies will choose not to go public, and the capital markets won’t be optimal
3.        increasing and maintaining public confidence in those markets and the people
          operating in them: (if no confidence  no investment  no market)

       *These objectives are achieved through three mechanisms: (1) Registration
       requirement; (2) Prospectus requirement; and (3) Remedies for breach of
       requirements.

Overview of the Scheme of the Act (s. 25 Registration & s. 53 Prospectus Requirements)

s. 25(1):    Registration for trading
             No person or company shall:
            (a) trade in a security or act as an underwriter unless the person or company is
                registered as a dealer or is registered as a salesperson or as a partner or as an
                officer of a registered dealer and is acting on behalf of the dealer, OR
            (b) repealed, 1999, OR
            (c) act as an advisor unless the person or company is registered as an advisor, or is
                registered as a representative or as a partner or as an officer of a registered adviser
                and is acting on behalf of the advisor


s. 53(1):    Prospectus Required
            no person shall trade in a security where such trade is a distribution, without filing
            and obtaining receipts for a preliminary prospectus and a prospectus (s. 25 and s. 53)

Notes:
Why not let markets govern themselves?
Always ask what are they trying to do and why are they doing it?

General Rule
No person shall trade in a security, without being registered, and if such trade is a distribution,
without preparing a prospectus. (s. 25 & s. 53)




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Does the Securities Act apply?

The methodology is as follows:
       1. Does the transaction involve a "security"?  If not then the Act is not relevant to the
          transaction If yes, continue
       2. Does the transaction a "trade" in a security?  If not a trade then the transaction
          doesn’t apply If yes, continue
       3. Does the trade constitute a "distribution" of securities?  If there is no distribution
          then the prospectus requirement of the act does not apply If yes, then the issuer
          must prepare a preliminary and final prospectus unless an exemption can be found.
______________________________________________________________________________
NOTE: If you did not prepare a prospectus then the transaction is voidable at request of the
purchaser

Courts start with a general proposition that all statutes must be in accordance w/the interpretation
act (s. 10) - must meet with its intended purpose of securities law (underlying policy) which is
the protection of the investing public through full and true plain disclosure of all material
facts
 Courts make sure that transactions are caught by the act. Take broad provisions and give
    them broad interpretations

If you know what each term means then you know exactly when the S.A. applies to a
transaction and, therefore, when a prospectus is req’d.
 what is a security, a trade, and a distribution – this will tell us if a prospectus is needed

NOTE: ONLY WHEN THERE IS A “TRADE” IN A “SECURITY” WHICH
CONSTITUTES A “DISTRIBUTION” DOES THE REQUIREMENT TO PREPARE A
PROSPECTUS APPLY

                                        What is a “security”?
S. 1(1) defines a “security” (note: that the sub-paragraphs of securities is not exhaustive)
        (a) any document or instrument commonly known as a security
             commonly known by a sophisticated security advisor such as a securities lawyer
                 (not to the average person)
    (b) any document constituting evidence of title to or interest in the capital, assets property,
        profits, earnings or royalties of any person or company
     too broad – court read down so that not every sale of an asset is caught
     Legislation said this means only instruments intended as investments are securities
        (consistent with objectives of OSA) and not those bought and sold for other commercial
        purposes. If investor investing w/a piece of paper for profit then that is a security. If
        buying an underlying commodity and given a piece of paper as evidence of ownership
        then is not a security. Something more than a simple property interest must be
        required to create a security
             i.e. buying a condo – if get a piece of paper that document is not a security – but if
                 you buy a condo from the company and they tell you to buy it and we will



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                 manage it for you, find a tenant, then that document you receive that says the
                 same title might be a security
    (n) any investment contract
   a security includes any investment contract – on its face any contract would be a security, but
    this is not the case
   **This is the most important branch of the definition of “security”

SCC case Pacific Coast Coin Exchange of Canada v. Ontario (Securities Commission)
attempted to define what is an investment contract for the purpose of securities

Facts: Sale of silver coins done in 2 ways: give $100 in exchange for bag, or buys bags on
       margin (buy w/out having to put money up front, and pay balance in future at which time
       you can claim bag i.e. on credit) through a contract called a “current account commodity
       agreement.” SCC found that the vast majority of purchaser’s for Pacific Coast were
       margin purchasers and the majority of those people would not take delivery but instead
       let PC resell it for them for cash profits as the price of silver went up. Although PC was
       under no obligation to resell the silver on behalf of the customer, its literature said that it
       would do so. Key to PC’s success was its ability to “hedge.” Knew of possibility for
       buyers to pay off and claim silver. They had to time when to buy silver in the market (to
       buy at lower price and then sell to make a profit). Eventually PC went bankrupt b/c of
       bad hedging. Purchasers argued for return of their money, claiming that these
       agreements were investment Ks (securities w/in def’n of SA) and that PC’s failure to file
       a prospectus was contrary to SA.
Issue: Were these “current account commodity agreements” securities? B/c if they were then
       must accompany a prospectus. If there was no prospectus then the investors could get
       their money back. [Company argued that this was merely the sale of coins]
Holding:       SCC held (8-1) that the K were securities under the branch of the definition and
               relied on two U.S. tests to determine that they were securities.

               But court essentially takes a broader approach than these 2 tests. There is no
               formal, exhaustive test of what a security is, you must look at the circumstances
               and decide on the policy. The BASIC IDEA: are you buying a commodity or are
               you buying someone else’s management or expertise, relying on someone else’s
               expertise in order to make a profit on that investment. (i.e. is there a need to
               protect the public confidence in the marketplace)?

* SCC looks at the tests set out in the following two cases, but Pacific effectively says that any
contract may be considered a security (policy of investor protection should always prevail). GO
WITH POLICY not tests

1. HOWEY TEST (S.E.C. v. W.J. Howey & Co. (1946) US SC):
Facts: Investors given opportunity to buy a tract of land in an orange grove. Court found the
       investors had an option to buy the land and operate it themselves or enter into a
       management K w/Howey who would manage the land and give the proceeds to the
       investors. People invested in the second option and lost money as the company went bad.




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       Sued for lack of prospectus arguing that these contracts were securities. Investors wanted
       their money back.
Issue: Were the contracts securities (was it an investment contract?)
        Company said I sold you a tract of land, so no need for a prospectus
Holding:      Court said that the contracts were securities and developed a
              4 part test to determine whether a security (an investment contract):
              Is a security if:
              1. money was invested;
              2. in a common enterprise;
              3. with the expectation of profit;
              4. to be derived solely from the efforts of others.

   don’t care whether there was a deed or not, found to be a security and money was to be given
    back to the purchasers. The court in Howey held that the test was met: the buyers were
    “attracted solely by the prospects of a return on their investment.” The sale of an
    “investment contract” was involved in the transaction. Triggering the registration
    requirement of the Securities Act.

2. HAWAII TEST (State of Hawaii v. Hawaii Market Center (1971) US P. 39
FACTS: Pyramid Scheme.
Found the Howey test to be overly mechanical (too technical) and should use the following test:
             4 part test: Investment K is created whenever:
             1. offeree (investor) furnishes initial value to an offeror (money was
                invested);
             2. a portion of that value is subjected to the risks of that enterprise;
             3. that initial value was induced by a promise that there would be some
                benefit (motivation is the expectation of profit);
             4. investor does not have the right to exercise practical and actual control
                over the managerial decisions

   Court held that clearly Pacific Coast fits this test
   If someone is managing your investment you want to know what their expertise are you have
    a lot of questions to know about the company or person before you give them your money
    thus there should be a PROSPECTUS (if you’re relying on expertise, it’s probably a security)
   If it is a security the Security Act says that have to do a prospectus which forces the company
    to answer all the questions before the investor invests. It tells the investor about the risks
    involved
   If want to protect investors and have confidence in the public market then investors should
    have a prospectus - investment protection legislation
   The piece of paper that you have that says what your investment is, is a security

   Bottom line? Courts do not want “offerors” to be able to collect $ from the public w/o
    ensuring that the mechanisms designed to protect the public domain are in place (consistent
    w/ objectives of SA).




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Key Questions re: is it a “security”:
would you want to ask a myriad of questions about what the company knows about the venture,
its experience in the market (qualifications), backing or protection against default (risks)? Do we
want such info to be available in the public domain? If so, it is a security and falls within the
scope of the S.A.




                                      What is a “trade”?
General rule says the Act doesn’t apply unless there is a trade in a security

s. 1(1) of S.A. defines a “trade” or “trading” to include:

    (a) any SALE or disposition of a security for valuable consideration, whether the terms
    of payment be on margin, installment or otherwise, but does NOT include a
    PURCHASE of a security or, except as provided in (d), a transfer, pledge or encumbrance
    of securities for the purpose of giving collateral for a debt made in good faith.
     Basically, a sale of security(contract) for consideration

      Excluded from the definition of a security is the purchase of a security. WHY?
     The reason for excluding a purchase of securities from the prospectus requirement is that
      we are trying to protect the purchaser (investor). We do not want him to have to file a
      prospectus to buy a security – only the seller should have to do this.
     The sale of a security is a trade b/c before you sell it you must prepare a prospectus – the
      purchaser is just buying

    (b) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in
    furtherance of “any of the other activities constituting a trade”

    Any attempt to sell is considered a trade requiring a prospectus
     If you try to sell a security you are engaging in trading, even if you never sell it b/c
      security legislation is pro-active not reactive legislation. It is not possible to always catch
      every transaction so try to catch it as early as possible (preventative)
     If TRY to sell a security must prepare a prospectus
     Policy rational – legislation seeks to allow the regulators to step in to prevent harm
      before it occurs, rather than waiting for the harm to crystallize

QUESTION: X tries to sell Y & Z shares of company A and Z purchases – How many trades
are there?
Answer: Three - the offer to Y, the offer to Z and sale to Z


                                         What is a distribution?

s.1 (1) of SA defines distribution as:


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(a) a trade in securities that have not been previously issued
(b) a trade by or on behalf of an issuer in previously issued securities of that issuer which have
    been redeemed, purchased by or donated to that issuer

          To evidence the ownership interest in a co., the co. issues shares. There are two
           things a co. can do: (1) they can issue all of their shares that have been authorized by
           the articles, or (2) they can offer some shares and hold back others to be issued at a
           later date (those shares that are not distributed are called treasury shares b/c they are
           in the treasury of the company waiting to be issued at some point in time, shares that
           in the hands of the public called outstanding shares).
          When securities have never been issued before (not previously issued) and are
           released to the public, then that is a form of distribution that requires a prospectus
           (want to encourage people to invest/ take reasoned risks – force filing of prospectus
           the first time company issues to public).

           Why is trade in securities that have not been previously issued called distribution
           but not those that have already been issued? B/c when selling treasury shares to the
           public the company has an obligation to prepare a prospectus (must meet the
           general rule of when does a company have to prepare a prospectus)
          Must prepare a prospectus when there is a trade of a security that is a distribution to
           ensure that those who are asked to contribute capital to the corporation have sufficient
           information with which to make an informed investment decision.

               3 Ways securities are distributed to the public:
       1) Direct Issue
        the co. does not engage an investment dealer, banker or agent
        direct contact btw the co. and the investor
        this method is only effective w/ a small number of purchasers that have intimate
           contact w/ the co. eg. rights offering to existing shareholders or private placements
           (co. does not have the network, time or expertise to sell shares to the public at large.)

       2) Offer to Sell
        most common way to sell securities to the public
        the co. goes to an investment banker to sell its shares
        the investment banker will underwrite the securities - ie. buy all the securities at a
           price less than par value and then resell them at par value to the public at large.
        Firm Underwriting Agreement: (‘bought deal”): an underwriter is obliged to buy the
           securities even if he is unable to sell all of them to the public (greater risk and greater
           profit). These underwriting agreements almost always contain “market out clauses”
           which releases the underwriter from its commitment if the market crashes. W/out
           these clauses the markets could be damaged by a crash b/c all the underwriters may
           go bankrupt.

       3) Best Efforts Underwriting
        similar to a firm underwriting agreement, except that the investment banker no longer
           agrees to buy the securities unconditionally for resale. Rather, they agree to use their



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             “best efforts” to sell the securities on the co.’s behalf. There is no firm obligation to
             buy the securities if they cannot sell them for the co. (Less risky - lower commission).


                                       What is a prospectus?

s. 53 (1):      No person shall trade in securities without being registered and if such trade is a
                distribution, without a prospectus being filed (general rule)

s. 56 (1):      2 essential requirements for the preparation of a prospectus:
                (i) A prospectus must provide “full true and plain disclosure of all material
                     facts” relating to the securities issued or proposed to be distributed; and
                (ii) Must comply with the requirements of the act and its regulations

*NOTE: There is civil liability if there is misrepresentation in a prospectus

“Misrepresentation” is defined in s. 1(1) as: a) an untrue statement    b) an omission

s. 60:          Purchaser’s Rights: the issuing company must inform investors:
                (i) of their right to sue the company if the prospectus contains a
                     misrepresentation (s. 130); and
                (ii) that a prospectus must be delivered to the investor before securities can be
                sold to them (s. 71)

Misrepresentation defined in s. 1(1): as either an untrue statement of a material fact or an
omission of a material fact
               The disclosure obligation is onerous b/c
               not only must everything you say be true, but you must be sure to have said
                 everything you ought to have, AND
               the issuing company has only one defence against a claim of misrep. (the
                 purchaser purchased w/ knowledge of the misrep) and it bears the onus of
                 proof. Due diligence cannot save the issuing company from liability for a
                 misrep’n.

RULE 41-501: that the form of the prospectus should like one of the forms in the securities act
41-501F1

s. 56: mere technical compliance with the act is not sufficient – can’t just follow the form and
        assume that you have complied (must also anticipate questions not provided for in act)
 the company and the people selling the securities (underwriters) signs a certificate that
    says the contents are true and certain rights flow from this
 Factual information (historical facts): First thing a purchaser would want to know about an
    issuer of securities is what does the issuer do? What are you buying? Also want to know
    price, is there competition, how can I get out, risks involved, who runs the company, how
    much are they getting paid, who are the major shareholders, at material contracts are there,




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   are they unionized, how many shares are going to be issued, what are my rights, , does the
   company pay dividends….
 Preparing a prospectus: Telling investors what you think they need to know before
   investing in your company
** Look at form 41-501F1 and prospectus in index
 Don’t just want to know historical information but an investor also wants to know what
   the future looks like

                                   Dual role of a prospectus
1. Selling document: The prospectus is the only document that you can deliver to investors to
   encourage them to invest (buy securities)
2. Liability document: if say something in the document that is misrepresentative – untrue
   statement or omission – there is liability

 Lawyer’s challenge:
Key is to be able to do or avoid both well. To draft a prospectus that strikes an appropriate
balance between the prospectus’ dual functions – must prepare a document that sells – must
ensure that protection from liability isn’t overkill (resulting in poor sales), but also that the
prospectus doesn’t overdo the sales pitch (resulting in exposure liability)

Future Oriented Data
 Provides the best example of this tension b/t the prospectus as a selling document and as a
   liability document
• Most important and difficult in regards to future oriented information – prior to 1982 could
   not put this into prospectus b/c it was too unreliable, but if trying to protect investors then
   they need to know some information that they can evaluate so securities commission came up
   with a policy – NATIONAL POLICY 48 which deals w/the use of future oriented data in a
   prospectus – it is proposed that this policy be change to policy 52-101
NOTE: A prospectus is the only sales document that a company can use to sell securities to the
public

                                 What are policy statements?
   Statements by Commissions on how they will exercise their discretion under the SA,
    attempts to provide some level of clarity
   Given the discretion we have under the Act this is how we will deal w/things – they do not
    have the force of law

3 types of policy statements:
1. OSC policy statements: policies of the Ontario Securities Commission as to how they will
    interpret the OSA
2. Uniform Policy Statements: policies of BC, Alberta, Saskatchewan, and Ontario
    Commissions – initiatives of a provincial regulator
3. National Policy Statements: all provinces of Canada jointly exercise their discretion in
    regards to use of future oriented statements in a prospectus




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National Instrument: this is a rule of law, which is one level higher than a national policy
statement
National Policy: policy statements don’t have the rule of law, just how the OSC might use their
discretion



                                    Key Elements of NP 48
National Policy 48 deals with two types of future oriented data (hereinafter fod)

Difference b/t Forecast and Projection

Forecast: a written estimate using assumptions all of which reflect the issuer’s planned course of
action for the period covered given managements judgment as to the most probable result of
operations of a company for some point in the future.
 Less speculative than projections
 I.e. interest rates could be b/t 4-6% but most likely 4% - so put this into prospectus as an
    assumption – most probable results of operation and use this

Projection: an estimate of results that follow a given set of assumptions – bound to use the most
probable assumptions – don’t have to pick the most likely, can work w/a band of assumptions,
more latitude - reasonableness of assumption is left to the reader
 May incorporate one or more “hypotheses” which are defined in the policy statement to mean
   assumptions that assume a set of economic conditions or courses of action and represent
   plausible circumstances (not necessarily the most probable, just plausible)
 Projections are subject to greater restrictions than forecasts b/c they are more speculative
 I.e. if interest rates are going to be b/t 4-6%, so could put either

National Policy 48: Financial Forecasts
Future oriented info in a prospectus: don’t have to use future oriented data in prospectus
BUT if you chose to you must comply w/National Policy 48 and if you don’t you can’t talk
about the future in connection w/the sale of your securities

1. If want to use future oriented data in your prospectus it must be by way of forecast, unless
   issuer has been in operation for less than 24 months then can use a projection BUT must
   make it clear in your document if it is a projection or forecast
    It is thought that an issuer with less than 24 months of operating history does not have
        sufficient data or operating experience to provide meaningful info without incorporating
        certain hypotheses
2. It is difficult w/a new company to determine the most probable set of assumptions
3. Can’t put a forecast and projection in the same document b/c the very existence of a forecast
   will lend credibility to the projection and we don’t want that for the protection of the
   investing public
4. The document, forecast or projection, must be prepared in accordance with CICA (Canadian
   Institute of Chartered Accountants) guidelines and audited in accordance w/CICA auditing
   guidelines (need an accountant)


                                                                                                13
5. Future oriented financial info has to be viewed regularly for changes and must be updated if
   changes occur (must keep it current and must be updated b/t preliminary prospectus
   and final prospectus)
6. Future oriented info can’t extend beyond that time which the commission deems as
   reasonable and the max is 24 months b/c anything else is too speculative

Note: Need to discuss info and prospectus w/your client b/c:
 May be bound by a forecast (if more than 2 years) - You are bound by the prospectus
 Failing to comply w/NP 48 may expose co. to liability and lose business credibility in the
   market that you can rarely get it back – need to precondition in the market

                           What can be done before the PP is filed?
Testing the Waters
This is illegal in Canada
 If you do a public offering you must do a prospectus, (subject to relying on private placement
   exemptions) can’t talk to people to see if it is going to work. Can’t test the waters to
   determine the market demand b/c this is thought to act in furtherance of a sale
 The issuer must file a preliminary prospectus before it or the underwriter can start
   testing the waters

Two rationales:
(1) The danger of insider trading – an issue of new securities by a firm that is already public (a
    RI) very often affects the price at which the issuer’s outstanding securities trade – testing the
    waters would involve the communication of privileged info (that the firm expects to make a
    public offering of securities) to a select few
Note: this rationale doesn’t apply to a private co. that is going public
(2) to enable securities regulators to step in at an early stage, before a consummated sale to
    prevent exploitation of prospective investors who received inadequate info about the
    securities they are being tempted to purchase

Scenario: what if underwriter approach invests w/a view to completing a private placement then
abandon the plan and instead the underwriters conduct a public offering of the same securities
 Do the underwriters’ pre-prospectus discussions with the institutional investors – which are
   perfectly legal as part of a planned private placement – nevertheless become illegal acts in
   furtherance of a distribution in the absence of a prospectus?
 If there was a bone fide intention to effect an exempt distribution that was subsequently
   abandoned, the prior discussions would be considered a “distribution” separate from the
   eventual distribution in respect of which the prospectus was filed and would therefore not be
   in violation of the OSA
 Otherwise if such discussions would be in furtherance of the eventual public offering – b/c
   such an offering would be a distribution – the discussions conducted before a prospectus was
   filed would constitute a violation of the OSA

                         Process of Preparing and Filing a Prospectus

Steps in Brief…


                                                                                                   14
   Preliminary prospectus (PP) is handed to the OSC; it is stamped and a receipt for PP is
    issued.
   You enter into a waiting period during which all the deficiencies of your PP are brought to
    your attention. [cannot sell during the waiting period but you can create interest by showing
    the PP to potential investors]
   Company makes the necessary changes and adds in the price and goes back to the OSC to
    get a final receipt for a FP.
   OSC now has a lot of discretion and may choose not to give you a receipt for a FP b/c it is
    not in the public interest.
   If a FP receipt is issued, you prepare for a closing whereby you exchange shares of the
    company for money w/ the underwriters.


(i) Preliminary Prospectus (PP)

A Preliminary Prospectus looks the same as a final prospectus except that it omits the price that
the securities will be offered and matters relating to the price

s. 54(1):      preliminary prospectus is the first step in preparation of a prospectus.

s. 54(2):      says that the PP 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 price…
               B/c during this waiting period phase only indications of interest and not binding
               sales until a final prospectus is made under s. 54(2)(c) and can assess the market
               w/out determining the price to be sold

Item 1.2 of Rule 41-501F1 & 2.2 of 41-101:
Says that a PP must have a statement written in red ink and italics on the outside front cover
identifying document as (a) preliminary prospectus, (b) saying it is not final for the sale of
securities, (c) info may not be complete, and (d) securities may not be sold until final
prospectus is obtained (securities can’t be sold pursuant to this document)
    this is known as the “Red Herring” and is removed from the final prospectus
Can only include pictures of items you are actually selling

Item 1.4 (or is it 1.1?) of 41-501F1 & 2.1 OF 41-101:
Provides that both the preliminary and final prospectus must contain a statement on the outside
front cover that no securities commission has expressed an opinion about these securities,
and it is an offence to claim otherwise

**PP is not a draft document and there is liability for misrepresentation in the PP as in the FP
*Must have formal amendment if there is a mistake in the PP - If you need amendments to a
preliminary is not good b/c you will loose creditability in the market place

                                      Certification Process




                                                                                                   15
   Once the preliminary prospectus is drafted then the certification process takes place before
    it is sent to the securities commission:

s. 58(1):     Certificate by issuer: mandates that the chief executive officer (CEO), the chief
              financial officer(CFO), and 2 other directors of the company must certify in
              writing (sign) that the document contains full, true, and plain disclosure of all
              material facts relating to the securities offered by the prospectus
Note: S. 130 basically imposes strict liability on the company (no defence except proof that the
purchaser purchased w/knowledge of the misrepresentation)

s. 59: Certificate by underwriter: provides that every underwriter to the securities being
       offered must sign the document to certify that to their best knowledge, information and
       belief the document contains full, true, and plain disclosure of all material facts to the
       securities being offered by the prospectus

       Note: less onerous, the liability is not as severe, b/c the company knows more about its
       own company but the underwriters still need to be careful (due diligence defence is
       allowed)

Once the PP is signed take to securities commission and get a receipt:

s. 55: Receipt of preliminary prospectus: when OSC receives PP they must give a receipt for
       the PP as long as the document complies w/the rules

       Note: usually not denied a receipt of preliminary prospectus (usually discretion of the
       final prospectus) – as long as document complies w/statute get a receipt


(ii) The Waiting Period

The receipt of a PP means the commencement of the waiting period

S. 65 (1):     there must be an interval of at least 10 days b/t the issuance of receipt of the
               preliminary prospectus and the issuance of a receipt of the final prospectus –
               this is known of the waiting period

3 reasons for the waiting period:
    1. Gives the solicitor and accountant of OSC time to review the prospectus for
       deficiencies and comments in order to get receipt of final prospectus
    2. If giving investors all this information then must give them time to assess it – need at
       least 10 days to review and assess
    3. Gives the underwriters time to assess the market to determine the demand and
       determine the appropriate price for these securities – based on supply and demand

s. 65(2):      Distribution of Material During the Waiting Period: says that during the
        waiting period (b) underwriters can distribute/deliver copies of PPs and (c) can solicit



                                                                                                   16
        expressions of interest from a prospective purchasers, provided that the underwriter
        delivers a copy of the PP to the prospective purchaser either before the solicitation or
        after a prospective purchaser has expressed interest (but can’t enter into a binding
        agreement of purchase and sale at this time)

        Note: this is of no legal consequence

s. 66   Distribution of PP: In addition to 65(2)(c), any dealer distributing a security to which s.
        65 applies must send a copy of the PP to each prospective purchaser who, without
        solicitation, indicates an interest in purchasing the security and requests a copy of such
        PP

s. 67: Distribution list: says that the underwriters must keep a record of all names and
       addresses of anyone who receives a copy of the PP b/c if an amendment is required they
       need to see who received a copy of the preliminary so they can receive the amendment
              (a) Advertising during the waiting period

   There are strict limitations of the type of material that can be delivered to potential
    investors during the waiting period
   The regulators and Securities Act does not allow advertising during the waiting period

Rationale of the OSC: If all this advertising was done then people will not read the
prospectus and won’t read of the risks. The OSC needs to protect the public who would only
get the highlights and not read the risks compromising the objective of investor protection and
proactive approach of the OSC.

