Securities Forbes w07 by jehOhHKR

VIEWS: 27 PAGES: 81

									Market Regulation  Getting Ready to Trade ............................................................................................................... 1
   What is a trade? ............................................................................................................................................................................ 7
   What is a Security? ....................................................................................................................................................................... 8
Distributions  the Prelude to a Prospectus ................................................................................................................ 12
   Prospectus 101 ............................................................................................................................................................................ 13
   Preliminary Prospectus .............................................................................................................................................................. 17
   FOFI – forward looking financial information .......................................................................................................................... 20
   Material Change ......................................................................................................................................................................... 23
   Exotic prospectus forms ............................................................................................................................................................ 26
   Civil liability for prospectus disclosure ...................................................................................................................................... 30
   Due diligence defences .............................................................................................................................................................. 32
   Exempt transactions .................................................................................................................................................................. 33
      Accredited Investor ......................................................................................................................................................................................................34
      Minimum Investment Amount Exemption .............................................................................................................................................................35
      Benign Securities ...........................................................................................................................................................................................................35
      Hardship Exemptions ..................................................................................................................................................................................................36
      Issuer relationship exemptions ...................................................................................................................................................................................38
      Employee exemptions ..................................................................................................................................................................................................38
      Underwriter exemption ................................................................................................................................................................................................38
      Rights Offerings ............................................................................................................................................................................................................38
      Conversions/Purchases ...............................................................................................................................................................................................39
      DRIPS – Dividend Reinvestment Plans ...................................................................................................................................................................39
   Offering Memorandum .............................................................................................................................................................. 40
   Resale Restrictions ..................................................................................................................................................................... 42
   Control Distributions ................................................................................................................................................................. 44
Continuous disclosure obligations ................................................................................................................................ 46
   Periodic Continuous Disclosure ................................................................................................................................................ 48
   Material Change Disclosure....................................................................................................................................................... 49
   Civil Liability for Continuing Disclosure ................................................................................................................................... 52
      Rights of Action Available ..........................................................................................................................................................................................53
      Core/Non-Core Documents ......................................................................................................................................................................................54
      Due diligence defence to actions under s.138.3 ......................................................................................................................................................54
Insider Trading ............................................................................................................................................................. 56
      Two things  Chinese firewalls and the Regulations ............................................................................................................................................58
      Defences to Insider Trading .......................................................................................................................................................................................59
   Tipping ...................................................................................................................................................................................... 60
   Remedies for Tipping/Insider Trading ..................................................................................................................................... 61
      Measure of Damages ....................................................................................................................................................................................................61
   Insider Reporting ....................................................................................................................................................................... 62
Takeover Bid Regulation .............................................................................................................................................. 65
     What is jointly and in concert? ...................................................................................................................................................................................66
     What is beneficial Ownership? ...................................................................................................................................................................................66
     Pseudo-simulation of the process of a takeover bid process from the beginning ............................................................................................69
   Takeover Bid Exemptions ......................................................................................................................................................... 70
   Takeover Bid Defences .............................................................................................................................................................. 72
     Share issues ....................................................................................................................................................................................................................74
     Break fees .......................................................................................................................................................................................................................75
     Asset sales.......................................................................................................................................................................................................................75
     Shareholder Rights Plans  poison pill defenses ...................................................................................................................................................75
Enforcement .................................................................................................................................................................. 77
        Civil liability provisions of the OSA  s.130 – 138.1 ...........................................................................................................................................77
        There are also statutory offences under s.122 .........................................................................................................................................................77
        Criminal Code provisions ............................................................................................................................................................................................77
        Public interest power of the OSC under s.127 of the OSA ..................................................................................................................................78
        Investigations .................................................................................................................................................................................................................80
Market Regulation  Getting Ready to Trade
 Basically dealing with a set of comprehensive rules about securities industry in Ontario
 There is an aspect here of trying to regulate unscrupulous activities
 Security is a broad thing  as evidenced in the Act itself
    o    Any type of investment property that is not a commodity
 There is an element to securities that deals with the actions of others
    o    Investors rely on the company’s performance for example
 There are comprehensive regulations regarding securities  look at the size of the book
 In this way it is similar to tax  very rules driven
 There are five basic themes to securities regulation
    o     Make for good markets through licensing
                Get bad actors out of the market and keep them out of the market
                There are also different types of licenses for different actors
    o Primary market disclosure
                Two thoughts – there are primary and secondary markets
                        Primary – if you want to sell securities to the public you must make good disclosure  do this using a
                            prospectus which includes information about the company to allow the public to make informed
                            investment decisions
                                 o There are a lot of rules about prospectus’ including what needs to be in them
                                 o They often cost a lot of money and not everyone can afford to go through this process
                                          In response to this there are provisions – called exempt distributions – which allow
                                              people to sell securities without having to satisfy the prospectus requirements
                        Secondary – after a company’s securities are already in the public domain and private investors wish to
                            trade amongst themselves they do so through the secondary markets
                There are a criminal as well as civil penalties for improper disclosure  directors could be liable
                        But they may have due diligence defences
    o Continuous disclosure
                Aimed at the secondary market
                There is an obligation on security issuers to keep the markets informed of what is happening with the company
                There is also the idea of material change disclosure
    o Insider trading
                If one has special information they cannot use the information to their advantage or tip it to others to use to their
                   advantage
                Both the tipster and the one to whom the information is tipped are liable for damages
    o Takeover bids
                Kind of the opposite side of the primary market idea where someone wants to take a public company private
                   they must provide information  again to allow investors to make informed choices
                        As with much else in securities there are exemptions to rules for takeover bids
                There are also regulations about what companies can do to defend themselves from takeover bids
   Securities regulation in Canada is a provincial matter
    o As a result we have 13 regulators – 1 federal, 2 territorial, and 10 provincial
    o Some of these simply collect fees and perform record keeping duties
    o Others, such as Ontario and British Columbia perform more extensive regulatory functions
   In the US there is only one regulator – the SEC – and it operates on a national basis
   This is the same as in Australia
   Due to provincial sovereignty over securities we have a somewhat fractured system
    o To do a national offering a company needs to have receipts for its prospectus from each regulator
                But, in response to situations such as this, we have national initiatives to make things simpler
    o It is also possible to get exemptions to allow for such activities as employee distributions etc.
    o It is necessary for companies to go to the regulator for each jurisdiction in which it operates when dealing with securities
          issues
   Some of the regulations of the different jurisdictions are inconsistent with each other  but it is better than it used to be
   Securities trading is becoming more international in operation whereas it used to be much more localized
   It is now possible to have 24 hour a day trading
   It makes sense to have larger regulatory agencies – such as a national one – due to the changes in the securities industry but
    attempts at developing one in Canada have proven thus far unsuccessful
   There have been many attempts but it has not happened
    o Largely because the provinces would lose some say  also some do not like the idea that Toronto (and by extension
          Ontario) would be the centre of any national regulatory agency
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 Also there is the issue of non-congruence in the views of the regulatory agencies – some do not agree on what regulation
    should look like – e.g. BC with their recent changes
 Over the past two years the number of IPO’s have fallen in Canada
 Companies are opting for AIM in the UK because of easier listing requirements
 Another reason for not changing the way things work is a sense of complacency  the system seems to work fine the way it
    is so why should it be changed
 The major issue is constitutional  property and civil rights vs. regulation of trade and commerce
    o    Also the issue of the federal power to regulate banks, insurance companies, and federal companies
    o    It is likely that the federal government could pass securities regulation but it does not have the power to make the
         provinces cede any power  would just result in another regulator being created
                There used to be regulatory powers in the CBCA but they were taken out
   Multiple Access v McCutcheon
    o Federal company, the CBCA had insider trading rules and the provinces prosecuted for insider trading violations under
         their laws
    o The SCC said that it was possible to have complementary legislation  they could co-exist
    o The would only be an issue where compliance with one law meant breach of the other
   Australia had a system similar to ours but eventually moved to a national regulator  no reason that we could not do this
    either  but unlikely for above stated reasons
   Our system is a bit of a mess but we find a way to make it work  Multiple Access is an example
   The court could have ruled that it was an occupied federal field and that there was no room for the provinces
    o A ruling like that would have perhaps provided impetus to the creation of a national regulator
   Ontario v Quebec (Caisse case)
    o Action by a Quebec company would not have violated Quebec law but it did violate Ontario law
    o Caisse claimed it was immune from Ontario law because it was a Crown corporation
    o Court said that to an extent this was true but that since the breach occurred in Ontario the Quebec Crown corporation has
         to abide by the laws of Ontario
                This ruling reinforces the regulatory system that we have in Canada
   Ontario is interested in securities transactions involving Ontarians  either selling to others or being sold to by others
   In Ontario the OSC has the power to pass rules about the operation of the securities markets and these rules have the effect of
    law  BC and Alta also have this power while the other provinces must act by regulation
   In order to smooth over some of the differences between jurisdictions and make it easier for companies to operate we have
    multi-jurisdictional instruments (or National Instruments)
   One national policy says that provinces have agreed on prospectus’
    o One provinces’ regulator will look over the prospectus and once it signs off the other regulators will provide receipts
         evidencing that the prospectus is valid
   If you only issue securities in Ontario you only need to worry about Ontario rules
    o But what if you list on the TSX and someone in BC buys your shares
                No problem so long as the company itself does not go into BC to sell its shares or do some other thing that will
                    mean that BC laws apply
   Looking at the Statute (Book)
    o The colour bars on the side have meanings
                The first one is the Statute itself
                          But the rest of the book is also important
                The Act itself is rather simplistic and straightforward
                          The regulations are also important but again short
                                  o Is the second section
                                  o The regulatory framework is similar to that found in other regulatory systems
                                  o S.143(2) of the Act allows for the regulations to be enacted
    o Up until 1994 the Act and the regulations were all that there was to securities regulation in Ontario
                For about 15 years prior to this the OSC was publishing policy statements that dealt with the OSC’s
                    interpretation of the Act and regulations
                The regulation of the securities industry was not a big issue up till then  it was difficult to get changes to the
                    Act or new regulations enacted  especially since capital markets move quickly
                When individuals faced prosecution for breaches of policy statements they would claim that the policy
                    statements were not law  two cases led to changes in the laws
                          Pezim in BC and Ainsley in Ontario
                          In Ontario this led to the enactment of s.143(1) allowing for rule making power for the OSC
                                  o The OSC has 62 heads of rulemaking power  some are broad and in essence the OSC now
                                        has the power to enact rules related to anything doing with securities in Ontario

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               S.143(13) - If there is a conflict or an inconsistency between a regulation made by the Lieutenant Governor in
                Council under this Act and a rule, the regulation prevails but in all other respects a rule has the same force and
                effect as a regulation
                      As a result of this provision the OSC, in effect, has the power to make law in relation to securites in
                          Ontario
                      OSC can bring their expertise to bear in the area of securities law and regulation
 The Act contains very strict procedures for passing a rule  s.143.2
  o The OSC needs to draft the rule and put it in the marketplace for comment  must be out for comment for a period of at
      least 90 days (send it out to market participants)
  o If the comments lead to material changes to the rule it then needs to be republished for comment for a further 90 days
  o When the comment period is done the OSC can send the rule to the Minister who can do one of three things
            Accept it
            Amend it
            Send it back to the OSC for reworking
  o This area of law is expertise driven  many will defer to the discretion of the OSC because of its expertise
            Courts will limit their oversight of the discretion of the OSC
  o Once the Minister approves the rule it then has the force of law
 OSC rules
  o Often have companion policies that deal with the interpretation of the rule
            They deal with what the OSC thinks the rule means but they do not have the force of law
  o There are also multilateral instruments (such as National Instruments (NI))
            Parts of the NI are Ontario law  i.e. Ontario will have passed a rule dealing with this issue
            Other jurisdictions with rulemaking power will also do this
                      Those without rulemaking power will need to pass regulations instead
            Multilateral instruments become law once adopted
                      There are agreements by the provincial regulators to enact such a law
            After multilateral instruments there are multilateral policies
                      Companion policies that deal with the interpretation of the instrument but they have no legal effect
            Multilateral instruments need not be adopted by all provinces
                      Will include somewhere in the instrument which provinces have adopted the instrument
  o Also have commission orders
            Decision of the OSC on some area of securities law where the OSC is entitled to make an order under the Act
            The OSC also has the power to grant exemptions if it is in the interest of the public or the markets to do so
            Can also get an order where staff have made a decision and you do not agree  can appeal a staff decision to
                the Commission
            OSC also has the power to revoke licenses but only after a hearing
            But orders do not have the effect of law
            Orders can provide you with an overview of the outcome of any proceeding that you may have before the OSC
                at the time
            Also have blanket orders (and blanket exemptions)
                      Blanket orders provide for a fact scenario and if you fit within the fact scenario then you can rely on
                          the blanket order to know the outcome of your particular situation and how to proceed
                      Blanket orders have the effect of law since they are in effect the Commission’s ruling on a certain
                          situation  the Commission is using its discretionary powers
  o Also have staff notices
            Could be staff saying that they are considering a particular rule and just allowing for people to have some notice
                of potential changes that may be coming
            Could also be simply the staff letting people know how rules are numbered
  o The Rules break down into 9 discrete chunks
            These make it a bit easier to find the particular rules
            We will look mostly at sections 4, 5, and 6 of the rules
                      4 – distribution requirements such as prospectus and exemptions
                      5 – ongoing requirements for issuers and insiders
                               o After you sell securities into the market you still have obligations
                               o Need to keep the market informed of what is going on
                               o Insiders  insider trading rules and rules about insider information and disclosure
                      6 – takeover bids
                               o Issuer bids, insider bids etc.
                               o If someone wants to make a bid for a company they need to make disclosure


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                              o       If they are an insider they will be held to a higher standard because they may have some
                                      information that is advantageous
                                 o Issuers also face these additional requirements
              We will also look at s.3 a little bit  regulation of participants
    o Numbering system for rules
              AB-CDE
              A = part, section of the act (coincides with 4, 5, 6, etc from above)
              B = subject matter  part of the section that the rule deals with
              C = jurisdictional level
                        1 = national policy (multilateral instrument)
                        3 = staff notice
                        5 = Ontario rule (or local rule)
              D=
              E=
    o Often you will have a situation where there is a national policy, a staff notice, and a local rule
              If there is a local rule dealing with the same thing as a national instrument it means that Ontario has
                  supplemented the national instrument in some fashion
                        This may be because Ontario wanted some extra provisions related to the rule
   Who are the regulators and how do they function
    o The OSC is the main regulator in Ontario but there are also subsidiary regulators such as stock exchanges and self-
        regulatory organizations (SRO’s)
   The OSC
    o Is a Crown corporation without share capital with the usual incidents of a corporation
    o But the OSC also acts as an agent of the Crown
    o The OSC is self-funded  this is a recent development as it used to be funded by the province
              In recent years the OSC has actually been a net contributor to the province
                        This is because through its statutory powers it has the ability to raise money
                        Rule 13-501 deals with the payment of fees
                                 o The rule deals with Part 1, section 3, local rule
                                 o Deals with procedures
                                            Reporting issuer must pay a fee depending upon its market capitalization
                                                     Larger the market cap the larger the fee
                                 o For example Part 3 of the rule deals with capital market participation fees
                                            Fees for all people who hold licenses
                                                     This fee is based on the amount of fees generated in Ontario
                                                              o For underwriters, brokers etc
                                 o Part 4 of the rule deals with activity fees
                                            Pay a fee for a number of different proceedings
                                 o There are also late fees involved
                        Funding occurs on a user pays basis which is based upon the level of participation in the securities
                            markets
   There is a diagram at page 117 of the book outlining the structure of the OSC
    o Have a chair and vice-chair  these are largely policy based positions
    o Also have an Executive Director who, in effect, is similar to a COO (Chief Operating Officer)
    o The chair of the commission is the external face of the commission
    o Under the ED there are a number of directors of different departments  have different responsibility areas
              Director of finance  will have under them finance teams dealing with specific reporting issuers
              Capital markets  deals with the exchanges, issues with markets and market participants
              Enforcement  is an important area dealing with investigations, surveillance etc
                        Surveillance looks at the trading of a company’s stock and any type of activity that warrants an
                            investigation
              Director of investment funds  this position is evidence of the changing nature of securities and investment as
                  it did not exist 10 years ago
   Commissioners sit on the commission as an adjudicative panel
    o If someone disagrees with the decision of the staff they are then faced with having to go to the commission for a
        determination
              Ranking of decision making in securities matters
                        First  staff decision
                        Second  appeal to the commission
                        Finally  appeal to the courts
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 Decisions of the commission can be appealed to the courts where the only real hope is to attack the OSC decision on the basis
    of the standard of review which is usually patently unreasonable
    o An appeal will either need to be grounded on the standard of review or on an incorrect legal interpretation by the
          Comission
                Absent either of these there is limited chance of success at the court level
   The OSC is empowered to determine the case, make a decision, enforce a decision, judge a decision and investigate the
    decision
    o This multiplicity of roles can potentially create issues
    o If you jump the queue – go to a commissioner over the head of the staff – it can lead to problems later on
   It is also necessary to look at the legislation creating the OSC
    o The purpose provisions of the Act are recent only being implemented in the past few years
    o They were put in to protect the public interest
   Purpose provisions of the Act
   S.1.1. - The purposes of this Act are,
    o      (a) to provide protection to investors from unfair, improper or fraudulent practices; and
    o      (b) to foster fair and efficient capital markets and confidence in capital markets.
   There is a need to balance these two purposes
    o It is possible that the most efficient market is one without any investor protection
    o It is also possible that a market with effective investor protection is one that is inefficient
                This depends, in some measure, on the way that you measure efficiency
                For the first if efficiency is determined on the basis of being able to get things done then a market with investor
                   protections may not be efficient
   There are also principles of consideration in the Act
   S.2.1 - In pursuing the purposes of this Act, the Commission shall have regard to the following fundamental principles:
    o 1. Balancing the importance to be given to each of the purposes of this Act may be required in specific cases.
    o 2. The primary means for achieving the purposes of this Act are,
                i. requirements for timely, accurate and efficient disclosure of information,
                ii. restrictions on fraudulent and unfair market practices and procedures, and
                iii. requirements for the maintenance of high standards of fitness and business conduct to ensure honest and
                   responsible conduct by market participants.
    o 3. Effective and responsive securities regulation requires timely, open and efficient administration and enforcement of
          this Act by the Commission.
    o 4. The Commission should, subject to an appropriate system of supervision, use the enforcement capability and
          regulatory expertise of recognized self-regulatory organizations.
    o 5. The integration of capital markets is supported and promoted by the sound and responsible harmonization and co-
          ordination of securities regulation regimes.
    o 6. Business and regulatory costs and other restrictions on the business and investment activities of market participants
          should be proportionate to the significance of the regulatory objectives sought to be realized.
   Public interest is an important consideration in the securities arena
   S.127(1) - The Commission may make one or more of the following orders if in its opinion it is in the public interest to make
    the order or orders:
              1. An order that the registration or recognition granted to a person or company under Ontario securities law be
               suspended or restricted for such period as is specified in the order or be terminated, or that terms and conditions be
               imposed on the registration or recognition.
              2. An order that trading in any securities by or of a person or company cease permanently or for such period as is
               specified in the order.
              2.1 An order that acquisition of any securities by a particular person or company is prohibited, permanently or for
               the period specified in the order.
              3. An order that any exemptions contained in Ontario securities law do not apply to a person or company
               permanently or for such period as is specified in the order.
              4. An order that a market participant submit to a review of his, her or its practices and procedures and institute such
               changes as may be ordered by the Commission.
              5. If the Commission is satisfied that Ontario securities law has not been complied with, an order that a release,
               report, preliminary prospectus, prospectus, return, financial statement, information circular, take-over bid circular,
               issuer bid circular, offering memorandum, proxy solicitation or any other document described in the order,
                         i. be provided by a market participant to a person or company,
                        ii. not be provided by a market participant to a person or company, or
                       iii. be amended by a market participant to the extent that amendment is practicable.
              6. An order that a person or company be reprimanded.
              7. An order that a person resign one or more positions that the person holds as a director or officer of an issuer.

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             8. An order that a person is prohibited from becoming or acting as a director or officer of any issuer.
             8.1 An order that a person resign one or more positions that the persons holds as a director or officer of a registrant.
             8.2 An order that a person is prohibited from becoming or acting as a director or officer of a registrant.
             8.3 An order that a person resign one or more positions that the person holds as a director or officer of an
               investment fund manager.
             8.4 An order that a person is prohibited from becoming or acting as a director or officer of an investment fund
               manager.
             8.5 An order that a person or company is prohibited from becoming or acting as a registrant, as an investment fund
               manager or as a promoter.
             9. If a person or company has not complied with Ontario securities law, an order requiring the person or company
               to pay an administrative penalty of not more than $1 million for each failure to comply.
             10. If a person or company has not complied with Ontario securities law, an order requiring the person or company
               to disgorge to the Commission any amounts obtained as a result of the non-compliance.
   Prior to the introduction of the purpose provisions there was an issue about how you go about determining that there was, or
    was not, a public interest involved in the case
   The keystone of investor protection is disclosure
   Front running  when one party tips another about an intention by another to purchase a stock at a certain price  the one
    receiving the tip can act on it, purchase the stock at a lower price, and then sell it when the third person buys it, for a gain, of
    course
   The commission, under s.127 is empowered to make orders in the public interest
    o One of these orders may consist of a cease-trade order for example  can be very damaging to a company who is
         subject to one, or to directors and officers who are subject to them
               Cease-trade orders are usually reserved for the most severe examples because it is a severe penalty
    o It is also possible for the OSC to deny exemptions to either the company or its directors thereby limiting their ability to
         do things
    o Companies are able to get credit for cooperation, for example where they bring an issue to the attention of the
         Commission they are more likely to receive leniency
   In the securities arena it is possible to have criminal as well as civil penalties for violations of securities law
   The OSC often exercises its public interest jurisdiction
   The regulation of stock exchanges is not at the heart of securities regulation (TSX for example)
    o The TSX was an SRO (self-regulatory organization) for many years
               Kind of like a members club
               Needed to buy a seat and then could trade on the exchange
               The exchange regulated members and regulated issuers listing on the exchange
                         Issuers had to have a listing agreement setting out their responsibilities and requirements for
                             maintaining their listing
                                  o Such as minimum number of shareholders, minimum share price
                                  o If a condition was breached the issuer could be delisted
               The rules of the exchange were compatible with the OSC rules and regulations
                         The OSC has a role in the exchange because it has an overriding right to license exchanges
                                  o OSC can also approve the procedures of the TSX
   Much of this changed in 2002 when the TSX demutualized and became a public company like any other
    o TSX is now listed like other companies,
    o TSX took the money from its IPO and turned around and bought the CDNX renaming it the TSX-V (TSX – Venture
         Exchange)
    o TSX is still licensed by the OSC whieh also provides procedures etc.
   Historically an exchange was a place where buyers and sellers would get together to trade but this has changed
    o There is no longer a trading floor as everything has become electronic instead
    o Rather than having a need for traders on the floor to make a trade happen it is possible to do it through a computer
         terminal from just about anywhere at just about any time
    o With this development it is now theoretically possible for anyone to start an exchange anywhere  this opens up the
         ability to trade (and potentially creates problems for securities regulation)
   Policy 21-101 (Multilateral Instrument (NI))
    o Part 2, Section 1
               Deals with market participants
                         Exchanges, alternative trading systems (ATS) and new markets
               This NI says that ATS are exchanges if they meet certain criteria
                         As a result, if the criteria are met, they need to be licensed by the securities regulators
    o One concern with alternative markets is the possibility for fragmentation which could lead to inefficiency if trades do not
         clear  an exchange must have systems in place that ensure that trades clear
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 IDA (Investment Dealers Association) is another SRO for dealers
    o    Its role is to oversee market participants and to ensure that they operate on the up and up
    o    IDA also provides a fund for individuals who suffer losses because of the proverbial “dealer gone bad”  sort of like an
         insurance fund
   The OSC is the major regulator
    o Effectively have a director of operations  the ED
    o Below this are a number of departments
    o Above the ED is the Commission itself
   The role of the TSX is as a trading platform  there are others as well such as the ME, ATS etc
   In Ontario it is necessary to have disclosure whenever an issuer wants to sell securities
   There are two important sections of the Act in this respect  s.25 and s. 53
   S.25 (1)(a) - No person or company shall, 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; and the registration has been made in accordance with Ontario securities law and the person or company
    has received written notice of the registration from the Director and, where the registration is subject to terms and conditions,
    the person or company complies with such terms and conditions
    o S.25 is known as the registration provision  need to be registered in order to trade
               However s.25 does not really catch distributions, and that is why we have s.53(1).
               This section deals with all trades, regardless of whether or not it is a distribution
   S.53(1) - No person or company shall trade in a security on his, her or its own account or on behalf of any other person or
    company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed
    and receipts have been issued for them by the Director.
    o A prospectus is the basic disclosure document in securities regulation
               Tells the investor all they need to know about the company so that they are in a position to make an informed
                    decision as to whether or not they wish to purchase the offering
    o The general issue with a distribution is that it will either be a new issue coming to market or otherwise the sale will be
         from a control block of the company
    o This section (s.53) is the gateway into distributions
    o One important consideration in distributions is the exemptions that are available
   S.25 applies to all trades, s.53 only applies to distributions


What is a trade?
 Definitions are found is s.1 of the Act
 Trade, or trading includes
    o (a) any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin,
      instalment or otherwise, but does not include a purchase of a security or, except as provided in clause (d), a transfer,
      pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith,
            The latter portion covers the giving of security over a security  is not a trade, unless it falls under (d) 
                control block
            A gift of a security is not a trade  because need valuable consideration
            The fact that a purchase does not constitute a trade follows through with the registration requirement  do not
                have to be registered to buy a security
  o (b) any participation as a trader in any transaction in a security through the facilities of any stock exchange or quotation
      and trade reporting system,
  o (c) any receipt by a registrant of an order to buy or sell a security,
  o (d) any transfer, pledge or encumbrancing of securities of an issuer from the holdings of any person or company or
      combination of persons or companies described in clause (c) of the definition of “distribution” for the purpose of giving
      collateral for a debt made in good faith, and
  o (e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the
      foregoing
 Use of the word “includes” means that this list is not exhaustive
 Have (d) of the definition because controlling shareholders are treated differently under securities law
  o This is because they are assumed to have knowledge that others do not have  can impact shares etc.
  o Giving of security over securities by a controlling shareholder is called a trade because it is possible that the controlling
      shareholder may default on the security agreement and then there would be a change in control  if there was no need
      for this to be a trade then the bank could sell the shares without a prospectus and this may not be (most likely would not
      be) a good situation for the other shareholders



                                                                                                                                     7
              However there are exemptions that allow for controlling shareholders to give security over their holdings
               without a prospectus but it may be that those who get the securities through an exempt transaction are
               themselves precluded from issuing them to the market without a prospectus
 A control block is treated differently because we want to ensure that the control block does not find its way onto the market
  without a prospectus
 The most important part of the definition of trade is (e)  any act in furtherance of a trade
  o Because it is very broad  can include talking up a security etc.
 Under the definition of a trade virtually anything that has to do with the transfer of a security will be a trade and therefore
  will be caught by the OSA and be subject to regulation by the OSC