There are 2 policy statements which govern advertising:

1. Uniform policy 2-13 (Advertising during waiting period b/t PP and FP – p. 1776)
       Says all you can do by way of advertising is put a newspaper ad (a) identifies the
       security, (b) state the price of the security, if known (rare, only if you know your
       demand), and (c) where to obtain the prospectus and where purchases can be made, (d)
       solicit expressions of interest
       Must indicate that a PP has been filed w/SC but has not yet become final for the
       purpose of a distribution to the public. Must indicate that the ad does not constitute an
       offer to sell or solicitation to buy and there will be no sale or acceptance of an offer to
       buy these securities until a receipt for a PP is obtained
2. NP 42
       Restricts advertising to: (a) the name of issuer, (b) a concise statement of the nature of
       the business, (c) the specific type of securities, (d) a concise statement of whether the
       securities are qualified for a special tax treatment, (e) the nature of the registrant, and (f)
       instructions for obtaining a copy of the PP or FP

Note: The purpose of the advertisements permitted by legislation during the waiting period is
essentially to alert the public to the availability of the preliminary prospectus




                                                                                                     17
Problems with restrictions: Unless you have a broker, you would not know that prospectuses
are available to you – this seems contrary to consumer protection

   The Scope of the Advertising Rule: “normal course advertising” - OSC says you can do
    corporate image advertising that you did in the past as long as it is not in furtherance of
    securities – must be consistent w/your past. OSC will analyze the intention/purpose of the
    advertising. If in violation there is not usually a cease in trading, which rarely happens b/c
    companies comply w/the rules

      I.e. Canwest could not say on their news that they want to go public
      I.e. Maple Leafs: We are going public and tickets are available for the next game – can’t
       say in advertising that we are going public
   **must be careful of what you say and do during the waiting period
   Image advertising is allowed. Ie. can advertise your inventory.
   This denies the public access to public offerings. (rest of world allows advertising)

NOTE: No smart guys

            (b) Material Changes during the Waiting Period (After receipt of the PP)

B/c the waiting period extends for a period of time it could happen that a material change occurs.
i.e. a fire, new contract, strike that would make the prospectus inaccurate

s. 1(1) defines “material change”:
        is a change in the business, operations or capital that would reasonably been
        expected to have a significant effect on the market price or value of the securities of
        the issuer and includes a decision to implement such a change by the board of directors of
        the issuer, or by senior management who believe that the confirmation of the decision by
        the board is probable.

s. 57(1):       Amendment to preliminary prospectus on material change: If an adverse
                material change occurs during the waiting period (after receipt for PP but before
                receipt of FP) then the company must prepare and file an amendment to the
                PP reflecting that change as soon as possible, but in any event w/in 10 days of
                the day of the change.

s. 57(3):       Notice of Amendment: The company must deliver a copy of that amendment
                (document that reflects the change) to every person who received a copy of the
                preliminary prospectus according to the record maintained (s. 67).

Note: this reflects the need to keep all names and addressed of who received the preliminary
** if change not adverse, is positive, then you don’t need not do an amendment, can if you wish,
b/c this change will get picked up in the FP


                  (iii) Receipt for Final Prospectus (After the Waiting Period)


                                                                                                 18
   still can’t sell securities until get final receipt for Final Prospectus (FP)
   there is a lot of discretion in the hands of the OSC if they will give you receipt for FP
   full disclosure does not mean that you get a receipt (just b/c the info is ok)

                                         Discretion of SC

s. 61(1):      the director or securities commission will issue receipt for a FP unless it is
               contrary to the public interest to do so (even if the company has disclosed
               everything that has to be disclosed and has complied w/every requirement)

        Note: this could mean a lot of things – this provision gives legislative authority to the
        Commission to regulate content and quality of document (FP), the merits of the
        securities, and not just whether you have complied w/the disclosure obligation. Investors
        could be deprived of the opportunity to invest if the SC feels greater protection is needed
        (i.e. issuer not permitted to sell b/c the investment is too risky

Arguments against discretion:
The OSC has mandate and obligation to consider the quality of the securities being offered and
to deny access to the capital markets where there has been compliance w/the SA requirements.
I.e. commission thinks the directors are too inexperienced and won’t give receipt for FP or think
the price is too high. But shouldn’t this be left to the public? Fully informed investors should
have the opportunity to decide for themselves. Why can’t the public and the market place decide
whether they want to invest in a company if they are fully aware of the risks?
 Someone has to look at the greater good – the bigger picture – if too may times people invest
     in public companies and lose money then they will lose confidence in the stock market and
     people will not invest in the capital market and then our economy and country can’t compete
     – securities commission believe that they are making the best decision for the capital market
 Regulators are thoughtful and concerned of commerce, business and the public good the
     public market would not be responsible it would allow to benefit a few to the expense of the
     rest


Arguments for discretion:
If legislators lacked this discretion and every wild scheme was permitted to enter the market,
people would lose confidence in the market. Need to ensure the integrity of the market. If the
Canadian capital market got a reputation for being too risky an investment, it would encourage
the public to invest outside the country and business persons w/talent to go to the US to go public
(brain drain).



Deprinol Research
Facts: Shulman takes a drug in U.S. called Deprinol and feels better for Parkinson’s disease. He
sets up a company to seek Food and Drug Act approval for the production and sale of this drug
in Canada. He gets to final receipt and SC says that if you take the public’s money and you don’t


                                                                                                 19
get approval by the FDA then these people will lose their money (too risky). Shulman says he
put the risks in the PP many times. SC didn’t care, said it was too risky, and would not give
receipt for FP. After a period of time SC recants and finally gave receipt for FP. Company gets
approval from FDA and it is now available in Canada
        MORAL: If the SC would not have given approval for FP then the drug wouldn’t
        have been available and the public would not have had the opportunity to invest

NOTE: The commission has a lot of power to decide if the public will be able to invest in certain
companies. SC says they are trying to protect the public

   Usually there will not be a section 61 problem if FP not issued. This is very rare. Most
    get receipt for FP
   Healthy respect b/t regulators, lawyers and the business world


                                     Where FP is not Issued

s. 61(2): Refusal of receipt: The director will not issue a receipt for a FP:

       (a) if you haven’t substantially complied with the Act
       (b) if it appears that an unconscionable consideration was paid to someone in
       connection with the prospectus (this goes beyond disclosure to consider merits of an
       issuance)
       (c) if the proceeds from the sale of the securities to which the prospectus relates together
       with other resources of the issuer, are insufficient to accomplish the purpose of the issue
       stated in the prospectus - there is insufficient proceeds for what the prospectus is
       designed to do you don’t get a receipt
        must disclose the use of the proceeds, what you are going to do with the money –
            commission can say that if you take your resources you will not be able to do what
            you say you are going to do
       (d) if the financial condition of the company is not suitable
       (e) if the past conduct of the company or directors is inappropriate such that it assumed
       the company will not be conducted with integrity and in the best interests of its security
       holders (or will put the public market into disrepute than will not give FP) (consumer
       protection)
                OSC Policy 5.7 - commission authorized to do security checks on directors
                (criminal background checks)
       (f) Escrow: Won’t get receipt for FP unless satisfactory escrow arrangements have
       been entered into (founders of a company cannot trade their shares until a time after the
       company goes public (3 years)). Shares are held in escrow to help ensure that founders
       share in any risks. Can’t simply pass them off entirely to the public
        this is a balancing of risks b/t founders of business and new investors so impose a
            contract on the issuer saying that the price you pay for taking your company public is
            that you can’t sell your shares until an appropriate time – shares are held in escrow to
            ensure that founders share the financial risk w/the new investors
       Note: Escrow only applies the first time you go public


                                                                                                 20
       (i) Can’t get receipt for FP if there is an unacceptable professional involved in your
       prospectus



Steps in brief….

   Assuming you have complied w/the act, made amendments, no s. 61 problem, take off red
    herring, put in the price and you re-certify the document (everyone signs again) and go to the
    securities commission again for a receipt for a FP
   Remember you cannot begin selling securities until you have received a final receipt for a
    final prospectus
   Once you get a receipt for FP, you can begin the process of getting into binding
    agreements for the purchase and sale of the securities, but there is a cooling off period after
    investor receive the FP
   there is a 2-3 week period b/t receipt for FP and the actual closing of the transaction, during
    which time commitments and distribution arrangements are made
   Copies of FP are issued and delivered to all those who received the PP
   Investors have two days to change their minds after they receive a FP
   Cheques are gathered and exchanged for shares, the transaction closes and the company is
    public
   The company becomes a reporting issuer, defined by s. 1(1) and becomes subject to the
    continuing disclosure requirements of the SA

                 (iv) Material Change After Receipt of FP but Before Closing

What if there is a material change in the affairs of the company b/t final receipt for FP and
closing? – i.e fire, new contract

s. 57(1):      If any material change occurs after the receipt for a FP but before closing, then the
               company must prepare and file amendment as soon as practical, or within 10 days
               of date of change and deliver the amendment to everyone who received copy of
               FP, except those people whose 2 day cooling off period has expired (b/c they
               will rely on the continuous disclose required by the act)

Note: material change does not have to be adverse

Why is it necessary to report all material changes b/t final receipt of prospectus and closing,
and not just adverse changes (as required during the waiting period)?
 During the waiting period positive changes are not essential to amendment b/c they will get
   picked up in the FP. You must reflect the negative information instantly as the positive
   information will find its way into the final prospectus
 However, after receipt of FP you need to give the investors all the info that is necessary,
   positive and negative, there is not subsequent document




                                                                                                 21
   The continuous disclosure requirements do not come into play until the closing and it is
    necessary to ensure that all changes that occur before closing are covered in amendments to
    the FP
   Objectives of security regulation demand that there is a complete and accurate snapshot (full,
    plain and true) before any sale of securities – this explains why FP must be amended
    regardless of whether the material change is positive or negative


Statutory Rights of the Purchasers in the Context of the Offering

s. 60: Statement of Rights: every prospectus must contain a statement of the rights given to a
       purchaser by sections 71 and 130 of the securities act

s. 71(1):      Obligation to deliver prospectus: a dealer must deliver a copy of the latest
               prospectus and any amendment w/in 2 days of the agreement to buy securities

s.71(2):       Withdrawal from purchase: an investor is entitled to change mind within 2 days
               of receiving the latest prospectus and any amendments – cooling off period


                                     (i) Cooling Off Period

Securites act wants to give you 2 days with all the info in order so you can make a decision if
you want to buy securities and can back out of the deal. You are not bound to buy the securities
until you have completed a 2 day cooling off period

Note: if don’t ever get FP then are not bound to buy the securities

   The cooling off period begins to run only once purchaser receives the FP and, if a
    material change occurs before the end of the 48 hours from receipt of FP, then it runs
    from time of receipt of amendment to FP

Note: To avoid this problem, underwriters will immediately send out the FP. The Act is trying to
make sure that investors are not making and not bound by poorly informed decisions.
 get 48 hours after you get the FP, with all the info, to make a decision if you want to keep the
   securities or get your money back – have 48 hours before bound by agreement of purchase
   and sale

Ask: have I had 48 hours will all the infoif yes then bound to buy
   if nothen not bound to buy

Example 1:                                     Example 2:
Day1agree to buy securities                   Day 1buy securities
Day 2prospectus delivered                     Day 2receive FP
When is cooling off period over?               Day 3fire (intervening event)
Answer: Day 4bound to buy                     Day 8amendment delivered


                                                                                                22
                                               When is cooling off period over?
                                               Answer: Bound to buy on Day 10 (can get
                                               money back)
                                               Note: The fire happened during the cooling
                                               off period so you are entitled to get the
                                               amendment and then have another 2 days

Example 3:
Day 1buy securities                           Example 4:
Day 2receive FP                               Day 1buy securities
Day 7fire                                     Day 4receive FP
When is cooling off period over?               Day 5fire
Answer: Day 4                                  Issue: when is cooling off period over?
Bound to buy on Day 4fire happened            Answer: 2 days after you receive the
after the cooling off period ended             amendment

Example 5:
Day 1buy securities
Day 4fire
Day 5receive FP
Day 14receive amendment
Issue: when is cooling off period over?
Answer: Day 16 (b/c 2 days after received
the amendment with all the info)



Note: Up till now is called an initial public offering

Note: Every time a company issues shares (securities) (even if there have already been shares
issued) to the public they have to do a prospectus (b/c issuing treasury shares), unless there is an
exemption

Note: BUT Escrow only applies the first time you go public

                   (ii) Misrepresentations in Prospectus and Consequences

s. 130 of SA: New statutory liability for misrepresentation and omission of material facts in
prospectus

   At CL: liable exists for fraudulent misrepresentation of info that is fraudulent, or made with
    reckless disregard for the truth. Case law also supports action against the negligent
    preparation of public statements (Hedley Byrne, reliance where duty is owed)
   Securities law imposes liability for misrepresentation which is much broader than at
    CL. S.R. places greater burden on defendant to defend against liability than on a plaintiff to
    prove it (s. 130) – CL thresholds were considered too difficult to prove


                                                                                                  23
   Policy: this is proactive legislation and is therefore set up as strong deterrent (many people
    are potentially liable in hope that the threat of liability will ensure persons involved behave
    responsibly)
   Where a prospectus is found to contain a misrepresentation, each purchaser is deemed to
    have relied on it (reverse onus b/c person is deemed to have relied on misrepresentation and
    defendant must now show that the purchaser didn’t rely on the misrepresentation – makes it
    very difficult to prove that the purchaser had knowledge of the misrepresentation prior to
    purchase)

Misrepresentation is defined under s. 1(1):
      (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

s. 130: if there is a misrepresentation in the prospectus or amendment, a purchaser who
        purchased securities and relied on the misrepresentation at the time of purchase has a
        right of action for either damages or a right of rescission (rescind purchase) from any or
        all that are liable

130(10):       The right of action for rescission or damages is in addition to and not in
               derogation of any rights the purchaser may have at common law

3 issues that s. 130 deals with:
1. Liability
2. Damages
3. Defences


                                           1. Liability

s. 130: if there is a misrepresentation in a prospectus the following are liable: company, its
        directors, each selling security holder, any officer who signed the prospectus, the
        underwriters, and experts

       Note: anyone whose expertise opinion was requested in the document – experts give
       expert opinion and sign off on this

       Selling security holderrefer to secondary offerings by large shareholders who sell
       pursuant to the same prospectus (principle or founder that sells securities and the money
       goes to them and not the co.). Why would a selling security holder sell by way of
       prospectus and not wait and sell on the open stock market? Restricted to selling shares
       because have a large block of shares, can’t just sell these shares through a broker




                                                                                                 24
Policy: Statue is proactive, not reactive. They are trying to avoid circumstances in which a
       misrepresentation will occur. The more they hold people liable, the greater the chance
       that no one will make a misrepresentation (incentive to be diligent) or that a
       misrepresentation will be caught – focus of legislation is on deterrence

s. 130(1):     when a prospectus contains a misrepresentation each person is deemed to have
               relied on the misrepresentation

s. 130 (1)(d): experts are only responsible for the “expertised” portions of the prospectus that
               was made by them (wherever advice or opinions are given)

s. 130 (8):    each of the defendants is jointly and severally liable for the whole with the right
               to seek contribution from each other, unless the court denies the right to
               contribution

Policy debate: cumulative effect of legislating layers upon layers of liability on directors (for
unpaid taxes, for unpaid wages, for misrepresentations, for environmental etc) is that we deter
the best and brightest directors from risking involvement w/ companies that are upcoming (i.e
which have no established reputation or prestige, but which are most in need of good directors).
It is questionable whether we can retain good directors in Canada, let alone attract reputable
international directors to Canadian Boards. The most effective regulation is self-regulation –
execs have so much to lose from blows to reputation that reputation should be incentive enough
for directors to behave responsibly w/o imposing liability at every legislative turn. Flipside:
statutory presumptions of director liability can be adequately rebutted by demonstrating
responsible director behaviour – i.e. so long as a director is diligent in his job, he should not be
deterred from taking a directorship by exposure to liability.

So why would a director go on a public board of company that is new b/c run the risk of being
sued, they have assets? It doesn’t seem that the legislators are protecting them – this is becoming
a big problem

What can be done? Once the prospectus is finished the company will put directors who do not
have money on the FP, and once the company does well it will change the directors
 BAD IDEA: Can’t do this b/c if selling w/these people on the board they have to be there.
   People will buy securities and invest based on the reputation of who is on your board. If you
   put a person in the prospectus who is not reputable then people will not buy. THERE IS A
   TRADE-OFF – need a balance b/t the advantages these people will gain by being on these
   boards and the liability they will have – can’t go too far one way
 But at some point will drive people away from directing companies - Lastman thinks that
   there is too much liability imposed on directors

                                          2. Damages
   A purchaser can either rescind purchase or sue for damages
   Damages seek to replace any economic loss suffered as a result of the misrepresentation




                                                                                                   25
   In claim for damages purchaser would claim the diminution in value of securities b/c of
    misrepresentation (the defendant is only liable for damages that flow from the
    misrepresentation)

s. 130(7):     Limitation in action for damages: defendant is not liable for damages that the
               defendant proves do not represent the depreciation in value of the security
               (diminution in value of securities) as a result of the misrepresentation relied upon
               (onus on D)

               Note: onus on defendant to prove that portion of loss is not related to the
               misrepresentation, which is difficult

s. 130 (9):    Limitation re amount recoverable: maximum damage a purchaser can recover
               is the price the securities were offered to the public (i.e. limited to recovering
               actual damages with no compensation for opportunity costs or punitive damages)

s. 130(6):     Limitation re underwriters: if there is more than one underwriter in the offering
               they are liable for only the portion they wrote under them (they would still be
               jointly and severally liable but the party then has a right to contribution for the
               amount that they had nothing to do with)

s. 130(1)(d): experts are only liable for the reports made by them

s. 130(8):     all defendants are jointly and severely liable with right to recover against one
               another unless court denies that right of contribution


                                          3. Defences
With respect to the company or the selling security holder there is essentially strict liability -
the only defence available to the company or the selling security holder is to prove that the
person purchased the securities with knowledge of the misrepresentation

Note: The onus is on the company or the selling security holder to prove that the purchaser had
knowledge of this misrepresentation when they purchased the securities – otherwise there is
liability

With respect to underwriters, directors, officers, experts who signed the prospectus there
are a number of defences available to them (in addition to the purchased w/knowledge
defence):

s. 130(2):     Defence- purchaser purchased with knowledge of misrepresentation and the
               onus is on the defendant to prove this (almost strict liability for the issuer or
               selling security holder as this is their sole defence)




                                                                                                   26
s. 130(3)(a): if the prospectus was filed without your knowledge and consent and on
              becoming aware of this you told the OSC that it was filed without your
              knowledge or consent

s. 130(3)(c):   deals with the liability of non-experts for the expert portion of the prospectus.
                The non-expert must have had no reasonable ground to believe and did not
                believe that there had been a misrepresentation in the expert portion
                (SUBJECTIVE AND OBJECTIVE TEST)

s. 130(3)(d) & (4):     liability of experts for the expert portion of the prospectus – the only
                        time an expert can get off is if the expert can show that after reasonable
                        investigation they had reasonable grounds to believe and did believe
                        (OBJECTIVE AND SUBJECTIVE) that the prospectus fairly
                        represented their report. If on becoming aware of the fact that it did not
                        represent their report they gave notice to the commission that it did not
                        represent their report and that they would not be responsible for that
                        portion of the report.

s. 130 (5):     Due Diligence Defence (Most significant defence) (Note co. and security holder
can’t use this defence)

       Must demonstrate 3 things:
       1. D must show that they had an actual belief that there had been no misrepresentation;
       2. D had reasonable grounds for that belief; and
       3. They conducted such reasonable investigations to support that belief

       Blind reliance on the opinion of others (even experts) is clearly unacceptable – must
       conduct some due diligence independently (reasonable verification). But what is
       conducting such reasonable investigation or belief? The OSC provides a useless
       definition:

s. 132: Standard of reasonableness: the standard of reasonableness is that required by a prudent
        person in the circumstances of the particular case

How reliable is this?

Policy: these parties have a responsibility to the investing public to be careful in conducting the
investigations of their co. If they do this improperly, then they are liable. However, if they have
done everything that a reasonable, prudent person would do in the circumstances to verify the
accuracy of the info., should that info. then turn out to be wrong, they are not held liable.
Arguably, the extent of such liabilities drives away talent and reduces Canada’s competitiveness.
What’s an alternative that still ensures accountability? Even if remove director liability, the
integrity of the system is still protected b/c so many other people remain liable – removing
liability from directors will encourage directorship, in turn strengthening the Canadian economy.




                                                                                                 27
Escott v. Barcharis
FACTS:        US district crt attempted to define the level of due diligence required. Barcharis
              was in the business of equipping bowling alleys and needed money, so had public
              offering in 1961. The company goes bankrupt the next year and the shareholders
              who bought shares sued saying that they bought on misrepresentation – the court
              found that the prospectus did in fact contain misrepresentations in a number of
              placing
ISSUE:                There is liability and damages, is there a due diligence defence available?
HOLDING: Court held that the company, CEO, founders, CFO, in-house lawyer,
              underwriters, and outside director were all liable

REASONING:
 company: the co. did not show that the investor purchased w/ knowledge of the
  misrepresentation or did not rely on it. No other defences are available to it (based on strict
  liability  liable).
 CEO: Russo was the CEO of Barchris, member of executive committee and signed the
  prospectus – court said he knew all the facts and had no due diligence defence and was liable
 Founders: The founders of the company the vice president and the president had limited
  education and could not have understand the prospectus – court said this is irrelevant should
  have known all the facts and thus liable no DD defence
 CFO – his defence was that he was an accountant and he hired lawyers and auditors to file a
  prospectus that was accurate – court said you are liable and liable to the expertised portion
  b/c you shut your eyes to the expert portion when you should have known it was not accurate
  – no DD defence, liable
 In house council lawyer to Barcharis – became a director after the PP but before the FP –
  was not an executive officer and didn’t participate in the management of the company – court
  said he made no investigation, relied on others, should have known your legal obligations –
  no DD defence and thus liable
 Outside director – became director after PP – says he is a new guy and asked all the others
  if the prospectus was accurate and he believed them – court says doesn’t matter how new you
  are – should have investigated, not sufficient to inquire and simply accept answers. Liable –
  no DD defence
 Underwriters say we didn’t do due diligence b/c we relied on lead underwriter – court says
  can’t rely on him, have to do your own DD and you are liable – the prospectus is not ours,
  but the company’s, all we did was sell securities – court says the purpose of the section is to
  protect investors and each underwriter must make a reasonable attempt to verify the facts, if
  the underwriter is to be valuable to the purchasers then they must be reliable and do
  reasonable investigations to what they are signing

Critique of Case: Case is supposed to define level of due diligence required in connection w/a
public offering, but really only tells you what is not acceptable due diligence.
 Regardless the due diligence obligation extends well beyond asking questions and getting
   answers: you must independently verify facts to ensure that the prospectus constitutes full,
   true and plain disclosure
 No brightline tests



                                                                                                  28
   The legislation is designed to allow purchasers to rely on the credibility of signatories, thus it
    is reasonable to expect that persons signing it know the content and have taken reasonable
    steps to ensure its accuracy

   Why does the securities commission make everyone jointly and severely liable for the
    misrepresentation of the prospectus (liable for the whole document)? B/c recognition
    under securities legislation that many of these incidents will go unnoticed so the legislation is
    proactive and not reactive and designed so a breach or misstatement doesn’t occur so hold a
    whole host of people liable – can hold company and selling security holder strictly liable –
    can’t hold directors, underwriters, or officers to the same level of liability, but want them to
    be careful so will give them a defence to show that they were careful and that the info was
    accurate (due diligence to show that they did what was reasonable in the circumstances)
   Some say should not give the option of any defence at all
   Significant and important obligation of everyone involved in the process of a prospectus
    to be careful b/c other people are relying on it
   We need a sense of what careful means – hire lawyers, spend a reasonable amount of time to
    make sure everything is accurate


Sample Underwriting Agreement in casebook

   Used for primary and secondary offerings when the underwriters are purchasing the co.’s
    shares and selling them to the public
   The agreement is dated the same date as the FP and signed concurrently – contemplates that
    the agreement and the FP were executed simultaneously
   First time there is a binding obligation on the underwriters to buy the securities

Lead in paragraph: the underwriters are offering to purchase the shares from the company for
resale for an underwriting fee

Paragraph 1: specified the dates on which the receipt for FP must be received in each province
– negotiation b/c the underwriters want this ASAP b/c want to get into a binding agreement so
cooling off period can begin – the company wants a bit of leeway

Paragraph 2: another form of DD – deals w/certificates, the company confirms that the
prospectus is accurate, it adheres to the proper form and DD has been done – this does not
relieve the underwriters from doing their own due diligence

Paragraph 3: demands company to deliver commercial copies of prospectus to the underwriters
so the cooling off period can start

Paragraph 5: if there is a material change during the period of distribution of the Offered Shares
(after FP and before closing), then the company has to tell the underwriters b/c they need to
know if an amendment is needed so they can deliver it. The underwriters are liable as well if
there is a material change



                                                                                                    29
Paragraph 14: Indemnity Clause - company agrees to indemnify the underwriters for any losses
suffered if there is a misrepresentation in the prospectus. All underwriter agreements contain
such a clause
 What is the problem w/this? Courts in Canada have never tested an indemnity clause but in
    the US they have found indemnity clauses to be unenforceable b/c it is contrary to public
    policy. The whole point of the legislation is to be proactive and if you can be made whole the
    deterrence is not as significance, it removes a layer of liability. Underwriters would have no
    economic risk with respect to misrepresentations and would thus have no incentive to
    conduct independent due diligence – Globus and Law Research Service Inc.

Paragraph 15: Contribution Clause - if indemnity clause is not available and one party gets sued
for the whole then the corporation will contribute to this
 Will this hold up in court? The corporation is only going to contribute but US case law
    Lavethol, et – contribution clauses are enforceable b/c it is not contrary to public policy, it
    enforces the public policy aspect of securities law - b/c we want people to be sued so that
    they will be careful

Paragraph 17: right of underwriters to terminate the agreement – right to terminate if there is an
investigation, new occurrence, etc.
Market out clause 17(b): state of financial markets being such that the underwriters feel the
securities can’t be profitably marketed so they have an out, can terminate their obligation to buy
– there is always a market out clause (must be a catastrophe to terminate)
 Market out clause must also be stated in the prospectus

Paragraph 18: the company pays all expenses of the offering (including the underwriters’ fee)
whether or not the offering is completed (it succeeds or not). I.e. if the offering never happens
b/c no final receipt is issued, it is the company, not the underwriters, that bears the risk and loss


Vincor Prospectus (Sample Prospectus)
 Need to know what the underwriters fees are b/c this money is of no use to the company

P. 2: Legal for life opinion – Eligibility for Investment (p. 2)

Pages 3 – 5: summary of offering

Pages 6-23: description of the company – what does the company do

P. 24: use of proceeds – tell the public what you are going to do w/the money

P. 25: consolidated financial forecast – did this b/c national policy says this is how you do this –
forecast is the most probable set of assumptions – has to be a forecast if company is in existence
for less than 24 months

P. 35 Capital Structure




                                                                                                    30
P. 36 ?

P. 37: Directors – want to know who the directors are

P. 42: executive compensation

P. 44: any agreements that exist b/w Vincor and the executive officers

P. 45: Stock Options

P. 46: Underwriting Agreement – has a market out clause
If the market is shitty, they can get out of the deal

P. 47: Escrow – can put in escrow and get final receipt or not and be subject to escrow
So that shares balance out

P. 48: Risk Factors - things to think about before you invest

P. 51: Rights of Purchaser - must be put into the clause

P. 69: Certificate of Company – CEO, CFO and 2 directors certify full and plain disclosure of all
material facts

P. 70: Certificate of the Underwriters

Prospectus - policies in the form of rules to give investors protection



2 Relationships b/t dealer and promoter (issuer):
1. Agency relationship – weaker one, underwriter acts as a sales agents, promising to use
   reasonable efforts or “best efforts” to sell as much of the issue as it is able - younger issuers
   will do it this way – underwriter collects a commission on only those securities that it
   actually sells to 3rd party purchasers
2. Underwriting relationship – dealer is committed to purchase the entire issue of securities. If
   an underwriter is unable to resell the securities to its various clients, it cannot return the
   unsold securities to the issuer.
 term sheet may not specify price - figure out price at a later date


PP is the marketing (selling) document and a liability document
 Liability for misrepresentation under PP and FP, but under the PP rare to get sued for
   damages b/c investors have not bought securities yet
 In US it is a longer process, don’t market the prospectus until you get FP b/c don’t like to
   make changes – in Canada can market the PP




                                                                                                 31
Green Sheet
 B/c prospectus is really long
 It is only supposed to go to the dealer’s sales force
 Short, summary of info derived form prospectus and is not supposed to get into the hands of
   the public
 The commission doesn’t review this
 The lawyer’s job is to review the green sheet to make sure there is nothing in it that is not in
   the prospectus and that it doesn’t fall into the public’s hands
 No statutory recognition

   People don’t trust the market so the regulators do extensive background checks of directors
   In Canada can get director liability insurance, in the US can’t get this coverage
   In Canada rare that a receipt for FP is denied
   OSC is not supposed to look at the merits of the prospectus, but often do
   OSC can’t deny b/c don’t like the business model of the company, but have

   Right before the FP is filed, issuer will sign the underwriter or agency agreement

POP – Short Form Prospectus
 Long form prospectus requirements – Form 45-5-1
 15 business day comment period
 market opportunities change rapidly so an issuer may not want to go through the long form
  prospectus requirement
 short form prospectus system recognizes the timing requirement and that there is public
  disclosure but there might be a lot of info out there about these companies – makes little
  sense to require repetition of that information in a prospectus
 if issuers are big enough or around for a certain period of time are entitled to do a short form
  prospectus – defines the terms of the offering
 discloses only the essentials or the terms of the offering
 the review period is condensed, Commission in jurisdiction has to come up w/comments in 3
  business days and out of jurisdictions has 2 business days
 have to have a public flow of 75 million and have to be a reporting issuer for at least 1 year
 prep procedure allows both preliminary and final receipts to be received without a price
 file a later document w/a price
 so underwriters don’t face any unnecessary risk
 prep supplement




                                                                                                  32
Segment II – After Going Public

Continuous Disclosure Regime……………………………………………………….27

Regular Financial Disclosure…………………………………………………………28

Timely Disclosure……………………………………………………………………..29
      What must be disclosed? ………………………………………………………30
      Material Change (definition) …………………………………………………30
      Internal v. External Changes……………………………………………………30
      Actual v. Proposed………………………………………………………………31
      Material Fact v. Material Change………………………………………………..31
      Options for Disclosure of Material Change……………………………………..31
              Regular and Complete Disclosure………………………………………31
              Incomplete Disclosure…………………………………………………..32
              Confidential Disclosure…………………………………………………32

Early Warning System……
…………………………………………………………..34
      Early Warning during Outstanding Take-over Bid………………………………35

Insider Reporting……………………………………………………………………..35
       Who is an Insider (definition) ………………………………………………...36



                                                                     33
Insider Trading
       Offences (Trading Where Undisclosed Info & Tipping) ………………………37
       Who is in a Special Relationship (Definition) ………………………………..39
       How to answer and exam question………………………………………………40
       Defences to Insider Trading……………………………………………………..41
       Liability for Insider Trading…………………………………………………….43



                               Segment II – After Going Public

CONTINUOUS DISCLOSURE REGIME

(A) Introduction


      APPLIES TO REPORTING ISSUERS:
       Continuous and timely disclosure obligations are imposed on company’s once they have
       decided to go public and have become a reporting issuer (i.e., company’s that have filed
       a prospectus in Ontario and have obtained a receipt).
                   One of the advantages of being a reporting issuer is that there is greater
                      liquidity in the secondary market.
                   SEONDARY MARKET: sales b/t investors in the open market
                   Prospectus provides only a snapshot in time, it includes all the necessary
                      info to make an initial investment decisions. However after a co. goes
                      public and distributes its securities, the prospectus is quickly stale-date.
                      Companies change, sell things, buy things. This info must be kept current
                   In order to facilitate the secondary market, continuous disclosure
                      obligations are imposed to ensure that the info available to public
                      investors remains current and accurate.
                   The legislative goals are to protect the integrity of info in the
                      marketplace and ensure equality of access of all market participants.

      Thus, FUNDAMENTAL PURPOSE of continuous disclosure is to protect the open
       market, investors buying and selling securities in the secondary market, by access to info
       upon which decisions are made
      Reporting issuers must keep the information provided in the prospectus current through
       press releases and filing material change reports


      WHO is subject to the continuous disclosure regime (to comply w/the 5 requirements
       below)? Imposed on companies when they become reporting issuers as defined by s. 1(1)
       of the securities act
        REPORTING ISSUER [s. 1(1)]: an issuer of securities becomes a reporting issuer
           by filing a prospectus and obtaining a receipt for it.


                                                                                                34
      QUESTION THEN IS: What continuous disclosure obligations are imposed on
       companies that have gone public, that have distributed securities by filing a prospectus?

NOTE: Once an issuer becomes a reporting issuer, it is subject to all of the periodic and
timely disclosure obligations, until such time, if any, that the issuer applies to the OSC and
is granted an order deeming that it has “ceased to be a reporting issuer.”


 Justification for Continuous Disclosure Regime
1. Integrity in the market: Essential to maintain integrity in the market by insuring fairness so
   that everyone has access to the same info and make informed decisions
2. Helps Investment: provides info to investors who hold securities to tell them if they should
   keep them or sell them and provides info for new investors to decide whether they want to
   get involved in the company
3. Share Value: it is an ongoing mechanism designed to ensure that the stock has the correct
   value, which will reflect in the market and make it more valuable. Shows confidence in the
   capital markets
4. Deterrent: Operates proactively as a deterrent to fraud as well as an accountability technique
   (management is required to account regularly to owners which encourages more efficient
   management and deters fraud)

**It is unclear what remedies are available to an investor or what sanctions may apply where a
co. has failed to meet its continuous disclosure responsibilities in the secondary mkt. Compare
this to the clear remedies available for violations for prospectus requirements (primary market).

                              5 aspects of Continuous Disclosure

a. Regular Financial Disclosure at predictable fixed intervals, s. 78 (National instrument
   51-102 – annual audited financial statement within 90 days of the year-end of the company.
   Also must distribute quarterly unaudited statements to whomever requests this): SA
   mandates public companies to file, disclose and disseminate financial statements at certain
   period times – annual & quarterly statements (market will use this info from regular
   disclosure to assess how the co. is doing)(s.80 has some particular exceptions)
b. Timely Disclosure, s.75: Tell public when something changes in company. (national policy
   52-101 clarifies this). disclose/occurs at irregular and unpredictable intervals which will be
   caused by a material change in the operation of the co. Even can be planned (i.e. an
   acquisition) or unplanned (i.e. fire at the plant, lawsuit filed) This material change or
   business development that needs to get into the market place and must be disclosed when it
   occurs
   Note: company must report even if the public already knows through a newspaper, etc
c. Insider Reporting, s.107: When insiders of a co. buy/sell public securities, they have an
   obligation to disclose. There is nothing wrong w/insiders of a company buying and selling
   securities as long as they don’t do it with knowledge that you don’t have
        Insider Reporting lets investors know what insiders think of their co. and what they
           are doing, i.e. did the president sell all their stock, and it helps deter insider



                                                                                                35
d. Early Warning System, s.101: When investor acquires 10% or more of a company they
   have to notify the world b/c may indicate a potential takeover bid.
e. Insider Trading, s. 76: If insiders of a company buy and sell shares with knowledge that is
   not in the public domain, is illegal and can go to jail (doesn’t apply to private companies)


(A) Regular Financial Disclosure

      PURPOSE OF REGULAR DISCLOSURE: The purpose of regular disclosure is to keep
       shareholder appraised of what is going on with the reporting

      COMPARATIVE FINANCIAL STATEMENTS

s. 78(1):      Comparative financial statements: requires a reporting issuer to distribute to
               security holders and file with OSC annual, audited, comparative financial
               statements within 140 days of the companies fiscal year end

       [Note: Section 78 an obligation on every reporting issuer to file annually, audited
       comparative financial statements relating separately to the last financial year as well as
       the year proceeding that year.]

      Financial statements are as follows: balance sheet, income statement, statement of
       retained earnings, and cash flow statement and in most cases these financial
       statements must be reviewed by the issuer’s audit committee, approved by the
       board of directors, and signed by 2 directors indicating such approval

     INTERIM FINANCIAL STATEMENTS
s. 77(1):  Interim financial statements: requires RI to distribute to security holders and
           file with OSC cumulative, quarterly unaudited financial statements on a
           comparative basis within 60 days following the end of each financial quarter

           the comparative basis helps readers of financial statements evaluate the performance
            of the issuer
           Note: interim statements don’t have to audited but the auditor should review them
            BUT the issuer’s board of directors or the audit committee must review the
            statements before they are filed and delivered

       [Note: Section 77 imposes an obligation on every reporting issuer to file quarterly,
       unaudited interim financial statements, including comparative quarterly interim financial
       statements from the corresponding quarterly periods in the last financial year.]

      EXCEPTIONS FROM REGULAR DISCLOSURE: Section 80: allows for the relief in
       whole or in part of certain of the regular disclosure obligations. This can occur upon the
       application of the reporting issuer, the Commission may do so where in its opinion it
       would not be prejudicial to the public interest



                                                                                                36
(B) Timely Disclosure

        CENTRAL OBJECTIVE OF TIMELY DISCLOSURE: The objective of timely
         disclosure is to provide investors with equal access to material information regarding the
         affairs (to access up to date and accurate info in the market) of the reporting issuer, so as
         to create a level playing field in the market. This intern will facilitate the efficiency of the
         secondary market and will discourage insider trading (to reduce the risk that persons with
         access to that info will act upon undisclosed info). B/c w/out timely disclosure
         obligations, those investors lucky enough to have special access to such corporate
         information would have an unfair advantage over others
          However, it must be remembered that timely disclosure involves judgment calls with
             respect to what must be disclosed or what is a material change; premature disclosure
             is offensive as late disclosure since it puts unreliable information into the
             marketplace. Hence, with timely disclosure, do not be early, do not be late, BE
             RIGHT.

Note: Not always clear when a matter is right for disclosure. If you are not sure and you chose
not to disclose then to protect yourself do an internal cease trade, send memo “until further
notice, do not buy and sell securities of this company.” This will protect you at least from insider
trading

*      COUNTERVAILING CONCERNS WITH RESPECT TO TIMELY DISCLOSURE:
Timely disclosure is not a simple task because it requires the balancing of countervailing
considerations with the goal of wanting to provide full information to the market:

   (a) Confidentiality: The reporting issuer may not want to disclose every event that occurs. In
       fact, certain business operations would not go ahead if they had to be disclosed right
       away (e.g., if had to disclose a deal was being done, lots of them would not get done).
       The Act allows for some different types of disclosure to address the legitimate and real
       confidentiality concerns. There is a tension b/t the need to inform the public ASAP and
       the need for business confidentiality.

   (b) Premature Disclosure and Market Manipulation: Too much disclosure too early is as
       offensive as late disclosure since it puts unreliable and risky information into the
       marketplace and these may cause market fluctuations; this does not maintain the integrity
       and confidence in the capital markets.


*       REQUIREMENTS FOR TIMELY DISCLOSURE: The requirements for timely
disclosure can be found in s. 75 and must read in conjunction w/national policy 51-201, which
purports to “supplement” the continuous disclosure provisions of provincial securities
legislation, including the OSA.

   (a)   Section 75:




                                                                                                      37
       Publication of a Material Change, s. 75(1): Subject to subsection (3) [Confidential
       Disclosure], where a material change occurs in the affairs of a reporting issuer, it shall
       forthwith issue and file a news release authorized by senior officer disclosing the nature
       and substance of the change. Must make public disclosure in the affairs of your business.

       Report of Material Change, s. 75(2): Subject to subsection (3) [Confidential
       Disclosure], 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 10 days of the date on
       which the change occurs.

NOTE: * In the case of information previously known, must disclose immediately upon it
becoming apparent that the information is material


WHAT MUST BE DISCLOSED?

There is very little guidance in the Act as to what must be disclosed. You just have to be right
and the answer will be judged in hindsight.

      Material change defined in s. 1(1): as a change in the business, operations, or capital of
       an issuer that would reasonably be expected to have a significant effect on the market
       price or value of the securities of the issuer and includes a decision to implement such a
       change made by the board of directors of the issuer or by senior management of the
       issuer who believe that confirmation of the decision by the board of directors is probable

   NOTE: Not all changes require disclosure, only changes that will likely have a
   significant effect on the market price or value of the securities

Obligation of s. 75 arises when there is an occurrence of a material change in the affairs of an
issuer BUT what is a material change that requires disclosure? The following may be of some
help:

                                Internal vs. External Changes
Change in the business affairs of the company draws distinction b/t internal change, which
requires disclose and an external change that do not (WITH ONE EXCEPTION)

          Internal Change: a change related to the company (e.g., the company is closing down
          a plant) and thus, this requires disclosure.

          External Change: the effects of external political, economic, and social developments
          on the company’s affairs (e.g., the prime rate increases) beyond the control of the
          company. If the impact on the company is no different from the impact on any similar
          company, then no disclosure is required. However, National Policy 51-201 states that
          if an external material change effects upon the business and affairs of the reporting
          issuer different from the effect generally experienced by other issuers engaged in
          the same business or industry, the issuer must explain the particular impact on them.



                                                                                                   38
          [For e.g., a government policy that affects most issuers in a particular industry does
          not require an announcement, but if it affects only one or a few issuers in a material
          way, such issuers should make an announcement.]



                                 Actual vs. Proposed Change
Definition of material change also differentiates b/t actual changes and proposed changes:

              Actual change: change that has actually occurred and are likely to have an
              impact, i.e. fire, strike, new K signed

              Proposed change: decision is made today to undertake a change in the future
              (i.e. co. decides it will close its plant in 3 months) and should be disclosed and
              should be in the market place (not the plan)

              2 instances when a proposed change is material and should be disclosed:
                      (a) When board of directors decide to implement something (make a
                          decision for change)
                      (b) When senior management decides to do something and they believe
                          that board of director approval is probable*

           *this is the very earliest moment disclosure might be made. Requiring disclosure
           even before the proposed changes are approved and, therefore, binding serves
           more to give the SC the heads-up to watch for insider trading than to inform the
           pubic (disclosure is often confidential at this stage)

           NOTE - Intentions: It is important not to confuse “proposed changes” with mere
           “intentions” to do something; intentions are not required to be disclosed. Further, the
           issuer must have the ability to carry out the intention

                               Material Changes vs. Material Facts
Definition of material information that must be disclosed under s.75 is a change in the affairs
of the company and NOT material facts
 material facts defined in s. 1(1): where used in relation to securities issued or proposed
    to be issued, means a fact that significantly affects, or would reasonably be expected to
    have a significant effect, on the market price or value of such securities

Note: according to NP 51-201 material information consists of both material facts and
material changes relating to the business affairs of an issuer

Royal Trust Co. v. Campeau
Facts: Royal was subject to a hostile takeover bid which its directors knew would fail (the
board members knew that large shareholder (60%) were not going to tender). The
directors told some of the shareholder not to worry. Campeau lost a lot of money and
complained that Royal should have disclosed this information.



                                                                                               39
Issue: Is the info a material fact or a material change?
Holding: Court held that the info was a material fact
There was no material change and therefore no timely disclosure issue, don’t need to
disclose – it was a material fact that shareholder would not tender
     If only material facts then don’t have to disclose this in timely disclosure obligation

OPTIONS for Disclosure of a Material Change
   3 options (types of timely disclosure) if there is a material change in the affairs of the
     reporting issuer:

          (1) Regular and Complete public disclosure, [s. 75(1) & (2)]: if there is a material
              change affecting the affair of the co., the company must do 2 things: make
              complete public disclose by making media announcement and filing of form 27

              (a) Issue a press release forthwith describing the substance and nature of the
                  change. NP 51-201 (NP 40): Press releases are to be factual and balanced,
                  neither over-emphasizing favourable news nor under-emphasizing
                  unfavourable info, and without editorial comment or exaggeration (media
                  that will facilitate quick and wide dissemination of information)

              (b) Company must file form 27, material change report, (and file the press
                  release) that forces you to describe the nature and substance of the
                  change. s. 75 (2): must file as soon as practicable but in any event w/in 10
                  days of the date of the change

                     Note: must also comply w/stock exchange rules if securities are listed
                     on the stock exchange

                     Note: Misleading Announcements - while all material info must be
                     released immediately, the timing of an announcement of material
                     information must be handled carefully, since either premature or late
                     disclosure may damage the reputation of the securities market

          (2) Incomplete Public Disclosure: same as public disclosure but one aspect is that
              you can persuade the securities commission that some info should not be
              disclosed b/c it is confidential, even if it is material. A co, can seek confidential
              status for some facts from the Commission. Must write them a letter setting
              out the confidential material that you didn’t want to disclose b/c that
              particular info would be unduly detrimental to the co. A press release and
              material change report must still be filed, but they will exclude the
              confidential info.

               (a) Issue the press release with everything but that fact;
               (b) File the material change report with everything but that fact;
               (c) File with the Commission a separate letter stating the           reasons for the
                  omissions.



                                                                                                40
   (3) Confidential Disclosure, [s.75 (3)]: SC grants the RI permission to keep material
       info confidential (temporarily). The RI have knowledge of sensitive
       confidential info that is material, and that certainly must be disclosed
       eventually, but is not quite “ripe” for disclosure. Premature disclosure of
       such information could, in certain circumstances, cause an issuer to lose
       valuable opportunities to the detriment of the issuer and its investors. There
       is no press release or material change report. RI are required under the law to
       file a report to the Commission and indicate that it is confidential info and written
       reasons for non-disclosure. Since the Commission is aware of the change they
       can monitor trading activity to ensure no insider trading, but the info does not
       have to be publicly disclosed (confidential filing). The SC has the discretion to
       reject the request for confidential status.

  [Note: Once you request confidential disclosure, you are admitting that it is a
  material change; hence, you give up the defence that it was not a material change; if
  the OSC rejects an application for confidential disclosure, the reporting issuer will be
  obligated to public disclose the material change.]


  Section 75(4): Must advise the Commission within 10 days of the date of filing the
  initial confidential report why it should remain confidential and every 10 days
  thereafter until it is generally disclosed via news release and a material change report.
  If the material change is of the “as a right” type described below, once Board approves
  it, disclose via a news release and material change report and if the Board rejects it, do
  nothing.