What is a Security?
 Is another important definition in the OSA
 It is also a non-exhaustive listing due to the use of the word “includes”
 Security:
    o    (a) any document, instrument or writing commonly known as a security,
    o    (b) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or
         royalties of any person or company,
    o (c) any document constituting evidence of an interest in an association of legatees or heirs,
    o (d) any document constituting evidence of an option, subscription or other interest in or to a security,
    o (e) any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation
         certificate, certificate of share or interest, preorganization certificate or subscription other than a contract of insurance
         issued by an insurance company licensed under the Insurance Act and an evidence of deposit issued by a bank listed in
         Schedule I or II to the Bank Act (Canada), by a credit union or league to which the Credit Unions and Caisses Populaires
         Act, 1994 applies or by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act,
    o (f) any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by
         reference to the value of a proportionate interest in a specified portfolio of assets, except a contract issued by an
         insurance company licensed under the Insurance Act which provides for payment at maturity of an amount not less than
         three quarters of the premiums paid by the purchaser for a benefit payable at maturity,
    o (g) any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or
         interests at the option of the recipient or of any person or company,
    o (h) any certificate of share or interest in a trust, estate or association,
    o (i) any profit-sharing agreement or certificate,
    o (j) any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate,
    o (k) any oil or natural gas royalties or leases or fractional or other interest therein,
    o (l) any collateral trust certificate,
    o (m) any income or annuity contract not issued by an insurance company,
    o (n) any investment contract,
    o (o) any document constituting evidence of an interest in a scholarship or educational plan or trust, and
    o (p) any commodity futures contract or any commodity futures option that is not traded on a commodity futures
         exchange registered with or recognized by the Commission under the Commodity Futures Act or the form of which is not
         accepted by the Director under that Act,
    o whether any of the foregoing relate to an issuer or proposed issuer
   This is a very broad definition, pretty much everything is captured by it  (a) might have been enough
   Some of the portions of this definition of security seem to overreach and make the definition overly broad
   Looking at (e) of the definition why are bank deposits and insurance certificates not included
    o Probably because insurance companies and banks are already heavily regulated  do not need more
               Also because (maybe) they are occupied federal fields and the province may have a hard time regulating them
               This carve-out is pretty narrow in application
               This is also probably why annuity contracts not issued by insurance companies (m) are covered in the definition
                    they are not subject to the same regulation
   Part (o) is a recent addition to the definition of security because of the changing nature of the way people save
    o There were some scholarship programs that had troubles and the OSC wants to add some “security” to these programs
   Under part (p) we have the same issue as with (e) etc. since these markets are already regulated why add on another layer
    when it is not necessary to protect anyone’s interests
    o The exchanges are regulated and ensure that the market is operating efficiently  protects investors
   A big question is what is an investment contract from (n)
    o Investment contract is not defined in the Act
    o As a result need to look at the case law, in particular two American cases: Howey and Hawaii
    o Howey
                                                                                                                                    8
                 Interrelated companies operated in Florida
                 Owned a hotel, and induced guests to invest in orange groves, and to purchase service contracts through another
                  company (all related to each other)
              Individuals would get to own part of an orange grove, could choose how big, could choose the age of the groves
                  etc. and then get the service company to tend the trees, pick the fruit and market it
              It was not necessary to buy the service contract, but most investors did buy it
              Without the service contract it was not possible to get at the fruit so it would just rot on the tree
              The question was whether this was a security or not
              The land deal would not be a security, it is the combination of the land and the service contract that made it a
                  security
              The SEC said that this was an investment contract and laid out a test for an investment contract
                        There must be an investment of money
                        There must be a common venture
                        There must be a view to a profit
                        The profits have to be solely through the efforts of someone else
              If all of these criterion are satisfied then it is an investment contract
   OSC v Brigadoon Scotch
    o Company sold certificates to people evidencing a right to 5000 gallons of scotch
    o The company would store it for them, let it age, they would bottle it, sell it, and, after deducting a fee, pay the money
        earned to the person who bought the certificate
    o The OSC said that this was a security, the company claimed it was just a sale of whiskey
    o OSC said that if you sell someone a certificate representing a commodity that they are likely to use themselves then that
        is not a security
              The key question is whether it is intended as an investment or not, if not then it is okay, if so then it is a security
    o The intention in this case was not to consume the scotch but to make money so it was a security
   Example
    o Bar of gold  is it a security or a commodity?
              OSC says it is not a security even though it has an investment component to ownership
                        Need to have something more, just relying on market dynamics is not enough
                        Look at Pacific Coast Coin Exchange for example
                                  o The SCC did not say the purchase of the silver was a security but rather it was the way the
                                       whole contract was structured that created a security
   Pacific Coast Coin Exchange (SCC)
    o Back in the 1960’s the price of silver took off  coins had silver in them at the time but that changed due to the
        increasing price of the metal and as a result the coins were worth more than their face value
    o PCCE would sell bags of silver coins
              The coins in the bag could be worth more or less depending upon the spot price of silver
              People could either buy the bag of coins outright or they could put up 35% and either buy the rest later or sell it
                  back to PCCE for the market price and never actually take delivery of the coins
    o PCCE started selling these bags to people in Ontario and the OSC said that it is a security, that there is no prospectus
        (violates s.53) and that PCCE was not selling through a registered dealer (violates s.25)
              Using the Howey test
                        Is there an investment of money  Yes
                        Is there is common venture  no since it is just a commodity
                        Is there a view to a profit  Yes
                        Is the profit due solely to the efforts of others  No due to the market forces dictating the price of
                             silver on the market
    o The SCC said that it was a security because it was an investment contract
              They looked at the facts behind PCCE
              If someone came in a put down 35% PCCE would not segregate their bag of silver but rather would hedge
                  through a combination of futures contracts and options in order to cover their risks
                        This is the feature that made it an investment contract
                        If the hedging was not successful then investors could lose money – a lot of it – or not get what they
                             were promised – the payout from PCCE whenever they wanted to cash in on their bag of silver (that
                             they had not purchased outright)
              The common venture was because you would only get your money back if PCCE was successful at hedging
                  their risk
              Also the possibility of profit was due, at least in part, to the efforts of PCCE in hedging
                        Did not need to be solely due to the efforts of another just mostly, or in some significant portion
   Albino (page 209)
                                                                                                                                     9
    o  Was the CEO of Rio Algom (I think it was a subsidiary of Rio Tinto??)
    o  He received what was called Stock Appreciation Rights  they were like options but no actual stock was involved.
            He was granted the SAR’s at a certain price and could cash them in whenever he wanted
            There was no ability for the company to deny this
            It was a term of his employment contract
            What he was getting was the difference between the share price of the stock when the “option” was granted and
                when he chose to exercise the “option”
  o Things were starting to go bad for Rio Algom and he had some insider information
  o Based on this information he decided to cash out his SAR’s
            Unlike stock options with SAR’s Albino was able to use the inside information to his advantage
  o The company had to disclose these bonuses paid to him and shareholders, and the OSC, objected
  o The OSC had a three person panel hear the case
            One decided that it was okay because it was not a security
            One decided that it was a security and therefore not okay
            One decided that he did not have to determine whether or not it was a security because it was apparent that
                Albino had done something wrong that should not be allowed
  o What’s wrong with this situation
            He used information that was not available to the public to his own advantage
            It was something that would shake reliance in the capital markets
            However, unlike with a security, there was no other party that was harmed by this transaction
                     Unless you consider the fate of shareholders who ultimately own the company and, through the payout,
                         lose some portion of their equity or dividend
  o Forbes  this is not a security
            The problem is that he benefited with insider information and the OSC does not like that much
 About 7 or 8 years after this case Albino was a director of an insurance company that was demutualizing and the OSC
  threatened to withhold its approval so long as he remained a director  they threatened to use their s.127 public interest
  power to stop the demutualization from going ahead
 Examples of securities
  o Can a golf club membership be a security?
            How could this ever be a security
                     Need to look at the nature of the thing
                     Facially it looks more like a commodity than anything else
                     What if it is easily transferable, you can own more than 1,
                     What if they are being pre-sold to raise revenue for the construction of the course itself and you could
                         buy 10 of them at X dollars and sell them later for Y
            Would need to apply Howey and see what shakes out
            What are the issues in determining if this is a security
                     Transferability  can you sell for any price, at any time
                     Ability to buy more than one  if so looks more like a security
                     Nature of the membership
                              o Is it part ownership  looks more like a security
                              o Is it a license to play golf  more like a commodity
                     Do you have to keep it for a period of time  if so looks more like a commodity
  o Is a “footprint” license to sit in the seats at the ACC for Raptors games a security
            Cost of one license is $17,500
            They can be transferred  but are there limitations
                     No since you can sell for any price
                     The team just wants to know what price you got for them so they know what the market is
            Can buy more than one  would not want to go to a game alone anyways
            Can transfer it any time you want
            Raptors were worried about it looking like a security and needing a prospectus
            Forbes was involved in this one
                     Concluded that they were not securities
                     Put provisions in the licenses limiting the ability to sell the seats
                              o If you scalp tickets then you could cancel the person’s tickets
                              o Can’t transfer the license for at least three years
                                         Make it look less like a security
                                         Team also liked because it would keep them off the market for a time
                     Want the primary reason for buying them to be so that you go to watch the games and not to make a
                         profit on the seats
                                                                                                                           10
    o Can shipping containers be securities
            Wanted to take TEU’s and sell them to investors who could then deduct the CCA on the investment and at the
                same time get the vendor to turn around and lease them to others
            The vendor tracks the containers, collects payments etc. and remits the proceeds (minus a fee) to the “owners”
            Using Howey it looks a lot like a security
            Could instead rent the containers back to the vendor for a fixed fee and then the vendor goes out and leases
                them on the market
            Person did not like this advice
                      About 6 months later got an OSC staff bulletin about it saying that they felt that it was a security and
                         that the OSC would use s.127 to stop it
  o Can a timeshare be a security
            About 10 years ago an OSC bulletin came out about timeshares
            It was possible to take your interest in a timeshare in Florida, for example, and trade it for time in another unit
                somewhere else
            OSC looked at it but decided not to get involved
            But recent amendments to the Consumer Protection Act incorporated provisions about timeshares
  o What about viatical insurance policies
            Someone with a terminal illness has a life insurance policy  initially arose around AIDS where someone had a
                policy, needed treatment, could sell policy for immediate payment
            Reason it arose was because it was possible that without treatment the life expectancy was much lower than
                with treatment and the payment could assist in obtaining that treatment – a win-win
            How it worked
                      Someone has an insurance policy for $500,000
                      Could wait until they die and their beneficiary would get the money
                      Or could sell it for, say $400,000 now, get treatment, and live for longer
                      The one who bought the policy could pay the $400,000 today and get $500,000 in a few years
            Is this a security
                      On its face it is not a security since it is just an assignment of an insurance policy
                      But what happens when you put 10, or 20, or 100 of these together, package them and sell them to
                         investors so that you have the money to buy all of the policies
                              o Then turn around and pay out an annual amount based on ownership in the overall pool over a
                                   number of years
                              o Then it looks an awful lot like a security
 There is a continuum involved in assessing whether something is, or is not, a security
  o At one end of the continuum is a commodity which is not a security and at the other end is Howey which represents a
      security
            The questions don’t arise at either end of the continuum but rather in the middle where things are not quite so
                clear
 Case from Alberta
  o Guy had a chinchilla ranch and was selling ½ interests in breeding pairs of chinchillas
            Would then pay out the profits on the sales of chinchilla offspring to the investors
            The ASC said that this was a security




                                                                                                                             11
Distributions  the Prelude to a Prospectus
   Under s.53(1), whenever you engage in a distribution you need a prospectus
   Distribution is another term that is defined in the Act
   Again it is a non-exhaustive listing
   Distribution, where used in relation to trading in securities, means
    o (a) a trade in securities of an issuer that have not been previously issued,
    o (b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or
          purchased by or donated to that issuer,
    o (c) a trade in previously issued securities of an issuer from the holdings of any control person,
    o (d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as
          underwriter, prior to the 15th day of September, 1979 if those securities continued on that date to be owned by or for that
          underwriter, so acting,
    o (e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as
          underwriter, within eighteen months after the 15th day of September, 1979, if the trade took place during that eighteen
          months, and
    o (f) any trade that is a distribution under the regulations,
    o and on and after the 15th day of March, 1981, includes a distribution as referred to in subsections 72 (4), (5), (6) and (7),
          and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the
          course of or incidental to a distribution and “distribute”, “distributed” and “distributing” have a corresponding meaning
   The book indicates that (b) of the definition is redundant since redeemed shares are supposed to be cancelled under
    corporations law but a security is broader than shares and therefore this section is not redundant  could include debt
    instruments or other securities
   Part (c) is important to know as well  use an example
    o Have a company with two shareholders, each of whom owns 100 shares
                The company wants to go public and can do it in one of two ways
                          Can issue new shares  need prospectus
                          Can subdivide the shares of the current owners – say 1 million for 1 – and sell half of each block to the
                              public
                If it was not for (c) then it would not be necessary for there to be a prospectus
                          Would be a backdoor way of getting the shares onto the market
   It is also important to know the definition of control person
   Control person
    o (a) a person or company who holds a sufficient number of the voting rights attached to all outstanding voting securities
          of an issuer to affect materially the control of the issuer, and, if a person or company holds more than 20 per cent of the
          voting rights attached to all outstanding voting securities of an issuer, the person or company is deemed, in the absence
          of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer,
          or
    o (b) each person or company in a combination of persons or companies, acting in concert by virtue of an agreement,
          arrangement, commitment or understanding, which holds in total a sufficient number of the voting rights attached to all
          outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a combination of persons or
          companies holds more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer, the
          combination of persons or companies is deemed, in the absence of evidence to the contrary, to hold a sufficient number
          of the voting rights to affect materially the control of the issuer;
   Controlling shareholder example
    o Company has four large shareholders – A = 25%, B = 10%, C = 18%, D = 10%, public owns the rest
    o One of them wants to sell shares into the market
                If A would seem that they would need a prospectus but that may not be enough
                What if B, C and D always worked in tandem on the board and in shareholder votes
                          Though each, individually, would not be a controlling shareholder, collectively they are
                          If this is so then if one of them wants to sell it may effectively alter the control of the company and
                              mandate a prospectus being filed
   Usually in these types of circumstances it is difficult to prove that they are actually working together
    o There is usually no shareholder agreement, no notice filed with the OSC as per the regulations
    o All you may have is anecdotal evidence  they always vote the same way
    o It may be necessary for the companies to introduce evidence refuting the claim that they work together
                It is also possible to get exemptions from the control block rules about prospectuses
   Often, when companies are going to buy a significant block of shares, they will request that the target company sign a
    contract allowing the acquiring company access to the information needed to file a prospectus
   One final component to the definition of distribution is the post-amble which refers to s.72 of the OSA
                                                                                                                                      12
    oThe idea behind this was that in 1981 the OSA was changed and the OSC did not want people to be able to get exempt
     securities and then put them on the market without a prospectus
            As a result there was a requirement for people to hold the securities for a period of time through the “closed-
               system rules”
                     If people did not abide by the closed-system rules then it would be a distribution requiring a prospectus
  o In relation to s.72(4)(5)(6)(7) the OSC has passed a multi-jurisdictional instrument
            MI 45-102  says that these sections are not useful anymore and providing new rules for reselling securities
               acquired through an exempt distribution
                     The result of MI 45-102 is the same
                             o If the resale is not done under MI 45-102 then a prospectus is necessary
 What is a reporting issuer
  o Is not really a part of distributions since only become a reporting issuer after on the market
  o Again is defined in the Act
  o Reporting issuer goes more to continuous disclosure


Prospectus 101
 Preliminary prospectus is called just that, preliminary prospectus
 Final prospectus is simply called a prospectus
 Need a receipt for a preliminary prospectus and a final prospectus before you can go to market
 The receipt for the preliminary prospectus is “as of right”  once you file the preliminary prospectus you get the receipt
 The receipt for the final prospectus may, or may not, be issued by the regulator
 For distributions
  o First question is what do you want to do  look to s.53
             Also look to the definition of the terms in s.53  trade, security and distribution
  o If these three criteria are satisfied (what you are trying to do fits within the definitions) then ask
             Is there an exemption available
                      If so then you do not need a prospectus
                      If not then you need to do one
             But may also ask whether you want to do a prospectus
                      It is possible to get money in return for equity in other arenas  private equity etc.
             But there may be no alternative to doing a prospectus
 Why would you not want to do a prospectus
  o Because the company is successful and has an advantage etc. that would become public knowledge and may affect the
       success of the company
  o Because the company has a close-knit management that would not be able to survive as a public company due to
       independent director stipulations
  o The company would have to alter its operations to meet the dictates of the marketplace and that may not be in its best
       interests
  o Also one consideration is that it costs a lot of money
             Study from TSX in the book indicates that it costs an average of $3.9 million for an IPO
 There are different types of prospectuses
  o Long-form prospectus  prospectus in contemplation of an IPO
  o Short-form prospectus  for reporting issuer already in the market
  o Shelf prospectus  want to qualify a prospectus for an amount but only want to immediately issue a lower amount, but
       can rely on the qualified prospectus to enable further distributions “off the shelf”  have already been approved and just
       need some minor supplemental information
             These are more “exotic” prospectuses
 Issues with prospectus timing
  o What type of market is the offering aimed at?
             Is there a market window that exists
                      If you know this you can work backwards from the date you want to enter the market to map out
                          timelines
                               o E.g. you have a product that has to be out for RRSP season  know when to put it all in place
                      Between the preliminary prospectus being filed and a receipt for a final prospectus it will be at least 15
                          business days
  o What is going on in the company
             Is there some other project that the company is looking at
                      Need to consider whether or not the other project will negatively, or positively, impact the company’s
                          prospects because this will impact the data in the prospectus
                                                                                                                                13
                               o  Question is “will this other project create material changes that will need to be incorporated
                                  into the prospectus?”
            Also want to know if there are some expected future events that should be disclosed
                     This is also where the issue of FOFI arises
 Also the question of the availability of financial information
  o Rule 41-501 – part 4 (National Instrument)
            4.1 Annual Financial Statements of the Issuer - Subject to sections 4.2, 4.3 and 5.2, an issuer shall include in
               its prospectus the following annual financial statements of the issuer:
                     1. Statements of income, retained earnings and cash flows for
                              o (a) each of the three most recently completed financial years ended more than 90 days before
                                  the date of the prospectus; or
                              o (b) if the issuer has not completed three financial years, each completed financial year ended
                                  more than 90 days before the date of the prospectus; or
                              o (c) if the issuer has not completed one financial year, the financial period from the date of
                                  formation to a date not more than 90 days before the date of the prospectus.
                     2. A balance sheet as at
                              o (a) the last day of the most recently completed financial year, if any, ended more than 90 days
                                  before the date of the prospectus; and
                              o (b) the last day of the immediately preceding financial year, if any; or
                              o (c) if the issuer has not completed one financial year, as at a date not more than 90 days
                                  before the date of the prospectus.
            4.2 Exception to Annual Statement Requirement if More Recent Annual Financial Statements Included –
               An issuer may omit its financial statements for the oldest financial year otherwise required under section 4.1, if
               audited financial statements of the issuer are included in the prospectus for a financial year ended 90 days or
               less before the date of the prospectus.
  o According to this rule if you go more than 90 days past the end of the financial year you will need to have audited
      statements from the just completed year
            This presents difficulties because of the time lag in getting audited financial statements because auditors are
               cautious  especially after some of the recent scandals that have occurred
  o Need to get the receipt for the preliminary prospectus prior to the expiry of the 90 day period
  o It is also necessary to use interim financial statements  again from Rule 41-501
            4.6 Interim Financial Statements of the Issuer - Subject to subsection 4.7(3) and section 5.2, an issuer shall
               include in its prospectus the following interim financial statements of the issuer:
                     1. Statements of income, retained earnings and cash flows for the most recently completed interim
                         period that ended more than 60 days before the date of the prospectus and for the comparable period in
                         the immediately preceding financial year.
                     2. A balance sheet as at the last day of the most recently completed interim period referred to in
                         paragraph 1.
  o Interim financial statements = quarterly statements
            These do not need to be audited but the OSC will expect a comfort letter from the auditor saying that the
               statements are not audited but that they appear to adequately represent the financial position of the company at
               that point in time
  o It is important to note the timing of these things  within 90 days of year end you need annual, audited statements and
      within 60 days of quarter end you need interim financial statements
            Note that if you do not get them in within the time period you will have to wait for a while after that to have a
               chance to file a preliminary prospectus
  o There are also other important aspects to Rule 41-501
            14.1 Procedures and Requirements for Granting Receipts
                     (1) An issuer shall not file a prospectus if the issuer is in default in filing or delivering to the
                         Commission a document required to be filed or delivered by the issuer under Ontario securities law.
                     (2) An issuer shall not file a prospectus more than 90 days after the date of the receipt for the
                         preliminary prospectus.
            15.1 Exemption - The Director may grant an exemption from the provisions of this Rule, in whole or in part,
               subject to such conditions or restrictions as may be imposed in the exemption.
                     Director will usually only allow for this where it is just slightly over the deadline – such as 10 days –
                         and the company has been diligently working to get it in
                              o This usually will only arise in situations where market dynamics have put the squeeze to the
                                  company in one way or another
  o Example
            Year end is December 31

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                            Need a receipt for the preliminary prospectus by March 31 or will have to include 2006 audited
                             statements
                         Will need to have a receipt issued within 60 days of any quarter end
   One issue with prospectuses is that many companies moving towards a distribution may not be used to preparing quarterly
    financial statements and may not have the systems in place to do so
    o Also the issue of lag between the quarter end and the time when the statements become available due to accounting
         realities
   You only need an interim statement ending at the end of the applicable quarter
    o E.g. if it is past six months then you only need a half-year statement and not one for the first quarter and half-year
   With audited yearly statements and a year end of December 31 you have until March 31 plus 60 days to get the receipt for the
    preliminary prospectus
   Once you have filed a preliminary prospectus then what
   S.54(1) - A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting the
    form and content of a prospectus, except that the report or reports of the auditor or accountant required by the regulations
    need not be included.
    o Do not need an audit report, but do need the financial statements
   S.54(2) - A preliminary prospectus may exclude information with respect to the price to the underwriter and offering price of
    any securities and other matters dependent upon or relating to such prices
    o Do not need the price because the preliminary prospectus is used to drum up interest and it may not be possible to know
         the price prior to going out and finding what level of interest exists in the market for the product
               Also because the market may change between the time of the preliminary prospectus and the final prospectus
    o Really what the preliminary prospectus is about is soliciting interest in the security and the determination of what price
         would be appropriate
               Once the receipt is issued the underwriters will go out into the market and “build the book” on the offering by
                   soliciting interest in the issue and surveying the market
   In a short form prospectus
    o Will be cleared rather quickly because of the already available information in the public domain
    o So underwriters will sometimes have given guarantees about the ability to sell the issue at a set price
               They may even do a bought deal
    o Have this because it is sometimes easier to gauge the market in response to an already listed company
   Once you file a preliminary prospectus you get the receipt for it
   S.55 - The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof
   S.56(1) - A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or
    proposed to be distributed and shall comply with the requirements of Ontario securities law
   What is a material fact  definitions in s.1
   Material fact - when used in relation to securities issued or proposed to be issued, means a fact that would reasonably be
    expected to have a significant effect on the market price or value of the securities
   S.60 - Every prospectus shall contain a statement of the rights given to a purchaser by sections 71 and 130
    o S.71 – rescission rights  cooling off period of 10 days
    o S.130 – civil liability provisions
               Misrepresentation and remedies
               Rights of action against issuer, underwriter and directors (with the latter two having access to the due diligence
                   defence)
   S.58(1) - Subject to subsection (3) of this section and subsection 63 (2), and subject to any waiver or variation consented to in
    writing by the Director, a prospectus filed under subsection 53 (1) or subsection 62 (1) shall contain a certificate in the
    following form, signed by the chief executive officer, the chief financial officer, and, on behalf of the board of directors, any
    two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or company who is a promoter of
    the issuer
          The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this
          prospectus as required by Part XV of the Securities Act and the regulations thereunder.
   S.58(2) - Subject to subsection (3) of this section and subsection 63 (2), a prospectus filed under subsection 53 (2) shall
    contain a certificate in the following form, signed by the chief executive officer, the chief financial officer, and, on behalf of
    the board of directors, any two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or
    company who is a promoter of the issuer
          The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities previously issued
          by the issuer as required by Part XV of the Securities Act and the regulations thereunder.
   S.59(1) - Subject to subsection 63 (2), where there is an underwriter, a prospectus shall contain a certificate in the following
    form, signed by the underwriter or underwriters who, with respect to the securities offered by the prospectus, are in a
    contractual relationship with the issuer or security holder whose securities are being offered by the prospectus