 Two Circumstances where you can get confidential disclosure

(a) “Business Judgment” Exemption, s. 75 (3)(a): Where in the opinion of the RI the
    release of the material change would be unduly detrimental to the interests of the
    company

     This exceptions can only be justified where the potential harm to the issuer or to
      shareholders caused by immediate disclosure may reasonably be considered to
      outweigh the undesirable consequences of delaying disclosure (reflects the need to
      balance the objective of informing the public and the need for confidentiality so
      that companies can function efficiently); this is a difficult test to meet. There is a
      discouragement from securities administrators and stock exchanges from delaying
      disclosure for a lengthy period, since it is unlikely that confidential information
      can be maintained beyond a short term. Also, since the information is not generally
      disclosed, you must certify that nobody will trade on it.
     If is uncertain how you prove that the release of certain info will be materially
      detrimental to the affairs of a company, regulators and courts will take a strict
      stance (must show evidence of real economic harm) and will err on the side of
      caution



                                                                                          41
          What is unduly detrimental? NP 51-201 gives 3 instances in which disclosures
          might be unduly detrimental to an issuer’s interests (i.e. reduction in profit or
          income),where:

          (i)     Release of the info would prejudice the issuer’s ability to pursue specific
                  and limited objectives or to complete a transaction or series of
                  transactions that are under way. I.e. premature disclosure of the fact that
                  an issuer intends to purchase a significant asset may increase the cost of
                  the acquisition

          (ii)    Disclosure of the info would provide competitors with confidential
                  corporate info that would significantly benefit them (if the detriment to
                  the co. resulting form disclosure would outweigh the detriment to the
                  market in not having access to the info). I.e. decision to release a new
                  product may be withheld for competitive reasons, but such info should
                  not be withheld if it is available to competitors from other sources

          (iii)   Disclosure of info concerning the status of ongoing negotiations would
                  prejudice the successful completion of those negotiations. But disclosure
                  should be made once “concrete information” is available, such as a final
                  decision to proceed with the transaction or, at a later point in time,
                  finalization of the terms of the transaction.


       (b) “As of Right” Exception, s. 75 (3)(b): This exception applies in circumstances
           where the material change consists of a decision to implement a change by
           management who believes board of director approval is probable. It is then a
           material change and there is still an obligation to disclose, but you have an
           absolute right to file to the Commission detailing/disclosing the change and its
           confidentiality. Senior management must certify that they have no reason to believe
           that persons w/knowledge of this info has made use of it in buying or selling
           securities – must advise OSC every 10 days of this, and OSC will watch over
           company. However, confidentiality “as of right” lapses once directors approve it
           and then must disclose (b/c it becomes a binding decision) – if rejected by board
           of directors then don’t have to disclose b/c there is nothing to disclose

          NOTE: Why require disclosure of non-binding management decisions in the
          first place? The SA is proactive legislation – when decisions or material changes
          are pending, disclosure puts the SC on notice to “watchdog” trading activity.
          Can’t force public disclosure if senior management think that it will be probably
          approved b/c this would preempt the board – file report w/OSC that they can
          watch the stock – it is a deterrent to insider trading

RUMOURS or SPECULATION: (Maintaining Confidentiality): NP 51-201 says that even if
there is a case that has been approve for confidential disclosure of material info, in the



                                                                                              42
event that rumours circulate in the market place, info is leaked, and when market activity
indicates that the trading is unduly influenced by the rumour (note: other than in the
necessary course of business) then the issuer is required to make an immediate
announcement on the matter, must disclose. Even if have confidential right still have to
disclose once rumours start to circulate and trading is influenced. (now in the act)



(D) Early Warning System (s. 101 and 102)

      PURPOSE OF THE EARLY WARNING SYSTEM (EWS): The take-over rules in
       the OSA kick-in at 20%, and hence, it would be difficult to generate an auction
       which the Commission agrees is the best result, when a company has a 20% head
       start; it is too much of an advantage. EWS designed to give advanced warning in the
       market place that someone is accumulating a large amount of stock (and may be
       planning a take over bid, which is material info). Useful info for the market

      OBLIGATIONS: imposes obligation on individual to give advanced notice to the
       world if they hold 10% or more of the outstanding voting or equity securities of a
       class – must issue and file a news release (s.101(1)(a)), file a report w/the OSC (s.
       101(1)(b)), and refrain from making additional purchases for one business day from
       the date the report is filed (s.101(3))

What is the obligation?

s. 101(1):       Every offeror that acquires beneficial ownership of, or the power to exercise
                 control or direction over, or securities convertible into, voting or equity securities
                 of an class of a reporting issuer that, together with such offeror’s securities of that
                 class, would constitute 10% or more of the outstanding securities of that class is
                 required to
                 (a) issue and file a press release forthwith, AND
                 (b) within 2 business days of the transaction file a report with OSC containing
                     the same info as that contained in the news release

        Acting Jointly or in Concert: This section includes any person acting jointly or in
        concert with the offeror, as defined in s.89(1) “Offer” (together owning 10%). Thus,
        all their stock will be lumped together for the purposes of the Early Warning System
        (for e.g., two people cannot agree to buy 9% each to do a take-over – it will be seen as
        18%). However, if two independent people vying for control accumulate stock and
        then decide to join forces, this will not trigger the Early Warning System; s. 101(1)
        states “acquires” and so they will trigger the Early Warning System when they acquire
        shares thereafter.

             Contents of Press Release is found in appendix E of National Instrument 61-103 (p.
             1395) section 1(f): says offeror and any joint actors, must disclose the transaction
             that gave rise to the new release, including any future intention to acquire



                                                                                                     43
              ownership of, or control over, additional securities of the RI [However, usually
              will say that they bought 10% and may or may not buy more; careful not to
              reveal too must if doing a takeover bid b/c will cost too much.]

           Freeze Period
        s. 101(3):   Freeze Period: upon attaining 10%, an offeror (or anyone acting jointly or
                     in concert with him) may not purchase any more securities until 1 business
                     day after a report was filed under s. 101 (1) (have a freeze on the
                     acquisition of more stock until 1 business day after you file your report),
                     except where it is the trade which puts the offeror over 20%, in which case
                     the take-over rules apply [no freeze then after going over 20%; s.
                     1010(4)].

                  Purpose of freeze period: Must give notice and time for the market to digest
                  the information of a potential takeover bid (have to prepare the market for
                  this) and ensures speedy filing b/c offerors want the business day freeze to be
                  over

        Every Additional 2%
s. 101(2):   Every time the offeror (or anyone acting jointly or in concert with him)
             acquires an additional 2% or more of such outstanding securities (anything
             subsequent to the 10%), starts the whole EWS again. Must issue and file a
             press release, file a report within 2 business days, and 1 day freeze period on
             acquisition of securities (in compliance w/s. 101(1))

Note: must file a press release and report (freeze period) for every 2% acquired between
10% and 20%, at which point, a press release and report are still required, but the freeze
period no longer applies

s. 101 (4):    Exception: subsection (3) (freeze period) does not apply to an offeror who has
               acquired 20% or more of the outstanding securities of a class of the target
               company’s securities (no longer have an obligation of a one day freeze)
This is b/c the purpose of the section is to detect potential changes in control
Note: you can’t prepare your seller, have to find him the way he is

Note: it is only the trade that puts you over 10% (or 2% in the case of s. 101(2)) that has to
be disclosed under s. 101(1)
 the strategy is to get 9.9% (buy the small SH up first) and save the largest transaction to the
    end
 once at 9.9%, the goal is to make the largest buy possible in order to push ownership the
    greatest amount over 10% before the company has to follow the EWS disclosure rules

                         Early Warning during an Outstanding Take-over bid

Take-over bid: is when an offeror makes an offer to acquire outstanding voting or equity
securities of a class where the number of shares the offer owns, couples w/the number of shares



                                                                                                 44
they offer to acquire, constitute 20% or more of the outstanding securities of that class (at the
date of the offer to acquire)

s. 102(1):     During the currency of take-over bid: If there is an outstanding take-over bid (it
               has not expired) an offeror, (other than the bidder) who acquires (or anyone
               acting jointly or in concert with him), together w/such offer’s securities of that
               class, 5% or more of the outstanding securities of the class of shares subject
               to the bid, must issue and file a news release, not later than the beginning of the
               next business day. Note: no report or freeze period

s. 102 (2):    Every subsequent 2% thereafter that the offeror acquires requires issuing
               and filing a press release no later than the opening of trading on the next
               business day UNTIL the trade that puts him over 10%, then the regular
               early warning system obligations kick in

               PURPOSE: this could suggest a competing bidder b/c then there could be an
               auction for those shares


(E) Insider Reporting

       PURPOSE OF INSIDER REPORTING: Lawful trading by insiders: Nothing wrong
        w/insiders of a company buying and selling shares of that company as long as they
        don’t do it with material undisclosed information that is not in the public domain
        (confidential inside information). Thus if an “insider” trades must comply w/special
        public reporting requirements b/c:

        (a) To assist w/free and open market. Useful for pubic to know what insiders are
            doing as it could be indicative of the future performance of the co. If you are an
            investor or potential investor important to know what the company is doing, are
            they buying or selling
        (b) Insider reporting is a compliment to insider trading provisions. Used as a
            deterrent to insider trading. If trades have to be reported, it is less likely that
            people will trade on inside info. If OSC has knowledge of trades, it can more
            easily investigate possible inside trades

Note: if you disclose that you are going to do insider trading then can’t do it

       REQUIREMENT UPON BECOMING AN INSIDER (WITH NO PREVIOUS
        SHARES)
s. 107(1):   persons or company who become insiders must file an initial report, 55-501F,
             within 10 days after becoming an insider describing any ownership or control
             over securities of the RI

       REQUIREMENTS WHEN AN INSIDER BUYS OR SELLS SHARES




                                                                                                    45
       s. 107(2):    once an insider every time there is a change in ownership (buy or sell
       securities) must file a report describing the change, within 10 days of the change (this
       form becomes available as a public record)

Who is an insider?
  s. 1(1) defines “insider” or “insider of a reporting issuer” as:
      (a) every director or senior officers of a RI
      (b) every director or senior officer of a subsidiary of a RI (“subsidiary” is any company
          that the principal owns 51% or more of its securities)
      (c) any person or company who beneficially owns, directly or indirectly, or exercise
          control or direction over 10% or more of the voting securities of a RI (other than an
          underwriter who holds voting securities in the course of distribution) – i.e. “directly
          or indirectly”- can’t set up holding company to own the relevant securities
      (d) a RI where it has purchased, redeemed, or acquired any of its securities, for so long as
          it holds any of its securities

   Note: if issuer purchases its own securities pursuant to a normal-course issuer bid, the
   reporting deadline is relaxed, report must be filed on the 10th day following the end of
   the month in which the purchases were completed. (share buy back)

                                           IMPORTANT
Ownership of 10% or more of an INSIDER triggers two disclosure obligations:
(a) must file initial insider report and/or change in ownership requirement
(b) must file early warning disclosure documents


NI 55-101 – Exemptions from Certain Insider Reporting Requirements: there are
exemptions to these rules b/c many directors or senior officers have no special access to
information about a RI
(a) a director or officer of a subsidiary of a RI is not required to file insider-reporting reports,
    unless the subsidiary is a “major subsidiary” (assets and revenues that are at least 10% of the
    consolidated assets or consolidated revenues of the RI) or unless the director or officer
    “receives or has access to” inside information before it is generally disclosed
(b) officers and directors of affiliates of insider companies are exempt unless they have access to
    inside information or unless the affiliate is a material supplier or has a material contractual
    relationship w/the RI
[Note: May be exempt from Insider Reporting but would have to comply with early warning]
Companion Policy 55-101: If a director or senior officer acquires securities of the RI w/out ever
exercising any independent investment decision, then would be exempt from insider reporting
requirements, such as participation in dividend reinvestment plan when payments are used
automatically to purchase additional shares for them

               (F) Insider Trading

(i) Introduction




                                                                                                  46
*       PURPOSE OF INSIDER TRADING RULES: The insider trading rules are used to
protect the integrity of the capital markets and an attempt to provide a level playing field, such
that everyone has access to the same information when buying or selling securities. The
legislation attempts to do this through strong penalties upon getting caught. On the other hand,
do not the insider trading rules perhaps give people a false sense of security or the illusion of a
level playing field; it is difficult to police as well as trace and prove. Further, there have only
been of few cases in Canada and the vast majority of people engaging in insider trading do not
get caught. Lastman believes company’s might be better able to police such a practice because if
a company was to practice it a lot, it would lose confidence in the market and no one would buy
its stock; hence, the company could threaten termination to any employee caught.


*      MISNOMER: The word “insider trading is a misnomer:
       (a) applies not just to insiders, but anyone in a “special relationship;”
       (b) ‘trading’ is limited to the sale of securities, but insider trading deals with both buying
           and selling of securities.

“Insider-trading” liability occurs when a person in a special relationship with a RI trades (buys or
sells securities) w/knowledge of an undisclosed material change or material fact, or discloses
such info (“tips”) to other who then profit by trading w/knowledge of such information.

NOTE: If an insider buys securities and doesn’t report then go to jail

   Purpose: of insider trading provisions is to prevent people w/access to privileged info
    from buying or selling securities based a material fact or change that has not yet been
    disclosed in the public domain
   Rational: theory of equal opportunity in the market place, do not want those
    w/undisclosed info to exploit their advantaged position vis a vis investors at large
   Approach: positive action is taken to invoke insider trading provisions (SA is proactive)
    focus is on deterrence first, rather than remedy after – necessary to protect the integrity
    of the capital markets and to inspire confidence in a level playing field
   Essentially s. 76 prohibits insiders from trading based on info until the info is available to the
    public (i.e. insiders are not generally barred from trading, but are barred in this specific
    circumstance)
   Stigma: allegations of insider trading are enough to destroy your trading career

        Debate over SA regulation of Insider Trading:
        Against:
   legislation is not effective, insider trading goes on all the time and there is no level playing
    field
   SA regulation creates unfounded confidence in the system by giving investors a false
    sense of security and confidence in their ability to compete (stop lying to the public)
   Insider trading occurs everyday and there is no level playing field– if everyone was trading
    w/the same info who would trade
   s. 76 should be abandoned in favour of self-regulation by RI: impose obligations on the
    companies b/c the market place will govern itself – companies can regulate more effectively


                                                                                                   47
    b/c they are in the best position to monitor both insiders and any trading activity in their own
    securities
   Companies have an incentive to regulate b/c if public finds out that the company has insider
    trading then the public won’t buy these securities and the company won’t be able to raise
    investment capital
   Making companies responsible will make them more careful w/the dissemination of info

For:
 just b/c we can’t stop people from insider trading doesn’t mean we just throw out the
   legislation
 legislation is a deterrent b/c the consequences are severe
 there is not a lot of insider trading in Canada, which suggests that the legislation works
 Symbolic value of law – just b/c the creation of an offence does not eliminate the activity
   does not mean there should be no law against it

Why Regulate Securities Trading of Insiders?
1. Unfair Access: it seems intuitively unfair to many people that corporate insiders
   w/access to important undisclosed information about an issuer might use such
   information to make large profits in the trading of their own companies’ securities
    Those who oppose restrictive insider-trading law argue that is no more unfair for
       insiders to trade on info that is unavailable to other investors, than it is unfair for
       corporate officers and directors to be paid fees or salaries to which ordinary
       shareholders are not entitled
2. Information as a Corporate Asset: inside info about an issuer is an asset of that issuer and
   the value of such information belongs to the issuer, not to those people, the insiders,
   who happen to be in a position to exploit it
    Not clear that where insiders purchase securities of an issuer on a basis of
       undisclosed info that he has compromised his position or distorted his incentives –
       would have a greater incentive to generate price improving initiatives – the
       corporation will not lose anything
    In the case of insiders selling securities on the basis of undisclosed info is different.
       Allowing such sales can place insiders in a position where their duty and their
       interest conflict – might not have a strong incentive to increase the firm’s value –
       also concerns of “short selling” where an insider sells shares that are not theirs by
       borrowing the securities from a lender, completing the sale, and then purchasing
       securities of the same type in the market so that they can be returned to the lender –
       this is only profitable if the market price of the securities falls b/t date of original
       short sale and the date on which the short seller covers his or her short position by
       purchasing securities in the market – would have an incentive here to drive down
       the value of their own company’s shares
3. Economic Harm to Markets and Issuers: insider trading can damage capital market by
   undermining investor confidence and/or increase the cost of capital for issuers.
   Prospective investors will refuse to purchase securities if they have reason to fear that
   insiders will be free to trade on the basis of undisclosed info. Capital markets will dry
   up and our economy might collapse. The ideal securities market should be free and
   open market with the fullest possible knowledge of all relevant facts among traders. It


                                                                                                  48
    could increase the cost of capital for issuers b/c investors may demand compensation in
    the form of lower prices for securities for their expected insider trading losses
     Opponents of restrictive insider-trading rules argue that this is a genuine risk and
        that companies are in a better position than regulators to respond w/their own
        internal restrictions on insider trading

(ii) The Offence of Insider Trading

s. 76:          prohibition against someone buying and selling securities in a preferential position
                (have confidential info that the public does not have b/c an insider). This reduces
                the integrity of the public market b/c will not be a true level playing field

        OFFENCES OF INSIDER TRADING: s. 76 highlights 2 offences caught under insider
         trading

         (1) Trading where Undisclosed Change (“buy/sell”)

         s. 76(1):       It is an offence for a person in a “special relationship” with a RI to
                         purchase or sell securities with the knowledge of a material fact or a
                         material change that has not been generally disclosed
         (2) “Tipping”

         s. 76(2):       it is an offence for the RI, persons in a special relationship with RI, or a
                         person or co. proposing to make a take over bid, to disclose to
                         someone else any material fact or material change w/respect to the RI
                         that has not been generally disclosed to the public, except in the
                         necessary course of business

                         [i.e. the party above is guilty of tipping whether or not the person actually
                         buys or sells the shares (or becomes a “tippee”)]
Notes:
    to be caught under insider trading have to be a person in a special relationship
    here is material fact as well as material change whereas continuous disclosure is only
       material changes
    offence covers buying and selling – whereas for definition of trade for prospectus
       obligation is only a sale
    it is an offence for the RI to tip, but not an offence for RI to buy/sell securities
       w/undisclosed material info. Legislation allows– this is a trade off in the legislation b/c
       take over bids are beneficial to society
    Officer and directors of a RI cannot buy/sell, but the RI (co. itself) can has to do
       w/takeover bids (considered a good thing)
    A RI making a bid does not have to disclose until it triggers the EW provisions
    In both offences it is buying or selling based on material fact or change that has not been
       disclosed or tipping in those circumstances

        DEFINITON OF SPECIAL RELATIONSHIP:


                                                                                                    49
s. 76 (5): defines who is in a “special relationship” with the RI:
    (a) a person or company that is an insider, an affiliate, or an associate
        (i) of the RI,
        (ii) a person or company proposing to make a take over bid of the RI
                  I.e. if 10% holder of that company or a 10% shareholder of a company that is
                     making a bid for a company, then are in a special relationship, then can’t sell
                     securities w/knowledge that has not been disclosed (however, the company
                     can buy shares, but not the directors)
                  I.e. if go to a company to discuss a take over bid, then are in a special
                     relationship w/RI and can’t buy and sell shares
    (b) A person or company that is engaging in or proposing to engage in any business or
        professional activity with or on behalf of the RI or with or on behalf of a company
        proposing to make a take over bid
              i.e. if retained as a lawyer for someone who is making a take over bid then are in a
                 special relationship and can’t buy shares
    (c) A person who is a director, officer, or employees of RI, or of a company proposing to
        make a take over bid
    (d) persons or companies that learned of the material fact or material change regarding
        the RI while they were (a), (b), or (c) (those who were formally in a special relationship
        are deemed to continue to be i.e. former lawyer)
    (e) person or co. is in a special relationship if learns of a material fact or change w/respect
        the issuer from any other person or co. described in this section (those in a special
        relationship) including those described in this clause, and knows or reasonably to have
        known that the other person or co. is a person or co. in a special relationship
              “tippees” persons who learn of undisclosed information (a material fact or
                 change regarding the RI) from a person in a special relationship w/a RI and knew
                 or ought to reasonably to have known that such person was in a special
                 relationship (then they are now in a special relationship and can’t buy or sell
                 securities and can’t tip – “tipper legislation”)

             In order to be considered a tippee there are 2 requirements:
       1. The person who gave you the info (the tippor) must be in a special relationship
       2. The person now getting the info (the tippee) knew of ought to have reasonably
          known that that they are getting info from someone who is in a special relationship
          (the tippor was in a special relationship) – subjective and objective test

       Note: The tippee must learn the information from a person in a special relationship; if
       information comes from themselves due to what they see or already know, it is fine.]

              if learned info from a person who was in a special relationship then you are in a
       special relationship and can’t buy and sell securities – if you tell someone about this, and
       that person knew or ought to have known that you learned of this info from someone in a
       special relationship and that made you in a special relationship then that person is in a
       special relationship



                                                                                                 50
Who is caught by “tipping” provision?
 It is an offence not only for any person in a special relationship w/RI to “tip” but also for any
  person who obtains knowledge of a material fact or material change from such a source (a
  “tippee”) to tip w/knowledge of that info before it is generally disclosed, unless the tippee did
  not know, or ought not reasonably to have known, that the tipper was in a special relationship
  w/the RI

   Do not confuse offence w/evidentiary issues – know what the offence is, what is ought to
    have reasonably known – this will be judged in hindsight and will look at all material facts –
    did you behave reasonably? Will be addressed on case by case basis, it is fact specific

When is it not an offence to Tip? What is the necessary course of business?
 It will not be an offence under s. 76(2) to tip a person or company if it is done in the
  necessary course of business. Hence, if you tell your banker when you are trying to set up
  financing for a take-over, you are not guilty of tipping, since it occurred in the ordinary
  course of business, but the banker is now in a special relationship (i.e., since he learned
  material information from a person in a special relationship and knew that person was in a
  special relationship) and is prohibited from buying or selling the stock and from tipping
 Royal Trust case where directors knew Campeau could not win his takeover bid and told
  shareholders there was no risk. Is considered tipping b/c giving an informational advantage
  to shareholders, this is not in the necessary course of business

How to answer a question on an exam about insider trading (or anything):
Start at beginning, tell the story and go to the end – don’t go back and forth
Define insider trading…First ask what type of offence (trading where an undisclosed change
or tipping).
      If first one then determine if the person is in a special relationshipif yes, is it a material
         fact or change (define) if yes, determine if they had knowledge of this fact or change
         (how did they find out) – is it in the necessary course of businessguilty or not AND
         any defences
      If the second determine if person is in a special relationship, and if is then caught, if
         yesis it a material change or fact (define)if yes, how did they know of this material
         fact or change (how did they find out), was it in the necessary course of course of
         business. Note: Doesn’t matter if the person they gave the info to knew they were in a
         special relationship or acted upon that info. guilty or not AND any defences
      May also need to determine if a person is considered a tippee (use the criteria above
         and s. 76(5)(e) and thus can’t trade (buy or sell with undisclosed material fact or info that
         they received) and can’t tip. (THIS IS AN EVIDENCIARY FINDING, person will only
         be guilty of buying or selling or tipping of found to be in a special relationship and
         caught by tipping legislation)

***some story***

Old Exam Q:
Generic drug C. steals patents. A pharma company develops a drug and will prob get a patent in
a week. Generic goes to patent the drug before hand. Can I sell the pharma stock short?


                                                                                                    51
Do I have a special relationship?
The special relationship test is a “bright line test”
Prob not

(iii) Defences to insider trading

       OLD LEGISLATION – MAKE USE DEFENCE (doesn’t apply anymore): It used to be a
        defence for insider trading if the purchaser or seller proved that they did not make use of
        the information anyway (i.e., bought or sold for other valid reasons). However, this was
        problematic since there can always be other reasons and one cannot get inside someone’s
        head to know if they are really guilty; thus, no convictions resulted from it. Hence, the
        OSA was amended and the “make use defence” was eliminated. Backlash in securities
        industry. Need defences for people who had no real knowledge, they need an ought

   As a response to backlash defences in 175 of regulations

OSA Regulation (s .175) Defences for Trading where Undisclosed Change:

        (i)   Chinese Wall Defence [s. 175(1) of the Reg.]: Provides a defence for companiess and
              persons caught by ‘deemed’ knowledge through agency law, where the company has
              taken reasonable precautions to prevent the careless dissemination of undisclosed
              information, then you are not guilty of inside trading. Confidential info possessed by
              one department is not disclosed to anyone outside of the department A person or
              company, to be not guilty of insider trading, must show:

               (a) You had no actual knowledge, just deemed knowledge, by way of agency (i.e.,
                  deemed knowledge because one of the directors, officers, partners, or employees
                  had the actual knowledge);

               (b) Theperson who made the decision to buy or sell did not have the actual
                  knowledge;

               (c) No   advice was given to you by persons who had the actual knowledge;

               (d) An appropriate ‘Chinese Wall’ was in place to prevent the flow of information
                  from going from those who had the actual knowledge to that person who made
                  the decision to buy or sell. [s. 175(3) of the Reg.]. Thus, can’t actually know
                  something but if you are sloppy then will be held liable


   OSC Policy 33-601 (2.3 (b)), sets out procedures to contain inside information: (i) by
    using code names of issuers for confidential projects being worked on, (ii) keeping
    confidential info in sensitive areas secured when not being immediately supervised, (ii)
    ensuring electronic transmission of inside info takes place only when there are adequate
    controls for sending and receiving the transmission




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   I.e. partner in law firm and deemed to know everything partners know, but in reality don’t
    really know everything. Some files could be under code name. If one partner is doing a take
    over bid then I shouldn’t be guilty b/c didn’t actually know
   If the only reason you know something is b/c it is known to one of the partners and this party
    had nothing to do w/your decision to buy or sell or did not give you any advise, and if your
    firm took reasonable precautions so that this info would not fall into your hands, then
    not guilty – but if your firm was sloppy then will charge you civilly

OSC Policy 33-601 (2.4) Restrict Transactions:
Employs the concept of classified lists (”grey lists” and “restricted lists”):
 Before a person wants to buy shares of a company, then call someone to check either list
    (either have a custodian or company will distribute a list that says what you can buy or not).
    If the issuer is on a list then restricted from trading or any transactions that have to do with
    that issuer.
(a) Grey List: a highly confidential list, complied by the registrant, of issuers about which
    registrant has received inside information about the issuers, i.e. registrant has been invited to
    manage or participate in a possible offering or merger
     This list is not generally circulated to other members of the firm, but is made available, as
         necessary, to compliance officers
     The registrant removes an issuer’s name from the grey list to the restricted list when it no
         longer has inside information regarding the issuer
(b) Restricted List: a list complied by the registrant of issuers about which the registrant may
    have inside information, i.e. registrant has agreed represent the issuer in a take-over bid and
    is providing continuing advisory services, and the transaction (take-over bid) has been
    generally disclosed, but the registrant is still in possession of or may gain access to inside
    information during the course of the transaction
     The restricted list is disseminated throughout the firm
     Trading in securities of issuers on the list stops, except in the case of “normal market-
         making or other permitted activities
     A registrant should remove an issuer’s name from the restricted list when the registrant is
         no longer in possession of inside information i.e. when the take-over bid has been
         completed

    (ii)Automatic Dividend (Reinvestment) Plan [OSA Regulation, s. 175(2)(b)]:
    Exempt from s. 76(1) and liability under s. 134 of the Act, where the person or company
    proves that the purchase or sale was made pursuant to participation in an ongoing automatic
    dividend plan that was entered into by the person or company prior to the acquisition of
    knowledge of the material fact or change, it is not considered inside trading when the
    company buys that stock with the dividend money.

    (iii)Unsolicited Order Defence [OSA Regulation, s. 175(2)(a)]: Exempt from s. 76(1) and
    liability under s. 134 of the Act, where the person or company proves that the purchase or
    sale was entered into as agent of another person or company pursuant to a specific
    unsolicited order form that other person or company to purchase or sell [show that you did a
    trade for another person as agent that it was an unsolicited order, that the trade was at the
    request of that other person, broker can execute the trade and it will not be insider trading]


                                                                                                  53
      I.e. your broker knows something about Disney (is being taken over) and you call your
       broker and say buy me shares and your broker executes this on your behalf then not
       guilty (your broker has 2 options: can execute trade or tell you he/she can’t do it, which
       will make you curious) – if an unsolicited trade and only carrying out orders then it is
       not insider trading (where the person or company was acting as an agent for a 3rd
       party pursuant to “a specific unsolicited order”

   (iv)Legally Binding Contract Defence (Former Non-Discretionary Contract) [OSA
   Regulation, s.175(2)(c)]: Exempt from s. 76(1) and not liable under s. 134 or the Act where
   the person or company proves that purchase or sale was made to fulfill a legally binding
   obligation entered into by the person or company prior to the acquisition of knowledge of the
   material fact or change [However, if the contract is discretionary, and you exercise the
   discretion in favour of buying or selling, and complete the transaction, you are caught here]
    If entered into a legally binding obligation before gaining the undisclosed info and you
       subsequently gained knowledge of it, then you can complete the transaction – i.e. you
       enter into an agreement to purchase shares of co. A in 2 weeks and two days later you
       find out that a takeover is happening. If have a legally binding obligation to another
       before you found out inside info then not insider trading – not forced to break K. But if
       have an option (like a way out of the K) and then have knowledge that you didn’t have at
       the time the obligation became legal then can’t do it. No offence for not doing something
       (have to actually buy and sell). But if you sell, with the option not to, and have
       knowledge, then guilty



Defences for BOTH Trading where undisclosed Change or Tipping:

1. Believed Knew Info/Same Information Defence [s. 175(5) of Regulation, or s. 134(b), or
    s.134(2)(e)(tipping)]
Exempt form s. 76 (1) (2) or (3) where the person or company proves that they believed that the
other party to a purchase or sale of securities had the same knowledge of the material fact or
change, both parties to the transaction have the same knowledge base of the material fact or
charge, and if both are in a special relationship, then no harm done and not insider trading. The
material fact or change was known or ought reasonably to have been known to the seller or
purchaser.
     Directors trade between themselves or have disclosed material information to each other,
        if knew or ought reasonable to know the information you did, then okay

2. Believed Generally Disclosure Defence (s. 76(4), s. 134(1)(a), s.134(2)(d)(tipping):
s: 76(4):    No person or company shall be found to have contravened s. (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 before they
             traded or tipped. But the onus is on the person charged w/insider trading to
             prove that they had such a reasonable belief

      What is “generally disclosed”? The OSA does not define this so look at case law


                                                                                               54
When is there satisfactory general disclosure and thus allowing those in special relationship to
buy and sell stock?
Texas Gulf and National Sea case: two-part test to determine if the info has been generally
disseminated:
    (a) info must be disseminated to trading public, and
    (b) The public must have information in their possession for a period of time that they can
        digest it

      Thus cases held that the mere issuing of a press release is not sufficient. Info must first
       be disseminated to the trading public and the pubic must then have sufficient amount
       of time to digest the info. A safe working rule is that insiders should wait a minimum
       of one full trading day after the release of the info before trading, but this depends on
       the nature of the stock (industry) and the place of the news release. The basic point
       is that you cannot trade with an advantage. Lastman believes the test is: “Did you
       behave reasonably and responsibly and are you confident that the public had a reasonable
       time to digest the info – it is based on judgment – it depends on the complexity of the
       news release – could be five days or 6 hours

Defence for Tipping [s. 134(2)(f)]: It will no be an offence under s. 76(2) to tip a person or
company if is done in the necessary course of business (see above for definition on the
necessary course of business)


(iv) Liability for Insider Trading and Tipping

There are least 5 sorts of sanctions or liability to which a person or company who violates s. 76
may be exposed:
(a) penal sanctions
(b) statutory civil liability
(c) administrative sanctions
(d) civil court proceedings
(e) stock exchange or self-regulatory organizations

(a) Penal Sanctions
s. 122 (4): Fine for contravention of s. 76: A fine for the contravention of s. 76: In addition to
any imprisonment imposed under subsection (1) [up to 2 years], if convicted of contravening s.
76(1), (2), or (3) liable for a fine of not less than the profit made or loss avoided by the person or
company by reason of the contravention and not more than the greater of:
        (a) $1,000,000; AND
        (b) an amount equal to triple the profit made or loss avoided by the person or company
            by reason of the contravention.

 (b) Statutory Civil Liability
s. 134, Liability of Insider Trading: If a person or company breaches s. 76(1) they are liable
to compensate the seller or purchaser of the securities for any damages as a result of the



                                                                                                    55
trade. Suggestions for how the amount of damages is to be calculated are in s. 134(6), but
the court is still allowed to consider such other measures of damages as may be relevant in
the circumstances.

s. 134 (4), Accountability of gain: For actions brought by issuers: An insider, associate, or
affiliate of the reporting issuer is accountable to the reporting issuer for any benefit or advantage
received as a result of the purchase, sale, or communication

       * this special rule only applies in the case of unlawful trades by insiders, affiliates, and
       associates, and not in other cases involving persons or companies in a special
       relationship with the RI – based on the theory that corporate information is an asset of the
       corporation itself
       Note: this is why it is not measured on the amount of loss or damage suffered by the RI

s. 134(2), Liability for Tipping: If a person or company (RI or those in special relationship
with RI) breaches s. 76(2) (informs another person or company of a material fact or
material change w/respect to the RI that has not been generally disclosed) they are liable to
compensate for damages any person or company that thereafter sells securities of the RI to
or purchases securities of the RI from the person or company that received the
information, unless (exemption, can prove…)

(c) Administrative Sanctions
In the case of an insider-trading violation committed by a securities professional, such as a
broker, the OSC can suspend, restrict, or terminate the registration of the offender (but
does not usually have the power to order an offender to pay monetary penalties

(d) Civil Court Proceedings
The OSC may apply to the Superior Court of Ontario for a declaration that a person or
company has not complied with or is not complying with Ontario Securities law – court
then has broad powers to issue an appropriate remedial order

(e) Securities Exchange
Where securities of a company are listed on a stock exchange, or where an insider trader is
subject to the jurisdiction of an exchange, or is a member of a self-regulatory organization,
additional policies and sanctions may apply to insider trading




                                                                                                   56
Segment III: The Closed System
General Rule revisited: No person shall trade in a security unless registered, and if such trade is a
distribution, without preparing a prospectus (s. 25 and 53(1) of the OSA)

2 requirements:
(1) Registration – requires trades of securities through the use of underwriters
(2) Prospectus – if a trade in securities is a distribution, then seller must prepare, file,
and deliver to the purchasers a prospectus


The general rule is EXPENSIVE – EXEMPTION NEEDED: The above are very time
consuming and expensive and not all companies are of the size so that they can afford to
participate. Hence, efficient capital markets requires that there be another way for such
companies to raise money from the public other than the expensive prospectus way – Private
Placement Exemptions

Note: in almost every case where a distribution of securities is exempt from the prospectus
requirement that distribution is also exempt from the registration requirement, which is why we
do not focus on registration exemptions but rather prospectus exemptions




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How can issuers sell securities without registering or going through the prospectus requirement?
By private placement exemptions – can place securities privately w/out going through the time
and expense of prospectus

Not all companies can file prospectuses – system would not work

SA contemplates 3 ways to sell securities to the public:
(1) By way of prospectus
(2) Though the use of one of the private placement exemptions
(3) Discretionary Ruling from SC – which is rare
    s. 74: OSC may exempt the issuer from the prospectus requirement or having to comply
    with the exemption
s. 74(1):      the SC has the authority to grant an exemption if it would not be prejudicial to
               public interest to do so
But what is prejudicial to the public interest?

Why do people do private placements?
2 principled ADVANTAGES:
(1) Speed – since there is no prior regulatory review then PP can be done quickly – no receipt or
    filing issues
(2) Confidentiality – the terms of your offering can be confidential b/c not subject to the
    prospectus requirements and the continuous disclosure requirements

People believe that they are superficially regulated, this is not true

Why do we allow PP exemptions?
PURPOSE of the PP exemptions – Reflects a trade off b/t investor protection on the one hand
and efficient capital markets on the other. In some cases it does not make sense to impose an
obligation to prepare a prospectus and thus the OSA recognizes this need to raise capital from the
public and provides these exemptions, which allow for the sale of securities without a
prospectus.
 Companies that are already public may use the PPEs to raise fast capital at a lessor cost
 Companies that chose not to go public or are not ready to go public may need access to the
    capital market (financing of small ventures)
PPEs balance the needs of these companies with the needs of investor protection
Note: in the case of companies that have not yet gone public, it avoids the ongoing continuous
disclose obligations that come w/being a RI
 While investor protection remains that single most important goal of securities regulation, it
    must be pursued within a regime that is sufficiently flexible and cost-effective to ensure that
    the capital markets are not closed to smaller companies, which are often the most innovative
    players in our economy

Every exemption is PREMISED on the view that the normal requirements of prospectus are not
necessary b/c these 3 POLICIES:
(1) Recognition that the purchaser is sophisticated (and wealthy and can therefore protect
    themselves) (base on the identity of the purchaser)


                                                                                                58
(2) the info is otherwise readily available in the public domain (duplication would be useless),
    or
(3) the securities are so inherently safe that to require a prospectus would be meaningless,
    unnecessary to protect investors (Canada Savings Bond) (based on the nature of the security,
    regardless of the identity of the purchaser)
(4) from the book: accommodate small issuers (not financially feasible to assemble a
    prospectus
 Place each exemption into one of these policies

Built on a cost-benefit calculation: the cost of assembling a prospectus exceeds the likely benefit
(i.e. enhanced investor protection) that would be achieved by imposing this requirement

OSC Rule 45-501: changed the rules of PPs in Canada

4 CATEGORIES of PRIVATE PLACEMENT EXEMPTONS:

1.   Based on Wealth or Sophistication of the Purchaser
2.   Limited Offering Exemptions
3.   Private Issuers (Trades in Securities of Private Issuers)(Private Company)
4.   Isolated Trade Exemptions




            1. Exemption Based on Wealth and/or Sophistication
a) OSC Rule 45-501 (2.3) Exemption for a Trade to an Accredited Investor: s. 25 and 53 of
the Act do not apply to a trade in a security if the purchaser is an accredited investor and
purchases as principal

Known as the “accredited investor exemption” – purchasers who are sophisticated or deemed
to be sophisticated b/c of certain characteristics that they possess
 allows co. to raise any amount of money from any number of investors as long as they
    are all accredited investors
 Rationale is that the buyer is able to protect its own interests in purchasing the securities -
    theory is that these investors are so sufficiently sophisticated (wealthy) that they have the
    resources available to do due diligence themselves and don’t need the SA – if investors can
    take care of themselves then don’t need to put the co. thru the time and expense of a
    prospectus

Who are “accredited investors” (if any of these investors, the issuer need not prepare a
prospectus)? Defined in OSC Rule 45-501, s. 1(1):
(a) Banks (credit unions, trust or loan corporations)
(b) Insurance companies
(c) Government Agencies (federal, municipal, provincial, public board, commission)
(d) Pension Funds
(e) Charities


                                                                                                 59
Purchasers who meet certain income or asset thresholds:
(f) An individual who beneficially owns alone, or together w/their spouse net financial assets
    (i.e. cash, securities, insurance K, certificates of deposit) w/an aggregate realizable value
    exceeding $1,000,000
(g) An individual whose net income before taxes exceeded $200,000 in each of the 2 most recent
    years or whose net income before tax combined w/that of their spouse exceeded $300,000 in
    the two more recent years who, has a reasonable expectation of exceeding the same net
    income level in the current year
(h) Asset test for non-individuals: a company, limited partnership, limited liability partnership,
    trust or estate, with net assets of at least $5,000,000 (as shown on its financial statements)

If one of these investors then can buy securities w/out a prospectus – no documentation or
disclosure requirement – can sell to them w/out a prospectus
Must deliver an offering memorandum to accredited investors
Note: Sometimes will have to give more info to investor before transaction – must deliver an
“offering memorandum” if decide to do this – must deliver this document to OSC w/in 10 days
of the date of the trade

b) 150 000 exemption
This exemption used to exist, then they abolished it, and now they brought it back.
The purpose of the legislation is that the OSC is not going to force companies to file prospectus
who can’t afford it.

Rule: All they have to do is go to a bunch of their friends who invest no less than $150 000 each.

Lastman- what planet are these guys on? Who has these friends who want to invest 150 000 in a
private, little company.

Rationale – If you are going to spend 150 000 cash to buy securities you will go to lengths to
protect yourself and you don’t need a prospectus. If the purchaser is sufficiently wealthy and
therefore sophisticated that they will engage in whatever professional they need (lawyers, etc) in
order to properly evaluate the investment and therefore to impose an obligation of a prospectus is
meaningless. We don’t need to protect rich people because they will find ways to protect
themselves. Thus if you sell securities to a bank, the bank will do whatever it needs to protect
itself- they don’t need to invent a prospectus.


Question: what if I get 5000 from 30 people to have 150 000 - NO- can’t do that. BUT…what if
Ford is buying securities- can do it because Ford does other things.

45-106- don’t try to govern your affairs to offend the policy because if you do, you loose.

Lastman: If Four Seasons wants to raise more money from the public, they only have 2 ways to
do it: 1) do a new prospectus with respect to the securities they want to sell, 2) short form




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prospectus. We will see next week why they might want to choose one route over another. This
is an important strategic decision.



           2. Limited Offering Exemptions (2)

                   1. Government Incentive Securities Exemption
Completely different policy for this exemption: manifests a compromise of the legislation’s
overarching policy of investor protection in favour of other policy objectives pursued by the
government
 there are certain industries, such as those linked to exploration, development, or oil and gas,
   that the government encourages investment in – so the government will offer an exemption to
   these businesses b/c it is good for the country and the economy – i.e. oil or gas company

s. 2.13 of Rule 45-501: provides an exemption from the prospectus requirement (s. 25 and 53 of
the Act) in connection w/government incentive securities provided all the necessary
preconditions are met:
(a) can only solicit 75 persons and can only sell to 50 purchasers each of whom must purchases
    as principal
     so be careful who you ask solicit – how does SC know, this is an enforcement issue
         (sometimes put numbers of documents that you circulate to, but business do not always
         stick to these numbers)
    Note: if going to someone who has money then don’t offer them securities under this
    exemption b/c they would be considered as an accredited investor, they would be one of the
    75 people who you solicit but would buy under the accredited investor exemption
     Don’t waste this exemption on people who are accredited investors – protect solicitations
         and who you sell to – if have accredited investors then don’t put them under this
         exemption
(b) Before entering into an agreement of purchase and sale, the prospective purchaser has to be
    supplied with an offering memorandum that includes the following information (prospectus
    like info for the purpose of avoiding a prospectus – kinda dumb):
    (i) identifying every officer and director of the issuer,
    (ii) identifying every promoter of the issuer,
    (iii) giving the particulars of the professional qualifications and associations during the five
    years before the date of the offering memorandum of each officer, director, and promoter of
    the issuer that are relevant to the offering,
    (iv) indicating each of the directors that will be devoting his or her time to the affairs of the
    issuer, and
    (v) describing the right of action referred to in s. 130(1) of the Act that is applicable in
    respect of the offering memorandum (liability for misrepresentation in a prospectus)
(c) The prospective purchaser has access to substantially the same information concerning the
    issuer that a prospectus filed under the act would provide and
    (i) a person who by virtue of their net worth or investment is able to properly evaluate
    the investment, or (rich guys so why do an offering memorandum?)



                                                                                                   61
    (ii) is a senior officers or director of the company/issuer or its affiliates or the spouse or
    child of any director or senior officer of the issuer or its affiliates or
(d) can’t advertise in connection with this offer
     b/c will violate the first condition that can’t solicit to more than 75
(e) no promoter can use this exemption more than once in any calendar year
     promoter is defined in s. 1(1) - person responsible for engineering the transaction
     makes sense b/c if promoter then set up a company and solicit 75 and sell to 50, then set
         up subsidiary and do the same thing

           2. Founder and Family Exemption

   A founder or a family member of such a person who controls this company, has access to an
   exemption to sell securities amongst founder and family. This deals with closely held
   situations where someone wants to sell securities within this small group. If you give these
   people a document that meets the definition of an operating memorandum, then it is an
   offering memo.




           3. Private Issuers

Private issuer exemptions –
   - This exemption says that you can sell securities of a private issuer to an enumerated list
       of purchasers or to a person who is not a member of the public (Lastman: whatever that
       means “not a member of the public”).
           o What is a private company? To be a private company there has to be 3 things in
               your articles of incorporation: 1) a provision that says that shareholders cannot
               transfer shares without the permission of someone (directors). Thus directors
               have to consent to the transfer, 2) can’t be more than 50 shareholders exclusive of
               current and former employees, 3) it must say there is no invitation to the public to
               subscribe
           o Section 2.4 (2) of the policy 45-106 lists the categories of people you can sell to
               under this exemption if you are a private company: directors, officers, employees,
               spouses, brothers, sisters, close personal friend, close business associate.
           o The only other way to use this exemption is to prove that the purchaser is not a
               member of the public, which is not defined.
           o There is a bunch of case law that says that a member of the public is a member of
               the public and that it is up to you to figure out if you are not a member of the
               public
           o Tests articulated- “if you have common bonds of interests you are not a member
               of the public or if you don’t need to know the information the prospectus
               provides, then you are not a member of the public”


               4. Isolated Trade

                                                                                                 62
s. 72(1)(b):   there is an exemption from the prospectus requirement for an isolated trade
What is an isolated trade? No one knows that this exemption is useless


What is an “Offering Memorandum”?
Certain of the private placement exemptions impose a legal obligation to deliver an
offering memorandum prior to or contemporaneous with the trade. In other situation, good
business practice may dictate that a document that meets the requirements of an OM be delivered
to investors to entice them to invest

Definition of an Offering Memorandum, s. 1.1(2) of Rule 45-501: an OM is a document that
is prepared by a seller of securities for a prospective purchaser, which describes the business and
affairs of the co. and allows investors to make an informed investment decision about the
securities being sold, in a distribution to which a private exemption applies (allows investors a
right of action, nothing untrue and nothing missing).

s. 4.1 of Rule 45-501, Application of Statutory Right of Action: If the seller delivers an
offering memorandum to a prospective purchaser in connection with a trade made in reliance
upon an exemption from the prospectus requirement then the right of action referred to in s.
130(1) must apply and must be described (s. 4.2) - that the purchaser has a statutory right of
action that can to sue co. for damages if there is a misrepresentation in the offering memorandum

s. 130(1): Liability for misrepresentation in offering memorandum: where an offering
memorandum contains a misrepresentation, a purchaser who purchases a security offered by the
offering memorandum during the period of distribution shall be deemed to have relied on the
misrepresentation and:
        (a) the purchaser has a right of action for damages against the issuer and a selling
            security holder on who behalf the distribution was made
        (b) or elect to exercise a right of rescission against the person or company (thus will have
        no right of action for damages

S. 4.3 of Rule 45-501, Delivery of Offering Memorandum to Commission: If an offering
memorandum is delivered to purchaser of securities in respect of trade made in reliance upon an
exemption from the prospectus requirement, then the seller shall deliver to the Commission a
copy of the offering memorandum within 10 days of the date of the trade

Under the definition of misrepresentation: the OM must be complete b/c if it not then can get
sued for misrepresentation – this sounds a lot of like a prospectus

Objective of these exemptions is to sell securities to the public w/out a prospectus
 What if a pubic company like four seasons - have to file a prospectus or rely on the PP
   Exemptions – every time four seasons wants to raise money, they don’t always need to make
   a prospectus but they are still subject to the continuous disclosure if have filed a prospectus
   initially, but can now use a PP exemption to issue shares
 PP exemptions are usually used by private companies but not always


                                                                                                  63
   Allows smaller companies to raise money on capital markets

In order to do transaction must deliver a document that meets the definition of an OM – it
doesn’t matter what the document is called – if it meets the definition of the OM then it is
deemed to be an OM and thus b/c it is OM it must have attached to it a cause of action
document that says you can sue if there is a misrepresentation
 have not complied w/exemption if don’t send one

How do you know when the document is an OM or not b/c not every document for
exemption is an OM
 If you provide nothing more than a term sheet that just defines the terms of the
   transaction then that document is not an OM – if you go any further of that, describe the
   business and affairs of the co. so can make an informed investment decision then that
   document will be an OM and it will force you to ensure that there is no omission or
   misstatement
 onerous obligation
 an annual report, term sheet, or any statutory required document is not sufficient to constitute
   the OM
 Keep in mind, where an offering memorandum is provided, whether pursuant to a PPE
   or voluntarily, the law provides for civil liability for misrepresentations - this right must
   be described in the OM

Consequences of selling securities w/out prospectus or PP exemption
Jones v. Deacon – D is investment banker and created a private co. to invest in oil business and
sold to securities to Jones in 1980 w/out prospectus or PP – Jones goes to Australia and is
charged w/fraud – Deacon testifies against him
Launches action against D to get him money back – says it is statute barred b/c can’t sue after 3
years – Jones says there is no statute of limitations b/c there was no
Court held: The requirement of filing a prospectus or relying on PP exemption is so
fundamental to securities law that it can’t be statute barred by statute of limitations and
anyone who purchased securities at any time w/out a prospectus or PP exemption can void
the transaction at any instance
 This is the law and has never been appealed
 Taking risk by giving oral representation or books b/c if purchaser argues that you didn’t rely
     on PP exemption or give prospectus then can get money back
-----------------------
                  Registration Requirement

General Rule: No person shall trade in securities unless registered, and if a trade is a distribution,
then need a prospectus

Can sell securities by way of PP w/out prospectus, and thus do not need the continuous
disclosure requirement




                                                                                                    64
Policy Objective for registration requirement: Ensure that participants in the market place will
behave responsibly and can regulate their performance – can take away their license if
misbehave

s. 25: prohibitions in trading in securities unless person is registered
 Registration requirement is satisfied when the co. engages an underwriter who is registered
 Underwriter satisfied registration requirement when using a prospectus

How is the registration requirement satisfied where securities are sold in the context of a PPE?
s. 35: registration exemption for essentially all the transactions that are private placements

June 30, 1987 – amendment of SA and the Universal Registration System was introduced
 Registration exemptions in s. 35 that correspond to PPEs continue to apply to the issuing
   company itself – If issuing co. wants to do the selling, itself, and it does so under a PPE, it
   falls within the corresponding registration exemption - if want to sell securities by way of PP
   then have exemption and don’t need to register

For everyone other than the issuing co., the registration requirement still applies
 If a market intermediary can only act as such and carry on business (sell securities to the
   public) if registered under one of the categories in SA

A market intermediary is defined as: anyone who trades or holds themselves out as trading in
securities

     Exemptions in s. 35 continue to apply, but only market intermediary can act as such if
registered
PPE – must retain investment banker instead of underwriter
Enter into an agency agreement when a company wants to sell securities

Resale Rules

Rationale
Without resale rules, the prospectus/registration process could be circumvented by private
placements  those people would sell the securities on the secondary market (gets around the
prospectus). The next person may not be a protected investor and may need the prospectus and
continuing disclosure. A person qualifying as an exempt purchaser might agree to purchase
securities of a particular issuer and immediately resell them to a non-exempt
purchaser”backdoor underwriting” – an effective scheme for the regulation of primary market
offerings must address this danger by regulating the first resales (or first trades) of securities
initially sold to exempt buyers. SA conceptually has to stop the second trade – has to stop
accredited investors from selling to non accredited investors without any protection to the 2nd
investor. But we have to be able to allow the resale of private placement securities. But we can’t
let you sell them completely freely either. The resale rules protect PPE for legitimate purposes
until a prospectus can be issued or the sophistication of the purchaser reduces the need for a
prospectus to be filed.