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          To the best of our knowledge, information and belief, the foregoing constitutes full, true and plain disclosure of all
          material facts relating to the securities offered by this prospectus as required by Part XV of the Securities Act and the
          regulations thereunder.
   Underwriter is also defined in the Act
   Underwriter - means a person or company who, as principal, agrees to purchase securities with a view to distribution or who,
    as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct
    or indirect participation in any such distribution, but does not include,
    o (a) a person or company whose interest in the transaction is limited to receiving the usual and customary distributor’s
         or seller’s commission payable by an underwriter or issuer,
    o (b) a mutual fund that, under the laws of the jurisdiction to which it is subject, accepts its shares or units for surrender
         and resells them,
    o (c) a company that, under the laws of the jurisdiction to which it is subject, purchases its shares and resells them, or
    o (d) a bank listed in Schedule I, II or III to the Bank Act (Canada) with respect to securities described in paragraph 1 of
         subsection 35 (2) or to such banking transactions as are designated by the regulations
   As principal  the underwriter assumes the risk of the transaction (Underwriter Offering)
   As agent  underwriter makes best efforts but the risk remains with the company (Best Efforts Offering)
   Final part of the definition  direct or indirect
    o Does not include those who would just qualify for a sellers commission payable by the underwriter or issuer
               Tells us that there are several parties that may be involved in the deal (Waterfall in Distributions)
                         There are underwriters in contractual privity
                                   o Either in a principal or agent role
                         They in turn may get others to come in as sub-underwriters (direct and indirect participants) who share
                             some of the risk and in turn get some of the commission
                                   o These are referred to as the Banking Group members
                         Could also get others to help sell the deal but they assume none of the risk and get a portion of the
                             commission (but less than Banking Group members)
                                   o Called Selling Group
   Should the OSC allow FOFI in a prospectus
    o Forecasts by their very nature are unreliable
    o But they may be material in spite of unreliability  they may be the most material information that the company has at
         that time
    o How does the OSC deal with this
    o S.60 of the Regulations
               (1) In this section,
                         “distributing firm” means a registrant that is an underwriter with respect to a distribution and includes
                             the issuer of the securities being distributed if the issuer is registered as a security issuer;
                         “forecast” means a written estimate of the most probable results of operations of an issuer, alone or
                             together with one or more of its affiliates, that contains any or all of,
                         (a) an estimate of earnings or a range of earnings,
                         (b) an estimate of the most probable financial position,
                         (c) an estimate of changes in financial position,
                         for one or more periods that are future periods or are periods not completed when the estimate is made,
                             but does not include an estimate,
                         (d) that is prepared in the ordinary course of business and without reference to a specific distribution
                             of securities, and
                         (e) that appears in a compendium of estimates relating to a number of issuers or in a publication that
                             is distributed regularly to investors or prospective investors, who are not selected because of their
                             potential interest in a specific issue of securities. R.R.O. 1990, Reg. 1015, s. 60 (1).
               (2) The Director may permit the inclusion of a forecast in a prospectus and, where the Director permits the
                   inclusion of a forecast,
                         (a) the forecast shall be identified as such in the prospectus; and
                         (b) the prospectus shall include the written comments of a public accountant concerning the
                             accountant’s review of the forecast. R.R.O. 1990, Reg. 1015, s. 60 (2).
               (3) No distributing firm, during the course of a distribution of securities for which a prospectus is required to be
                   filed under the Act, shall disseminate a forecast with respect to the issuer of those securities, unless the forecast
                   is set out in the prospectus and what is disseminated by the distributing firm consists solely of that forecast or a
                   reasonable extract therefrom or summary thereof.
   OSC has yet to get around to brining FOFI into modern times
   The director may permit FOFI s.60(2) but it would be necessary to get the permission of the Director first if you want to
    include FOFI  would need to pre-file the prospectus and get it pre-cleared
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    o     If you have FOFI in the prospectus you must have a public accountant comment (OSC Policy 48)
               Policy 48 predates the rule making power of the OSC
   No one can distribute a forecast if it is not in the prospectus  was a response to companies deciding not to include them but
    to disseminate them nonetheless
   Policy 48 – page 2673 of Statute Book
    o S.4.2 and 4.3  set time-limits for forecasts
   Forecasts are unreliable and the longer your forecast the more unreliable it is
    o You can forecast out to the end of the current year and one additional year
   Forecast has to comply with GAAP and be based on the most likely set of assumptions about the future
   Rule 41-501 – Part 13 – Requirements as to Filing
    o What you need to file the prospectus
    o Once it is filed the Director shall issue a receipt – s.55 of the OSA
    o But can be rescinded
    o S.68 - Where it appears to the Director that a preliminary prospectus is defective in that it does not substantially comply
         with the requirements of Ontario securities law as to form and content, the Director may, without giving notice, order
         that the trading permitted by subsection 65 (2) in the security to which the preliminary prospectus relates shall cease until
         a revised preliminary prospectus satisfactory to the Director is filed and forwarded to each recipient of the defective
         preliminary prospectus according to the record maintained under section 67
               Need to be able to stop the use of the preliminary prospectus because it is used to solicit support for the offering
                   and if it is defective then the support may also be defective (or deceptive)
   What happens after the preliminary prospectus has been filed in Ontario
    o If all you want to do is issue securities in Ontario then that is all you need to do
    o If you want to issue in other jurisdictions you will need to file there as well
               If you want to go national you will need to file in all provinces and the territories as well
   Once you have filed in all provinces does every province get a chance to comment on it
    o Generally no  would take too long
    o Have National Instrument 43-201 – Mutual Reliance Review System (MRRS)
               Elect one province as the lead and that one reviews the preliminary prospectus and comments on it  will go
                   through the prospectus word for word (This takes 10 business days)
                         Could get comments on language etc
                         Could get comments on technical issues or being too promotional  commission will ask for
                              information to back up promotional comments
                         Could also question the veracity of comments or rationale behind statements
                                   o Would then have to rewrite some portions of the preliminary prospectus
               Once done the principal jurisdiction will send its comment sheet to the other provinces for comments as well
                         They have 5 days to respond and make additional comments
               If any of the other jurisdictions dislike the way you respond they can opt out of MRRS
                         Would mean that the principal jurisdiction could not offer a national receipt
                         Otherwise, if all jurisdictions agree, the principal jurisdiction can issue a national receipt
    o It is not necessary for the commissions to meet the 10 and 5 day deadlines, they only need to make best efforts
    o In MRRS most of the commissions recommend the filing of a black-line prospectus where all of the changes are
         underlined
               Because what if you changed something else  would you then need to go back and get it approved again?
                         They may want more disclosure depending upon what you changed


Preliminary Prospectus
 Preliminary prospectus is the first version of the final document that will accompany a public offering of securities
 The supporting documentation for a prospectus filing typically includes a resolution of the Board authorizing the filing, the
    underwriting agreement, financial statements and certification notes by senior officers
 S.58(1) - Subject to subsection (3) of this section and subsection 63 (2), and subject to any waiver or variation consented to in
  writing by the Director, a prospectus filed under subsection 53 (1) or subsection 62 (1) shall contain a certificate in the
  following form, signed by the chief executive officer, the chief financial officer, and, on behalf of the board of directors, any
  two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or company who is a promoter of
  the issuer:
  o The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this
       prospectus as required by Part XV of the Securities Act and the regulations thereunder.
 S.58(2) - Subject to subsection (3) of this section and subsection 63 (2), a prospectus filed under subsection 53 (2) shall
  contain a certificate in the following form, signed by the chief executive officer, the chief financial officer, and, on behalf of

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    the board of directors, any two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or
    company who is a promoter of the issuer:
    o The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities previously issued
         by the issuer as required by Part XV of the Securities Act and the regulations thereunder.
   Although called preliminary, the prospectus is the issuer’s near to final form that it will use in a distribution to the public
    once the review has been completed and any necessary revisions are made, the final prospectus is filed and a receipt issued
   The preliminary prospectus may contain a caution that it is not final, may not be completed and may have to be amended
   There are specified requirements for the form and content of a preliminary prospectus
   A preliminary prospectus must substantially comply with the rules governing a final prospectus
    o But it is not required to comply with things such as price to be paid to the underwriter or the list price of the securities
    o S.54(2) - A preliminary prospectus may exclude information with respect to the price to the underwriter and offering
         price of any securities and other matters dependent upon or relating to such prices
    o Also do not need the auditor’s report because the financial information must be updated by the final receipt date
    o S.54(1) - A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting
         the form and content of a prospectus, except that the report or reports of the auditor or accountant required by the
         regulations need not be inc
   Once the preliminary prospectus is filed the director of the securities commission must issue a receipt for it
   S.55 - The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof
   Prospectus must provide full, true and plain disclosure of all material facts and must comply with statutory requirements
   S.56(1) - A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or
    proposed to be distributed and shall comply with the requirements of Ontario securities law
   The prospectus must be accompanied by such financial statements, reports, or other documents as are required by statute and
    regulations
   S.56(2) - The prospectus shall contain or be accompanied by such financial statements, reports or other documents as are
    required by this Act or the regulations
   After the preliminary prospectus is filed there is a mandatory waiting period
    o During this period the activities of the issuer are restricted in terms of communicating with potential investors
    o The waiting period is the time between when the receipt for the preliminary and final prospectus is issued
    o Securities cannot be sold until a receipt is issued for the final prospectus
   The waiting period allows time for the regulators to consider whether the prospectus complies with the statutory and
    regulatory requirements
   Waiting Period – s.65(1) - means the interval, which shall be at least ten days, between the issuance by the Director of a
    receipt for a preliminary prospectus relating to the offering of a security and the issuance by the Director of a receipt for the
    prospectus
   Regulators engage in selective review of preliminary prospectuses  they do not review all of them
    o They do an initial screening to determine if they will review them at all
    o Prospectuses pursuant to an IPO receive a full review as do those which raise matters where a full review would be
         beneficial
   Where the regulator feels that the preliminary prospectus is defective in that it does not substantially comply with securities
    law as to form and content, the director may order cease trading in the prospectus until it is corrected
   S.68 - Where it appears to the Director that a preliminary prospectus is defective in that it does not substantially comply with
    the requirements of Ontario securities law as to form and content, the Director may, without giving notice, order that the
    trading permitted by subsection 65 (2) in the security to which the preliminary prospectus relates shall cease until a revised
    preliminary prospectus satisfactory to the Director is filed and forwarded to each recipient of the defective preliminary
    prospectus according to the record maintained under section 67
    o Activities which are restricted during the waiting period include advertising
               Re: Cambior  put an ad in the paper saying that gold was a hedge against inflation, we’re a gold company,
                   therefore we’re a hedge against inflation so you should invest in us
                         Commission found this to be a violation of the Act but did not issue a cease trade order since the
                            company had stopped the ads, and placed an notice to the effect that this was a breach in the OSC
                            Bulletin
    o Some communication is okay  it is a matter of balancing, need to be careful, can’t go “rah-rah” but can extol the virtue
         of the company to some extent  can test for interest, but can’t solicit
   National Instrument 41-501 – Part 4 – Financial Statement Disclosure for the Issuer
    o 4.1 Annual Financial Statements of the Issuer - Subject to sections 4.2, 4.3 and 5.2, an issuer shall include in its
         prospectus the following annual financial statements of the issuer:
    o 1. Statements of income, retained earnings and cash flows for
               (a) each of the three most recently completed financial years ended more than 90 days before the date of the
                   prospectus; or

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                 (b) if the issuer has not completed three financial years, each completed financial year ended more than 90 days
                  before the date of the prospectus; or
              (c) if the issuer has not completed one financial year, the financial period from the date of formation to a date
                  not more than 90 days before the date of the prospectus.
    o 2. A balance sheet as at
              (a) the last day of the most recently completed financial year, if any, ended more than 90 days before the date of
                  the prospectus; and
              (b) the last day of the immediately preceding financial year, if any; or
              (c) if the issuer has not completed one financial year, as at a date not more than 90 days before the date of the
                  prospectus.
    o 4.2 Exception to Annual Statement Requirement if More Recent Annual Financial Statements Included – An issuer may
        omit its financial statements for the oldest financial year otherwise required under section 4.1, if audited financial
        statements of the issuer are included in the prospectus for a financial year ended 90 days or less before the date of the
        prospectus.
   Every prospectus also must contain a statement of rights provided to the prospective purchaser
   S.60 - Every prospectus shall contain a statement of the rights given to a purchaser by sections 71 and 130
   YBM Magnex case
    o Reliance on external professional advice – lawyers, accountants, other advisors, is a good things – and can go a long way
        in proving a due diligence defence
    o The test for materiality is objective and is one of market impact  an investor wants to know facts that would
        reasonably be expected to significantly affect the market price or value of the securities
    o Is important to ensure that there is true independence when you have a special committee
    o Need to ensure that you can verify the information provided by management  don’t take at face value
    o Must do what’s reasonable in the circumstances  obviously will vary with the circumstances
   Prospectuses must follow the contents of the form as laid out in the Act
   Rule 41-501
   S.3.2 – Style of Prospectus
    o (1) Except as otherwise provided in a required form of prospectus or the regulations, the information contained in a
        prospectus shall be in narrative form.
    o (2) A prospectus shall include descriptive headings.
    o (3) A prospectus shall include a table of contents.
    o (4) Except for information that appears in a summary, information required under more than one item of a required form
        of prospectus need not be repeated.
    o (5) Despite subsection (1), a prospectus may contain graphs, photographs, maps, artwork or other forms of illustration, if
        relevant to the business of the issuer or the distribution and not misleading.
   Form 41-501F1  Page 886 of Book
   Not everything in the form will be necessary for every offering  will depend
   Highlights of the form  things likely to be included
    o Item 1 - Cover page guidelines
    o Item 1.2 - Red ink requirements (red herring) - noting it being incomplete (1.2)
    o Item 4 - Corporate structure chart
    o Item 5 - History of the development of the business
              Business trends
              3 year history
              The theory is that the prospectus disclosure is made for the financially sophisticated investor or his sophisticated
                  advisor
    o Item 6 - Narrative Description of the business itself (in language people might understand)
    o Item 10 – Description of the Securities Distributed
              The more complicated a security that is being offered, the more detailed a description will be required
    o Item 13 – Prior Sales
              Highs and lows of trading of the security
              Has there been volatility in the sale price
    o Item 15 - Guidelines for stating principal shareholder
              Describe the ownership structure
              Information about the principle shareholder
              Who is behind the company
              This could be relevant to the value of the securities
    o Item 16 - Information about the directors
              Conflicts of interest
              Personal business history

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    o   Item 17 - Disclosure of executive compensation
              Who gets paid the most
              What is the system of payout/compensation
              Must show that they are compensated in a fashion that is consistent with shareholder value
  o Item 19 - Plan of distribution
              Who are the underwriters
              What is the agreement
  o Item 20 - Risk Factors
              The more fulsome you can get your risk factors, the better
              Clients might want not to include things that aren’t as likely to be risks but it is good to include everything, just
                  to be safe
  o Item 21 - People who are selling the security for you will take the summary of your prospectus (found at front) and use it
        as a selling tool
  o Will send the whole prospectus once someone shows some interest
 Just because the requirements of the form have been met does not relieve the obligations of full, true and plain disclosure
 Remember the civil liability provisions under s.130
 It is possible to include forecasts in a prospectus

FOFI – forward looking financial information
 S.60 of regulations – (1) In this section,
    o    “distributing firm” means a registrant that is an underwriter with respect to a distribution and includes the issuer of the
         securities being distributed if the issuer is registered as a security issuer;
    o “forecast” means a written estimate of the most probable results of operations of an issuer, alone or together with one or
         more of its affiliates, that contains any or all of,
               (a) an estimate of earnings or a range of earnings,
               (b) an estimate of the most probable financial position,
               (c) an estimate of changes in financial position,
               for one or more periods that are future periods or are periods not completed when the estimate is made, but does
                   not include an estimate,
               (d) that is prepared in the ordinary course of business and without reference to a specific distribution of
                   securities, and
               (e) that appears in a compendium of estimates relating to a number of issuers or in a publication that is
                   distributed regularly to investors or prospective investors, who are not selected because of their potential
                   interest in a specific issue of securities
    o (2) The Director may permit the inclusion of a forecast in a prospectus and, where the Director permits the inclusion of a
         forecast,
               (a) the forecast shall be identified as such in the prospectus; and
               (b) the prospectus shall include the written comments of a public accountant concerning the accountant’s
                   review of the forecast
    o (3) No distributing firm, during the course of a distribution of securities for which a prospectus is required to be filed
         under the Act, shall disseminate a forecast with respect to the issuer of those securities, unless the forecast is set out in
         the prospectus and what is disseminated by the distributing firm consists solely of that forecast or a reasonable extract
         therefrom or summary thereof
   If an issuer is putting FOFI into a prospectus they will need to comply with Policy 48
   Policy 48  page 2673
   Forecasts are unreliable and the longer you forecast into the future, the less reliable they become
   Commission says that you can forecast out for the rest of the current year and one year thereafter
    o Forecast must comply with generally accepted accounting procedures
    o What you have to do is discover and glean the most likely set of circumstances or assumptions to support your forecast
               What are the assumptions that are going to have to be in there
               Must be able to justify the assumptions
               i.e. inflation, growth,
               If all the requirements are met, you’ll get your FOFI in the prospectus
               You have to get it as close to right as possible
               It becomes material
    o What about a dealer giving advice
               They are allowed to do so but they should not be producing written forecasts
   What is SEDAR
    o Use it to electronically file prospectus with the commission

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 Geographic limitations
 If you only want to trade in Ontario, you only need to file there
  o Otherwise, must file in each jurisdiction
  o If you wanted to do a national offering, must fire in all provinces and territories
  o Will all jurisdictions comment on your prospectus  generally not
 National Policy 43-201  MRRS (mutual reliance review policy)
  o A national policy saying that all the commissions shouldn’t review a prospectus separately
  o System that allows a principal regulator to make a review
  o You must designate a principle reviewer
  o Only certain commissions have sufficient staff to do the review (can’t use territories, PEI, Newfoundland)
  o Must select the jurisdiction where you have your head office unless there is a very good reason to do otherwise
  o Principal jurisdiction does the initial review
  o They are to get you prelim comments within 10 working days
             Check it for form
             Read it for perceptual comment
  o Any other commission has another five working days to make their own comments on top of the comments that the
       principle jurisdiction has made
  o If any other jurisdiction doesn’t like the way you respond their comments, they can opt out of the MRRS
  o Then the principal jurisdiction can’t issue a national MRRS receipt
 Filing a black line prospectus
  o For changing information in preliminary prospective
  o File it beforehand to allow commission to consider disclosure in it to assure that you are ready to go

 S.56(1) - A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or
    proposed to be distributed and shall comply with the requirements of Ontario securities law
 S.55 - The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof.
 S.68 - Where it appears to the Director that a preliminary prospectus is defective in that it does not substantially comply with
    the requirements of Ontario securities law as to form and content, the Director may, without giving notice, order that the
    trading permitted by subsection 65 (2) in the security to which the preliminary prospectus relates shall cease until a revised
    preliminary prospectus satisfactory to the Director is filed and forwarded to each recipient of the defective preliminary
    prospectus according to the record maintained under section 67
   There is a gap in time between the filing of the preliminary prospectus and the receipt for the final prospectus
   This gap will be at least 15 days – look to MRRS for the times – 10 days for the principal jurisdiction to make comments and
    5 days for the others to make comments
   Once you get this you then have the “all clear” to go forward with the final prospectus
   This 15 day gap is the bare minimum – 3 weeks – though it is more likely that it will be 4 – 6 weeks
   What can you do while the OSC is looking over and vetting the preliminary prospectus
    o Using s.53 it would appear that there is not too much that you could be doing
               This is because the definition of trade is so broad – includes pretty much everything
               But there is some room to work provided under the statute
   S.65(2) - Despite section 53, but subject to Part XIII, it is permissible during the waiting period,
    o (a) to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company
         identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a
         person or company from whom purchases of the security may be made and containing such further information as may
         be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication
         states the name and address of a person or company from whom a preliminary prospectus may be obtained;
    o (b) to distribute a preliminary prospectus; and
    o (c) to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the
         prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded
         to him, her or it.
   If what you are doing does not fit under s.65(2) then it is likely that it is prohibited
   What is the “waiting period” spoken of in s.65(2)
    o S.65(1) – waiting period means the interval, which shall be at least ten days, between the issuance by the Director of a
         receipt for a preliminary prospectus relating to the offering of a security and the issuance by the Director of a receipt for
         the prospectus.
   There is also s.66 and s.67
   S.66 - Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c),
    send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in
    purchasing the security and requests a copy of such preliminary prospectus


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 S.67 - Any dealer distributing a security to which section 65 applies shall maintain a record of the names and addresses of all
    persons and companies to whom the preliminary prospectus has been forwarded
    o Why this requirement  because if the prospectus is changed you need to make sure that those who have it are apprised
         of the changes to it  replace the prospectus of those who originally received one
               To this end the underwriters keep the prospectuses numbered so that they know who got it and can replace them
                  if necessary
   What can’t you do during the waiting period?
    o Cannot enter into a contract to sell securities
    o Cannot do anything not permitted by s.65(2)
    o Cannot “groom the market”
               Trying to use any other activity than the preliminary prospectus to market the offering
   Cambior
    o Filed the prospectus (preliminary) and at the same time placed ads in the paper saying that gold and gold stocks were an
         effective hedge against inflation
    o OSC held hearings and found this to be a violation of 65(2) – an attempt to improve the market
               Said that they would hold the prospectus for a month to allow for the effect of the grooming to work its way
                  through the system
               Also reprimanded the law firms involved because it said that they should have known that this was a violation
               Also said that this would have been sufficient basis to use the OSC’s s.127 public interest jurisdiction and to not
                  provide a receipt for the final prospectus
   Companies can do a roadshow where they go out and talk to people about the offering and provide the information that is in
    the preliminary prospectus to them
   What is allowed in the waiting period is always a bit of a balancing act  don’t want to step too far or else you could be in
    trouble but want to do as much as you can to sell the product to the market
   What does s.65(2) allow you to do
    o Look at the underwriters
               Have the three levels  those in contractual privity, those who share some risk, and those who sell
                        Why do the underwriters in contractual privity want to share the commission
                        One reason is to share the risk of the deal not being sold
                                 o Also IDA has a rule that the amount of underwriting that can be done by an underwriter is
                                      relative to its regulatory capital so as the deals get larger they by necessity require more
                                      underwriters to be involved
               The underwriters organize the road-shows in an attempt to drum up interest in the offering
                        Take the executive officers of the issuer to meet with some of their institutional clients in an attempt to
                            “build the book”
                                 o Going to clients and asking how much of the offering they would like at different prices in an
                                      attempt to gauge the strength of the market for the issue
                                 o There is often a belief that the shares should “trade-up” once they are issued and so many
                                      times they will want to offer them at a price that will ensure that clients get to make a quick
                                      profit on the offering
                                 o When the clients say that they will buy so many shares at each price it is not a contract
                                      between the underwriter and the client but just an indication of interest
                                            Client could back out, or not buy so many  however if they do this there is a
                                                likelihood that in later deals they will either a) not get the shares at all, or b) get
                                                fewer than they wanted meaning they will have to go on to the market to get the rest
                        This attempt to build the book is one of the reasons that the preliminary prospectus does not include
                            price or the number of shares being offered or the expected earnings from the offering
                        Important for securities lawyers to determine what is going to be said, presented at the road-show in
                            order to make sure that it does not run afoul of s.65(2)
   Want to ensure that the comments from the OSC are received during the waiting period so that you can ensure that the timing
    is okay for the offering  if you get the comments back too late the time may be off for that particular deal
   One issue with deals is that you do not want to jump the queue  move in front of another deal – because if you do that you
    may either a) piss off someone at the commission – or get someone in trouble – or b) annoy the other issuers that expected to
    come out ahead of you  could impact the market
   What happens if you are in the waiting period and something drastic happens
    o For example it is an offer for a mining company and the mine goes down for some reason
               Have to tell the market about the changes that have occurred
               But what obligation is there to tell the market – s.57
   S.57(1) - Subject to subsection (2), where a material adverse change occurs after a receipt is obtained for a preliminary
    prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a
                                                                                                                                    22
    material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under
    such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as
    practicable and in any event within ten days after the change occurs.
    o Have 10 days to file the amendment  at the outside
              Need to file the amended prospectus  including the certificates stating that it is full, true and plain disclosure
Material Change
 What is a material change  look to the definitions again
    o   (a)     when used in relation to an issuer other than an investment fund, means,
                (i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a
                    significant effect on the market price or value of any of the securities of the issuer, or
                (ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other
                    persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the
                    decision by the board of directors or such other persons acting in a similar capacity is probable, and
    o (b) when used in relation to an issuer that is an investment fund, means,
                (i) a change in the business, operations or affairs of the issuer that would be considered important by a
                    reasonable investor in determining whether to purchase or continue to hold securities of the issuer, or
                (ii) a decision to implement a change referred to in subclause (i) made,
                          (A) by the board of directors of the issuer or the board of directors of the investment fund manager of
                              the issuer or other persons acting in a similar capacity,
                          (B) by senior management of the issuer who believe that confirmation of the decision by the board of
                              directors or such other persons acting in a similar capacity is probable, or
                          (C) by senior management of the investment fund manager of the issuer who believe that
                              confirmation of the decision by the board of directors of the investment fund manager of the issuer or
                              such other persons acting in a similar capacity is probable
   Material fact is a much broader definition than material change  could be something internal or external to the company
    whereas the material change is something internal to the company
   Kerr v Danier Leather
    o Danier had included FOFI in its prospectus
                Nothing happened with the business, operations or capital of the company
                It was just that spring was warm and people did not buy as many coats as usual
                          This happened during the distribution period
                Company concluded two things
                          This only meant that people would delay their purchases of leather coats
                          This was not a material change
    o Court of Appeal agreed with them  said that there is a distinction between a material fact and material change
                But did this not impact the business of the company
                The OSC did not like this position (of the Court of Appeal)
                          TSX rules say that you need to disclose material information  even broader than material fact or
                              material change
    o Another case like this is Pezim
   Why the distinction in s.57 for material adverse change in the preliminary prospectus period and material change in the
    distribution period
    o Because it is assumed that any positive material change in the preliminary prospectus period will be disclosed since it is
          likely to assist with the selling of the issue
   S.57(3) - An amendment to a preliminary prospectus referred to in subsection (1) shall, forthwith after it has been filed, be
    forwarded to each recipient of the preliminary prospectus according to the record maintained under section 67
    o S.67 deals with the list of people to whom the preliminary prospectus has been delivered
   Basic components of the underwriting agreement
    o “we as principal agree to purchase these securities for a closing in three weeks time. We agree to pay X/share for a total
          of Y shares, minus our commission”
                There are usually also a bunch of conditions attached to these agreements
   Usually the underwriters will want to have the closing – when they have to pay the issuer – three weeks or so in the future to
    allow for time to sell the deal
    o If the whole deal has not been sold they will likely also want the issuer to undertake to help them in selling the rest of the
          deal
   It is not necessary to update financial statements between the preliminary and final prospectus
   Rule 41-501
    o Part 14.1(2)  only have 90 days to get the final prospectus in after the receipt for the preliminary prospectus