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I – Resale Rules For Non-Control people

The Act has to solve this problem by preventing the resale of these securities unless a number of
criteria are met:

Rule: If Securities are acquired pursuant to a PPE, the seller cannot resell them unless:
   1. a prospectus is filed with respect to the trade of the subject securities (this can be very
       expensive);
   2. the seller relies on another PPE (find another accredited investor, 2nd investor is still
       bound by the resale rule). In the case of the government incentive securities exemption,
       can only resell to one of the other 49 (out of 50 out of 75).
   3. an exemption order is obtained from the OSC allowing you to do it (you will never get
       this)
   4. the resale rules set out NI 45-102 are followed:
           a. Issuer must have been a reporting issuer in a jurisdiction in Canada for at least 4
               months immediately preceding the trade.
           NOTE **(This requirement does not apply if the issuer became a reporting issuer
           after the distribution date by filing in a Canadian jurisdiction. Prospectus must have
           been issued within 4 months before the distribution to apply)**
           b. At least 4 months must have passed since the distribution date (restricted period)
               (You must have held the security for at least 4 months).
           NOTE **(This does not apply if the security was distributed pursuant to the PPE as a
           private issuer.)**
           c. Must be a legend on the share certificate to differentiate this security (restriction
               notice).
           d. No market manipulation
           e. No extraordinary commission or consideration is paid in respect of the trade; and
           f. No grounds to believe that the issuer is in default

Even if a prospectus is issued, still need to wait the 4 months because of lousy reason – don’t
want to flood the market with shares before market has time to settle.

PPE – accredited investor – 4 months + prospectus
PPE – private issuer – prospectus

Jan1 P April 1 D (can sell now if private issuer exemption) Aug 1 resale

II – Resale Rules for Control Persons (CP)
Rationale
Regulated for different reasons than for private placements
If you control a public company, they want to control the sale of your securities for different
reason: They have tons of info
Want to know that you are a person in control and that you don’t know anything that I don’t
know and give the market notice.
A million rules to describe this




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s.1(1) defines a control person as a person or company who holds sufficient securities alone or
with others to effectively control the destiny of the company. In the absence of evidence to the
contrary, you are deemed a control person if you own more than 20% of voting shares. (you can
be controlling at less, or not controlling at more)

Use definition of distribution to prevent people from selling a security

3rd aspect of the definition of distribution is the sale of security by a control person.

5 ways that a control person can resell securities, no matter how they were acquired:
   1. The CP qualifies a prospectus with regard to the subject securities (need to get the
       company on board, have to pay costs, and there is strict liability like an issuer)
   2. Get an exemption order from the OSC (never will get it)
   3. They can sell pursuant to another PPE which gives rise to the resale rules (SA is not
       meant to protect them, the securities will be worth less because there is a 4 month holding
       period)
   4. sell to another CP (which gives rise to these resale rules)
   5. CP sells pursuant to the “Advance Notice Route” – can sell to any purchaser within 30
       days (renewable) as long as they give advance notice the OSC and the world that they
       are control people (advantage is that they are freely tradable shares and hold their value
       because the resale rules do not apply)
           a. The issuer is and has been a reporting issuer in a Canadian jurisdiction for the 4
               months immediately preceding the trade (i.e. the date of the resale of the security)
               NOTE **(This requirement does not apply if the issuer became a reporting issuer
               after the distribution date by filing in a Canadian jurisdiction. Prospectus must
               have been issued within 4 months before the distribution to apply)**
           b. CP must have held 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 that the issuer is in default

Scenarios

Situation:
I own no shares of 4 seasons
One guy own 18% - he is in control
I’m an accredited investor
He sells me that block on Nov. 1
I decide on Nov. 2 to resell

What resale rules do I have to worry about?
Both, because not just what I have, but who I am.
Must ask the right questions

Situation 2:
I own 10% of 4 seasons



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I buy PPE 8% more
Does the 8% taint the rest?
No, 1 holding period does not taint the rest
But if you are a control person, its all tainted because it matter who you are.


 Shelf Prospectus
Another alternative to the long-form prospectus (aside from short-form)
s. 53(2):       a preliminary prospectus and a prospectus may be filed in accordance with this
                part to enable the issuer to become a reporting issuer, despite the fact that no
                distribution is contemplated
 a prospectus without taking in any money to get hold periods started so you can sell your
    shares
 it is a disclosure document that is prepared, filed, and put on the metaphorical shelf (for up to
    25 months) until the issuer decides that it wishes to take some or all of the qualified securities
    "off the shelf” and distribute them
 issuers eligible to use the short-form prospectus system are eligible to use the shelf system
 the eligibility rules require an issuer to satisfy the criteria twice: first at the time the shelf
    prospectus is filed, and again at the time that the securities are actually sold pursuant to the
    shelf prospectus



Segment IV – Control Transactions

                                           Takeover bids

How does one co. gain control of another?

Social Reasons why people believe takeover bids are good or bad

                Socially useful reasons for takeover bids
1. it moves assets to the most desired uses – buys asset and puts it to a better use than the
   previous owner
2. it creates synergies – take 2 assets and put them together and make it more effective and
   productive
3. the threat of a takeover bid forces management to be efficient – if not efficient stock price
   will go down and will result in takeover bid

                Socially negative reasons for takeover bids
1. all someone is doing is buying an undervalued asset and taking it for themselves – others in
   society will not benefit from this
2. it is seen as empire building – people want bigger toys – not what you do w/them but how
   many you own
3. creates monopolies




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   Takeover bids are a good thing
   What is the legislation and why do we have this legislation? Why not let the market take care
    of itself

Objective of takeover legislation: Protection of the interests of the target shareholders to
make sure they receive enough info about the terms of a bid to make an informed decision
and all shareholders are treated alike
 also want to create a level playing field where bidding and targets are free from oppression

Legislation manifests itself in 3 forms:
Protect interests of target shareholders by:
1. Information: wants to make sure there is info for the shareholders of the target co. to
   decide whether they want to tender their shares to the bid
2. Time: no point in giving shareholders info if you don’t give them time to assess that info (a)
   give shareholders them time to assess the info and respond (b) give management/directors
   of target co. time to asses the offer and give their views/recommendations to the shareholders
   (c) Auction: time for other bidders to assess the co. and decide if they want to start an auction
   for the highest offer – competing bids for the shares
3. Equality: All shareholders are treated equally in terms of time, consideration, and
   opportunity to tender their shares– must all receive the same benefits

               Rationale Driving Takeover Bid legislation & Concept of Control
 Takeover Bid legislation is based on the principle that an individual shareholder does
   not own “control”. Control belongs to the company and all shareholders of the company
   have a right to share in the premium paid on control shares.
 Hence, the take-over legislation mandates that offers be made equally to everybody in the
   class so that the control premium can be shared, rather than going to a majority shareholder.
 This right to share in the premium on control is realized by forcing a bidder to offer the
   same premium share price to all shareholders.
 In practice, this means that a shareholder is free to reap the benefits of control while he owns
   the shares, but if he wants to sell them at a premium, that premium must be shared w/ all
   shareholders
 If want to acquire 20% can’t unless you make the same offer to all shareholders b/c it is
   assumed that you will pay a premium to control the co. and must make this offer to all
   the shareholders who will benefit from this premium
PREVIOUS TO TAKE-OVER-BID:
Previous to accumulating 20% of an issuer’s shares, there is nothing to prevent one from
acquiring 19.99% of common shares of a co. from whoever or whatever price, subject to the
Early Warning System and Insider Reporting Obligations. Yet, as soon as the purchaser buys
.01% more shares it is a takeover bid and rules below apply.

Mechanics: s. 89-105 and 182-203 of the regulations

       Control of co. as long as it is in your hands you can do whatever you want but if sold
        it must be shared by all shareholders




                                                                                                 69
1. Takeover Bid Definitions

Takeover bid is defined in s. 89(1):
As an “offer to acquire” outstanding “voting” or “equity” securities of a class, which together
with the “offeror’s securities” constitute in the aggregate, 20% or more of the outstanding
securities of that class

                                          “Offer to Aquire”
Is defined in s. 89(1) to include an offer to purchase OR a solicitation of an offer to sell OR an
acceptance of an offer to sell.

Applies To Offers of Outstanding “Voting” or “Equity” Securities:
The take-over rules apply when to offer is for outstanding voting or equity securities of a class
(i.e., already been issued). Thus, the take-over rules do not apply if the shares are issued from the
treasury of the company b/c in this case all the shareholders will share in the control premium
and therefore there is no problem concerning the control premium.

“Offeror’s Securities”
The offeror’s securities includes securities controlled, beneficially owned, deemed by s. 90(1) to
be beneficially owned by an offeror, or persons acting jointly or in concert with the offeror.

       s. 90(1) Deemed Beneficial Ownership
       Provides that a person (offeror or any person acting jointly or in concert with the offeror)
       is deemed to have beneficial ownership of securities where the person has the
       right/option to acquire those securities within 60 days of the date in question or the
       security is convertible within 60 days into the underlying security.
       Note: 60 days is the bright line test
      20% on a class by class basis
      If you are deemed to own shares within the 60 days that will result in a take over bid, you
       cannot acquire any shares during that time b/c then take over bid legislation will kick in
      If it is exercisable IN 6 months then not deemed to own them (example 3)
      Have to offer to buy shares for it to be a takeover bid

       (E.g.) if own 15% with an option to buy 10% more – deemed to beneficially own all
       25%, thus, if make an offer to acquire (i.e., exercise option,) a take-over bid; without an
       offer to acquire, however, not a take-over bid.

       s. 90 (1) Acting Jointly or in concert: in calculating all securities you have there are no
       smart guys – will include you and everyone acting in concert with you

       It is a question of fact whether or not any person or company is acting jointly or in
       concert with an offeror. Presumed to be acting jointly or in concert where…
       (a) A person or co., as a result of an agreement, commitment, or understanding with the
             offeror, acquires or offers to acquire securities from the same class as those subject
             to the offer.




                                                                                                     70
       (b) A person or co., as a result of an agreement, commitment, or understanding with the
           offeror, intends to exercise voting rights jointly with the offeror that are attached to
           any securities subject to that offer
       (c) Every associate or affiliate of the offeror.


“Indirect Acquisition”
Is defined in s. 92 to include a direct or indirect offer to acquire securities, or the direct or
indirect acquisition of securities, or direct or indirect control or direction over securities (e.g.,
treats).
     If an offeror tries to do indirectly what he can’t do directly, it will get caught
     b/c takeover bid rules do not apply to private companies, rather than buy shares of
         Treats and have to offer a premium to all shareholders – they bought the private co that
         controlled Treats (57% of co. owned by 3 private investors and 43% of the co. is owned
         publicly). Even though there was nothing in the SA to prevent this – the SC said you
         cannot offer the private investors a premium [s. 92 was introduced as a result]
     no INDIRECT OFFERS

 Brightline test – 20% Rule
 Even though there is legal control at 51% ownership, for purposes of the SA, control is
    defined at a lesser level - there is deemed to be control at 20% (bright line test – not
    elegant, but provides certainty). To determine whether or not it is a takeover bid:

                             if what an purchaser already owns
                                         together w/
                    what the purchaser proposes to buy (from target co.)
    is greater than 20% (of the outstanding voting or equity shares), it is a takeover bid

 If the proposed purchase pushes ownership to 20% so as to constitute a takeover bid -
  purchaser cannot buy the additional shares unless he makes the same offer to all
  shareholders.
 Conceptually, the share that puts ownership over 20% is treated as if it is the share that puts
  ownership over 50%
NOTE: control is defined at 20%

    Q: If I own 80% of a co. and I want to buy 2% more (at a premium), can I do it?
    A: No, it does not matter that you are already in control (must still make such an offer to
    every shareholder).
    Q: if there are two shareholders – one owns 70% and the other owns 30%, can someone buy
    the 30%?
    A: a 30% purchase is a takeover bid – so it requires the purchaser to make the same offer to
    buy the 70%

NOTE: Can’t trigger a takeover bid until you BUY shares together with what you own and are
deemed to own




                                                                                                    71
WHO gives you the OPTION?
 Does it matter who gives you the option of exercisable shares?

Takeover bid rules only apply when shares are being bought at a premium AND where not
all shareholders stand to share equally in that premium.

There are two kinds of shares:
(1) outstanding shares that have already been issued by the co; and
(2) treasury shares that have not been issued by to co. but that are approved by the articles.

                            The Company vs Shareholders as Vendor
The reason for the TOB legislation is to prevent individual shareholders from reaping the
premium on control. If the company itself offers to sell additional shares at a premium, this
is not a takeover bid b/c the premium is going to company and therefore all the shareholders
benefit equally from it. This is why the definition of a takeover bid refers to an offer to acquire
"outstanding voting or equity securities of a class.”

                                           Key question
Look at the proposed purchase that would put you over 20% ownership (when calculating
ownership, must include beneficial ownership of convertibles/options exercisable w/in 60 days -
deemed to own them).
Who is benefiting from the purchase of shares at a premium? Does it give a premium to
particular shareholders and not others? Or do all shareholders benefit from the premium? (i.e.
are the shares purchased from the co or from shareholders?) Remember, any premium it belongs
to all shareholders
 Can’t go over 20 without giving the money to the co. [option to buy (treasury shares) from
    co.- money will go the co. and thus to the shareholders] or by a takeover bid pursuant to the
    legislation [buying from an individual]

Sample Problems (handout)

                               DAY 1                      DAY 4                    DAY 6
          1.             Own 10% of               Option from co. to        Consider buying 2%
                         Common Shares (CS)       purchase 9% of CS         of CS in open mkt.
                                                  exercisable at any
                                                  time
          2.             Own 10% of CS            Option from               Consider buying 2%
                                                  individual to purchase    of CS in open mkt.
                                                  9% of CS exercisable
                                                  at any time
          3.             Own 10% of CS            Option from               Consider buying 2%
                                                  individual to             of CS in open mkt.
                                                  purchase 9% of CS
                                                  exercisable in 6
                                                  months
          4.             Own 10% of CS            Option from co. to        Consider buying 2%


                                                                                                 72
                                                   purchase 9% of CS         of CS in open mkt.
                                                   exercisable in 6
                                                   months

1.       Is the acquisition of 2% a takeover bid?
         Yes, b/c on Day 4, you are deemed to own 19% (b/c option of 9% is exercisable at any
         time, and thus deemed to own it) and so, the extra 2% puts you over 20% (these are
         outstanding shares and you will pay a premium for the extra 2% that will go to the
         individual shareholder
2.       Is the acquisition of 2% a takeover bid?
         Yes, same reason as (1). Here and in (1) not concerned w/how you got to the 20% b/c we
         are concerned only w/the 2% that will take over. You already are deemed to own the 19%
         and doesn’t matter if the exercisable option came from the co. or the individual b/c if you
         exercised the 9% option would still only own 19%
3.       (a) Is the acquisition of 2% a takeover bid?
         No, you can buy the additional 2% b/c the option is not exercisable w/in 60 days (cannot
         buy the additional 9% until 6 months). You will only own 12% on Day 6.
         (b) When the exercise option for 9%, is it a takeover bid?
         Yes, b/c you have exercised the option once you already had 12% and exercised it from
         an individual so will pay a premium
4.       (a) Is the acquisition of 2% a takeover bid?
         No, b/c the option is not exercisable w/in 60 days (cannot buy the additional 9% until
         6 months). You will only own 12% on Day 6.
         (b) When exercise option for 9%, is it a takeover bid?
         No, if you exercise the option after the 2%, you are buying directly from the co. (not
         outstanding shares – premium is going to co. that will be shared by all shareholders – this
         is the takeover bid policy).

2. Takeover Bid Circulars
General Rule: If want to own or control 20% or more of securities of a RI must prepare a
TAKEOVER BID CIRCULAR for the target shareholders (unless an exemption is available)
[s.98(1)]
Note: to speed up the 35 day bid period (to get it started) the offeror can publish a detailed
announcement of the bid in a major newspaper (up to 10 days before a bid document can be
mailed to shareholders) and then file and deliver a copy of the bid (and takeover bid circular) to
the target co. In order for the 35 day period to run from advertisement date, bidder must request a
list of target security holders to whom the bid must be delivered (the co. has 10 days to produce
this list) and the delivery must occur within 2 business days following the receipt by the bidder
of this list. Hostile bidders will issue a public statement in advance.

        Details are communicated to shareholders by way of a takeover bid circular

(a) Content of Circular: Must contain information set out in Form 32 – gives shareholders
sufficient info to make an informed decision as to whether they want to tender their shares to the
bidder (will describe offer, such as the number of shares and any conditions and is sent to all
shareholders)



                                                                                                  73
Note: If it is a cash offering, must tell what your intentions for the money are. If it involves a
share swap (the acquirer is offering shares as part of the bid) then must provide prospectus level
of disclosure about those shares being offered in exchange - so that the investors may make an
informed decision.

(b) Minimum Period for the Bid
S. 95(2): Minimum deposit period: The bid must be open for 35 CALENDAR DAYS, but it
could be open longer
     Policy reasons for this: it provides time for shareholders to asses the merits of the bid, it
       provides management time to assess the bid and make recommendations to shareholders
       and attract further bids, it allows time for there to be other potential bidders so as to
       create an auction.
     The bid may be commenced by delivery of a takeover bid circular to all shareholders (in
       which case the bid is dated the date of delivery) or by advertisement of a summary of the
       bid (which case the bid is dated the date of first publication)

s. 95(3): When Taking up prohibited: even if shares are deposited they can not be taken up by
the offer until the end of the 35 day period from the date of the bid - (shareholder can withdraw
at any time before the securities are taken up). In case shareholder changes their mind which
generally occurs when a higher offer is made.

(c) Pro Rata
95(7): Proportional take-up: where the bid is for less than all the shares and the bid is
           oversubscribed, the offeror must take-up and pay for the shares on a pro rata
           basis (concept that all shareholders should be treated equally: not first come, first
           serve b/c encourages impulse tendering and not “pick and choose” b/c discriminates
           between, treatment of shareholders).
 If the offer wants to buy a maximum number of shares and more than this number are
    tendered, the shares are taken-up pro rata and not first come first serve

   This ensures that shareholders are not pressured to tender early (and can therefore take
    time to review all pertinent info.) and are treated equally.
   The bidder will only take the percentage he/she wants from everyone’s shares and then
    returns the remainder to those shareholders.

Identical Consideration: s. 97(1) states that all holders of the same class of securities must be
   offered
identical consideration (This ensures that a higher price per share is not paid for larger blocks or
           for shares
tendered early)– this would compromise equality and/or time objectives)

Collateral Agreements: s. 97(2): states that there can be no collateral agreements, commitments
or understandings with any holder or beneficial holder of securities that has the effect of
providing to the holder or owner a consideration of greater value than that offered to other
holders of the same class of securities.




                                                                                                 74
In determining whether there is a “collateral agreement” look at the offeror’s intentions on
making the arrangement – was it done for a legitimate business purpose to ensure that the
business being acquired continues to operate properly (i.e., may want to enter into a separate
agreement w/director who owns shares to make sure they stay if bid successful) or was it done
simply to entice the person into giving up their shares. This will be fact specific

Under s. 104(2), a party can make an application to the OSC in to determine if you are offering a
collateral agreement. (i.e., for a legitimate business purpose).