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                   Can be extended by the Director but likely not going to happen and will not happen unless there is some good
                    reason, and usually for not longer than a 7 day extension (but could get 10)
    o Part 13.3 – requirements for filing final prospectus (p. 881 of Book)
                Need to have expert’s opinions
                          Auditors statement signed – or comfort letter for interim reports
                                  o These are important for the civil liability provisions of the Act
                          Lawyer’s tax opinion telling investors the tax consequences of the investment
                          Engineer’s report for oil and gas issues
                                  o Proven and probable reserves
   Once the prospectus is filed
   S.61(1) - Subject to subsection (2) of this section and subsection 63 (4), the Director shall issue a receipt for a prospectus
    filed under this Part unless it appears to the Director that it is not in the public interest to do so
   S.61(2) - The Director shall not issue a receipt for a prospectus or an amendment to a prospectus if it appears to the Director
    that,
    o (a) the prospectus or any document required to be filed with it,
                (i) does not comply in any substantial respect with any of the requirements of this Act or the regulations,
                (ii) contains any statement, promise, estimate or forward-looking information that is misleading, false or
                    deceptive, or
                (iii) contains a misrepresentation;
    o (b) an unconscionable consideration has been paid or given or is intended to be paid or given for any services or
          promotional purposes or for the acquisition of property;
    o (c) the aggregate of,
                (i) the proceeds from the sale of the securities under the prospectus that are to be paid into the treasury of the
                    issuer, and
                (ii) the other resources of the issuer,
                is insufficient to accomplish the purpose of the issue stated in the prospectus;
    o (d) the issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of the
          financial condition of,
                (i) the issuer,
                (ii) any of the issuer’s officers, directors, promoters, or control persons, or
                (iii) the investment fund manager of the issuer or any of the investment fund manager’s officers, directors or
                    control persons;
    o (e) the business of the issuer may not be conducted with integrity and in the best interests of the security holders of the
          issuer because of the past conduct of,
                (i) the issuer,
                (ii) any of the issuer’s officers, directors, promoters, or control persons, or
                (iii) the investment fund manager of the issuer or any of the investment fund manager’s officers, directors or
                    control persons;
    o (f) a person or company that has prepared or certified any part of the prospectus, or that is named as having prepared or
          certified a report or valuation used in connection with the prospectus, is not acceptable;
    o (g) an escrow or pooling agreement in the form that the Director considers necessary or advisable with respect to the
          securities has not been entered into; or
    o (h) adequate arrangements have not been made for the holding in trust of the proceeds payable to the issuer from the
          sale of the securities pending the distribution of the securities
   Enter into an underwriting agreement when the final prospectus is ready
    o Remember the three levels of underwriters
                Those in contractual privity, banking group and selling group
                The first group is the one that enters into the contract with the issuer
                          They in turn will give allotments to the banking group and selling group members
                                  o Selling group will just try to sell the securities
                          It is at this stage that s.53 is engaged  the distribution begins
                Underwriters will go to the “grey circle” orders  clients who expressed an interest by circling how many
                    securities they will purchase at a set price
                          The underwriters will try to get these orders confirmed
                                  o The selling group will go to their retail customers and try to get orders as well
                                  o All of these are the hard contracts for the purchase of the securities
   There is also a rescission period
    o S.71(2) - An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser, if the dealer
          from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the
          purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day, exclusive of

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          Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any amendment to the
          prospectus
   Also the underwriting agreement will contain a clause stating that if there is a material adverse change before the close of the
    deal  usually three weeks from the date of the contract  then the underwriters may walk away from the deal and not close
    it
    o It is also possible that the closing may be extended to allow for a freeze between the time that a material adverse change
          occurs and the amended prospectus is ready for delivery to customers
   The shares are issued on the closing date
   But what if there are 10 million shares to be sold and only 7 million are sold by the closing
    o What can the underwriter do then  look to Rule 41-501
    o S.11.1(3) - Despite subsection (1), if securities are distributed for cash under a prospectus, the price of the securities may
          be decreased from the initial offering price disclosed in the prospectus and, after such a decrease, changed from time to
          time to an amount not greater than the initial offering price, without filing an amendment to the prospectus to reflect the
          change, if
                (a) the securities are distributed through one or more underwriters that have agreed to purchase all of the
                   securities at a specified price;
                (b) the proceeds to be received by the issuer or selling security holders or by the issuer and selling security
                   holders are disclosed in the prospectus as being fixed; and
                (c) the underwriters have made a reasonable effort to sell all of the securities distributed under the prospectus at
                   the initial offering price disclosed in the prospectus.
   The underwriters cannot increase the price above the initial offering price on the prospectus without having a new prospectus
    created
    o What they may do if the price rises above the offering price is that they may say that they are out of distribution and take
          the securities for the house account  they could then sell them at the market price
                But the OSC does not really like this because there could be a significant block of shares going on the market
                   without, in essence, having a prospectus
   It is possible that the underwriters could lose money on the distribution, or receive a lesser commission
    o This is the risk that they take when they do a distribution
                But they need to take this risk because if all they ever did was offerings that made them money, and refused to
                   do ones where they did not make money they would suffer harm to their reputation
   What types of clauses would be in an underwriting agreement  the agreement is signed on the date of the final prospectus
    because the underwriters want to have the deal moving forward as soon as possible after they have gone out and solicited
    interest in the offering
    o Statement that the underwriter will buy the shares as principal  this is a firm underwriting
                Could also have a best efforts offering where the underwriter buys as agent and makes best efforts to sell the
                   securities
    o The price of the securities and the closing date
    o Statement that the company represents that the prospectus contains full, true and plain disclosure (satisfies the s.55
          requirement)
                They want this because people get sued over this issue
                Underwriters will also want to include a statement that the company indemnifies them from any suit on the
                   basis of a failure to adhere to s.55
                          But is this valid  no Canadian case law but there is US case law  Globus Realty
                                  o Issue is whether or not an underwriter can be indemnified where they have a statutory
                                       protection of due diligence  the only way that they could be liable would be if they failed to
                                       satisfy the due diligence requirements
                                  o Issue in the case was whether such indemnity clauses would be contrary to public policy
                                       where the underwriter had a due diligence defence
                                  o Court said that it was contrary to public policy
                          Regardless of this you still see the indemnity clause as underwriters seek to protect themselves 
                              lawyers, in their opinions, will say that they have no opinion as to whether or not these types of clauses
                              would be valid
                Underwriters will also want a clause saying that they can seek contribution from the issuer for any damage
                   claim or award
                          Will want contribution in the relative percentage of the deal  e.g. if the underwriters only get 3%
                              commission they will only want to be liable for 3% of any damage award
                          But this may also be against public policy where the due diligence defence exists
                          Again there is no case law on point
    o Underwriters will want a commitment from the company to print commercial quality copies of the prospectus and have
          them delivered to distribution points so that customers can get them

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                   Underwriters need to get the prospectus and get it to customers so that they can have the rescission period pass
                    and know what types of firm commitments they have
    o Will want a clause saying that if any event occurs that might reasonably be interpreted as a material change the company
          must disclose it and discuss with the underwriters to determine if a new prospectus is warranted
                    If one is needed then there will be a clause that the company will file an amended prospects and once a receipt
                    is issued the company prepare new prospectuses and get them to the distribution points so that customers can
                    get new prospectuses  because underwriter will have to stop selling for a while
    o Underwriter will also have a clause saying that they will inform the company when they are out of distribution because
          until this happens the company is obligated to inform the underwriter of changes and to amend the prospectus and print
          copies of the amended prospectus
    o There will also be outs in the underwriting agreement
                One will be that if there is a material change that affects the offering the underwrites can walk
                Another will be the market out clause which is somewhat contentious
                           If the underwriter determines that economic, market or political conditions are such that the offering
                              will not be successful they can walk away
                           However this may not happen often because of the reputation of the underwriters  will not want to
                              be known for doing this because then other potential issuers may not want to deal with that underwriter
                              again
                           Reason for this clause is that it could be that to go ahead with the offering will cause significant harm
                              to the underwriters  BP case where the market for oil had changed and the underwriters had no
                              market out and had to go through with the deal and lost $100 million combined
                           This clause does not mean that underwriters are not prepared to take a loss it is just that they do not
                              want to have to be in a position to lose everything  want some protection for themselves
   There is no requirement to provide a prospectus to those who bought before an amendment to the prospectus was
    implemented
   The underwriter wants to be out of distribution before the deal closes  that way they have no securities left and no risk left
    either
   If they are not out of distribution by the time the deal closes they will be in the situation where they have an old prospectus
    under which they cannot sell securities
   S.62 (1.1) - No distribution of a security to which subsection 53 (1) applies shall continue after the lapse date, unless a new
    prospectus that complies with this Part is filed and a receipt for the new prospectus is obtained from the Director
   What is a lapse date? S.62(1) - with reference to a security that is being distributed under subsection 53 (1) or this section, the
    date that is 12 months after the date of the most recent prospectus relating to the security
   In order to avoid having securities unsold at the closing date, and in order to get out of distribution the underwriter may
    decide to buy the remaining securities for the “house account” and just put them on the shelf where they can then sell them
    later
    o But the OSC and other regulators do not like this because is that not just the same as being in distribution, just a bit of
          trickery
Exotic prospectus forms
 Up until now we have been dealing with long-form prospectuses but there are other ways to get the product to market as well
  o Forbes refers to these are more exotic methods
  o Have the short form prospectus (POP (prompt-offering propsectus)) and shelf prospectus
 Even though the form may be a bit different the requirements of s.53 still apply to the offerings under POP and shelf
  prospectuses
 How do these work instead?
 Who is entitled to use short form prospectuses
  o National policy 44-101
  o S.2.2 - Basic Qualification Criteria - An issuer is qualified to file a prospectus in the form of a short form prospectus for
      a distribution of any of its securities in the local jurisdiction, if the following criteria are satisfied:
  o (a) the issuer is an electronic filer under NI 13-101;
  o (b) the issuer is a reporting issuer in at least one jurisdiction of Canada;
  o (c) the issuer has filed with the securities regulatory authority in each jurisdiction in which it is a reporting issuer all
      periodic and timely disclosure documents that it is required to have filed in that jurisdiction
            (i) under applicable securities legislation,
            (ii) pursuant to an order issued by the securities regulatory authority, or
            (iii) pursuant to an undertaking to the securities regulatory authority;
  o (d) the issuer has, in at least one jurisdiction in which it is a reporting issuer,
            (i) current annual financial statements, and
            (ii) a current AIF;
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o   (e) the issuer’s equity securities are listed and posted for trading on a short form eligible exchange and the issuer is not
    an issuer
          (i) whose operations have ceased, or
          (ii) whose principal asset is cash, cash equivalents, or its exchange listing.
o   S.2.3 - Alternative Qualification Criteria for Issuers of Approved Rating Non-Convertible Securities
          (1) An issuer is qualified to file a prospectus in the form of a short form prospectus for a distribution of
              nonconvertible securities in the local jurisdiction, if the following criteria are satisfied:
                    (a) the issuer is an electronic filer under NI 13-101;
                    (b) the issuer is a reporting issuer in at least one jurisdiction of Canada;
                    (c) the issuer has filed with the securities regulatory authority in each jurisdiction in which it is a
                        reporting issuer all periodic and timely disclosure documents that it is required to have filed in that
                        jurisdiction
                             o (i) under applicable securities legislation,
                             o (ii) pursuant to an order issued by the securities regulatory authority, or
                             o (iii) pursuant to an undertaking to the securities regulatory authority;
                    (d) the issuer has, in at least one jurisdiction in which it is a reporting issuer,
                             o (i) current annual financial statements, and
                             o (ii) a current AIF;
                    (e) the securities to be distributed
                             o (i) have received an approved rating on a provisional basis,
                             o (ii) are not the subject of an announcement by an approved rating organization, of which the
                                  issuer is or ought reasonably to be aware, that the approved rating given by the organization
                                  may be down-graded to a rating category that would not be an approved rating, and
                             o (iii) have not received a provisional or final rating lower than an approved rating from any
                                  approved rating organization.
          (2) Paragraph (1)(e) does not apply to an issuer filing a short form prospectus that is a base shelf prospectus
              under NI 44-102.
o   S.2.4 - Alternative Qualification Criteria for Issuers of Guaranteed Non-Convertible Debt Securities, Preferred Shares
    and Cash Settled Derivatives
          (1) An issuer is qualified to file a prospectus in the form of a short form prospectus for a distribution of
              nonconvertible debt securities, non-convertible preferred shares or non-convertible cash settled derivatives in
              the local jurisdiction, if the following criteria are satisfied:
                    (a) a credit supporter has provided full and unconditional credit support for the securities being
                        distributed,
                    (b) at least one of the following is true:
                             o (i) the credit supporter satisfies the criteria in paragraphs 2.2(a), (b), (c) and (d) if the word
                                  “issuer” is replaced with “credit supporter” wherever it occurs;
                             o (ii) the credit supporter is a U.S. credit supporter and the issuer is incorporated or organized
                                  under the laws of Canada or a jurisdiction of Canada;
                    (c) unless the credit supporter satisfies the criteria in paragraph 2.2(e) if the word “issuer” is replaced
                        with “credit supporter” wherever it occurs, at the time the preliminary short form prospectus is filed
                             o (i) the credit supporter has outstanding non-convertible securities that
                                        (A) have received an approved rating,
                                        (B) have not been the subject of an announcement by an approved rating
                                            organization, of which the issuer is or ought reasonably to be aware, that the
                                            approved rating given by the organization may be down-graded to a rating category
                                            that would not be an approved rating, and
                                        (C) have not received a rating lower than an approved rating from any approved
                                            rating organization, and
                             o (ii) the securities to be issued by the issuer
                                        (A) have received an approved rating on a provisional basis,
                                        (B) have not been the subject of an announcement by an approved rating
                                            organization, of which the issuer is or ought reasonably to be aware, that the
                                            approved rating given by the organization may be down-graded to a rating category
                                            that would not be an approved rating, and
                                        (C) have not received a provisional or final rating lower than an approved rating
                                            from any approved rating organization.
          (2) Subparagraph (1)(c)(ii) does not apply to an issuer filing a short form prospectus that is a base shelf
              prospectus under NI 44-102.
o   S.2.5 - Alternative Qualification Criteria for Issuers of Guaranteed Convertible Debt Securities or Preferred Shares –

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                   An issuer is qualified to file a prospectus in the form of a short form prospectus for a distribution of convertible
                    debt securities or convertible preferred shares in the local jurisdiction, if the following criteria are satisfied:
                          (a) the debt securities or the preferred shares are convertible into securities of a credit supporter that
                              has provided full and unconditional credit support for the securities being distributed;
                          (b) the credit supporter satisfies the criteria in section 2.2 if the word “issuer” is replaced with “credit
                              supporter” wherever it occurs.
   AIF – Annual Information Form
    o Is a continuous disclosure filing that each reporting issuer must do which update their story from the prospectus telling
          the story of the company for the past year
                Each reporting issuer must file one annually
                Until you have an AIF – have been in business for one year as a reporting issuer – you are precluded from doing
                    a POP offering
   It is possible to have debt offerings on non-convertible preferred shares so long as they are investment grade  if they are
    not listed
    o They need to be rated by investment rating agencies (such as Moody’s etc.)
    o Could also have the debt or non-convertible preferred shares guaranteed by someone who is POP eligible
   If the POP criteria are satisfied then you are POP eligible  you can start the short form prospectus
    o Short form of a prospectus
                Talks about the securities to be sold
                About who the underwriters are going to be and about the plan of distribution
                Also talks about what the proceeds will be used for
                Most of this is similar to what you would see in a normal long-form prospectus
                But you will also see the AIF information included in the short-form prospectus
                Will also have a claim about “full, true, and plain disclosure”, and incorporated into it will be reference to other
                    documents which by inference will include the AIF
                          Will have the certificate in the prospectus just as in the regular prospectus
                Clearly this is a less time consuming and presumably cheaper process than doing a long-form prospectus
                          Because much of the slog has already been done – especially the AIF information
   Another reason why POP is better  Rule 43-201
    o 5.3 Review Period for Short Form Prospectuses
    o (1) The principal regulator will use its best efforts to review materials relating to a preliminary short form prospectus and
          issue a comment letter within three working days of the date of the preliminary MRRS decision document. Each non-
          principal regulator will, within three working days of the date of the preliminary MRRS decision document, use its best
          efforts to:
                (a) advise the principal regulator of any material concerns with the materials that, if left unresolved, would
                    cause the non-principal regulator to opt out of the MRRS; or
                (b) indicate in the SEDAR "Filing Status" screen that it is clear to receive final materials, if there are no
                    outstanding applications that have been filed with the non-principal regulators.
    o (2) Despite the foregoing, if, in the opinion of the principal regulator, a proposed distribution by way of short form
          prospectus is too complex to be reviewed adequately within the prescribed time periods, the principal regulator may
          determine that the time periods applicable to long form prospectuses should apply, and the principal regulator will,
          within one working day of the filing of the preliminary short form prospectus, so notify the filer and the non-principal
          regulators. The filer is encouraged to submit a pre-filing to resolve any issues that may cause a delay in the prescribed
          time periods
   This is beneficial because of instead of three weeks – 10 days for principal regulator and 5 days for others, you are looking at
    four days
    o Submit on Monday and go to market on Friday
    o Also sometimes they will not even bother to look at the short-form prospectus\
   Because of the speed of the turnaround on a short-form prospectus it is possible that an underwriter will just go out and
    actually purchase the deal outright  will just buy all of the securities on Monday, knowing that on Friday they will be able
    to start selling them
    o This is the true “bought deal”
                Some say that a true underwriting deal – where underwriters buy as principal is the bought deal but this is
                    actually it  underwriter pays over the cash and takes the securities knowing that within a matter of days they
                    will start being paid back
                Will do this especially with senior issuers – ones with solid market history and with solid issue
   One question that arises with POP offerings is how the underwriters know that there is a market  isn’t it risky to buy the
    deal without knowing that you have it sold
    o Look to National Instrument 44-101 – specifically Part 7


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                  7.1 Solicitations of Expressions of Interest - The prospectus requirement does not apply to solicitations of
                   expressions of interest before the filing of a preliminary short form prospectus for securities to be qualified for
                   distribution under a short form prospectus in accordance with this Instrument, if
                         (a) the issuer has entered into an enforceable agreement with an underwriter who has, or underwriters
                             who have, agreed to purchase the securities,
                         (b) the agreement referred to in paragraph (a) has fixed the terms of the distribution and requires that
                             the issuer file a preliminary short form prospectus for the securities and obtain from the regulator a
                             receipt, dated as of a date that is not more than four business days after the date that the agreement is
                             entered into, for the preliminary short form prospectus,
                         (c) the issuer has issued and filed a news release announcing the agreement immediately upon entering
                             into the agreement,
                         (d) upon issuance of a receipt for the preliminary short form prospectus, a copy of the preliminary
                             short form prospectus is sent to each person or company who has expressed an interest in acquiring the
                             securities, and
                         (e) except as provided in paragraph (a), no agreement of purchase and sale for the securities is entered
                             into until the short form prospectus has been filed and a receipt obtained.
   Why is there a rule that you need to disclose that there is a deal coming down the pipe?
    o Because the deal is usually selling at a discount to the market price and someone who already owns shares and is being
         solicited to buy new ones may sell their current shares on the market in order to make a gain but not lose any shares
         overall
               This is not really fair  is analogous to tipping and need to offset this to make it fairer
    o One way to get around some of this is to agree to private placements prior to going to the market  especially with some
         of the larger institutional investors that the underwriter may have a long history of working with
               Private placements are usually big deals for big blocks of shares for big players such as banks, insurance
                   companies and pension funds
    o In short form prospectus – and the underwriting agreements that go along with them – underwriters still will insist on the
         same outs as with traditional agreements
   All bought deals are done under POP prospectuses but not all POP prospectuses are bought deals
   Provided there is nothing novel in the offering it will go through the OSC within three days
   For all intents and purposes the short-form prospectus process is the same thing as the long-form with some minor variations
   Shelf prospectuses are a bit different than either
   Are found under NI 44-102
   Use a shelf prospectus to qualify a security to be offered to the market over a period of time
   Will usually qualify securities that you will stick on the shelf and go to the market with them when you need to raise money
    o For example will qualify $1 billion in securities and go to market from time to time in tranches of $100 million or $200
         million
   To do a shelf you need to be POP eligible
    o Still have to meet the same criteria
    o A shelf prospectus is good for up to 25 months – no longer
    o There are two types of shelf prospectuses
               Where you are clearing a prospectus for securities of a type
                         For example unsecured medium term notes of 7-10 years at Bank Prime
                                  o $1 billion in total and plan on selling them from time to time to underwriters
                                  o As you need money you go to the market in tranches and seek $100 million at a time
                                  o All you need to do is to file a pricing supplement pricing the offering, file with the
                                       commission and off you go
                         Could even do a variety of different types of securities such as a combination of long and medium term
                             notes
                         These types of shelf prospectuses are often used for companies that need cash from time to time for
                             either capital investment or acquisitions but they are just not sure when they will need the cash  this
                             way they can get to the market quickly and raise the money that they need
               Can do a shelf for a continuous offering
                         Rather than a transaction by transaction basis
                         What is this
                                  o Contemplates a shelf for something that will continuously be in the market
                                  o Instead of using an underwriter an issuer can offer securities directly to the market
                                             Use short-form prospectus
                                             Have a maximum amount they want to raise
                                             Say what the nature of the security is
                                             Describe what the use of the proceeds is going to be
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                                         
                                         But what about the plan of distribution
                                               There is no underwriter, there is no pricing supplement b/c it is offered at
                                                  market price
                                               If common shares you cannot offer more than 10% of outstanding shares
                                               May not be allowed to distribute exotic products such as derivatives
 One issue with shelfs is how you go about your due diligence when a company files a prospectus every two years.
  o Do you do it when they file the short form – but such a short period of time before the prospectus is approved
  o How can you do diligence when transactions are done absent a prospectus – securities can go to market at any time
  o Presents some difficult questions


Civil liability for prospectus disclosure
 S.56(1) - A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or
    proposed to be distributed and shall comply with the requirements of Ontario securities law
 A certificate must be signed on behalf of the issuer – s.58
 S.58(1) - Subject to subsection (3) of this section and subsection 63 (2), and subject to any waiver or variation consented to in
    writing by the Director, a prospectus filed under subsection 53 (1) or subsection 62 (1) shall contain a certificate in the
    following form, signed by the chief executive officer, the chief financial officer, and, on behalf of the board of directors, any
    two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or company who is a promoter
    of the issuer:
    o The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this
         prospectus as required by Part XV of the Securities Act and the regulations thereunder.
   The underwriter also has an obligation to sign a certificate
   S.59(1) - Subject to subsection 63 (2), where there is an underwriter, a prospectus shall contain a certificate in the following
    form, signed by the underwriter or underwriters who, with respect to the securities offered by the prospectus, are in a
    contractual relationship with the issuer or security holder whose securities are being offered by the prospectus:
    o To the best of our knowledge, information and belief, the foregoing constitutes full, true and plain disclosure of all
         material facts relating to the securities offered by this prospectus as required by Part XV of the Securities Act and the
         regulations thereunder
   S.56 and s.59 connect with s.130(1) which is the civil liability clause in the OSA
   S.130(1) - Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser
    who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has,
    without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,
    o (a) the issuer or a selling security holder on whose behalf the distribution is made;
               selling security holder means the control block holder
    o (b) each underwriter of the securities who is required to sign the certificate required by section 59;
               these are the underwriters in contractual privity
    o (c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;
               includes all directors, not just those who signed the certificate
    o (d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a
         requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and
               expert opinions but experts only liable for the expertised portion of the report
    o (e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or
         companies included in clauses (a) to (d),
               could have promoters liable, CEO and CFO could be personally liable
    o or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another
         underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or
         underwriter, in which case the purchaser shall have no right of action for damages against such person, company or
         underwriter
   The purchaser has the choice to pursue damages or rescission – postamble
   What is a misrepresentation
    o (a) an untrue statement of material fact, or
    o (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
   All material facts must be disclosed so a failure to disclose a material fact is a misrepresentation under the OSA  the
    second part of (b)
   Misrepresentation under securities law is much broader than under contract law
    o Includes omissions and failures to do things
               This is not a misrepresentation under contract law
    o Also a misrepresentation under contract law does not necessarily lead to damages
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                 Need negligence, or fraudulent misrepresentation
 S.130 (10) - The right of action for rescission or damages conferred by this section is in addition to and without derogation
    from any other right the purchaser may have at law.
    o The rights under the Securities Act are in addition to those under common contract law so it is still open to one to use
          common contract law remedies as well
   Is it possible to have no s.130 right to rescission but to have one at common law
    o Yes b/c underwriter under s.130 may have due diligence defence
    o The due diligence defence is open to all people under s.130 except for the issuer
   S.130(5) - No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect
    to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and
    not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,
    o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no
          misrepresentation; or
    o (b) believed there had been a misrepresentation.
   In addition the amount that an underwriter is potentially liable for is limited by s.130
   S.130(6) - No underwriter is liable for more than the total public offering price represented by the portion of the distribution
    underwritten by the underwriter
   S.130(9) - In no case shall the amount recoverable under this section exceed the price at which the securities were offered to
    the public
    o But, looking at Kerr v Danier, does this mean that the offering price is the starting point for damages, or does it mean
          that the offering price is the cap for damages?
   In civil liability the liability is joint and several
   S.130(8) - All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and
    every person or company who becomes liable to make any payment under this section may recover a contribution from any
    person or company who, if sued separately, would have been liable to make the same payment provided that the court may
    deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of
    such contribution would not be just and equitable.
    o Reflect back on US cases about whether or not indemnity is enforceable (Globus Realty)
    o Best course of action is still to sue all potential defendants because the worst case scenario is that you sue only one and
          they end up with a defence that you cannot overcome and you win nothing
                 Also need to be aware of the issue of the cap on the underwriters portion of any award (s.130(6))
   Kerr v Danier (Ontario Court of Appeal)
    o Company was attempting to go public
    o Had tried on a couple of occasions
    o They included a forecast in their prospectus
    o Earlier attempts to go public had been aborted because of issues with forecasts
    o Went public at $11.25 in May with a forecast for 3 months, but weather was unseasonably warm and they were not
          selling many coats and were missing targets. On June 4th they announced they were behind forecast and the stock
          dropped to $8.90 from $11.65. By the end of the forecast period they were only $100k behind the forecast so the overall
          impact was negligible but it took years for the market price to rebound
    o Investors sued on the basis of improper disclosure – trial judge said a material fact was missing and the investors won at
          trial
                 Said that the company did not reasonably believe its own forecast at the time of the closing of the deal and that
                    they should have disclosed this
                 Said there is an implied representation that management believes their forecasts and that they need to disclose
                    when they do not believe them
                 But a forecast is not a fact  cannot be, is simply an opinion
                          If this is right then a forecast would need to be in every prospectus
    o Overturned at court of Appeal
                 Said that the trial judge was wrong for a couple of reasons
                          Did not think that a forecast must be both believable by management and objectively believed by
                              management
                                    o Until Kerr v Danier everyone thought that the business judgment rule applied  you could be
                                         wrong so long as you abided by the director’s duty of care
                                               Extends the judgment rule to possibly protect directors decisions under securities law
                                                        Some say that the duty of care has no role in securities law but it is
                                                          uncertain
                                    o Duty to amend a prospectus flows from a material change and not changes in material facts
                                               Material facts go in a prospectus
                                               Material changes do not

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                          Court of first instance said that a material fact was not disclosed but the Court of Appeal said this was
                           incorrect
                                o Said that those who had already purchased need not be given an amended prospectus
                                           b/c prospectus was good when the securities were purchased
                                o One potential outcome of the original decision would have been that due diligence would
                                     have had to have been done at the date of closing and not at the date of the final prospectus 
                                     would have been a mess
                        Court of Appeal said there was no material change  said that management believed the forecast had
                           should be given the benefit of the business judgment rule
                 Danier is an important case because it affirms that the prospectus doesen’t have to be good as of the date of the
                  closing of the deal
                        Also because of the conclusion about what a projection is
                                o Is not a fact, just an opinion
                 In calculating damages the original judge said that the starting point was the offering price of the securities 
                  since the Court of Appeal overturned the decision it never dealt with this issue but it doesn’t seem to make a
                  whole lot of sense
                        Court also said that you needed to give enough time for the news to work its way through the stock
                           market
                        Also said that if there were other things going on you needed to take account of them as well  such
                           as a market crash  this ties in with s.130(7)
                        S.130(7) - In an action for damages pursuant to subsection (1), the defendant is not liable for all or any
                           portion of such damages that the defendant proves do not represent the depreciation in value of the
                           security as a result of the misrepresentation relied upon.


Due diligence defences
 S.130(3) - No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it
  proves,
  o (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and
       that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;
  o (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on
       becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the
       consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;
  o (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the
       authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she
       or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of
       the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert
       or was not a fair copy of or extract from the report, opinion or statement of the expert;
  o (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his,
       her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or
       statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report,
       opinion or statement as an expert,
              (i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe
                 that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report,
                 opinion or statement, or
              (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly
                 represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission
                 and gave reasonable general notice that such use had been made and that he, she or it would not be responsible
                 for that part of the prospectus or the amendment to the prospectus; or
  o (e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what
       purports to be a copy of or extract from a public official document, it was a correct and fair representation of the
       statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe
       that the statement was true.
 S.130(4) - No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect
  to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an
  expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he,
  she or it,
  o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no
       misrepresentation; or
  o (b) believed there had been a misrepresentation

                                                                                                                                     32
 s.130(5) -No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to
    any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not
    purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,
    o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no
        misrepresentation; or
    o (b) believed there had been a misrepresentation
   Comments on Due Diligence Defences
    o What is reasonable investigation is not the same for everyone
              YBM Magnex, Enscott, Bar-Criss
                        Will depend upon who the person is, what the person knows, their position, their education, their
                            experience, their expertise, how close they are to the prospective process
                        Ones with greater knowledge will be held to a higher standard
                                 o YBM – underwriter/director held to a higher standard than other directors
                        Who you are will determine what is expected of you
                                 o Experienced directors will be held to higher standards
    o If you get a hint of a problem and do not follow up you will be held to a higher standard  YBM
    o Other people can do due diligence for you (to an extent)  YBM
              Lawyers can do due diligence, underwriters can do it as well
              But it depends on their relationship as to how much you can rely on them
              In YBM the fact that the underwriter was a director should have led one to have asked more questions about the
                  level of diligence undertaken
    o Cannot wholly abdicate responsibility for diligence to others
              At a minimum must make inquiries  did we do our diligence and can we rely on it?
    o Reasonable investigation is somewhat informed by what others do
              If there is a standard in the industry you should at least meet it
                        At the same time you don’t really want to be the one to establish a more onerous one
                        Because will be expected to meet it in the future
   There are tight time limitations for pursuing remedies under the OSA
   S.138 - Unless otherwise provided in this Act, no action shall be commenced to enforce a right created by this Part more than,
    o (a) in the case of an action for rescission, 180 days after the date of the transaction that gave rise to the cause of action;
        or
    o (b) in the case of any action, other than an action for rescission, the earlier of,
              (i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or
              (ii) three years after the date of the transaction that gave rise to the cause of action
   One issue is whether or not you keep your diligence files once you are done
    o Some say yes some say no
              Issue arises because it could bite you in the ass if you missed something but on the other hand what if you
                  showed up in court without it
              US firms shred it because of this fear


Exempt transactions
 What happens when an issuer does not want to do a prospectus
 After all it is expensive, time consuming etc.
 That is the purview of exemptions
 What is the factual basis for exempt transactions
  o Especially since there is the strong belief in the need for disclosure
             Remember the two competing purposes of the Act
                       1 – is the need to protect the investing public
                       2 – is to foster competitive and efficient markets
             It is for the second reason that we have exempt transactions
 What types of exempt transactions are there
  o Private placements
             The purchaser does not need disclosure
             The purchaser is an accredited investor such as a bank, insurance company, wealthy person etc. who knows
                  enough to protect themselves and does not need disclosure
                       After all disclosure is a bit paternalistic at its core
  o Benign securities  such as government bonds where the risks are negligible, if they exist at all
  o Hardship exemptions
             Where making a prospectus would be infeasible for the issuer in the circumstances
                                                                                                                                 33
            For example the family store where you want to provide ownership stakes to children
            Called the private issuer exemption
  o Issuer related exemptions
            The issuer is issuing securities to those who already have a relationship to it and therefore there is really no need
               to demand that it make any further disclosure to them
            Such as offering shares to employees, officers etc
            Also rights offerings where the company offers shares at a discount to current shareholders
 There are a bunch of prospectus exemptions in s.72 and 73 of the OSA and a bunch of registration exemptions in s.34 and 35
  of the OSA but these were put into the Act prior to the OSC being given rule making authority.
 These have now been displaced by a combination of Rule 45-501 and National Instrument 45-106
  o National Instrument 45-106 is the major one but there are some portions of it that Ontario did not like so it went with
       Rule 45-501 in addition
Accredited Investor
    o   Defined in the Rule
    o   (a) a Canadian financial institution, or a Schedule III bank,
    o   (b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act
        (Canada),
    o   (c) a subsidiary of any person referred to in paragraphs (a) or (b), if the person owns all of the voting securities of the
        subsidiary, except the voting securities required by law to be owned by directors of that subsidiary,
    o   (d) a person registered under the securities legislation of a jurisdiction of Canada as an adviser or dealer, other than a
        person registered solely as a limited market dealer under one or both of the Securities Act (Ontario) or the Securities Act
        (Newfoundland and Labrador),
    o   (e) an individual registered or formerly registered under the securities legislation of a jurisdiction of Canada as a
        representative of a person referred to in paragraph (d),
    o   (f) the Government of Canada or a jurisdiction of Canada, or any crown corporation, agency or wholly owned entity of
        the Government of Canada or a jurisdiction of Canada,
    o   (g) a municipality, public board or commission in Canada and a metropolitan community, school board, the Comité de
        gestion de la taxe scolaire de l’île de Montréal or an intermunicipal management board in Québec;
    o   (h) any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any
        agency of that government,
    o   (i) a pension fund that is regulated by either the Office of the Superintendent of Financial Institutions (Canada) or a
        pension commission or similar regulatory authority of a jurisdiction of Canada,
    o   (j) an individual who, either alone or with a spouse, beneficially owns, directly or indirectly, financial assets having an
        aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1 000 000,
    o   (k) an individual whose net income before taxes exceeded $200 000 in each of the 2 most recent calendar years or whose
        net income before taxes combined with that of a spouse exceeded $300 000 in each of the 2 most recent calendar years
        and who, in either case, reasonably expects to exceed that net income level in the current calendar year,
    o   (l) an individual who, either alone or with a spouse, has net assets of at least $5 000 000,
    o   (m) a person, other than an individual or investment fund, that has net assets of at least $5 000 000 as shown on its most
        recently prepared financial statements,
    o   (n) an investment fund that distributes or has distributed its securities only to
               (i) a person that is or was an accredited investor at the time of the distribution,
               (ii) a person that acquires or acquired securities in the circumstances referred to in sections 2.10 [Minimum
                  amount investment], and 2.19 [Additional investment in investment funds], or
               (iii) a person described in paragraph (i) or (ii) that acquires or acquired securities under section 2.18 [Investment
                  fund reinvestment],
    o   (o) an investment fund that distributes or has distributed securities under a prospectus in a jurisdiction of Canada for
        which the regulator or, in Québec, the securities regulatory authority, has issued a receipt,
    o   (p) a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan
        Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, acting on
        behalf of a fully managed account managed by the trust company or trust corporation, as the case may be,
    o   (q) a person acting on behalf of a fully managed account managed by that person, if that person
               (i) is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation
                  of a jurisdiction of Canada or a foreign jurisdiction, and
               (ii) in Ontario, is purchasing a security that is not a security of an investment fund;
    o   (r) a registered charity under the Income Tax Act (Canada) that, in regard to the trade, has obtained advice from an
        eligibility adviser or an adviser registered under the securities legislation of the jurisdiction of the registered charity to
        give advice on the securities being traded,
    o   (s) an entity organized in a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs (a) to (d)
        or paragraph (i) in form and function,
                                                                                                                                       34
    o   (t) a person in respect of which all of the owners of interests, direct, indirect or beneficial, except the voting securities
        required by law to be owned by directors, are persons that are accredited investors,
  o (u) an investment fund that is advised by a person registered as an adviser or a person that is exempt from registration as
        an adviser, or
  o (v) a person that is recognized or designated by the securities regulatory authority or, except in Ontario and Québec, the
        regulator as
               (i) an accredited investor, or
               (ii) an exempt purchaser in Alberta or British Columbia after this Instrument comes into force;
 Most of the accredited investor exemptions deal with people who can either look after themselves or can afford to hire
  someone who can look after their money for them
 It is also necessary to do some investigation into accredited investors  cannot accept their claims at face value but rather
  must look beyond their claim to determine whether or not they meet the criteria
Minimum Investment Amount Exemption
    o   2.10 of 45-106 - (1) The dealer registration requirement does not apply in respect of a trade in a security to a person if
              (a) that person purchases as principal,
              (b) the security has an acquisition cost to the purchaser of not less than $150 000 paid in cash at the time of the
                 trade, and
              (c) the trade is in a security of a single issuer.
              (2) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
                 subsection (1).
              (3) This section does not apply to a trade in a security to a person if that person is created or used solely to
                 purchase or hold securities in reliance on this exemption from the dealer registration requirement or the
                 prospectus requirement.
 Why have a rule like this  because if you have $150k maybe you can weigh the risks
  o It may be possible to use this exemption for an investment fund where not all of the investors are accredited investors
 It is not necessary to use the same exemption for everyone  can mix and match them in order to fit people into the mix
Benign Securities
 S.2.34 – 2.37 of NI 45-106
 S.2.34(2) - The dealer registration requirement does not apply in respect of a trade in a debt security
    o    (a) of or guaranteed by the Government of Canada or the government of a jurisdiction of Canada,
    o    (b) of or guaranteed by a government of a foreign jurisdiction if the debt security has an approved credit rating from an
         approved credit rating organization,
    o (c) of or guaranteed by any municipal corporation in Canada, or secured by or payable out of rates or taxes levied under
         the law of a jurisdiction of Canada on property in the jurisdiction and to be collected by or through the municipality in
         which the property is situated,
    o (d) of or guaranteed by a Canadian financial institution or a Schedule III bank, other than debt securities that are
         subordinate in right of payment to deposits held by the issuer or guarantor of those debt securities,
    o (e) in Ontario, of any school board in Ontario or of a corporation established under section 248(1) of the Education Act
         (Ontario),
    o (f) of the Comité de gestion de la taxe scolaire de l’île de Montréal, or
    o (g) of or guaranteed by a permitted supranational agency if
               (i) the debt securities are payable in the currency of Canada or the United States of America, and
               (ii) with respect to those securities, all documents or other information required by the regulator, or in British
                   Columbia, Ontario and in Québec, the securities regulatory authority, are filed with the regulator or securities
                   regulatory authority, as the case may be.
   s.2.34(3) - The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
    subsection (2)
   S.2.35(1) - The dealer registration requirement does not apply in respect of a trade in a negotiable promissory note or
    commercial paper maturing not more than one year from the date of issue, if the note or commercial paper traded
    o (a) is not convertible or exchangeable into or accompanied by a right to purchase another security other than a security
         described in this section, and
    o (b) has an approved credit rating from an approved credit rating organization.
   s.2.35(2) - The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
    subsection (1)
   2.36 (1) In this section, “syndicated mortgage” means a mortgage in which 2 or more persons participate, directly or
    indirectly, as a lender in a debt obligation that is secured by a mortgage.



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 S.2.36(2) Subject to subsection (4), the dealer registration requirement does not apply in respect of a trade in a mortgage on
    real property in a jurisdiction by a person who is registered or licensed, or exempted from registration or licensing, under
    mortgage brokerage or mortgage dealer legislation of that jurisdiction.
   S.2.36(3) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
    subsection (2).
   S.2.36(4) In British Columbia, Manitoba, Québec and Saskatchewan, subsections (2) and (3) do not apply to a syndicated
    mortgage.
   2.37 (1) The dealer registration requirement does not apply in respect of a trade in a security evidencing indebtedness secured
    by or under a security agreement provided for under personal property security legislation of a jurisdiction providing for the
    acquisition of personal property if the security is not offered for sale to an individual.
   S.2.37(2) - The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
    subsection (1).
   Difference between benign securities and accredited investors is that with benign securities it is the security itself that is
    exempt and with accredited investor it is the transaction that is exempt  does not matter who buys it
              Other that the PPSA one s.2.37 (chattel paper) which cannot be sold to an individual
Hardship Exemptions
 These are important ones
 The main one here is the private issuer exemption
 Who is a private issuer  S.2.4(1) of NI 45-106
    o In this section, “private issuer” means an issuer
             (a) that is not a reporting issuer or an investment fund,
             (b) whose securities, other than non-convertible debt securities,
                      (i) are subject to restrictions on transfer that are contained in the issuer’s constating documents or
                           security holders’ agreements, and
                      (ii) are beneficially owned, directly or indirectly, by not more than 50 persons, not including
                           employees and former employees of the issuer or its affiliates, provided that each person is counted as
                           one beneficial owner unless the person is created or used solely to purchase or hold securities of the
                           issuer in which case each beneficial owner or each beneficiary of the person, as the case may be, must
                           be counted as a separate beneficial owner, and
             (c) that has distributed securities only to persons described in this section.
 Private issuer is not a reporting issuer  is usually a private company
  o Must have restrictions on the sale of shares in the company
 Who can you sell to under this exemption?
  o S.2.4(2) of NI 45-106
             The dealer registration requirement does not apply in respect of a trade in a security of a private issuer to a
                person who purchases the security as principal and is
                      (a) a director, officer, employee, founder or control person of the issuer,
                      (b) a spouse, parent, grandparent, brother, sister or child of a director, executive officer, founder or
                           control person of the issuer,
                      (c) a parent, grandparent, brother, sister or child of the spouse of a director, executive officer, founder
                           or control person of the issuer,
                      (d) a close personal friend of a director, executive officer, founder or control person of the issuer,
                      (e) a close business associate of a director, executive officer, founder or control person of the issuer,
                      (f) a spouse, parent, grandparent, brother, sister or child of the selling security holder or of the selling
                           security holder’s spouse,
                      (g) a security holder of the issuer,
                      (h) an accredited investor,
                      (i) a person of which a majority of the voting securities are beneficially owned by, or a majority of the
                           directors are, persons described in paragraphs (a) to (h),
                      (j) a trust or estate of which all of the beneficiaries or a majority of the trustees or executors are
                           persons described in paragraphs (a) to (h), or
                      (k) a person that is not the public.
  o Why have accredited investor in the definition?
             Because if you sell outside of the private issuer exemption you are no longer a private issuer
  o What kinds of restrictions are there on sales  look to the companion policy
             Friends must be able to assess trustworthiness, must know you for a long time
                      Cannot be a close personal friend of a close personal friend
             Close business associate must also be able to assess capacity and trustworthiness

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                  One issue is who is a person who is not the public
                          Never give an opinion on this because it is impossible to know for certain what this is
                          R v Piepgrass
                                  o Look not to who you sold to but who you offered it to  if you offered it to sale to the public
                                       then the person you sold it to is the public
               The person’s relationship to the company must be sufficient to supplant good disclosure  without that you
                   will need to have a prospectus
   Ontario has walked away from the friends and family exemption in NI 45-106 (s.2.5 begins “Except in Ontario…..)
    o Because Ontario thought that it was too big of a loophole allowing too many things through
   Instead of the “Friends and Family” exemption of s.2.5 Ontario has s.2.7
   S.2.7(1) In Ontario, the dealer registration requirement does not apply in respect of a trade in a security to a person who
    purchases the security as principal and is
               (a) a founder of the issuer,
               (b) an affiliate of a founder of the issuer,
               (c) a spouse, parent, brother, sister, grandparent or child of an executive officer, director or founder of the issuer,
                   or
               (d) a person that is a control person of the issuer.
    o (2) In Ontario, the prospectus requirement does not apply to a distribution of a security in the circumstances referred to
         in subsection (1).
   One other exemption of some note is 2.30 of NI 45-106
    o Many say that this one is not very useful but it allows for a fit where nothing else will do
    o S.2.30 (1) The dealer registration requirement does not apply in respect of a trade by an issuer in a security of its own
         issue if the trade is an isolated trade and is not made
               (a) in the course of continued and successive transactions of a like nature, and
               (b) by a person whose usual business is trading in securities.
    o (2) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
         subsection (1).
               This exemption is available only to the issuer and not to the control holder
               Is only available for an isolated trade
               And only available intermittently  such period of time as is sufficient to ensure that it is truly isolated and
                   unconnected
                          S.4.6 of Policy Statement 45-106
   But if you use 2.30 for a private issuer they will no longer be a private issuer  private issuer can only use private issuer
    exemption
   But you can link 2.30 with accredited investor and min purchase transactions
   Hardship exemption available only in Ontario  look to Rule 45-501
    o Government Incentive Securities  usually see these for financing oil and gas juniors who need to raise cash from time
         to time (used to see these for film industry tax credit programs until the federal government got rid of the tax breaks)
    o S.2.1 of Rule 45-501 - (1) The dealer registration requirement does not apply to a trade by an issuer or a promoter of an
         issuer in a security of the issuer that is a government incentive security, if
               (a) in the aggregate in all jurisdictions in Canada, not more than 75 prospective purchasers are solicited
                   resulting in sales to not more than 50 purchasers,
               (b) before entering into an agreement of purchase and sale, the prospective purchaser has been supplied with an
                   offering memorandum that includes information
                          (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 full time to the affairs of the issuer,
                             and
                          (v) describing the right of action referred to in section 130.1 of the Act that is applicable in respect of
                             the offering memorandum,
               (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) because of net worth and investment experience or because of consultation with or advice from a
                             person that is not a promoter of the issuer and that is an adviser or dealer registered under the Act, is
                             able to evaluate the prospective investment on the basis of information about the investment presented
                             to the prospective purchaser by the issuer or selling security holder, or

                                                                                                                                     37
                        (ii) is an executive officer or director of the issuer or of an affiliate of the issuer or a spouse or child of
                         a director or executive officer of the issuer or of an affiliate of the issuer,
            (d) the offer and sale of the security is not accompanied by an advertisement and no selling or promotional
               expenses have been paid or incurred for the offer and sale except for professional services or for services
               performed by a dealer registered under the Act, and
            (e) the promoter, if any, has not acted as a promoter of any other issue of securities under this exemption within
               the calendar year.
  o (2) For the purpose of determining the number of purchasers or prospective purchasers under paragraph (1)(a), a
      corporation, partnership, trust or other entity is counted as one purchaser or prospective purchaser unless the entity has
      been created, or is being used, primarily for the purpose of purchasing a security of the issuer, in which event each
      beneficial owner of an equity security of the entity or each beneficiary of the entity, as the case may be, is counted as a
      separate purchaser or prospective purchaser.
  o (3) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
      subsection (1).
 This rule seems rather difficult to follow and difficult to meet the requirements of  it is
  o Seems to have been a sop to the oil and gas industry and since Ontario chose not to go with the friends and family
      exemption this is in there but perhaps they will amend it to make it more in line with the other provinces in the near
      future
Issuer relationship exemptions
 Or no need to know exemptions
    o    These individuals have a sufficient relationship with the issuer that they do not have a need for further disclosure
 There are a number of these
Employee exemptions
 For stocke purchase plans, stock accumulation plans, or stock option plans
    o  In each of these situations you are issuing securities
    o  In the case of options you issue two securities and need two exemptions
             One when the option is issued
             One when the option is exercised
 Rule 45-106 - 2.24 (1) Subject to section 2.25 [Unlisted reporting issuer exception], the dealer registration requirement does
  not apply in respect of
  o (a) a trade by an issuer in a security of its own issue, or
  o (b) a trade by a control person of an issuer in a security of the issuer or in an option to acquire a security of the issuer,
  o with
  o (c) an employee, executive officer, director or consultant of the issuer,
  o (d) an employee, executive officer, director or consultant of a related entity of the issuer, or
  o (e) a permitted assign of a person referred to in paragraphs (c) or (d) if participation in the trade is voluntary.
  o (2) For the purposes of subsection (1), a person referred to in paragraph (c), (d) or (e) includes a trustee, custodian or
       administrator acting as agent for that person for the purpose of facilitating a trade.
  o (3) The dealer registration requirement does not apply in respect of an act by a related entity of an issuer in furtherance
       of a trade referred to in subsection (1).
  o (4) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
       subsection (1).
Underwriter exemption
 Because the underwriter often will buy the securities before the prospectus is even issued
 Often this is viewed as more of a limitation than an exemption  since the underwriter got the securities under an exemption
  and there is no subsequent rule cleansing them to allow for their resale then they must be sold under a prospectus  so goes
  the thinking of the Commissions
 2.33 (1) – The dealer registration requirement does not apply in respect of a trade in a security between a person and a
  purchaser acting as an underwriter or between or among persons acting as underwriters.
 (2) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in subsection (1).
Rights Offerings
 S.2.1(1) - The dealer registration requirement does not apply in respect of a trade by an issuer in a right granted by the issuer
    to purchase a security of its own issue to a security holder of the issuer if
    o (a) the issuer has given the regulator or, in Québec, the securities regulatory authority, prior written notice stating the
         date, amount, nature and conditions of the trade, including the approximate net proceeds to be derived by the issuer on
         the basis of the additional securities being fully taken up,
                                                                                                                                      38
    o  (b) except in British Columbia, the regulator or, in Québec, the securities regulatory authority, has not objected in writing
       to the trade within 10 days of receipt of the notice referred to in paragraph (a) or, if the regulator or securities regulatory
       authority objects to the trade, the issuer has delivered to the regulator or securities regulatory authority information
       relating to the securities that is satisfactory to and accepted by the regulator or securities regulatory authority, and
  o (c) the issuer has complied with the applicable requirements of National Instrument 45-101 Rights Offerings.
 (2) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in subsection (1).
 45-101/Rights Offerings – says that if you want to do a rights offering you have to do stripped down disclosure
  o will object to the rights offering if you increase the pool of common shares too much
  o Will object if it benefits one large shareholder too much
             E.g. if one shareholder owns 30% of the company and you offer rights at 99% of current market price in an
                 attempt to increase the public float by 20% with a residual right to the major shareholder to pick-up the rest
                       Unlikely that many will subscribe to the rights offering so likely that the major shareholder could end
                          up with a majority of the company
                                o Is a NO-NO in the eyes of regulators
Conversions/Purchases
 For example when you are granted an option that only means that later on you get the “option” to buy a security  how do
    you convert it because that is a trade in a security
    o 2.42 (1) The dealer registration requirement does not apply in respect of a trade by an issuer if
             (a) the issuer trades a security of its own issue to a security holder of the issuer in accordance with the terms and
                 conditions of a security previously issued by that issuer, or(b) subject to subsection (2), the issuer trades a
                 security of a reporting issuer held by it to a security holder of the issuer in accordance with the terms and
                 conditions of a security previously issued by that issuer.
    o (2) For a trade under subsection (1)(b),
             (a) the issuer must give the regulator or, in Québec, the securities regulatory authority, prior written notice
                 stating the date, amount, nature and conditions of the trade, and
             (b) except in British Columbia, the regulator or, in Québec the securities regulatory authority, must not object in
                 writing to the trade within 10 days of receipt of the notice referred to in paragraph (a) or, if the regulator or
                 securities regulatory authority objects to the trade, the issuer must deliver to the regulator or securities
                 regulatory authority information relating to the securities that is satisfactory to and accepted by the regulator or
                 securities regulatory authority.
    o (3) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
        subsection (1).
DRIPS – Dividend Reinvestment Plans
 2.2 (1) Subject to subsections (3) and (5), the dealer registration requirement does not apply in respect of the following trades
    by an issuer, or by a trustee, custodian or administrator acting for or on behalf of the issuer, to a security holder of the issuer
    if the trades are permitted by a plan of the issuer:
    o (a) a trade in a security of the issuer’s own issue if dividends or distributions out of earnings, surplus, capital or other
         sources payable in respect of the issuer’s securities are applied to the purchase of the security that is of the same class or
         series as the securities to which the dividends or distributions out of earnings, surplus, capital or other sources is
         attributable, and
    o (b) subject to subsection (2), a trade in a security of the issuer’s own issue if the security holder makes optional cash
         payments to purchase the security of the issuer that is of the same class or series of securities described in paragraph (a)
         that trade on a marketplace.
   (2) The aggregate number of securities issued under the optional cash payment referred to in subsection (1)(b) must not
    exceed, in any financial year of the issuer during which the trade takes place, 2% of the issued and outstanding securities of
    the class to which the plan relates as at the beginning of the financial year.
   (3) A plan that permits the trades described in subsection (1) must be available to every security holder in Canada to which
    the dividend or distribution is available.
   (4) Subject to subsections (3) and (5), the prospectus requirement does not apply to a distribution of a security in the
    circumstances referred to in subsection (1).
   (5) This section does not apply to a trade in a security of an investment fund.