(d) Withdrawal Rights
Depositing security holders will be able to withdraw their securities
(i)    at any time before they have been taken by the bidder (bid open for 35 days) – “taken up”
       means acceptance to purchase by the offeror
(ii)   until the expiration of 10 days from the date of a notice of change or variation in the
       terms of the bid
(iii) if the offer has not paid for the securities within 3 business days after having taken up the
       securities
      Shareholders usually tender on the last day anyway just in case a higher bidder comes
       along and don’t want to deal with taking them back
      Withdrawal right important in case shareholder changes mind and in case a higher bid
       comes along – this puts undue pressure on shareholders and also to allow directors to
       seek out alternative offers

(d) Conditions on a Bid
An offeror may attach any conditions to a bid.which it believes to be appropriate except for
a condition on financing to pay for the securities tendered pursuant to the bid.
 Conditions may include Competition Act approval, getting at least 75% tendered etc. –
    however, the more conditions attached to a bid, the more discounted the shares will be on the
    market and the more likely a competitor will out bid it and less serious the market will see
    you

s. 96   Financing of Bid - before a takeover bid can be made, the bidder must have financing in
        place that will cover the maximum amount that the bid could possibly cost. (you must
        have sufficient money to pay the highest price that you are offering in your circular)

  In Canada, you cannot make a takeover bid conditional on financing – therefore, prior to
making a bid, a bidder must arrange a standby credit-line (banks will charge a fortune for this,
such that before the bid process even begins, the bidder has made a large investment).
  Note that usually the first one in always looses. As a consequence of this requirement and the
    costs involved, acquirers almost always go into the mkt. and buy some shares before
    announcing the bid (if they lose, they can sell the stock to the highest bidder and recoup their
    costs). They are defraying their costs
  When Onex went for Labatts, it bought shares of Labatts in the mkt. When it lost to
    Interbrew, it had 15% of Labatts that it could tender to Interbrew at a premium to make up
    for some of the costs of financing.
  This is why there are not so many takeover bids in Canada than in the US



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   In the US, anyone can make a bid conditional on financing – resulting in significantly
    more bids

   If you believe that takeover bids are a good thing – then this provision impedes bids.
    There is clear econ disincentive to making a bid b/c the first in rarely wins and it’ll cost a
    fortune to even try

(e) Payment for Securities
 If all the terms of the bid are satisfied, securities that were were tendered must be taken up by
the acquirer within 10 days after the expiry of the bid [s. 95(9)] and the acquirer must pay for the
securities as soon as possible and in any event within 3 days after the securities are taken up [s.
95(10)]. Or a shareholder can withdraw their shares
s. 95(13): News Release: Further, when all the terms and conditions of the bid has been
complied with or waived, the offeror shall immediately issue a press release to that effect which
discloses the number of shares deposited and the number that will be taken up.

Note: 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

(f) Extending Bid
A bid can be extended only if the securities previously deposited are first taken up [s. 95(12)]
and paid for within 3 business days. But if the bid is extended while tending shareholders
continue to have a withdrawal right, then the bidder does not have to take up these shares before
extending its bid [s. 95(12.1)].

(g) Variation of Bids
Where there is a variation/change in the terms of a bid (i.e. price goes up):
   (i)    The offeror must deliver a notice of variation to every person to whom the circular is
          required to be delivered and whose securities have not yet been taken up. [s. 98(4)]
   (ii)   Security holders must be given at least 10 days from the date of the variation to
          deposit their securities (extension period) [s. 98(5)]. Shareholders who have already
          tendered must be given a 10 day withdrawal right running from the date of notice of
          variation [s. 95(4)(ii)]
   (iii) There is a 10-day extension of the deposit period unless the change is the waiver of a
          condition in an all cash bid. [s. 98(6)]
   (iv)   Where a variation in the terms of a bid increases the value of the consideration
          offered, the offeror shall pay such consideration to each person whose securities were
          taken up whether or not such securities were taken up before the variation [s. 97(3)].

(h) Change of Information
   (i) If a change occurs in the information contained in the circular that would reasonably be
       expected to affect the decision of the security holders of the target company to accept or
       reject the bid, the offeror must send a notice of change to every person to whom the
       circular was required to be delivered and whose securities have not yet been taken. [s.
       98(2)]
   (ii) There is a 10 day withdrawal right.



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(i) Misrepresentation in the Take-over Circular
Offer responsible for accuracy in the circular and OSA provides a statutory remedy for
misrepresentations against the offeror, directors of the offeror, experts whose opinions appear in
the circular, and others who sign the certificate in the circular [s. 131]
        Provides for defences, including due diligence defence, to defendants other than the
        offeror. The offeror’s only defence is to prove that the security holder had knowledge of
        the misrepresentation [s. 131(4)]. The takeover bid circular must provide a statement of
        these s. 131 rights.
              OSC recently stated that the test to determine the adequacy of disclosure in a
                 take-over bid circular is the same articulated in US Supreme Court case of TSC
                 Industries Inc. v. Northway Inc….An omitted fact is material if there is a
                 substantial likelihood that a reasonable shareholder would consider it important
                 in deciding whether to tender his shares in the case of takeover bid (in that case
                 deciding how to vote since had to do w/proxy circulars)

Note: similar to statutory misrepresentation in a prospectus


3. Directors Circular
The directors of the target co. have an obligation to deliver a directors circular to all shareholders
not later than 15 days from the date of the bid [s. 99(1)] and make a recommendation to accept or
reject the bid or make no recommendation and give their reasons for not making a
recommendation [s. 99(2)].
     s. 99(5): if directors are not ready to give the recommendations above within the 15 days,
         then must deliver it at least 7 days before the scheduled expiry period during which
         securities may be deposited under the bid. (7 days before the bid expires)
                 4. Integration

                 Pre Bid Integration
 [s. 94(5)]: Where a formal take-over bid is made and, within a period of 90 days prior to the
bid, the offeror acquired beneficial ownership of securities of the class subject to the bid
pursuant to a transaction not generally available on identical terms to the holders of that class
of securities (i.e., a private transaction), the formal bid must provide for the following:

       (a) Highest Consideration: The consideration for the securities deposited under the bid
           must be at least equal to the highest consideration paid on a per-security basis under
           any of the prior transactions within the period, AND
       (b) Highest Percentage: The bid is for at least as high a percentage of securities of that
           class as was purchased by the offeror from a seller in any other prior transaction with
           in the period.
      When making a takeover bid will look back 90 days from the date of the bid and if in the
       90 day period you entered into a private agreement w/any shareholder then your takeover
       bid must be at the highest price and highest percentage of shares bought in that 90 day
       period




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I.e. 60 days before bid bought 50% of A’s shares for $5 a share and 45 days before bid bought
100% of B’s shares for $3 a share
 Takeover bid must be for all the shares of a company for at least $5 a share

Note: Pre-bid integration is very important b/c it is costly
This is for private agreements (not open market)

                Post bid integration
[s. 94(6)]: An offeror may not acquire beneficial ownership of securities of the class that was
subject to the bid for a period of 20 business days following the expiration of a bid by way of a
transaction that is not generally available on identical terms to the holders of the class of
securities in question. (meaning private agreements [Thus, you allowed to buy shares in the
market because the same terms are available to everyone.]
      Cannot enter into private agreements before your bid, during your bid, and after your bid
        (but can buy in the open market, subject to restrictions (SEE BELOW), b/c this would be
        available to all shareholders)

Exemption from Pre-Bid and Post-Bid Restrictions
[s. 94(7)]: The integration restrictions referred to above do not apply to trades effected in the
normal course in a published market so long as:
            (a) any broker acting for the purchaser or seller does not perform services beyond the
                customary brokers functions and does not receive an unreasonable commission.
            (b) the purchaser or his or her agent does not solicit or arrange for the solicitation of
                offers to sell securities of that class, AND
            (c) the seller or any other person or company acting for the seller does not solicit or
                arrange for the solicitation of offers to buy securities of the class subject to the
                bid.

Permitted Purchases During Take-over Bid
[s. 94(3)]: An offeror making a take-over bid may purchase, securities of the class that are
subject to the bid and securities convertible into securities of that class commencing on the 3rd
business day following the date of the bid until the expiry of the bid, if:

       (a) The intention to make such purchases is stated in the take-over bid circular;
       (b) the aggregate number of securities does not constitute in excess of 5% of the
           outstanding securities of that class as at the date of the bid.
       (c) The purchase is made thru a recognized stock exchange (in the open market)
       (d) The offeror issues and files a news release each day shares are purchases.

      provided that the bidder announces in his takeover bid circular that he will be buying
       shares in the open mkt., then 3 days after the bid is out there, he can buy up to 5% as
       long as a press release is issued each time shares are bought.

Sales During The Bid




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[s. 94(8)]: The offeror shall not sell or make any agreement, commitments, or understandings to
sell any securities of the class subject to the bid on any day from the announcement of the
offeror’s intention to make the bid until its expiry.
        Yet, s. 94(9) provides an exception, an offeror before the expiry of the bid, can enter into
an arrangement to sell securities that may be taken up by the offeror pursuant to the bid, after the
expiry of the bid, if the intention to sell is disclosed in the take-over bid circular.

Lock-Up Agreements
[Regulation 185(1)]: A “lock up agreement” is an agreement between an offer and usually a
major shareholder to the effect that the shareholder will tender their shares to a formal take-over
bid made by the offeror in accordance with the terms and conditions of the bid. The bidder will
usually agree to launch a takeover bid within a particular period and for a certain price.
Regulation 185(1) states that lock-up agreement are OK and should not be seen to be acting
jointly or in concert – b/c it does not give the shareholder to the agreement any preferential
treatment compared to other shareholders (premium on control is still equally shared)
     However, lock-up agreements are considered a material fact that would have to be
        disclosed in the circular.


4. EXEMPT Take-over Bids
There are situations were people should be able to acquire control without being subjected to
expensive, onerous rules (exempt from takeover bid provisions meaning don’t have make offer
to all shareholders:

(a) Private Agreement Exemption [s. 93(1)(c)]: *most important – A takeover bid is exempt
from the takeover bid requirements provided that the:

       (i) Purchase is from not more than 5 persons or companies (includes outside Ontario)
       (ii) Private: The bid is not made generally to security holders of the class of securities that
       is the subject of the bid.
       (iii) 115% Consideration: The price paid for the securities does not exceed 115% of the
       market price of securities of that class (15% more that the market price) [Market price
       defined as the average of the closing price of the last 20 trading days.]

s.93(2):        the acquirer cannot prepare the seller (ie. cannot get 5 people to each acquire
19.99% and then buy from them).
For purposes of private agreement exemption, where an offeror makes an offer to acquire
securities from a person or co. and that offeror knows or ought reasonably to know after
reasonable enquiry that,
        (a) the securities are held in trust, then the beneficial owners must be counted in
        determining whether the requirements of s. 93(1)(c) are met

       (b) then each person or co. from whom those securities were acquired shall be included in
       determination the number of sellers (the number of persons and co.s to whom the offer to
       acquire has been made) (NO SMART GUYS)




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Note: 115% is another brightline test – a 15% premium or less is not considered a premium and
is therefore not sufficient to trigger take-over bid rules

Market = average twenty day closing price.

(b) DeMinimus Exemption [s. 93(1)(b)]:
Can buy up to 5% of the outstanding securities of a class in any 12 month period in the open
market, as long as you do not pay more than the market price at any date of acquisition (do
not pay a premium above market price), you do not have to comply with the take-over rules.
Note: but will combine any shares that you bought by way of private agreement
 This is as long as the purchasing is gradual and well communicated (early warning rules will
    kick in).
 You are not paying a premium
 It has to be in the open mkt and not by private agmt (cannot call people and tell them to meet
    you on the trading floor w/ their shares; these are crosses and they are offensive b/c anything
    that helps big guys over little guys is offensive even if there is no premium in the case of pre-
    bid integration).

Example:
 If you bought 19% three weeks ago and then 2% today, then it is a takeover bid (b/c you can
   only buy up to 5% in any 12 month period).
 But, if you bought the 19% 5 yrs. ago and then the 2% today, this is not a takeover bid (there
   is early warning that kicked in at 10%, etc.; basically, the mkt. knows that you own 19% and
   has had time to understand this).

**Takeover rules are not designed to stop people from controlling companies or designed to
prevent people from controlling companies w/out paying a premium. They are simply designed
to ensure that shareholders are treated equally w.r.t. any premium on their shares.

Example:
There are a number of different shareholders w/ different sized holdings of a co. How can you
acquire the greatest number of shares possible in the shortest time w/out having to comply w/ the
takeover bid requirements?
1. Purchase 19.99% of shares from the smallest shareholders possible.
2. Wait 12 months, they buy 5% of the shares under the diminimus exemption s. 93(1)(b).
3. Purchase as many shares as possible from 5 large shareholders under the private agreement
    exemption s. 93(1)(c) (so long as the price paid is not above 115% of the mkt. price).

Note…since a private placement agreement to purchase securities from 5 shareholders counts
in the 5% over 12 months exemption. Therefore should first exhaust the 5% exemption and
then the 5 person exemption

(c) Private Company Exemption [s. 93(1)(d)]:
Takeover legislation does not apply to private




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NOTE: If the private company holds shares in a public company, this may be an indirect offer as
defined above, and constitute a take-over bid. A company is private if it is not a reporting issuer
and does not have more than 50 individuals.

(d) Stock Exchange Exemption [s. 93(1)(a)]:
One does not have to comply with the take-over rules in the OSA if they comply with the rules of
the TSE b/c these rules will regulate bids and protect investors.
However, today, these are essentially the same as the OSA rules, thus this exemption is useless.

E) Minimal Ontario Connection Exemption [s. 93(1)(e)]:
There is no need to comply with the OSA take-over rules if: The number of Ontario holders of
the securities of the class subject to the bid is less than 50 and the securities held by such holders
constitutes less than 2% of the outstanding securities of that class
        The bidder does not have to comply w/the takeover bid rules of Ontario as long as they
comply w/the provisions of the home jurisdiction


5. Equality as an objective of takeover bid legislation
Maintaining Control: Voting and Non-Voting Shares

   What if co. wants to sell shares to raise capital but don’t want to give up control?
   Issue voting and non-voting shares (co. grants founder voting shares and all others non-
    voting shares) or Subordinated voting shares, restricted or multiple voting shares: shares will
    be issued to the public that will have only 1 vote, while the founder has 20 votes for shares –
    when the founder sells his shares theses shares will be converted to 1 vote per share
   The policy of the Act dictates that in a takeover bid situation, all shareholders are to share
    equally in the premiums offered pursuant to the bid. The problem is that where there is a
    two class system of shares, where one type of shares has voting rights (single or multiple)
    attached to it and another does not, in a takeover bid situation, the bidder will only be
    interested in purchasing the outstanding shares that have voting rights attached to them and
    will not make an offer to shares without voting rights. How then can the Company make sure
    that all shareholders get to share equally in the premiums of a takeover bid?Add a COAT-
    TAIL PROVISION

Canadian Tire Case (1996)
Facts: the dealers of Canadian Tire offer to purchase 49% of the voting shares of Canadian tires
at $16 a share at a time when the shares were trading at $14 or $15. The Billis family the major
shareholder had entered into a lockup agreement with the dealers that said that the family
agrees to irrevocably tender their shares to the offer in exchange of a non-refundable deposit of
$30 million. The dealers already owned 17.4% of the voting shares of Canadian tire and together
with the other 49% would give 2/3rds of all the shares and would get complete control. This is
not a collateral agreement b/c there is no take-over bid. There is no obligation to make a bid for
the non-voting shares. The family will make a large profit, the public gets nothing and the
dealers get control
 In 1983, Billis family introduced two classes of shares: voting and non-voting. The family
    retained the voting shares while everyone else got non-voting. As a protection to the


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    shareholders, the Billis family introduced Coat Tail protection (a provision is added to the
    Articles whereby, in the event of a takeover bid/an offer for the voting shares, the non-voting
    shares will become voting shares for the purpose of the takeover bid so those so all
    shareholders can participate in the bid and decide if they want to tender their shares)
   But the coat tail is triggered when the majority of the voting shares are bidded for – but
    in the Canadian tire case the bid was for 49% and thus the non-voting could not coat
    tail
   Non-voting shareholders were furious and went the securities commission and wanted the
    trade stopped – the SC said that there is nothing in the SA or CL that could stop the trade
    BUT we will stop it anyway b/c it is not fair
   Think the law has certainty – but the SC showed differently
   REASONS: In 1983 the family misrepresented to the non-voting shareholders b/c told them
    they would have coat-tail protection, but they didn’t get it – THE TRADE WAS STOPPED
   Note: The family would not now give the dealers back their $30 million. Dealers went to the
    SC but the SC would not do anything about it b/c if the deal went thru then all the
    shareholders would benefit from the deposit as a premium

Note: the lock-up agreement: if you make a take over bid we will tender our shares to that bid
and in exchange we will give a non-refundable deposit – why is this not a collateral
agreement? If the takeover bid never happens then it is not a collateral agreement b/c can only
be one if there is a takeover bid – and if the takeover bid does happen then the deposit goes
toward the amount that the family would get

Note: Coat tails are now mandatory and companies will get punished in the marketplace when
they have non-voting shares. The TSE has a rule that requires coat tails for companies that have
non-voting and voting shares before they can be listed (but, companies before 1986 have been
listed w/out coat tails).
 B/c of Canadian Tire, companies w/ non-voting shares have depressed stock values b/c in the
     event of a takeover bid, as a result of coat tails, non-voting shares will come into play which
     will cost the bidder more money.

Note. Lastman thinks that this is the best case for the securities industry. This case simply tells
you not to be stupid ("no smart guys"). OSC should be applauded for doing something that they
had no legal basis to do.

6. Defensive Tactics: (pig farm and utility story, Onex Labatt, Coushe-Tard Beckers,
Torstar and Sun Media)
When someone makes a hostile takeover bid and directors wants to stop it, how can they achieve
this (debatably out of concern for shareholders receiving the highest bid (doing what is in the
best interest of the co.) or out of concern for their jobs)

(a) Golden Parachutes
A special employment agreement with a target office or manager affording certain financial
assurance in the event of a change of control
 If a co. is taken over, then the bidder will have to pay the officers a huge sum of money to
    leave the co. before the takeover.


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   OSC says that golden parachutes are acceptable b/c if an officer has a golden parachute, then
    they will act in the best interest of the shareholders b/c they will not try to entrench
    themselves and ruin a good deal (there are directors that create careers out of directing
    vulnerable cos and parachuting).
   As long as they are deemed to be reasonable, they are not challenged.

(b) Poison pill and Rights Plan
Creates a large and unattractive corporate liability that the offeror would have to swallow along
with the target
 It is common practice that shares issued to the public have a Rights Plan attached to each
    share. The “rights plan” provides that in a hostile takeover situation, the board of directors
    may exercise a Poison Pill to give every shareholder 1 share for 1 penny, except for the
    bidders
 This would makes it impossible for the bidder to buy
 This will blow up the co. (you cannot fix it once it is triggered). This is leverage to make the
    hostile bidder negotiate (if triggered, it makes it impossible for anyone to take control of the
    co.).
 There has never been a poison pill triggered. No hostile bidder has ever tried to drive
    through one either. There is a balance of power btw the two in order to necessitate
    negotiation in a takeover bid.
     Note that NP 62-202 states that this defensive tactic may attract regulatory scrutiny

(c) Sell the Crown Jewels
     Sell the target’s most valuable or significant assets, which it sells in order to reduce its
        attractiveness
     Note that NP 62-202 states that this defensive tactic may attract regulatory scrutiny
    ie. When Onex bid for Labatts, Labatts believed the intention was for the Blue Jays or TSN.
    Therefore, Labatts considered selling the Blue Jays as a defensive tactic.

(d) Find a “White Night”
The Board of the target co. will find another friendly co. that it persuades to merge with it or to
make a competing offer. This encourages an auction environment and provides greater
premiums for the shareholders.

(e) Enlist the Aid of the Law
 The co. may enlist the law as a defensive tactic by claiming that the takeover is anti-
    competitive. The attempt is to get an injunction and draft protection legislation.

(f) Advise Shareholders Not to Tender
 Management in its circular can tell shareholder not to tender.

(g) Pac-Man Defence
 The target co. turns around and starts trying to take over the bidder.
(i) Issuing Shares to a Friendly 3rd Party




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The target of a hostile takeover will issue new shares to a “friendly” third party in return for a
promise not to tender the shares to the hostile raider, or merely to make the offer as a whole that
much more expensive for the raider.
Unicorp v. Union Enterprise Utility Co.
Facts           In response to a hostile takeover bid by Unicorp, Union management bought a pig
                farm by issuing 20% of treasury shares to the farm owner. The agreement stated
                that the farm owner was not permitted to tender to a Unicorp bid, thus ensuring
                that a significant number of shares were held in friendly hands to block Unicorp.
Issue           Is this type of action permissible to block a takeover bid?
Holding         At the time, this action was permissible

Note. OSC has come out w/ a policy on defensive tactics as a result of the Unicorp and Union
Enterprise takeover bid.
    Note that NP 62-202 states that this defensive tactic may attract regulatory scrutiny

Note. Lastman thinks that what Union did was offensive.


SC developed a takeover bid defensive tactic statement – NP 62-202:
1. Takeover bids play an important role in society in reallocating resources – they are a good
   thing
2. Considering the merits of a takeover bid there is a possibility that the interests of the
   management will differ from the shareholders
3. The primary objective of takeover legislation is the bone fide interest of the shareholders of
   the target co. and to create a level playing field that neither favours the bidders nor the targets
4. Regulators are concerned that in the context of a TO bid the Board’s interests may frustrate
   the process and deny the shareholders the right to make an informed decision whether they
   want to tender
5. But the regulators do not believe that a fixed code of conduct for directors is needed b/c
   could be sufficient in some cases and excessive in others
6. Will review defensive tactics taken in hindsight, what was employed, and will decide if it
   was appropriate
7. If directors worried then get prior shareholder approval (this is impossible b/c take over bids
   last 35 days but calling a meeting of shareholders takes longer
8. Regulators like/want auctions. Offerors should make bids so shareholders get the best price.
   This is why defensive tactics are employed by the Board. Have to do what is in the best
   interest of your co. designed to create an auction which is okay but if it was done so that
   shareholders don’t have an option then not okay
9. Like the idea that can employ defensive tactics to create an option and don’t like the idea that
   the directors may deny the shareholders to make a choice (if bidder leaves and no one else
   comes along then the shareholders have no choice)


ISSUER BIDS
s. 89(1): an offer to acquire or redeem securities of an issuer made by the issuer (redeem its own
securites), regardless of the number of securities subject to the offer



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       There is no 20% threshold for issuer bids
A co. may find it advantageous to repurchase some of their outstanding shares b/c:
   (a) the market is undervaluing the issuer’s shares, and they are, thus, a good bargain
   (b) the co. can find no worthwhile investment projects, so is returning capital to its
       shareholders in a more tax-efficient manner than thru a declaration of a dividend
   (c) the co. seeks to increase its earning per share, which, if firm earning remain constant, is
       the certain result of reducing the number of outstanding shares by a share purchase

        The OSA treats issuer bids much like takeover bids. All rules that apply to takeover bids
         apply to issuer bid, just the person making the bid is different
   I.e. if more shares are tendered then the bid calls for then same rules apply (pro-rata)

Note: This stops “Green Mail:” When a bidder places a takeover bid, the bidder offers to
withdraw the bid provided that management purchases the shares from the bidder at a premium
(Green mail is illegal in Canada b/c (1) it precludes takeover bids; (2) it spends unnecessary
resources; and (3) the premium is not offered to all shareholders

       Where an issuer undertakes to purchase it own shares it must deliver an Issuer Bid
        Circular and has to make the same offer to all shareholders (no private agreement
        exception)

Issuer Bid Circular
Issuer bid circular must contain info set out in Form 33 (same requirements as takeover bid
circular)
     In addition to this rule OSC Rule 61-501 imposes 2 additional requirements in issuer bid
        circular compared to takeover bid circular Note: do this b/c of informational advantage of
        co.
        1. Issuer must obtain and disclose the results of a formal valuation prepared by an
            independent valuator of the securities subject to the bid.
                The co. knows everything about itself and now its interests are adverse to its
                shareholders so someone has to give a value who is an outsider so shareholders
                can then make a decision if they want to tender
        2. The board or directors of the issuer or an independent committee of the board will
            determine who the valuator will be and will supervise the preparation of the formal
            valuation (It is recommended that a special committee of the Board comprised of
            non-management directors to oversee the issuer bid)

Policy Concern: When an issuer undertakes the purchase of its own shares, regulators must be
concerned about the possible exploitation of informational advantage. Who after all has the
better information about the underlying values of an issuer’s shares that the issuer itself?