 Reporting
    o    OSC says that some exempt transactions have to be reported
    o    This is found in part 6 of rule 45-106
              Some accredited investor transactions
              Isolated transactions (2.30)
              Minimum purchase transactions (2.10)

                                                                                                                                     39
    o   OSC simply wants to know who bought, how much they bought, what price they paid and what exemption they
        purchased under


Offering Memorandum
 Kind of a strange topic  does not really line up all that well under securities law
 Problem is that only one exemption deals with offering memorandum  only need to have an offering memorandum for one
    exemption
    o Government incentive securities  the oil and gas exemption in Ontario
               Because Ontario did not like the loosened families exemption
   Eligible investor is defined in rule 45-106
    o (a) a person whose
               (i) net assets, alone or with a spouse, in the case of an individual, exceed $400 000,
               (ii) net income before taxes exceeded $75 000 in each of the 2 most recent calendar years and who reasonably
                   expects to exceed that income level in the current calendar year, or
               (iii) net income before taxes, alone or with a spouse, in the case of an individual, exceeded $125 000 in each of
                   the 2 most recent calendar years and who reasonably expects to exceed that income level in the current calendar
                   year,
    o (b) a person of which a majority of the voting securities are beneficially owned by eligible investors or a majority of the
         directors are eligible investors,
    o (c) a general partnership of which all of the partners are eligible investors,
    o (d) a limited partnership of which the majority of the general partners are eligible investors,
    o (e) a trust or estate in which all of the beneficiaries or a majority of the trustees or executors are eligible investors
    o (f) an accredited investor,
    o (g) a person described in section 2.5 [Family, friends and business associates], or
    o (h) a person that has obtained advice regarding the suitability of the investment and, if the person is resident in a
         jurisdiction of Canada, that advice has been obtained from an eligibility adviser;
   In provinces other than Ontario you can sell to an eligible investor in amounts of over $10,000 without a prospectus
    o Ontario did not like this  why then have the prospectus requirements in the first place
   Part 6 of Rule 45-501
    o 6.2 - Right of action for damages and right of rescission – (1) The rights referred to in section 130.1 of the Act apply in
         respect of an offering memorandum delivered to a prospective purchaser.
               (2) Despite subsection (1), the rights referred to in section 130.1 of the Act do not apply in respect of an
                   offering memorandum delivered to a prospective purchaser in connection with a distribution made in reliance
                   on the exemption from the prospectus requirement in section 2.3 of NI 45-106 [Accredited investor] if the
                   prospective purchaser is
                         (a) a Canadian financial institution or a Schedule III bank,
                         (b) the Business Development Bank of Canada incorporated under the Business Development Bank of
                            Canada Act (Canada), or
                         (c) a subsidiary of any person referred to in paragraphs (a) and (b), if the person owns all of the voting
                            securities of the subsidiary, except the voting securities required by law to be owned by directors of
                            that subsidiary.
    o 6.3 Description of rights in offering memorandum - If a selling security holder delivers an offering memorandum to a
         prospective purchaser in connection with a distribution to which the rights referred to in section 130.1 of the Act apply,
         the rights must be described in the offering memorandum.
    o 6.4 - Delivery of offering memorandum – If an offering memorandum is provided to a prospective purchaser, the seller
         must deliver to the Commission a copy of the offering memorandum or any amendment to a previously delivered
         offering memorandum within 10 days of the date of the distribution.
   Offering memorandum applies to private issuers, accredited investors, founders, control persons, min purchasers, and
    government incentive securities
   Rules applying to an OM must be delivered to a prospective purchaser
    o Does not say that you need to deliver
    o The section also does not define an offering memorandum
               CP to the Rule says that you need to look at Rule 14-501 which is the catch-all for definitions of terms that are
                   not defined elsewhere
    o Offering Memorandum
               Purports to describe the business
               Prepared for delivery to investors
               Not current information
    o If you deliver an OM you are into the s.130.1 civil liability provisions

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   The only time that you have to use the OM provisions is when you do a government incentive securities offering
   Otherwise why would you ever want to use one  because of the potential for liability
   Probably not going to use one unless you have to
   If you can use already available information instead then you will  because if you are going to face liability you are going
    to be much more diligent about the information you put out there and how you go about putting it together
   If it is possible to put together a package of already available information instead of preparing something specifically for
    investors then you will do it
    o Using things such as continuous disclosure, AIF
                Can look to the CP for guidance on what types of information would and would not be prepared for investors
                OSC says that generally information that is prepared in contemplation of soliciting investment
                          S.5.1(2) of 45-501(CP) on p.1336
   If you are using one of the 4 exemptions and you use an OM then you will sort of fall into civil liability  except
    government incentive securities where you have to use the OM
   S.130.1(1) - Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by
    the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the
    misrepresentation, the following rights:
    o 1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the
          distribution is made.
    o 2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect
          to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases
          to have a right of action for damages against the person or company. 2004, c. 31, Sched. 34, s. 7.
    o (2) - No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the
          securities with knowledge of the misrepresentation
    o (3) - In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages
          that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation
          relied upon
    o (4) - Subject to subsection (5), all or any one or more of the persons or companies specified in subsection (1) are jointly
          and severally liable, and every person or company who becomes liable to make any payment under this section may
          recover a contribution from any person or company who, if sued separately, would have been liable to make the same
          payment, unless the court rules that, in all the circumstances of the case, to permit recovery of the contribution would not
          be just and equitable
    o (5) - Despite subsection (4), an issuer shall not be liable where it is not receiving any proceeds from the distribution of
          the securities being distributed and the misrepresentation was not based on information provided by the issuer, unless the
          misrepresentation,
                (a) was based on information that was previously publicly disclosed by the issuer;
                (b) was a misrepresentation at the time of its previous public disclosure; and
                (c) was not subsequently publicly corrected or superseded by the issuer prior to the completion of the
                    distribution of the securities being distributed
    o (6) - In no case shall the amount recoverable under this section exceed the price at which the securities were offered
    o (7) - The right of action for rescission or damages conferred by this section is in addition to and without derogation from
          any other right the purchaser may have at law
    o (8) - This section applies only with respect to an offering memorandum which has been furnished to a prospective
          purchaser in connection with a distribution of a security under an exemption from section 53 of the Act that is specified
          in the regulations for the purposes of this section
   Remember the definition of misrepresentation in the OSA
   An underwriter who buys the securities for resale is not liable for a misrepresentation under this section
    o Had the legislature intended this to be the case they would have mentioned this – note 45-705
                The selling shareholder = control block holder
   On the civil liability front the OM is held to a similar standard as the prospectus
    o But it is not reviewed as a prospectus is  there seems to be a bit heavier burden on the issuer in this circumstance
   If you choose to use an OM the OSC frowns on using an preliminary OM and then a final OM unless the preliminary OM
    also includes mention of the civil liabliltiy provisions of s.130.1
    o Rule 45-501(CP) s.5.6 (1) The Commission cautions against the practice of providing preliminary offering material to a
          prospective purchaser before furnishing a “final” offering memorandum unless the offering material contains a
          description of the rights referred to in section 130.1 of the Act in situations when the rights apply.
    o (2) The only material delivered to a prospective purchaser in connection with a distribution made in reliance on an
          exemption referred to in section 6.1 of the Rule should be:
                (a) a “term sheet” (representing a skeletal outline of the features of a distribution without dealing extensively
                    with the business and affairs of the issuer of the securities being distributed), and


                                                                                                                                   41
                (b) an offering memorandum describing the rights referred to in section 130.1 of the Act available to purchasers
                 and complying in all other respects with Ontario securities legislation.
 The system for an OM is much better than it used to be
  o Used to be that the exemptions were only available if you described the civil liabilities etc. or else investors could walk
       away from the deal at any time at all  now there are limits to this abiltiy
             Jones case in the book
 In this area we are normally talking about people who are not big enough to go public with an IPO but who are too big to go
  to friends etc for money  they are looking for venture capital etc.
 If you use an OM you need prospectus type disclosure but why not do a prospectus
  o Because may not be big enough to go public
  o Don’t have all of the prospectus rules
  o May not have all of the same types of underwriting fees
  o Don’t have directors and officers liability




Resale Restrictions
 Really what these are is the OSC saying that “we gave you the ability to do exempt distributions in order to get the securities
  out there in the first place because of who you were  e.g. a bank, pension fund etc.
  o Problem arises when these people try to sell
             This is not a distribution  without resale rules there would be no restrictions on these
             Essentially the restriction is that once you receive securities through a distribution the only way that you are
                 going to be allowed to take them and move them is when there is good information out in the market
                       This usually happens after a prospectus has been filed and the company has become a reporting issuer
 Rule 45-102 – Resale Policy (page 1191)
  o S.2.2  the rules for Ontario that are listed in Appendix C do not apply (these are rules 72(4),(5),(6), and (7) of the OSA
             These were the old provisions under the OSA
  o If you breach the resale rules then you are doing a distribution of securities and all of the restrictions that apply to
       distributions will apply
             There are three types of distributions
                       Newly issued securities
                       Sales from a control block
                       Resale of exempt securities
  o There are two sections of NI 45-102 that deal with resale restrictions  s.2.5 and 2.6
  o S.2.5 is the more restrictive of the two since there is a minimum hold period on the securities
  o 2.3 Section 2.5 Applies - If a security was distributed under any of the provisions listed in Appendix D, the first trade of
       that security is subject to section 2.5.
             Clauses 72(1)(a), (b), (c), (d), (l), (m), (p) and (q) of the Securities Act (Ontario) and subclause 72(1)(f)(iii) of
                 the Securities Act (Ontario) if the right to purchase, convert or exchange was previously acquired under one of
                 the above-listed exemptions under the Securities Act (Ontario), or an exemption from the prospectus
                 requirement that specifies that the first trade is subject to section 2.5 of MI 45-102
             These are the exemptions that could sort of be used for back-door underwriting
                       Could blow securities out the back door in large block to large investors, get them to the market
                           through exemptions and without the resale restrictions could amount to underwriting without
                           limitations
                       It is possible to sell within the four month period by using another exemption
  o 2.4 Section 2.6 Applies - If a security was distributed under any of the provisions listed in Appendix E, the first trade of
       that security is subject to section 2.6.
             Clauses 72(1)(f), (i) if not included in Appendix F, (j), (k) and (n) of the Securities Act (Ontario), except for a
                 trade made under 72(1)(f)(iii) of the Securities Act (Ontario) that is:
                       (i) included in Appendix D or F of this Instrument; or
                       (ii) contemplated by section 6.5 of Ontario Securities Commission Rule 45-501 Exempt Distributions
             and sections 2.1, 2.2, 2.3 and 2.4 of MI 45-105 or an exemption from the prospectus requirement that specifies
                 that the first trade is subject to section 2.6 of MI 45-102
  o S.2.5 of NI 45-102
             1) Unless the conditions in subsection (2) are satisfied, a trade that is specified by section 2.3 or other securities
                 legislation to be subject to this section is a distribution.
             (2) Subject to subsection (3), for the purposes of subsection (1) the conditions are:
                                                                                                                                  42
                         1. The issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months
                          immediately preceding the trade.
                       2. At least four months have elapsed from the distribution date.
                       3. If the distribution date is on or after March 30, 2004 and
                               o (a) the issuer is a reporting issuer on the distribution date, the certificate representing the
                                   security carries a legend, or an ownership statement issued under a direct registration system
                                   or other electronic book-entry system acceptable to the regulator bears a legend restriction
                                   notation, stating:
                                         "Unless permitted under securities legislation, the holder of this security must not
                                             trade the security before [insert the date that is 4 months and a day after the
                                             distribution date]."
                                                   Or
                               o (b) the issuer is not a reporting issuer on the distribution date, the certificate representing the
                                   security carries a legend, or an ownership statement issued under a direct registration system
                                   or other electronic book-entry system acceptable to the regulator bears a legend restriction
                                   notation, stating:
                                         "Unless permitted under securities legislation, the holder of this security must not
                                             trade the security before the date that is 4 months and a day after the later of (i)
                                             [insert the distribution date], and (ii) the date the issuer became a reporting issuer in
                                             any province or territory."
                       4. The trade is not a control distribution.
                       5. No unusual effort is made to prepare the market or to create a demand for the security that is the
                          subject of the trade.
                       6. No extraordinary commission or consideration is paid to a person or company in respect of the trade.
                       7. If the selling security holder is an insider or officer of the issuer, the selling security holder has no
                          reasonable grounds to believe that the issuer is in default of securities legislation.
            (3) Item 3.(a) of subsection (2) does not apply to a trade of an underlying security if the certificate representing
                the underlying security or the ownership statement issued under a direct registration book-entry system or other
                electronic system acceptable to the regulator, is issued at least four months after the distribution date
  o S.2.6 of NI 45-102
            (1) Unless the conditions in subsection (3) are satisfied, a trade that is specified by section 2.4 or other securities
                legislation to be subject to this section is a distribution.
            (2) The first trade of securities issued by a private company or private issuer made after the issuer has ceased to
                be a private company or private issuer is a distribution unless the conditions in subsection (3) are satisfied.
            (3) For the purposes of subsections (1) and (2), the conditions are:
                       1. The issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months
                          immediately preceding the trade.
                       2. The trade is not a control distribution.
                       3. No unusual effort is made to prepare the market or to create a demand for the security that is the
                          subject of the trade.
                       4. No extraordinary commission or consideration is paid to a person or company in respect of the trade.
                       5. If the selling security holder is an insider or officer of the issuer, the selling security holder has no
                          reasonable grounds to believe that the issuer is in default of securities legislation.
 Because of the need for the issuer to become a reporting issuer before the investor can sell the securities we see the inclusion
  in contracts of clauses that allow investors to force companies to go to the market to become reporting issuers  without
  such clauses it is practically impossible for such investors to sell their securities unless they use one of the exemptions
 What happens if an investor acquires exempt securities under one of the exemptions to which the four month hold period
  applies under s.2.5 and then moves them to another investor using another exemption within that four month period  does a
  new four month period begin or does the original one continue
            The original one continues  the policy reason is to defeat back-door underwriting and to continue to tack on
                periods does not further this goal in any way
            S.1.8 of 45-102CP (p. 1214)
 Example
  o Do a private placement of convertible debentures and on day 90 the investor converts into shares
            There is a hold period on the convertible debentures  does the period of the hold continue or does it restart
                from the date of the conversion
                       Same as above it runs straight through for the same reason
                       S.2.10 - Exemption for a Trade in an Underlying Security if the Convertible Security, Exchangeable
                          Security or Multiple Convertible Security is Qualified by a Prospectus - Section 2.6 does not apply to a

                                                                                                                                   43
                         trade in an underlying security issued or transferred under the terms of a convertible security,
                         exchangeable security or multiple convertible security if
                              o (a) a receipt was obtained for a prospectus qualifying the distribution of the convertible
                                   security, exchangeable security or multiple convertible security;
                              o (b) the trade is not a control distribution; and
                              o (c) the issuer of the underlying security is a reporting issuer at the time of the trade.
 Under the resale policy what you are trying to do is to say that the resale of securities is not a distribution unless you cleanse
  the securities in some way
  o The general way to cleanse the securities – and therefore to make it so that the resale is not a distribution – is for the
       issuer to become a reporting issuer
 With an OM the key question is what are you trying to accomplish  that will drive your answer of whether or not you need
  an OM or not


Control Distributions
 This is the third type of distribution
 The sale of securities from a control block is a distribution
    o    Example was BCE’s aborted sale of a portion of Telesat  went to market to gauge support but pulled the deal and went
         private instead
              This type of deal is called a secondary offering
    o    Another way to do a control distribution is through a private placement
              To an accredited investor
    o    A third way is to use s.4.1 of rule 45-106
              (3) - The prospectus requirement does not apply to a control block distribution by an eligible institutional
                   investor of a reporting issuer’s securities if
                         (a) the eligible institutional investor
                                  o (i) has filed the reports required under the early warning requirements or files the reports
                                       required under Part 4 of NI 62-103,
                                  o (ii) does not have knowledge of any material fact or material change with respect to the
                                       reporting issuer that has not been generally disclosed,
                                  o (iii) does not receive in the ordinary course of its business and investment activities
                                       knowledge of any material fact or material change with respect to the reporting issuer that has
                                       not been generally disclosed, and
                                  o (iv) either alone or together with any joint actors, does not possess effective control of the
                                       reporting issuer,
                         (b) there are no directors or officers of the reporting issuer who were, or could reasonably be seen to
                             have been, selected, nominated or designated by the eligible institutional investor or any joint actor,
                         (c) the control block distribution is made in the ordinary course of business or investment activity of
                             the eligible institutional investor,
                         (d) securities legislation would not require the securities to be held for a specified period of time if the
                             trade was not a control block distribution,
                         (e) no unusual effort is made to prepare the market or to create a demand for the securities, and
                         (f) no extraordinary commission or consideration is paid in respect of the control block distribution
              (4) - An eligible institutional investor that makes a distribution in reliance on subsection (3) must file a letter
                   within 10 days after the distribution that describes the date and size of the distribution, the market on which it
                   was made and the price at which the securities being distributed were sold
    o    A fourth way is for them to use s.2.8 of rule 45-102
              (1) The prospectus requirement does not apply to a control distribution, or a distribution by a lender, pledgee,
                   mortgagee or other encumbrancer for the purpose of liquidating a debt made in good faith by selling or offering
                   for sale a security pledged, mortgaged or otherwise encumbered in good faith as collateral for the debt if the
                   security was acquired by the lender, pledgee, mortgagee or other encumbrancer in a control distribution, if the
                   conditions in subsection (2) are satisfied.
              (2) For the purposes of subsection (1), the conditions are:
                         1. The issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months
                             immediately preceding the trade.
                         2. The selling security holder, or the lender, pledgee, mortgagee or other encumbrancer if the
                             distribution is for the purpose of liquidating a debt, has held the securities for at least four months.
                         3. No unusual effort is made to prepare the market or to create a demand for the security that is the
                             subject of the trade.
                         4. No extraordinary commission or consideration is paid to a person or company in respect of the trade.
                                                                                                                                   44
                      5. The selling security holder has no reasonable grounds to believe that the issuer is in default of
                       securities legislation.
          (3) The selling security holder, or the lender, pledgee, mortgagee or other encumbrancer if the distribution is for
              the purpose of liquidating a debt, under subsection (2) must
                    (a) sign Form 45-102F1 no earlier than one business day before the form is filed;
                    (b) file Form 45-102F1 on SEDAR at least seven days before the first trade of the securities that is part
                       of the distribution; and
                    (c) file, within three days after the completion of any trade, an insider report prepared in accordance
                       with either Form 55-102F2 or Form 55-102F6 under National Instrument 55-102 System for Electronic
                       Disclosure by Insiders (SEDI).
          (4) A Form 45-102F1 filed under subsection (3) expires thirty days from the date the form was filed.
          (5) If a person or company filed a Form 45-102F3 or a renewal Form 45-102F3 under former MI 45-102 before
              March 30, 2004, the person or company is not subject to subsection (3) until 30 days after the date the Form 45-
              102F3 or the renewal Form 45-102F3 was filed.
o   Why do we have this exemption  to allow some flexibility to control persons  throughout the process we put
    restrictions on their ability to go to market and there should be some ability for them to access the markets when they
    need  this is a recognition of that need
o   Controlling shareholders usually use this exemption when they have a need for liquidity at some point




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Continuous disclosure obligations
 These are obligations on the reporting issuer once they are already active in the market
 We demand good disclosure from companies prior to allowing them to issue their securities to the market but once securities
    are on the market the sale of those securities are no longer distributions
 Continuous disclosure puts obligations on companies to maintain disclosure to keep the market informed about developments
    in the operation of the company so that the market is informed and so that the price of the securities can reflect this
    information
   Who do these obligations apply to  reporting issuers
   What is a reporting issuer  is defined in the OSA
    o (a) that has issued voting securities on or after the 1st day of May, 1967 in respect of which a prospectus was filed and
         a receipt therefor obtained under a predecessor of this Act or in respect of which a securities exchange take-over bid
         circular was filed under a predecessor of this Act,
    o (b) that has filed a prospectus and for which the Director has issued a receipt under this Act,
    o (b.1) that has filed a securities exchange take-over bid circular under this Act before December 14, 1999,
    o (c) any of whose securities have been at any time since the 15th day of September, 1979 listed and posted for trading
         on any stock exchange in Ontario recognized by the Commission, regardless of when such listing and posting for trading
         commenced,
    o (d) to which the Business Corporations Act applies and which, for the purposes of that Act, is offering its securities to
         the public,
    o (e) that is the company whose existence continues following the exchange of securities of a company by or for the
         account of such company with another company or the holders of the securities of that other company in connection
         with,
               (i) a statutory amalgamation or arrangement, or
               (ii) a statutory procedure under which one company takes title to the assets of the other company that in turn
                   loses its existence by operation of law, or under which the existing companies merge into a new company, or
    o (f) that is designated as a reporting issuer in an order made under subsection 1 (11);
   Why would you ever have a company that only filed a prospectus and obtained a receipt
    o Remember the need for resale restrictions  need company to be a reporting issuer
               If not a reporting issuer investors cannot sell securities
               Also if the company is of a substantial size they may want to have set themselves up so that at some later point
                   it time they are in a position to do a POP or shelf offering
   What are the obligations under the continuous disclosure rules
    o Continuous financial statement disclosure
               Rule 51-102  s.4.1 – 4.4
               4.1(1) - Subject to subsection 4.8(6), a reporting issuer must file annual financial statements that include
                          (a) an income statement, a statement of retained earnings, and a cash flow statement for
                                  o (i) the most recently completed financial year; and
                                  o (ii) the financial year immediately preceding the most recently completed financial year, if
                                       any;
                          (b) a balance sheet as at the end of each of the periods referred to in paragraph (a); and
                          (c) notes to the financial statements
               (2) annual financial statements must be audited
               4.2 – the audited financial statements required to be filed under 4.1 must be filed
                          (a) in the case of a reporting issuer other than a venture issuer, on or before the earlier of
                                  o (i) the 90th day after the end of its most recently completed financial year; and
                                  o (ii) the date of filing, in a foreign jurisdiction, annual financial statements for its most recently
                                       completed financial year; or
                          (b) in the case of a venture issuer, on or before the earlier of
                                  o (i) the 120th day after the end of its most recently completed financial year; and
                                  o (ii) the date of filing, in a foreign jurisdiction, annual financial statements for its most recently
                                       completed financial year.
               4.3(2) - Subject to subsections 4.7(4), 4.8(7) and, 4.8(8), and 4.10(3), the interim financial statements required
                   to be filed under subsection (1) must include
                          (a) a balance sheet as at the end of the interim period and a balance sheet as at the end of the
                             immediately preceding financial year, if any;
                          (b) an income statement, a statement of retained earnings and a cash flow statement, all for the year-to-
                             date interim period, and comparative financial information for the corresponding interim period in the
                             immediately preceding financial year, if any;

                                                                                                                                      46
                           (c) for interim periods other than the first interim period in a reporting issuer’s financial year, an
                            income statement and cash flow statement for the three month period ending on the last day of the
                            interim period and comparative financial information for the corresponding period in the preceding
                            financial year, if any; and
                        (d) notes to the financial statements.
               4.3(3) - (a) If an auditor has not performed a review of the interim financial statements required to be filed
                  under subsection (1), the interim financial statements must be accompanied by a notice indicating that the
                  financial statements have not been reviewed by an auditor.
                        (b) If a reporting issuer engaged an auditor to perform a review of the interim financial statements
                            required to be filed under subsection (1) and the auditor was unable to complete the review, the interim
                            financial statements must be accompanied by a notice indicating that the auditor was unable to
                            complete a review of the interim financial statements and the reasons why the auditor was unable to
                            complete the review.
                        (c) If an auditor has performed a review of the interim financial statements required to be filed under
                            subsection (1) and the auditor has expressed a reservation in the auditor’s interim review report, the
                            interim financial statements must be accompanied by a written review report from the auditor.
               4.4 - The interim financial statements required to be filed under subsection 4.3(1) must be filed
                        (a) in the case of a reporting issuer other than a venture issuer, on or before the earlier of
                                 o (i) the 45th day after the end of the interim period; and
                                 o (ii) the date of filing, in a foreign jurisdiction, interim financial statements for a period ending
                                      on the last day of the interim period; or
                        (b) in the case of a venture issuer, on or before the earlier of
                                 o (i) the 60th day after the end of the interim period; and
                                 o (ii) the date of filing, in a foreign jurisdiction, interim financial statements for a period ending
                                      on the last day of the interim period.
   There must also be Management Discussion and Analysis of the financial results
    o Part 5 of Rule 51-102
    o Need for both interim and annual financial statements
    o This is needed because the financial statements are only static and the MD&A is necessary to provide some sort of
         contextual analysis to the business – provide some look at how the business is doing and analyze the numbers for
         investors
   One big issue recently has been a tendency for auditors to be offering numerous services to companies and some blurring of
    traditional boundaries between auditors and management
   Have come up with new policies to try to avert Enron/WorldCom type scenarios
   Rule 51-110  dealing with audit committees
    o Need an audit committee comprised of independent directors etc
    o Must have at least three directors, must be independent
    o Each member of the committee must be financially literate  amount of financial knowledge will depend upon the
         company  the more complex the financial statements the greater the amount of knowledge the director will need to
         have
    o Committee is expected to review and approve financial statements and recommend annual report to the Board  they
         can accept interim on behalf of the board but only recommend the annual to the board
    o Committee manages the relationship between the management and the auditors to avoid Enron and WorldCom type
         scenarios
    o The committee pre-approves and recommends to the board the compensation of he auditors
    o The committee pre-approves any contract to the auditors for non-audit services
   Rule 51-110 was a response to Enron et al and an attempt to protect investors etc
   But what happens when management does not give the auditors the proper information because after all the auditors are
    limited to analyzing the information that they have available before them
   You want the CEO and CFO to certify the information so that they are liable for it  Rule 52-109
    o Requires them to issue a certificate in respect of each quarterly and annual financial statement that states that the
         information is to the best of their knowledge correct
               They are not certifying that the statements are correct just that to the best of their knowledge the information is
                  correct  they do not know they are wrong
               But in the CP it says that a wrong certification could lead to penalties including criminal charges
                        This is what has people scared
   Once an issuer becomes a reporting issuer it then has ongoing disclosure obligations if it wishes to have its securities
    continue to trade on the markets



                                                                                                                                    47
Periodic Continuous Disclosure
 The Backbone of Periodic Continuous Disclosure:
    o National Instrument 51-102
    o Annual Financial Statements
    o Quarterly Financial Statements
    o MD&A  Management Discussion and Analysis
           NI 51-102F1  page 1533
                    Form 1
  o Other forms of Periodic Continuous Disclosure
  o AIF  Annual Information Form
           NI 51-102F2  page 1548
                    Form 2
           Retelling of the business story of the company
           Required under Part 5 of 51-102 on Form F2 (page 1552)
           The Form states what is required (incl. changes, risks, capital structure)
  o Proxy Circular Disclosure
           NI 51-102 – Part 9  page 1501
                    (1) If management of a reporting issuer gives notice of a meeting to its registered holders of voting
                       securities, management must, at the same time as or before giving that notice, send to each registered
                       holder of voting securities who is entitled to notice of the meeting a form of proxy for use at the
                       meeting.
                    (2) Subject to section 9.2, a person or company that solicits proxies from registered holders of voting
                       securities of a reporting issuer must,
                            o (a) in the case of a solicitation by or on behalf of management of a reporting issuer, send an
                                 information circular with the notice of meeting to each registered securityholder whose proxy
                                 is solicited; or
                            o (b) in the case of any other solicitation, concurrently with or before the solicitation, send an
                                 information circular to each registered securityholder whose proxy is solicited.
                    (3) In Québec, subsections (1) and (2) apply, adapted as required, to a meeting of holders of debt
                       securities of an issuer that is a reporting issuer in Québec, whether called by management of the
                       reporting issuer or by the trustee of the debt securities.
           Required of anyone who solicits proxies for a shareholders meeting
           Applies beyond management (to ANYONE who solicits)
           Not every issuer must file proxy circular disclosure
           For example, debenture issuers, non-voting shares issuers
           If you don’t issue one, the info that would normally be required on one would go on AIF
           Contains info with respect to voting in directors/mgmt
  o Statement of Executive Compensation
           NI 51-102F6  page 1587
           Item 11 – Compensation of Directors
           Item 9 – Report on Executive Compensation  including information on stock options, stock acquisition
           Item 7 – termination of executives, employment contracts etc.
           Also consider with 58-201 (a new corporate governance policy) (Below)
  o Part 11 of 51-102
           Any other doc that you have sent to other shareholders
           ***Incl. Annual Report
  o Part 12 of 51-102
           Any doc that is out of ordinary course of business of the company and may be material to shareholders
           E.g. voting trusts agreements, shareholders agreements
           OSC lets companies Redact sensitive info (keep confidential, effectively)
 NI 58-201 – Corporate Governance Guidelines
  o S.1.1 - This Policy provides guidance on corporate governance practices which have been formulated to:
           • achieve a balance between providing protection to investors and fostering fair and efficient capital markets and
               confidence in capital markets;
           • be sensitive to the realities of the greater numbers of small companies and controlled companies in the
               Canadian corporate landscape;
           • take into account the impact of corporate governance developments in the U.S. and around the world; and
           • recognize that corporate governance is evolving
  o S.1.2 – the policy applies to all reporting issuers other than investment funds
  o S.3.1 - The board should have a majority of independent directors
                                                                                                                           48
    o   S.3.2 - The chair of the board should be an independent director
    o   S.3.3 - The independent directors should hold regularly scheduled meetings at which non-independent directors and
        members of management are not in attendance
    o   S.3.4 - The board should adopt a written mandate in which it explicitly acknowledges responsibility for the stewardship
        of the issuer
    o   S.3.5 – The board should develop clear position descriptions for the chair of the board and the chair of each board
        committee
    o   S.3.6 – The board should ensure that all new directors receive a comprehensive orientation
    o   S.3.7 – The board should provide continuing education opportunities for all directors, so that individuals may maintain
        or enhance their skills and abilities as directors, as well as to ensure their knowledge and understanding of the issuer's
        business remains current
    o   S.3.8 – The board should adopt a written code of business conduct and ethics (a code). The code should be applicable to
        directors, officers and employees of the issuer. The code should constitute written standards that are reasonably designed
        to promote integrity and to deter wrongdoing
    o   S.3.9 – The board should be responsible for monitoring compliance with the code
    o   S.3.10 – The board should appoint a nominating committee composed entirely of independent directors
    o   S.3.15 – The board should appoint a compensation committee composed entirely of independent directors
    o   S.3.18 - The board, its committees and each individual director should be regularly assessed regarding his, her or its
        effectiveness and contribution


Material Change Disclosure
 Objective: Equivalency of access to this info for everyone in the market
 2 Areas: s. 75 of the Act, Part 7 of 51-102
 NI 51-102 – part 7
    o    (1) Subject to subsection (2), if a material change occurs in the affairs of a reporting issuer, the reporting issuer must
               (a) immediately issue and file a news release authorized by an executive officer disclosing the nature and
                  substance of the change; and
               (b) as soon as practicable, and in any event within 10 days of the date on which the change occurs, file a Form
                  51-102F3 Material Change Report with respect to the material change.
    o (2) Subsection (1) does not apply if,
               (a) in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure
                  required by subsection (1) would be unduly detrimental to the interests of the reporting issuer; or
               (b) the material change consists of a decision to implement a change made by senior management of the
                  reporting issuer who believe that confirmation of the decision by the board of directors is probable, and senior
                  management of the reporting issuer has no reason to believe that persons with knowledge of the material change
                  have made use of that knowledge in purchasing or selling securities of the reporting issuer, and the reporting
                  issuer immediately files the report required under paragraph (1)(b) marked so as to indicate that it is
                  confidential, together with written reasons for non-disclosure.
   S.75 (see below) is one of the areas of the Act that is still operative  has not been overruled by a national instrument
   What is a material change
    o Remember definition from before
    o Could go with filing information with the Commission on a confidential basis
               But not wise because it invariably will leak
   When does a material change occur
    o Can occur when the board decides that they want to implement a change  before the change actually occurs
   How do you identify when you have a material change?
    o If info would have a significant/material affect on the market if released
               Must be tested on the affect on the individual company and all securities issued by that company
               This test is market driven
   51-201 Part 4 lists a number of things that may be a material change, but each situation must be analyzed in the context of the
    company itself
   NI 51-201  Part 4  Materiality  page 1612
   See YBM MAgnex – Uses the US idea of probability and magnitude analysis
    o Forbes thinks this analysis is unhelpful
    o Generally, err in favour of disclosure
   If you intend to keep silent, ensure:
               Cone of silence
               Any due diligence work with respect to the transaction is contained
               Scare everyone with “jail card” (eg, consequences)

                                                                                                                                 49
                    Get someone to watch the shares and market carefully
                    BE PREPARED TO CALL STOCK EXCHANGE TO SAY HALT TRADING and PENDING
                     ANNOUNCEMENT if there’s anything strange/any run on the stock
                Get a Confidentiality Agreement with the outside party
                Include a carve out to halt trading/disclose when necessary
   Selective disclosure – s.75 of the OSA – one of the sections of the OSA that is still operative
   S.75(1) - Subject to subsection (3), where a material change occurs in the affairs of a reporting issuer, it shall forthwith issue
    and file a news release authorized by a senior officer disclosing the nature and substance of the change
   S.75(2) - Subject to subsection (3), the reporting issuer shall file a report of such material change in accordance with the
    regulations as soon as practicable and in any event within ten days of the date on which the change occurs
   S.75(3) - Where,
    o (a) in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure
          required by subsections (1) and (2) would be unduly detrimental to the interests of the reporting issuer; or
    o (b) the material change consists of a decision to implement a change made by senior management of the issuer who
          believe that confirmation of the decision by the board of directors is probable and senior management of the issuer has
          no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing
          or selling securities of the issuer,
    o the reporting issuer may, in lieu of compliance with subsection (1), forthwith file with the Commission the report
          required under subsection (2) marked so as to indicate that it is confidential, together with written reasons for non-
          disclosure.
   Most people don’t like this confidential filing provision because of leaks in the Commission and also because once you file
    the OSC knows something is going on and will be looking over your shoulder urging you to disclose the information to the
    public
   This section is also incorporated into part 7 of Rule 51-102 – because the other jurisdictions liked the Ontario formulation
   Material change is defined in the Act  see above
   The more likely it is that there will be an impact and the greater that impact the more likely that it will be a material change
    that has occurred
   One way to do things if you are not sure if it is a material change would be to release the info to the market and see what
    happens  if no reaction no need to file a report, if a reaction then it was a material change and need to file a report
   Directors don’t like to read about their companies in the paper before they have made a decision
   It is difficult to say that you do not have a material change when you have already made a decision or signed an agreement 
    even a non-binding letter of intent  see AiT
    o E.g. in contemplation of a deal you may be trying to keep things quiet and sign confidentiality agreements
    o Try to keep it quiet but if the stock starts to run and the TSX calls to inquire if something is going on then what
    o Could file under s.75(3)
    o On the other hand don’t want to announce too soon because what if nothing happens
   What about rumours
    o Nothing wrong with saying you don’t respond to rumours, nothing wrong with saying nothing is going on  if that is the
          truth
                But if something is going on then that is a different issue
   Making an announcement
    o Generally should make it when the markets are closed  either after trading is over, or before opening
    o Don’t talk about a release in a selective meeting  such as a shareholder or analyst meeting
                If you are going to you should tell the TSX before so they can halt trading for a period around the time of the
                     meeting to allow the information to be disseminated
   Part 6 – NI 51-201 – Disclosure Standards
   6.1 General
    o (1) There are some practical measures that companies can adopt to help ensure good disclosure practices.
    o (2) The measures recommended in this policy statement are not intended to be prescriptive.
   6.2 Establishing a Corporate Disclosure Policy
    o (1) Establish a written corporate disclosure policy.
    o (2) You should design a policy that is practical to implement.
    o (3) The focus of your disclosure policy should be on promoting consistent disclosure practices aimed at informative,
          timely and broadly disseminated disclosure of material information to the market. Every disclosure policy should
          generally include the following:
                (a) how to decide what information is material;
                (b) policy on reviewing analyst reports;
                (c) how to release earnings announcements and conduct related analyst calls and meetings;
                (d) how to conduct meetings with investors and the media;
                (e) what to say or not to say at industry conferences;
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                 (f) how to use electronic media and the corporate Web site;
                 (g) policy on the use of forecasts and other forward-looking information (including a policy regarding issuing
                  updates);
              (h) procedures for reviewing briefings and discussions with analysts, institutional investors and other market
                  professionals;
              (i) how to deal with unintentional selective disclosures;
              (j) how to respond to market rumours;
              (k) policy on trading restrictions; and
              (l) policy on "quiet periods".
   6.3 Overseeing and Coordinating Disclosure
    o Establish a committee of company personnel or assign a senior officer to be responsible for:
              (a) developing and implementing your disclosure policy;
              (b) monitoring the effectiveness of and compliance with your disclosure policy;
              (c) educating your directors, officers and certain employees about disclosure issues and your disclosure policy;
              (d) reviewing and authorizing disclosure (including electronic, written and oral disclosure) in advance of its
                  public release; and
              (e) monitoring your Web site.
   6.4 Board and Audit Committee Review of Certain Disclosure
    o (1) Have your board of directors or audit committee review the following disclosures in advance of their public release
        by the company:
              • earnings guidance; and
              • news releases containing financial information based on a company's financial statements prior to the release
                  of such statements.41
    o You should also indicate at the time such information is publicly released whether your board or audit committee has
        reviewed the disclosure. Having your board or audit committee review such disclosure in advance of its public release
        acts as a good discipline on management and helps to increase the quality, credibility and objectivity of such disclosures.
        This review process also helps to force a critical examination of all issues related to the disclosure and reduces the risk of
        having to make subsequent adjustments or amendments to the information it contains.
    o (2) Where feasible, issue your earnings news release42 concurrently with the filing of your quarterly or annual financial
        statements. This will help to ensure that a complete financial picture is available to analysts and investors at the time the
        earnings release is provided. Coordinating the release of a company's earnings information with the filing of its quarterly
        or annual financial statements will also facilitate review of these disclosures by the board or audit committee of the
        company.43
   6.5 Authorizing Company Spokespersons
    o Limit the number of people who are authorized to speak on behalf of your company to analysts, the media and investors.
        Having a limited number of company spokespersons helps to reduce the risk of:
              (a) unauthorized disclosures;
              (b) inconsistent statements by different people in the company; and
              (c) statements that are inconsistent with the public disclosure record of the company.44
   6.6 Recommended Disclosure Model
    o (1) You should consider using the following disclosure model when making a planned disclosure of material corporate
        information, such as a scheduled earnings release:
              (a) issue a news release containing the information (for example, your quarterly financial results) through a
                  widely circulated news or wire service;
              (b) provide advance public notice by news release of the date and time of a conference call to discuss the
                  information, the subject matter of the call and the means for accessing it;
              (c) hold the conference call in an open manner, permitting investors and others to listen either by telephone or
                  through Internet webcasting; and
              (d) provide dial-in and/or web replay or make transcripts of the call available for a reasonable period of time
                  after the analyst conference call.45
    o (2) The combination of news release disclosure of the material information and an open and accessible conference call to
        subsequently discuss the information should help to ensure that the information is disseminated in a manner calculated to
        effectively reach the marketplace and minimize the risk of an inadvertent selective disclosure during the follow-up call.
   6.7 Analyst Conference Calls and Industry Conferences
    o (1) Hold analyst conference calls and industry conferences in an open manner, allowing any interested party to listen
        either by telephone and/or through a webcast..
    o (2) Company officials should meet before an analyst conference call, private analyst meeting or industry conference.
    o (3) Keep detailed records and/or transcripts of any conference call, meeting or industry conference
   6.8 Analyst Reports
    o Establish a policy for reviewing analyst reports.
   6.9 Updating Forward-Looking Information
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    o    When making voluntary forward-looking statements, clearly indicate what your practice is for updating those statements.
 6.10 Quiet Periods
    o    Observe a quarterly quiet period
 6.11 Insider Trading Policies and Blackout Periods
    o    Adopt an insider trading policy.
 6.12 Electronic Communications
  o (1) Establish a team responsible for creating and maintaining the company Web site.
  o (2) Use current technology to improve investor access to your information.
 6.13 Chat Rooms, Bulletin Boards and e-mails
  o Do not participate in, host or link to chat rooms or bulletin boards.
 6.14 Handling Rumours:
  o Adopt a "no comment" policy with respect to market rumours and make sure that the policy is applied consistently
 One problem with a disclosure policy is that in a situation of tough disclosure the policy could be the thing that hangs you 
  gets you caught in a bind




Civil Liability for Continuing Disclosure
 There is now civil liability for improper disclosure in continuing disclosure situations  s.138.1 of the OSA
 If a company has a misrepresentation in a prospectus or OM it is not really a problem to hold the company responsible and to
    tell them to give the money back to the investor
 But in this scenario – secondary market – they are not involved in the trade – they do not benefit financially
 As a result there is a much greater potential for liability
 Much more difficult to say that issuers are liable in these situations  may be why they have the due diligence defence
    available
 Unlike civil liability for misrepresentations in a prospectus the liability in continuous disclosure is proportionate and not joint
    and several  each defendant is only liable proportionate to their fault
 S.138.6(1) - In an action under section 138.3, the court shall determine, in respect of each defendant found liable in the
    action, the defendant’s responsibility for the damages assessed in favour of all plaintiffs in the action, and each such
    defendant shall be liable, subject to the limits set out in subsection 138.7 (1), to the plaintiffs for only that portion of the
    aggregate amount of damages assessed in favour of the plaintiffs that corresponds to that defendant’s responsibility for the
    damages
   Unless one defendant other than the responsible issuer knew that the information was incorrect and allowed the information
    to be sent out to the market – they can be liable for the whole of the damages
   S.138.6(2) - Despite subsection (1), where, in an action under section 138.3 in respect of a misrepresentation or a failure to
    make timely disclosure, a court determines that a particular defendant, other than the responsible issuer, authorized, permitted
    or acquiesced in the making of the misrepresentation or the failure to make timely disclosure while knowing it to be a
    misrepresentation or a failure to make timely disclosure, the whole amount of the damages assessed in the action may be
    recovered from that defendant
   Also unlike prospectus liability there is a cap on the total liability
   S138.7(1) - Despite section 138.5, the damages payable by a person or company in an action under section 138.3 is the lesser
    of,
    o (a) the aggregate damages assessed against the person or company in the action; and
    o (b) the liability limit for the person or company less the aggregate of all damages assessed after appeals, if any, against
         the person or company in all other actions brought under section 138.3, and under comparable legislation in other
         provinces or territories in Canada in respect of that misrepresentation or failure to make timely disclosure, and less any
         amount paid in settlement of any such actions.
   Again however this is tempered by the fact that one who authorized, permitted or acquiesced in the making of the disclosure
    while knowing it was a misrepresentation
   S.138.7(2) - Subsection (1) does not apply to a person or company, other than the responsible issuer, if the plaintiff proves
    that the person or company authorized, permitted or acquiesced in the making of the misrepresentation or the failure to make
    timely disclosure while knowing that it was a misrepresentation or a failure to make timely disclosure, or influenced the
    making of the misrepresentation or the failure to make timely disclosure while knowing that it was a misrepresentation or a
    failure to make timely disclosure
    o Liability limits are defined in s.138.1
               (a) in the case of a responsible issuer, the greater of,
                                (i) 5 per cent of its market capitalization (as such term is defined in the regulations), and
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                              (ii) $1 million,
              (b) in the case of a director or officer of a responsible issuer, the greater of,
                               (i) $25,000, and
                              (ii) 50 per cent of the aggregate of the director’s or officer’s compensation from the responsible
                   issuer and its affiliates,
            (c) in the case of an influential person who is not an individual, the greater of,
                               (i) 5 per cent of its market capitalization (as defined in the regulations), and
                              (ii) $1 million,
            (d) in the case of an influential person who is an individual, the greater of,
                               (i) $25,000, and
                              (ii) 50 per cent of the aggregate of the influential person’s compensation from the responsible
                   issuer and its affiliates,
            (e) in the case of a director or officer of an influential person, the greater of,
                               (i) $25,000, and
                              (ii) 50 per cent of the aggregate of the director’s or officer’s compensation from the influential
                   person and its affiliates,
             (f) in the case of an expert, the greater of,
                               (i) $1 million, and
                              (ii) the revenue that the expert and the affiliates of the expert have earned from the responsible
                   issuer and its affiliates during the 12 months preceding the misrepresentation, and
            (g) in the case of each person who made a public oral statement, other than an individual referred to in clause (d),
           (e) or (f), the greater of,
                               (i) $25,000, and
                              (ii) 50 per cent of the aggregate of the person’s compensation from the responsible issuer and its
                   affiliates
 Need leave of the court to bring an action
 S.138.8 - No action may be commenced under section 138.3 without leave of the court granted upon motion with notice to
  each defendant. The court shall grant leave only where it is satisfied that,
  o (a) the action is being brought in good faith; and
  o (b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff
 One other thing to remember is that unlike prospectus liability is that in these scenarios it is possible that there could be both
  buyers and sellers that are seeking damages  in prospectus liability there will only be buyers
Rights of Action Available
 138.3(1) - Where a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a
  responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of
  the issuer’s security during the period between the time when the document was released and the time when the
  misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company
  relied on the misrepresentation, a right of action for damages against,
             (a) the responsible issuer;
             (b) each director of the responsible issuer at the time the document was released;
             (c) each officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document;
             (d) each influential person, and each director and officer of an influential person, who knowingly influenced,
                               (i) the responsible issuer or any person or company acting on behalf of the responsible issuer to
                   release the document, or
                              (ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the release of
                   the document; and
             (e) each expert where,
                               (i) the misrepresentation is also contained in a report, statement or opinion made by the expert,
                              (ii) the document includes, summarizes or quotes from the report, statement or opinion of the
                   expert, and
                            (iii) if the document was released by a person or company other than the expert, the expert
                   consented in writing to the use of the report, statement or opinion in the document
 s.138.3(2) - Where a person with actual, implied or apparent authority to speak on behalf of a responsible issuer makes a
  public oral statement that relates to the business or affairs of the responsible issuer and that contains a misrepresentation, a
  person or company who acquires or disposes of the issuer’s security during the period between the time when the public oral
  statement was made and the time when the misrepresentation contained in the public oral statement was publicly corrected
  has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,
             (a) the responsible issuer;
             (b) the person who made the public oral statement;

                                                                                                                                    53
             (c) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the making of
            the public oral statement;
             (d) each influential person, and each director and officer of the influential person, who knowingly influenced,
                                (i) the person who made the public oral statement to make the public oral statement, or
                               (ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the making
                    of the public oral statement; and
             (e) each expert where,
                                (i) the misrepresentation is also contained in a report, statement or opinion made by the expert,
                               (ii) the person making the public oral statement includes, summarizes or quotes from the report,
                    statement or opinion of the expert, and
                             (iii) if the public oral statement was made by a person other than the expert, the expert consented in
                    writing to the use of the report, statement or opinion in the public oral statement
 s.138.3(4) - Where a responsible issuer fails to make a timely disclosure, a person or company who acquires or disposes of
  the issuer’s security between the time when the material change was required to be disclosed in the manner required under
  this Act or the regulations and the subsequent disclosure of the material change has, without regard to whether the person or
  company relied on the responsible issuer having complied with its disclosure requirements, a right of action for damages
  against,
             (a) the responsible issuer;
             (b) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the failure to
            make timely disclosure; and
             (c) each influential person, and each director and officer of an influential person, who knowingly influenced,
                                (i) the responsible issuer or any person or company acting on behalf of the responsible issuer in
                    the failure to make timely disclosure, or
                               (ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the failure to
                    make timely disclosure.
Core/Non-Core Documents
    o    If an insider of the company ALL documents are core and therefore liability attaches
    o    If an outside director then some documents may be non-core
               Quarterly financial statements
               Material change report
               Oral statements
    o    For non-core documents then there is a burden of proof on the plaintiff
    o    138.4(1) - In an action under section 138.3 in relation to a misrepresentation in a document that is not a core document,
         or a misrepresentation in a public oral statement, a person or company is not liable, subject to subsection (2), unless the
         plaintiff proves that the person or company,
                (a) knew, at the time that the document was released or public oral statement was made, that the document or
               public oral statement contained the misrepresentation;
                (b) at or before the time that the document was released or public oral statement was made, deliberately avoided
               acquiring knowledge that the document or public oral statement contained the misrepresentation; or
                (c) was, through action or failure to act, guilty of gross misconduct in connection with the release of the
               document or the making of the public oral statement that contained the misrepresentation
    o    138.4(2) - A plaintiff is not required to prove any of the matters set out in subsection (1) in an action under section 138.3
         in relation to an expert
Due diligence defence to actions under s.138.3
 S.138.4(6) - A person or company is not liable in an action under section 138.3 in relation to,
               (a)a misrepresentation if that person or company proves that,
                             (i) before the release of the document or the making of the public oral statement containing the
                   misrepresentation, the person or company conducted or caused to be conducted a reasonable investigation,
                   and
                            (ii) at the time of the release of the document or the making of the public oral statement, the
                   person or company had no reasonable grounds to believe that the document or public oral statement
                   contained the misrepresentation; or
            (b) a failure to make timely disclosure if that person or company proves that,
                             (i) before the failure to make timely disclosure first occurred, the person or company conducted
                   or caused to be conducted a reasonable investigation, and
                            (ii) the person or company had no reasonable grounds to believe that the failure to make timely
                   disclosure would occur
 Factors to be considered by the Court in assessing whether anyone is guilty of gross misconduct

                                                                                                                                    54
 S.138.4(7) - In determining whether an investigation was reasonable under subsection (6), or whether any person or
    company is guilty of gross misconduct under subsection (1) or (3), the court shall consider all relevant circumstances,
    including,
               (a) the nature of the responsible issuer;
               (b) the knowledge, experience and function of the person or company;
               (c) the office held, if the person was an officer;
               (d) the presence or absence of another relationship with the responsible issuer, if the person was a director;
               (e) the existence, if any, and the nature of any system designed to ensure that the responsible issuer meets its
              continuous disclosure obligations;
                (f) the reasonableness of reliance by the person or company on the responsible issuer’s disclosure compliance
              system and on the responsible issuer’s officers, employees and others whose duties would in the ordinary course
              have given them knowledge of the relevant facts;
               (g) the period within which disclosure was required to be made under the applicable law;
               (h) in respect of a report, statement or opinion of an expert, any professional standards applicable to the expert;
                (i) the extent to which the person or company knew, or should reasonably have known, the content and medium
              of dissemination of the document or public oral statement;
                (j) in the case of a misrepresentation, the role and responsibility of the person or company in the preparation and
              release of the document or the making of the public oral statement containing the misrepresentation or the
              ascertaining of the facts contained in that document or public oral statement; and
               (k) in the case of a failure to make timely disclosure, the role and responsibility of the person or company
              involved in a decision not to disclose the material change
   There are also safe harbour defences to actions under this provision
   S.138.4(8) - A person or company is not liable in an action under section 138.3 in respect of a failure to make timely
    disclosure if,
               (a) the person or company proves that the material change was disclosed by the responsible issuer in a report filed
              on a confidential basis with the Commission under subsection 75 (3) or the regulations;
               (b) the responsible issuer had a reasonable basis for making the disclosure on a confidential basis;
               (c) where the information contained in the report filed on a confidential basis remains material, disclosure of the
              material change was made public promptly when the basis for confidentiality ceased to exist;
               (d) the person or company or responsible issuer did not release a document or make a public oral statement that,
              due to the undisclosed material change, contained a misrepresentation; and
               (e) where the material change became publicly known in a manner other than the manner required under this Act
              or the regulations, the responsible issuer promptly disclosed the material change in the manner required under this
              Act or the regulations
   There is also a provision dealing with FOFI
   S.138.4(9) - A person or company is not liable in an action under section 138.3 for a misrepresentation in forward-looking
    information if the person or company proves all of the following things:
                 1. The document or public oral statement containing the forward-looking information contained, proximate to
              that information,
                                  i. reasonable cautionary language identifying the forward-looking information as such, and
                      identifying material factors that could cause actual results to differ materially from a conclusion, forecast or
                      projection in the forward-looking information, and
                                 ii. a statement of the material factors or assumptions that were applied in drawing a conclusion
                      or making a forecast or projection set out in the forward-looking information.
                   2. The person or company had a reasonable basis for drawing the conclusions or making the forecasts and
                       projections set out in the forward-looking information