Exemptions from issuer bids [s. 93(3)]
(a), (b) & (c) If the purchase is made thru a share provision such as where the shares are
redeemable (right in the co. to buy the shares) or retractable (where the holder is entitled to
demand from the co. to buy back its shares – co. can buy back without doing an issuer bid




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(d) Purchases from current or former employees of the issuer, provided the total number of
securities purchased does not exceed 5% of the total number of shares of such securities (in any
12 month period) and the price paid for the securities does not exceed the market (20 trading day
closing average)

(e) Bids made thru a recognized stock exchange

(f) Issuer can buy back not more than 5% of the total outstanding number of such securities
within a 12 month period, in the open market, as long as they publicly announce their
intention of doing so (can publish a notice of intention)
(like de minimus)
(g) Purchases made by an issuer of a private co. Issuer bids don’t apply to private companies

(h) Purchases made if there is a minimal Ontario connection (less than 50 shareholders holding
less than 2% of the outstanding securities of the class being acquired) provided the bid is made in
compliance with the rules of that jurisdiction and all material distributed in that jurisdiction are
send to the shareholders in Ontario


INSIDER BIDS (ie. an insider makes a takeover bid)
Concerns over information imbalance increased when offeror has access to inside information
about the target co. Thus, insider bids are subject to rules in addition to takeover bid rules
   OSC Rule 60-501 defines an insider bid as a takeover bid for the securities of an issuer made
   by an “issuer insider” of that issuer or by associates, affiliates, or those acting jointly or in
   concert with the issuer
 OSC Rule 61-501 says that if a takeover bid is being made by an insider (define insider)
   there are 2 additional requirements:
   1. the insider must include in the takeover bid circular a formal valuation, obtain at his own
        expense, prepared by an independent valuator chosen by an independent committee of the
        target co.’s board of directors
   2. The offer must enable that committee to supervise the formal valuation (this will oversee
        the fairness of the insider bid) (and committee will be comprised of non-management
        (independent committee))

Exemptions from the formal valuation requirement:
               1. The offer, who is an insider, in fact lacks knowledge or access to
                   information about the target co. The offeror doesn’t have or has not had
                   within the preceding 12 months any board of management representation
                   in respect of the target co. and has no knowledge of any material non-
                   public information concerning the target co. or its securities
               2. the price for the securities has been determined demonstrably by market
                   forces by for example a recently completed arm’s length transaction at the
                   same or a lesser price




                                                                                                 86
                                            GLOSSARY:

1° market
 co. sells shares to public/investors


2° market
 public/investors sell shares via TSE to other public/investors


2° offering
 when founding SHs sell to public
 proceeds go to founders, not to company


Distribution:
 “distribution” where used in relation to trading securities means,

  (a)   a trade in securities 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 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 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, but any holding of any



                                                                                                      87
         person, company or combination of persons or companies holding more than 20% of the
         outstanding voting securities of an issuer shall, in the absence of evidence to the contrary,
         be deemed to affect materially 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 Sept. 15, 1979 if those securities continued on
         that date to be owned by or for that underwriter, so acting, AND

   (e)   a trade by or on behalf of an underwriter in securities which were acquired by that
         underwriter, acting as underwriter, within 18 months after Sept. 15, 1979 if the trade took
         place during that 18 months,

   …and on and after March 15, 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 repurchase and resale in the course of or incidental to a distribution.


s. 1(1): DISTRIBUTION

Why?
 only need prospectus 1st time (1° market) -- don’t want to encompass each subsequent trade
  in the 2° market and make individual sellers prepare a prospectus about the co.
 s. 1(1) def’n is exhaustive

3 branches of def’n:

(1) when you sell securities that have not ever been issued (i.e., coming from the Treasury to
    investors)

(2) trade in securities that you acquired via a PPE unless the seller satisfies the resale rules in s.
    72(4),(5) of Act

(3) if you are a CP, you cannot re-sell securities unless certain conditions are met



Equity Security: s. 89(1)
 any security of an issuer that carries a residual right to participate in the earnings of the issuer
  and, upon the liquidation or winding up of the issuer, in its assets.


Escrow Arrangements
 when co. is issuing shares -- outlines how much and when founders of co. may sell their
   shares in co. -- ensures they continue to have a financial interest in co. along w/new investors




                                                                                                     88
Forecast
 written estimate of most probable result of operation of co. for some point in future
 done by computer
 based on most probable set of assumptions (e.g., interest rates, inflation, tax rate)


Futures K
 agreement that you'll buy X for $?? at some future time


Insider: [or “insider of a reporting issuer”] means [s. 1(1)]:

(a)   every director or senior officer of a reporting issuer
      [senior officer is defined in s. 1(1): the chair or vice-chair of the board, the president, a vice-
      president, the secretary, the treasurer, or the general manager of the company or any other
      individual who performs functions for an issuer similar to those normally performed by an
      individual occupying such an office, AND each of the highest paid employees of an issuer,
      including anyone mentioned previously.];

(b) every director     or senior officer of a company that is itself an insider or subsidiary of a
      reporting issuer [s. 1(4) defines Subsidiary Companies: a company which the reporting issuer
      controls (i.e., it carries more than 50% of the voting securities or can elect a majority of the
      directors)];

(c)   any person who beneficially owns, directly or indirectly, voting securities of a reporting
      issuer, or who exercise control or discretion over voting securities of a reporting issuer, or a
      combination of both, carrying more than 10% of the voting rights attached to all voting
      securities of the reporting issuer for the time being outstanding other than voting securities
      held by the person or company as underwriter in the course of distribution, and;

(d) a reporting issuer    where it has purchased , redeemed, or otherwise acquired any of its
      securities, for as long as it holds any of its securities.


Issuer Bid: “issuer bid” means, [s. 89(1)]
 an offer to acquire or redeem securities of an issuer made by the issuer to any person or
    company who is in Ontario or to any security holder of the issuer whose last address as
    shown on the books of the issuer is in Ontario and includes a purchase, redemption, or other
    acquisition of securities of the issuer by the issuer from any such person or company, but
    does not include an offer to acquire or redeem debt securities that are not convertible into
    securities other than debt securities.


Market Intermediary: [s. 204(1) of the Reg.]
 a person or company that engages or hold himself, herself, or itself out as engaging in
  Ontario in the business of trading in securities as principal or agent, other than trading in


                                                                                                            89
    securities purchased by the person or company for his, her, or its own account for investment
    only and not with a view to resale or distribution.


“Market-out” clause
 Underwriter can terminate the UW agreement if state of markets is such that issue can’t be
  properly marketed
 meant for catastrophic events (major market crashes)
 invalid in USA


Misrepresentation: [s. 1(1)]

(a) anuntrue statement of material fact, OR
(b) anomission to state a material fact that is required to be stated or that is necessary to make a
   statement not misleading in light of the circumstances in which it was made.


Material Change:
 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 and includes a decision to implement such a change made by the board of
  directors of the issuer or by senior management of the issuer who believe that conformation
  of the decision by the board of directors is probable. [s.1(1)]


Material Fact:
 a fact that significantly affects, or would reasonably be expected to have a significant effect
  on, the market price or value of such securities. [s. 1(1)]


Material Information:
 any information relating to the business and affairs of an issuer that results in or would
  reasonably be expected to result in a significant change in the market price or value of any of
  the issuer’s securities. Material Information consists of both material facts and material
  changes relating to the business and affairs of an issuer. [National Policy 40]


Offering Memorandum: [s. 32(1) of the Reg.]
 a document purporting to describe the business and affairs of an issuer that has been prepared
   primarily for delivery to and review by prospective investors so as to assist those investors to
   make an investment decision in respect of securities being sold in a distribution to which s.
   53 or s. 62 of the Act would apply but for the availability of one or more exemptions
   contained in clause 72(1)(c), (d), or (p) of the Act or clause 14(f) of the Regulation.




                                                                                                   90
Offer To Acquire: [s. 89(1)]
 includes,
        (a) an offer to purchase, or a solicitation of an offer to sell, securities,
        (b) an acceptance of an offer to sell securities, whether or not such offer to sell has been
            solicited,
…or any combination thereof, and the person or company accepting an offer to sell shall be
deemed to be making an offer to acquire to the person or company that made the offer to sell.
[i.e., no gift or inheritance.]


Policy Statements
 policy statements; don’t have force of law; not legislation -- just a statement indicating how
   SC will exercise its broad discretion under Sec’s Act (BUT: practice = enforced)
 3 types:
    OSC policy statements
    Uniform policy statements (several provinces use)
    National Policy Statements (all provinces agree)


Private Company:
 a company whose constating document (i.e., articles and by-laws), [s. 1(1)]
       (a) the right to transfer its shares is restricted,
       (b) the number of shareholders, exclusive of persons who are in its employment an
           exclusive of persons who, having been formerly in the employment of the company,
           were, while in that employment, and have continued after termination of that
           employment to be, shareholders of the company, is limited to not more than 50, two
           or more persons who are the joint registered owners of one or more shares being
           counted as one shareholder, AND
       (c) any invitation to the public to subscribe for its securities is prohibited.



Private co. exchanges securities w/public for $$
 now a public co.


Private Co.'s Information
 not available in public domain


Projection
 written estimate of results that follows a given set of reasonable assumptions (unlike
   forecast, not bound to use most probable set of assumptions)
 reasonableness is left to the reader


Prospectus


                                                                                                       91
   comprehensive disclosure document (assets, liabilities, risks associated w/business)


Public Market
 both 1° and 2° market = open market in capital


Reporting Issuer:
 an issuer that has filed a prospectus and obtained a receipt therefore under this Act or that
   filed a securities exchange take-over bid circular under this Act. [s. 1(1)]


SECURITY includes …

   (a): … commonly known as a security … (common to who? Broadly defined, unlike US
    where = legal/financial community)
   (b): (essentially any doc that says you own something)
   clarified by Ont.HighCt. -- only instruments intended as investments (not instruments sold
    for other commercial purposes)
   (?): any investment contract -- Pacific Coast Coin Exchange, SCC

Pacific Coast Coin Exchange, SCC
 sold bags of silver coins in 2 ways: give $100 in exchange for bag, or buy bags on margin
   (i.e., put up part of $$ w/oblig'n to pay balance in future at which time can claim bag)
   through a "current account commodity agreement" (type of K)
 no prospectus
 SCC found as a fact that almost everyone bought on margin; of all who bought on margin,
   almost no one took delivery -- instead price of silver went up so had PCCE resell at the
   higher price and give extra back to original buyer
 found as a fact that PCCE had no legal oblig'n to buy back/resell, although their literature
   made the offer to try to resell (no guarantees though)
 key to PCCE's success was its ability to hedge -- knew possible for buyers to pay off and
   claim silver; had to time when to buy silver in market (to buy at lower price and then sell to
   make profit)
 sold for $100; hoped to buy at $90 when time to hand over, but price of silver rose to $200
HELD:
 SCC (8 to 1) that K's were in fact securities by investment K branch of def'n (s. 1(1))
 DeGrandpre J: applied 2 tests from US cases: Howey & Hawaii (PCCE passed both -- see
   below)
 then SCC says: takes a broader approach than these 2 tests -- go w/policy not tests --
   legislative intent -- need to replace caveat emptor
 essentially gave blank cheque to courts to call what they like a security


HOWEY TEST:



                                                                                                  92
   investors given opp to buy specific tract of land in specific orange grove in Fla. (no
    prospectus) -- option: get deed and manage themselves OR get mangmnt K where Howey
    would manage, sell the fruit and give profits to them (problem = no profits)
 SEC: deemed a security -- used a 4-part test:
It's a security if:
(1) money was invested …
(2) … in a common enterprise …
(3) … w/expectation of profits …
(4) … to be derived solely from the efforts of others.


HAWAII TEST
 had it's own 4-part test:
An investment K is created when:
(1) someone furnished initial value
(2) a portion of this initial value is subjected to the risks of the enterprise (i.e., cd lose investmt)
(3) that initial value was induced by some promise of profit
(4) a person doesn't realize right to exercise practical or actual control over managerial decisions

 security = when you invest $$ and rely on someone else's expertise in order to make profit on
that investment

N.B. get $$ back if don't have a prospectus
 WHY? -- if dumb enough to invest w/out one
       b/c legislation has to be proactive to work


Special Relationship: [s.75(5)]
 “Person or company in a special relationship with a reporting issuer” means:

        (a)   a person or company that is an insider, an affiliate, or associate of:
                   (i) a reporting issuer,
                   (ii) a person or company that is proposing to make a take-over bid for the
                        securities of a 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;

        (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 subclause (a) (ii) or (iii); [e.g., a lawyer]

        (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);




                                                                                                        93
       (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); [e.g., if a lawyer and learn information and then
             fired, still in a special relationship.]

       (e)   a person or company that learns of a material fact or a 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 who knows or ought reasonably to
             have known that the other person or company is a person or company in a special
             relationship. [Thus, if you learn of such information, you are in a special relationship,
             and if you tell some and they know or ought to have know you were in a special
             relationship, they are in a special relationship. It creates a an endless chain of potential
             tippees. Then if they buy or sell shares, they are in a special relationship and caught by
             s. 76(1).]


Take-Over Bid: [s. 89(1)]:
 an offer to acquire outstanding voting or equity securities of a class made to any person or
   company who is in Ontario or to any security holder of the offeree issuer whose last address
   as shown on the books of the offeree issuer 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 of securities at the date of the offer to acquire.


TRADE or trading includes:
 (a) a sale of a security for consideration
 (e) any act, advertisement, or solicitation (i.e., only have to try to sell to constitute a trade --
  WHY? -- b/c legis'n is proactive)
 “purchase” is excluded from def’n -- WHY?
       if a purchase was a “trade” would need a prospectus -- but seller doesn’t need to
          know anything about the purchaser

E.g.: X offers to Y & Z; Z buys
Ans.: 3 trades: offer to Y, offer to Z, sale to Z



Voting Security: [s. 1(1)]
 any security other than a debt security of an issuer carrying a voting right either under all
   circumstances or under some circumstances that have occurred and are continuing.


owner’s shares = “issued and outstanding shares”
shares = “unissued/Treasury shares”
co. reserved right to issue upon incorporation of the co.



                                                                                                      94
                                         TEMPLATES:

Prospectus

General Rule:

Generally, no one can trade in securities without being registered (i.e., have a license to trade in
securities) and if the trade is a distribution without preparing a prospectus.

A trade is any sale of a security for valuable consideration, and includes any act, advertisement,
solicitation, conduct or negotiation (directly or indirectly) in furtherance of a sale. (see
Appendix)

A security is anything that is commonly known to be a security and includes, any document
constituting evidence of title of an instrument intended as an investment (Ont. High Court).
With respect to investment contracts, you are buying a security whenever you invest money and
rely on someone else's expertise in order to make profit on that investment (Pacific Coast Coin
Exchange). (see Appendix)

A distribution is:

(a) a trade in securities of an issuer that have not been previously issued,

(b) a trade in previously issued securities by a control person (i.e., a person/company or
    combination of persons/companies who (1) own more than 20% of the outstanding voting
    securities of an issuer, OR (2) don’t have 20%, but who own enough securities to affect
    materially the control of the issuer)

(c) the first trade in securities that were previously acquired through a private placement
    exemptions under s. 72(1) [s. 72(4)]. (see Appendix)

A prospectus is a comprehensive disclosure document that is intended to assist investors in
making informed investment decisions regarding the securities of a company. A prospectus must
provide full, true and plain disclosure of all material facts regarding the company.

Material facts are facts that significantly affects, or would reasonably be expected to have a
significant effect on, the market price or value of securities.

Material facts that should be included in a prospectus include: who the owners, Directors and
officers of the company are; a description of the business, its financial affairs, and what its future
plans are for the company and the proceeds of the issue; what the inherent risks of the business
are and a description of the competitive environment; what material contracts have been entered
into; and any litigation the company is involved in. The only information that companies do not
have to disclose is information such as trade secrets.


                                                                                                    95
   Note: Directors are liable for any misrepresentation in the P no matter what; officers are only
    liable if they sign the P.




                                                                                                96
                                    Continuous Disclosure

General Rule

Reporting issuers must keep the information provided in the prospectus current through press
releases and filing material change reports.


Reporting issuers are companies that have filed a prospectus and have obtained a receipt from
the Director (at which point they are allowed to trade in their securities), or that have filed a
securities exchange take-over bid circular.

Material changes are changes 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
its securities. This includes a decision to implement such a change made by the issuer’s board of
directors or senior management if they believe that conformation of the decision by the board of
directors is probable. According to National Policy 40, this includes any information relating to
the business and affairs of an issuer that results in, or would reasonably be expected to result in, a
significant change in the market price or value of any of the issuer’s securities. As such, this
could include both material facts and material changes.




                                                                                                    97
                                         Early Warning
General Rule

Any person or company who begins to acquire a significant amount of a company’s securities
must file reports with the OSC and issue press release to alert the market. The press release must
be filed before trading begins on the next business day and must state their intention regarding
the company. There is also a one-day freeze on purchasing shares after the report is filed (to
encourage hasty reporting).

The threshold amount is 10% ownership of the outstanding securities in a class, unless the
company is subject to a take-over bid. During a take-over bid anyone (other than the offeror)
with at least 5% of the outstanding securities of the class of shares subject to the bid must also
report any acquisition of 2% or more up to the 10% threshold (at which time the regular early
warning rules kick in).


Note that, ownership means beneficial ownership (i.e., you have the right to acquire the security
w/in 60 days, or if the security can be converted w/in 60 days into the underlying security). This
concept includes whenever persons/companies are acting jointly or in concert to acquire the
shares.

A take-over bid is when an offeror makes offer to acquire outstanding voting or equity
securities of a class where the number of shares the offeror owns, coupled with the number of
shares they offer to acquire, constitute 20 % or more of the outstanding securities of that class (at
the date of the offer to acquire). (See Appendix)

An offeror is a person/company who makes a take-over bid or an offer to acquire. (See
Appendix)

An offer to acquire includes an offer to purchase securities, a solicitation of an offer to sell
securities, and/or an acceptance of an offer to sell securities regardless of whether that offer has
been has been solicited. (See Appendix)




                                                                                                     98
                                       Insider Reporting
General Rule

Insiders must file a report disclosing any direct or indirect beneficial ownership or control over
securities of the reporting issuer as of the day they became insiders, within 10 days of the end of
the month in which they became insiders. In addition, any change in their ownership or control
must be reported within 10 days of the end of the month in which the change occurred.



Insiders are:
 every director or senior officer of a reporting issuer, or of a company that is an insider or
    subsidiary of a reporting issuer,
 any person who beneficially owns (directly or indirectly) and/or who exercises control or
    discretion over voting securities of a reporting issuer, more than 10% of the voting rights
    attached to all outstanding voting securities, AND
 a reporting issuer where it has acquired any of its securities, for as long as it holds any of its
    securities.


Reporting issuers are companies that have filed a prospectus and have obtained a receipt from
the Director (at which point they are allowed to trade in their securities), or that have filed a
securities exchange take-over bid circular.

Ownership or control means beneficial ownership (i.e., you have the right to acquire the
security w/in 60 days, or if the security can be converted w/in 60 days into the underlying
security). This includes whenever persons/companies are acting jointly or in concert with
respect to the securities.




                                                                                                   99
                                                                     if buys from another RI, not in a SR
                                                                      w/it
                                                                     if get info from a tippee who got
                                        Insider Trading               from a tippee  reasonable/ought to
                                                                      know this?
General Rule
It is illegal for anyone in a special relationship with a reporting issuer to buy or sell its shares
with knowledge of a material fact or material change regarding that issuer, that has not generally
been disclosed.

Persons who are in a special relationship are:
       (a)     an insider, an affiliate, or associate of:
               (i) a reporting issuer,
               (ii) a person/company proposing to make a take-over bid for the securities of a
                    reporting issuer,
and persons or companies
   (b)         that is in (or proposes to be in) a business/professional relationship with (or on
       behalf of) the reporting issuer OR a person/company in (a)(ii)
   (c)         who is a director, officer, or employee of the reporting issuer OR of a
       person/company described in (a) (ii) or (b);
   (d)         that learned of the material fact or material change regarding the reporting issuer
       while they were (a), (b), or (c);
   (e)         that learns of a material fact or a material change regarding the issuer from any
       other person in a special relationship w/a reporting issuer, and who knows or ought
       reasonably to have known that they were in a special relationship

Insiders are:
 every director or senior officer of a reporting issuer, or of a company that is an insider or
    subsidiary of a reporting issuer,
 any person who beneficially owns (directly or indirectly) and/or who exercises control or
    discretion over voting securities of a reporting issuer, more than 10% of the voting rights
    attached to all outstanding voting securities, AND
 a reporting issuer where it has acquired any of its securities, for as long as it holds any of its
    securities.

A take-over bid is when an offeror makes offer to acquire outstanding voting or equity
securities of a class where the number of shares the offeror owns, coupled with the number of
shares they offer to acquire, constitute 20 % or more of the outstanding securities of that class (at
the date of the offer to acquire). (See Appendix)

Reporting issuers are companies that have filed a prospectus and have obtained a receipt from
the Director (at which point they are allowed to trade in their securities), or that have filed a
securities exchange take-over bid circular.

Material facts are facts that significantly affects, or would reasonably be expected to have a
significant effect on, the market price or value of securities.

Material changes are changes 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


                                                                                                  100
its securities. This includes a decision to implement such a change made by the issuer’s board of
directors, or by senior management if they believe that conformation of the decision by the board
of directors is probable. According to National Policy 40, this includes any information relating
to the business and affairs of an issuer that results in, or would reasonably be expected to result
in, a significant change in the market price or value of any of the issuer’s securities. As such, this
could include both material facts and material changes.

                                     PPEs -- Resale Rules
General Rule -- PPE

Generally, a company cannot distribute securities unless it is registered (i.e., is licensed to trade
in its securities) and files a prospectus (investor protection). However, in certain circumstances
(i.e., where a purchaser is sufficiently sophisticated (wealth, experience), prospectus-type
information is otherwise readily available, the securities are inherently safe), a prospectus is
unnecessary and a company can distribute its shares via a private placement exemption.


A security is anything that is commonly known to be a security and includes, any document
constituting evidence of title of an instrument intended as an investment (Ont. High Court).
With respect to investment contracts, you are buying a security whenever you invest money and
rely on someone else's expertise in order to make profit on that investment (Pacific Coast Coin
Exchange). (see Appendix)

A prospectus is a comprehensive disclosure document that is intended to assist investors in
making informed investment decisions regarding the securities of a company. A prospectus must
provide full, true and plain disclosure of all material facts regarding the company.




General Rule -- Resale Rules

When you buy securities pursuant to one of the private placement exemptions (i.e., without a
prospectus), reselling those securities is restricted. You can only resell them if you comply with
certain conditions designed to allow information regarding the securities to be in the public
domain long enough so that investors can make informed decisions regarding those securities.

You cannot resell the securities unless:
 you issue a prospectus,
 you sell pursuant to another private placement exemption,
 you comply with the resale rules, or
 you receive an exemption from the OSC.




                                                                                                  101
A security is anything that is commonly known to be a security and includes, any document
constituting evidence of title of an instrument intended as an investment (Ont. High Court).
With respect to investment contracts, you are buying a security whenever you invest money and
rely on someone else's expertise in order to make profit on that investment (Pacific Coast Coin
Exchange). (see Appendix)

A prospectus is a comprehensive disclosure document that is intended to assist investors in
making informed investment decisions regarding the securities of a company. A prospectus must
provide full, true and plain disclosure of all material facts regarding the company.




                                                                                             102
                                         Take-over Bids
General

Whenever someone attempts to take-over a company by purchasing its outstanding shares, they
must comply with the take-over bid rules. These rules are designed to ensure equal treatment of
all shareholders and provide adequate time and information is available so that shareholders can
make an informed decision.

A take-over bid is when an offeror makes offer to acquire outstanding voting or equity
securities of a class where the number of shares the offeror owns, coupled with the number of
shares they offer to acquire, constitute 20 % or more of the outstanding securities of that class (at
the date of the offer to acquire). (See Appendix)

An offeror is a person/company who makes a take-over bid or an offer to acquire. (See
Appendix)

An offer to acquire includes an offer to purchase securities, a solicitation of an offer to sell
securities, and/or an acceptance of an offer to sell securities regardless of whether that offer has
been has been solicited. (See Appendix)

Note that, ownership means beneficial ownership (i.e., you have the right to acquire the security
w/in 60 days, or if the security can be converted w/in 60 days into the underlying security). This
includes when persons/companies are acting jointly or in concert with each other with respect to
their securities.



   Collateral agreements  not clear-cut -- use “if deemed to be …”

   Consideration is different (some get share for share, others get $$)  pre-bid integration
    -- all did not get on the same terms -- may not be sure what shares are worth in $$




                                                                                                  103

				
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