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Insider Trading
 There is an interrelationship between material change disclosure and insider trading
  o With the obligation to disclose a material change
  o And the obligation on insiders to not trade when they are in possession of material change or material fact information
 Insider trading is covered by s.76 of the Act which in some ways parallels s.53  prospectus disclosure provisions
 S.76(1) - No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the
  reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been
  generally disclosed
 There are a couple of things to pay attention to in this provision
  o Special relationship  what does that mean
  o S.76(5) - For the purposes of this section,
  o “person or company in a special relationship with a reporting issuer” means,
             (a) a person or company that is an insider, affiliate or associate of,
                        (i) the reporting issuer,
                        (ii) a person or company that is proposing to make a take-over bid, as defined in Part XX, for the
                          securities of the reporting issuer, or
                        (iii) a person or company that is proposing to become a party to a reorganization, amalgamation,
                          merger or arrangement or similar business combination with the reporting issuer or to acquire a
                          substantial portion of its property,
             (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),
             (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),
             (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) a person or company that learns of a material fact or material change with respect to the issuer from any
                other person or company described in this subsection, including a person or company described in this clause,
                and knows or ought reasonably to have known that the other person or company is a person or company in such
                a relationship
  o Even in this section there are certain terms where it is necessary to look beyond the section to get a proper definition of
       the terms
             Associate  where used to indicate a relationship with any person or company, means,
                        (a) any company of which such person or company beneficially owns, directly or indirectly, voting
                          securities carrying more than 10 per cent of the voting rights attached to all voting securities of the
                          company for the time being outstanding,
                        (b) any partner of that person or company,
                        (c) any trust or estate in which such person or company has a substantial beneficial interest or as to
                          which such person or company serves as trustee or in a similar capacity,
                        (d) any relative of that person who resides in the same home as that person,
                        (e) any person who resides in the same home as that person and to whom that person is married or
                          with whom that person is living in a conjugal relationship outside marriage, or
                        (f) any relative of a person mentioned in clause (e) who has the same home as that person
             Affiliate
                        S.1.2 of the OSA  A company shall be deemed to be an affiliate of another company if one of them
                          is the subsidiary of the other or if both are subsidiaries of the same company or if each of them is
                          controlled by the same person or company
             Insider
                        (a) a director or officer of a reporting issuer,
                        (b) a director or officer of a person or company that is itself an insider or subsidiary of a reporting
                          issuer,
                        (c) a person or company that has,
                               o (i) beneficial ownership of, or control or direction over, directly or indirectly, securities of a
                                    reporting issuer carrying more than 10 per cent of the voting rights attached to all the
                                    reporting issuer’s outstanding voting securities, excluding, for the purpose of the calculation
                                    of the percentage held, any securities held by the person or company as underwriter in the
                                    course of a distribution, or
                               o (ii) a combination of beneficial ownership of, and control or direction over, directly or
                                    indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights
                                                                                                                                     56
                                       attached to all the reporting issuer’s outstanding voting securities, excluding, for the purpose
                                       of the calculation of the percentage held, any securities held by the person or company as
                                       underwriter in the course of a distribution,
                          (d) a reporting issuer that has purchased, redeemed or otherwise acquired a security of its own issue,
                             for so long as it continues to hold that security,
                          (e) a person or company designated as an insider in an order made under subsection (11),
                          (f) a person or company that is in a class of persons or companies designated under subparagraph 40
                             v of subsection 143 (1);
               Material Change
                          when used in relation to an issuer other than an investment fund, means,
                                  o (i) a change in the business, operations or capital of the issuer that would reasonably be
                                       expected to have a significant effect on the market price or value of any of the securities of
                                       the issuer, or
                                  o (ii) a decision to implement a change referred to in subclause (i) made by the board of
                                       directors or other persons acting in a similar capacity or by senior management of the issuer
                                       who believe that confirmation of the decision by the board of directors or such other persons
                                       acting in a similar capacity is probable
               Material Fact
                          when used in relation to securities issued or proposed to be issued, means a fact that would reasonably
                             be expected to have a significant effect on the market price or value of the securities
               Generally Disclosed
                          In a way this gets us back to the issue of material change disclosure
                          Is a material fact or material change generally disclosed when a press release is issued or ten days later
                             when the material change statement is filed with the Commission
                          O’Connor case
                                  o It is somewhere in between these two days
                                  o Information has been generally disclosed when the information has been put out into the
                                       market and the market has had a reasonable time to absorb the information
                                             Will depend on the circumstances
                                             At a minimum one day  conservatively two days
                                             E.g. a takeover bid will go through the market quickly while some other information
                                                 will take a bit longer to work its way through the market
   When an insider fails to abide by the provisions of the insider trading sections they may face severe sanctions
    o Big fines
    o Jail time under the criminal code
    o Bans from trading etc.
    o Possibility of being forced to pay back any gains
    o Also possibility of civil liability
   The company (issuer) or the OSC could also go after the insider for the gains that they made as well
   The net is cast very wide by s.76  just look at the definition of insider and how the definition of special relationship seems
    to spiral outward
               Especially the special relationship 76(5)(e) where when one is tipped and then tips another the one who gets the
                   tip is then deemed to be in a special relationship where they “knows or ought reasonably to have known that the
                   other person or company is a person or company in such a relationship”
                          This relationship would keep expanding so far as the information keeps getting tipped
                                  o The example of the printer for Merrill Lynch tipping the broker
                                             The printer is in a special relationship b/c the company fits under s.76(5)(b) and is an
                                                 employee of that company  he tips it to the broker who should have known  the
                                                 broker is now in a special relationship and so on…
   Remember also that there are two parts to insider trading
    o There is a prohibition against insider trading
    o There is a need for those who need to file insider reports when they trade
               We are looking at those that need to file insider reports
                          Insiders of the company
   OSC policies themselves say that sometimes the net is cast too wide  you look at the size of some companies for example
    and there could be a far flung empire with numerous interrelated companies and it seems kind of weird to hold that a director
    or officer of one small company in a huge conglomerate is deemed to have insider information of a larger component of the
    whole  but the prohibition is still there just in case that information does get to that person
   Note however that for a bidder there is no stipulation that it is a special relationship with the target
    o Why is this  it has to make disclosure at 10% and again at 20%
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    o    Also maybe because it does not really stand to gain by making trades  after all it is trying to get the securities for the
         cheapest price not the most expensive (my words)
   S.76(5)(a)(iii)  arrangement  instead of making a takeover bid a company may propose an arrangement with a company
    instead whereby it agrees to swap shares in the old company for part shares and part cash in a new company or some
    variation  benefit for the acquirer is that it get total ownership in one fell swoop rather than piecemeal  however need
    court approval and 2/3 shareholder vote in favour (sounds like CCAA process  is that what it is??)
   Looking back at s.76(1) there is a prohibition against trading when you possess knowledge of either a material fact or
    material change that has not been generally disclosed
    o But there is no obligation on a reporting issuer to disclose a material fact  only need to disclose a material change for a
         prospectus or as part of continuing disclosure
                Seems kind of weird because material change is a much narrower thing  only things that affect business,
                   operations or capital while material fact is much broader  anything that might substantially impact the price of
                   the securities
   But because of the fact that insiders cannot trade until material facts are generally disclosed companies are likely to disclose
    rather than to not disclose them  even though they do not have to
   Three cases from the materials speak to the difficulties of determining when you should disclose a material fact
    o Pezim
                Mining company drilled a hole and had a high mineralogy content of gold. Normal practice is to drill additional
                   holes in order to determine the overall size of the deposit because one hole is not enough to know the size of the
                   seam. In Pezim’s view they had hit a high value seam he goes on to the market and starts buying securities but
                   did not disclose because he said it was not material  ruled that it was material and should have disclosed to
                   the market
    o R v. Harper
                Another mining company had done some trenching with some very positive results in Ghana and disclosed this
                   information to the market. Did some subsequent trenching which was not so positive but did not disclose
                   claiming that the results were inconclusive. Harper went to the market and began selling securities  was ruled
                   that should have disclosed because it was material
    o Donnini
                Worked for Yorkton Securities as a principal trader  traded for the house account. Heard some rumours about
                   a financing deal for a company and heard that it would be financed at a lower price than the market price. The
                   financing was to be done by Yorkton. Sold the company’s position and shorted the stock but said that was not
                   insider information because he did not know what was going on  ruled that it was insider information
   Probably the concluding factor in all three of these cases is that in each instance the trades happened in the same direction as
    the market  if the market was going to go up the trades went in the same direction (bought) and if the market was going to
    go down the trades went in the same direction (sold)
   If their trades had gone opposite to the direction that the market ended up going they probably would have been okay
   Donnini
    o What happens with a firm like Yorkton
    o Offers corporate finance, retail brokerage, analyst services and has a house account (Donini’s role)
    o Corporate finance people get approached by a client to do a deal of some sort  falls under s.76(5)(b)  professional
         services
                You have all of these different services offered by the firm and they could all be in a conflict of interest
                   situation because they become deemed to be in a special relationship through s.76
   What is the solution to this type of situation
Two things  Chinese firewalls and the Regulations
 S.175 of the Regulations
    o   (1) A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or
        material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76
        (1) of the Act and from liability under section 134 of the Act, where the person or company proves that,
              (a) no director, officer, partner, employee or agent of the person or company who made or participated in
                  making the decision to purchase or sell the securities of the reporting issuer had actual knowledge of the
                  material fact or material change; and
              (b) no advice was given with respect to the purchase or sale of the securities to the director, officer, partner,
                  employee or agent of the person or company who made or participated in making the decision to purchase or
                  sell the securities by a director, partner, officer, employee or agent of the person or company who had actual
                  knowledge of the material fact or the material change,
    o   but this exemption is not available to an individual who had actual knowledge of the material fact or change. R.R.O.
        1990, Reg. 1015, s. 175 (1).\


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    o    (2) A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or
         material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76
         (1) of the Act and from liability under section 134 of the Act, where the person or company proves that,
               (a) the purchase or sale was entered into as agent of another person or company pursuant to a specific
                    unsolicited order from that other person or company to purchase or sell;
               (b) the purchase or sale was made pursuant to participation in an automatic dividend reinvestment plan, share
                    purchase plan or other similar automatic plan that was entered into by the person or company prior to the
                    acquisition of knowledge of the material fact or material change; or
               (c) the purchase or sale was made to fulfil a legally binding obligation entered into by the person or company
                    prior to the acquisition of knowledge of the material fact or material change. R.R.O. 1990, Reg. 1015,
                    s. 175 (2).
    o (3) In determining whether a person or company has sustained the burden of proof under subsection (1), it shall be
         relevant whether and to what extent the person or company has implemented and maintained reasonable policies and
         procedures to prevent contraventions of subsection 76 (1) of the Act by persons making or influencing investment
         decisions on its behalf and to prevent transmission of information concerning a material fact or material change contrary
         to subsection 76 (2) or (3) of the Act.
    o (4) A person or company who purchases or sells a security of a reporting issuer as agent or trustee for a person or
         company who is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act by reason of
         clause (2) (b) or (c), is also exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act
    o (5) A person or company is exempt from subsections 76 (1), (2) and (3) of the Act where the person or company proves
         that such person or company reasonably believed that,
               (a) the other party to a purchase or sale of securities; or
               (b) the person or company informed of the material fact or material change,
    o as the case may be, had knowledge of the material fact or material change
   Without the types of controls mentioned in s.175(3) of the regulations it would be very difficult for a firm with several
    functions to carry on business once it entered into a contract to provide services to a client in a financing or takeover situation
     would be very messy
   The analyst is a different problem  in essence the firm owes a duty to its clients to disclose any information that it has to
    the clients  one problem could be though what happens if the analyst is preparing a report separately from the finance
    department that praises the company that is currently in a takeover situation  if the analyst releases the report is he then
    trading in insider information even though he does not know
    o Probably the only way to deal with this is to have the analyst barred from releasing any information on that particular
         company for the period while the information is confidential  to avoid any possible ramifications in the longer term
   Financial services firms and imputed knowledge  the development of firewalls to keep information compartmentalized has
    been an important part of protecting people from liability
    o Also have s.175 of the Regulations where there is the possibility of proving that there was no actual knowledge
   One is presumed to have knowledge of material fact or material change information if someone else – usually higher up – in
    the firm (such as a law firm, underwriting firm, brokerage etc.) has actual knowledge
    o Unless you can take advantage of s.175 of the regulations you will be in violation of the OSA on the basis of presumed
         knowledge
   Does it help if the company has policies and/or procedures in place to help compartmentalize and control access to this
    information
    o Yes  look at s.175(3)
    o What kinds of things would be useful
               Password protected computer files, locked filing cabinets, codeword for transactions, a “gatekeeper” at the firm
                    who is in charge of access to all such materials
    o One consideration could be whether the firm should have a blackout list where people within the firm would have to call
         the gatekeeper before trading to inquire as to whether a particular company is on a restricted list  if the company is on
         that list they would not be able to trade
               This would be an airtight way of protecting the firm but could create logistical nightmares
   In Donnini  if there were firewalls at Yorkton it is apparent that they did not work as they were supposed to work
Defences to Insider Trading
 S.175 of the Regulations is one defence
    o   S.175(1)  proves no actual knowledge or proves that no advice was given on the basis of that knowledge
    o   S.175(2)  proves that they acted solely as agent for an unsolicited order, the purchase was due to an automatic plan, or
        to fulfill a legally binding obligation
    o   S.175(5)  proves that they reasonably believed that the other party to the transaction had knowledge of the material
        fact or material change


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 S.76(4) - No person or company shall be found to have contravened subsection (1), (2) or (3) if the person or company proves
  that the person or company reasonably believed that the material fact or material change had been generally disclosed
  o But this is not very useful  remember Harold P Connor  must be enough time to allow for the market to absorb the
       information for the information to be “generally disclosed”
             A safe working rule would be that an insider should wait a minimum of one full trading day after the release
                of the information before trading
             Must be at least a day so it is kind of difficult to get away from this one because you should know what it means
                to be generally disclosed
  o The onus is on the accused to prove that he or she had such a reasonable belief  in addition the information must be
       generally disclosed
  o Green v Charterhouse Group Can. Ltd. (1976), 12 OR (2d) 280 (CA)
             I should comment upon Sinclair's so-called "warning letter" of April 30, 1968. Whatever may be said of this
                letter as being a discharge of the "moral obligations" which Godbout thought Green's former associates owed to
                Green, the letter was not the disclosure which may provide a defence to an action under s. 113(1) of the
                Securities Act. While the letter does not say so, the writer is really saying that "confidential information exists
                which might be of substantial significance to you but which I am not at liberty to disclose". Once the necessary
                ingredients of a cause of action against an insider under s. 113(1) are shown to exist, then the resulting
                obligation is discharged by disclosure of "such information". It is not discharged by disclosing it exists, without
                saying what it is.
 Reasonable mistake of fact
  o Insider will not be liable for an insider trade where there is a reasonable mistake of fact on a strict liability offence
  o In a way this is like the arguments of Donnini, Pezim and Harper
             They stated that they reasonably did not believe that the changes were material facts
             Usually the more unsophisticated of an investor you are the more likely it is that this defence will fly because
                when you are more sophisticated you should know better than this
             Again with these cases it just feels wrong  kind of lucky that your “mistake” just happened to work out to
                your benefit
Tipping
 S.76(2) - No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other
  than in the necessary course of business, another person or company of a material fact or material change with respect to the
  reporting issuer before the material fact or material change has been generally disclosed
  o Note that a reporting issuer can be a tipper  if the reporting issuer improperly releases information through its officers
       or directors then it can be in violation of this section
  o What is “other than in the ordinary course of business”
             When would a reporting issuer be allowed to tip information that is not generally disclosed
                       If a company is approached by another that is interested in doing a transaction
                       The target company may open a data room and allow the potential bidder access to confidential
                           information  this would be access to information that is not generally disclosed including some
                           information that may be material fact information not yet disclosed
                       In exchange the target will want to have the bidder sign confidentiality and standstill agreements
                                o Including provisions about not attempting to hire away key employees, go after key customers
                                    etc. for a set period of time
                                o But what about if employees leave the target later and go to the bidder if the bid does not
                                    materialize  will incorporate provisions about that as well
             The ordinary course of business refers to the reporting issuer  could also refer to the potential suitor as well
                depending upon the circumstances
                       Does not mean the ordinary course of the insider’s business  that would be a violation
                                o E.g. if the insider has investments and wants to benefits  tipping would be beneficial to
                                    them but would definitely be a violation
 S.76(3) - No person or company that proposes,
  o (a) to make a take-over bid, as defined in Part XX, for the securities of a reporting issuer;
  o (b) to become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with a
       reporting issuer; or
  o (c) to acquire a substantial portion of the property of a reporting issuer,
  o shall inform another person or company of a material fact or material change with respect to the reporting issuer before
       the material fact or material change has been generally disclosed except where the information is given in the necessary
       course of business to effect the take-over bid, business combination or acquisition
 Note the distinction here between this section and s.76(5)  definition of special relationship  bidder is not included in the
  definition of a special relationship

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    o Why then is there a provision for bidders under tipping
            Because you do not want a bidder tipping people off about an upcoming bid  could be a potentially huge
              loophole in the legislation
            Bidders are not in a special relationship however because it is permissible for them to use their own knowledge
              of their intention to make a bid to buy securities of the intended target
 76(5)(e)  person who receives a tip then becomes a person in a special relationship
  o Continuous chain of tipees  with the defence of “knows of ought reasonably to have known”




Remedies for Tipping/Insider Trading
 S.134 of the OSA
 S.134(1) - Every person or company in a special relationship with a reporting issuer who purchases or sells securities of the
    reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been
    generally disclosed is liable to compensate the seller or purchaser of the securities, as the case may be, for damages as a result
    of the trade unless,
    o (a) the person or company in the special relationship with the reporting issuer proves that the person or company
         reasonably believed that the material fact or material change had been generally disclosed; or
    o (b) the material fact or material change was known or ought reasonably to have been known to the seller or purchaser,
         as the case may be.
Measure of Damages
 S.134(6) - In assessing damages under subsection (1) or (2), the court shall consider,
    o    (a) if the plaintiff is a purchaser, the price paid by the plaintiff for the security less the average market price of the
         security in the twenty trading days following general disclosure of the material fact or material change; or
    o (b) if the plaintiff is a vendor, the average market price of the security in the twenty trading days following general
         disclosure of the material fact or material change less the price received by the plaintiff for the security,
    o but the court may instead consider such other measures of damages as may be relevant in the circumstances
   Accountability for Gain  pay back to the reporting issuer
   S.134(4) - Every person or company who is an insider, affiliate or associate of a reporting issuer that,
    o (a) sells or purchases the securities of the reporting issuer with knowledge of a material fact or material change with
         respect to the reporting issuer that has not been generally disclosed; or
    o (b) communicates to another person, other than in the necessary course of business, knowledge of a material fact or
         material change with respect to the reporting issuer that has not been generally disclosed,
    o is accountable to the reporting issuer for any benefit or advantage received or receivable by the person or company as a
         result of the purchase, sale or communication, as the case may be, unless the person or company proves that the person
         or company reasonably believed that the material fact or material change had been generally disclosed
   The general thought underpinning s.134(4) is that a gain by an insider is a breach of their fiduciary duty to the company and
    any gain should go back to the company
   Tying into this is s.135(4)  where the OSC can commence an action to have the insider pay back the money to the reporting
    issuer
   For all intents and purposes s.134(1) is kind of useless since it is all but impossible to tie the buyer and seller of securities
    together in all but the largest of trades  due to the electronic transfer systems where brokerage houses just transfer
    securities between themselves
   S.134(4) is more interesting especially when combined with the power of the OSC to force the repayment of any gains under
    s.135(4)  considering that this way all of the shareholders benefit
   Also consider that s.134(1) is much broader in application since it applies to all those in a special relationship while s.134(4)
    only applies to the more limited group known as insiders
   We also have other penalties
   S.122(1)  includes fines and possible jail time
   S.122(4) - Despite subsection (1) and in addition to any imprisonment imposed under subsection (1), a person or company
    who is convicted of contravening subsection 76 (1), (2) or (3) is liable to a minimum fine equal to the profit made or the loss
    avoided by the person or company by reason of the contravention and a maximum fine equal to the greater of,
    o (a) $5 million; and
    o (b) the amount equal to triple the amount of the profit made or the loss avoided by the person or company by reason of
         the contravention.
                                                                                                                                   61
 S.122(6)  definitions for s.122
    o Loss avoided - the amount by which the amount received for the security sold in contravention of subsection 76 (1)
      exceeds the average trading price of the security in the twenty trading days following general disclosure of the material
      fact or the material change
  o Profit made - (a) the amount by which the average trading price of the security in the twenty trading days following
      general disclosure of the material fact or the material change exceeds the amount paid for the security purchased in
      contravention of subsection 76 (1),
            (b) in respect of a short sale, the amount by which the amount received for the security sold in contravention
                of subsection 76 (1) exceeds the average trading price of the security in the twenty trading days following
                general disclosure of the material fact or the material change, or
            (c) the value of any consideration received for informing another person or company of a material fact or
                material change with respect to the reporting issuer in contravention of subsection 76 (2) or (3).
 The prohibitions against insider trading and tipping in the OSA are very broad  cover a wide range of people
 The problem with insider trading is getting a hold of the facts to allow for successful prosecutions
  o There have not been a whole lot of successful prosecutions  usually settle
            Normally settlements are usually for the profits and a fine
  o When RS starts to see some abnormal trading – and they will see it – they will let the TSX know and TSX may call the
      issuer to inquire as to what is going on, if anything. If a material change comes up soon after RS will let the OSC know
      and the OSC will ask the issuer for information on who at the issuer and any other firms (accountants, advisers, lawyers
      etc.) had knowledge of the material change. The OSC will then go to brokerages and see if any of those people have
      accounts and if any of them did any trading in that period of time. If they did they could be in trouble. It is always best
      to cooperate with the OSC because otherwise they may do a full-blown investigation


Insider Reporting
 Only people who are insiders need to report  as defined in the OSA
 S.107(1) - A person or company who becomes an insider of a reporting issuer, other than a mutual fund, shall, within 10 days
    from the day that he, she or it becomes an insider, or such shorter period as may be prescribed by the regulations, file a report
    as of the day on which he, she or it became an insider disclosing any direct or indirect beneficial ownership of or control or
    direction over securities of the reporting issuer as may be required by the regulations
               If they do not have anything to report they do not have to file a report  if they have no holdings
               Includes all types of securities
                         Options, derivatives, shares etc.
               Insider reporting is done electronically through SEDI
               Includes direct and beneficial control
                         Includes directly controlled securities and those controlled indirectly such as RRSP accounts
   S.107(2) – An insider who has filed or is required to file a report under this section or any predecessor section and whose
    direct or indirect beneficial ownership of or control or direction over securities of the reporting issuer changes from that
    shown or required to be shown in the report or in the latest report filed by the person or company under this section or any
    predecessor section shall, within 10 days from the day on which the change takes place, or such shorter period as may be
    prescribed by the regulations, file a report of direct or indirect beneficial ownership of or control or direction over securities
    of the reporting issuer as of the day on which the change took place and the change or changes that occurred, giving any
    details of each transaction as may be required by the regulations
               Want to know what the insiders are doing
               This information is useful for investors because if insiders are selling it may signal the investors that things are
                   not all that great with the company  same thing with if they are buying
               Commissions have become more vigilant in this area
                         Clearly Canadian CEO was fined $250k for not updating insider reports
                         Commissions will compare insider reports with proxy circulars  if there is a discrepancy then one or
                             the other is wrong  either is a violation
   S.107(3) – A person or company who becomes an insider of a reporting issuer by reason of subsection 1 (8) or (9) shall file
    the reports required by subsections (1) and (2) of this section for the previous six months or such shorter period that he or she
    was a director or officer of the reporting issuer within 10 days from the day that the issuer became an insider of a reporting
    issuer or the reporting issuer became an insider of another reporting issuer, as the case may be, or such shorter period as may
    be prescribed by the regulations
               Idea behind the six month thing is to check into whether or not, prior to the company becoming an insider of the
                   reporting issuer, the insiders of the company had been accumulating shares  because they would have been in
                   a special relationship with the reporting issuer
   National Instrument 55-101
   Part 2 – Exemptions for Certain Directors and Senior Officers
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    o 2.1 Reporting Exemption (Certain Directors) -- Subject to section 4.1, the insider reporting requirement does not
      apply to a director of a subsidiary of a reporting issuer in respect of securities of the reporting issuer if the director
            (a) does not in the ordinary course receive or have access to information as to material facts or material changes
                concerning the reporting issuer before the material facts or material changes are generally disclosed; and
            (b) is not an ineligible insider in relation to the reporting issuer.
  o 2.2 Reporting Exemption (Certain Senior Officers) - Subject to section 4.1, the insider reporting requirement does not
      apply to a senior officer of a reporting issuer or a subsidiary of the reporting issuer in respect of securities of the
      reporting issuer if the senior officer
            (a) does not in the ordinary course receive or have access to information as to material facts or material changes
                concerning the reporting issuer before the material facts or material changes are generally disclosed; and
            (b) is not an ineligible insider in relation to the reporting issuer.
  o 2.3 Reporting Exemption (Certain Insiders of Investment Issuers) - Subject to section 4.1, the insider reporting
      requirement does not apply to a director or senior officer of an insider issuer, or a director or senior officer of a
      subsidiary of the insider issuer, in respect of securities of an investment issuer if the director or senior officer
            (a) does not in the ordinary course receive or have access to information as to material facts or material changes
                concerning the investment issuer before the material facts or material changes are generally disclosed; and
            (b) is not an ineligible insider in relation to the investment issuer.
 Part 3 – Exemption for Directors and Senior Officers of Affiliates of Insiders of a Reporting Issuer
  o 3.1 Québec - This Part does not apply in Québec.
  o 3.2 Reporting Exemption - Subject to section 3.3 and 4.1, the insider reporting requirement does not apply to a director
      or senior officer of an affiliate of an insider of a reporting issuer in respect of securities of the reporting issuer.
  o 3.3 Limitation - The exemption in section 3.2 is not available if the director or senior officer
            (a) in the ordinary course receives or has access to information as to material facts or material changes
                concerning the reporting issuer before the material facts or material changes are generally disclosed;
            (b) is an ineligible insider in relation to the reporting issuer; or
            (c) is a director or senior officer of an issuer that supplies goods or services to the reporting issuer or to a
                subsidiary of the reporting issuer or has contractual arrangements with the reporting issuer or a subsidiary of the
                reporting issuer, and the nature and scale of the supply or the contractual arrangements could reasonably be
                expected to have a significant effect on the market price or value of the securities of the reporting issuer.
 Part 4 – Insider Lists and Policies
  o 4.1 Insider Lists and Policies - An insider of a reporting issuer may rely on an exemption contained in Part 2 or Part 3 if
            (a) the insider has advised the reporting issuer that the insider intends to rely on the exemption, and
            (b) the reporting issuer has advised the insider that the reporting issuer has established policies and procedures
                relating to restricting the trading activities of its insiders and other persons with access to material undisclosed
                information relating to the reporting issuer or to an investment issuer of the reporting issuer, and will, as part of
                such policies and procedures, maintain:
                      (i) a list of all insiders of the reporting issuer exempted from the insider reporting requirement by
                          sections 2.1, 2.2, 2.3 and 3.2; and
                      (ii) a list of all insiders of the reporting issuer not exempted from the insider reporting requirement by
                          sections 2.1, 2.2, 2.3 and 3.2.
  o 4.2 Alternative to Lists - Despite section 4.1, an insider of a reporting issuer may rely on an exemption contained in Part
      2 or Part 3 if
            (a) the insider has advised the reporting issuer that the insider intends to rely on the exemption, and
            (b) the reporting issuer has advised the insider that the reporting issuer has established policies and procedures
                relating to restricting the trading activities of its insiders and other persons with access to material undisclosed
                information relating to the reporting issuer or to an investment issuer of the reporting issuer, and the reporting
                issuer has filed an undertaking with the regulator or securities regulatory authority that the reporting issuer will,
                promptly upon request, make available to the regulator or securities regulatory authority
                      (i) a list of all insiders of the reporting issuer exempted from the insider reporting requirement by
                          sections 2.1, 2.2, 2.3 and 3.2; and
                      (ii) a list of all insiders of the reporting issuer not exempted from the insider reporting requirement by
                          sections 2.1, 2.2, 2.3 and 3.2.
 Part 5 – Reporting of Acquisitions Under Automatic Securities Purchase Plans
  o 5.1 Reporting Exemption - Subject to sections 5.2 and 5.3, the insider reporting requirement does not apply to a
      director or senior officer of a reporting issuer or of a subsidiary of the reporting issuer for
            (a) the acquisition of securities of the reporting issuer under an automatic securities purchase plan, other than
                the acquisition of securities under a lump-sum provision of the plan; or
            (b) a specified disposition of securities of the reporting issuer under an automatic securities purchase plan.
  o 5.2 Limitation
            (1) Other than in Québec, the exemption in section 5.1 is not available to an insider described in clause (e) of
                the definition of "ineligible insider".
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               (2) In Québec, the exemption in section 5.1 is not available to an insider described in clause (f) of the definition
                of "ineligible insider".
  o 5.3 Alternative Reporting Requirement
            (1) An insider who relies on the exemption from the insider reporting requirement contained in section 5.1 must
                file a report, in the form prescribed for insider trading reports under securities legislation, disclosing, on a
                transaction-by-transaction basis or in acceptable summary form, each acquisition of securities under the
                automatic securities purchase plan that has not previously been disclosed by or on behalf of the insider, and
                each specified disposition of securities under the automatic securities purchase plan that has not previously been
                disclosed by or on behalf of the insider,
                       (a) for any securities acquired under the automatic securities purchase plan that have been disposed of
                          or transferred, other than securities that have been disposed of or transferred as part of a specified
                          disposition of securities, within the time required by securities legislation for filing a report disclosing
                          the disposition or transfer; and
                       (b) for any securities acquired under the automatic securities purchase plan during a calendar year that
                          have not been disposed of or transferred, and any securities that have been disposed of or transferred as
                          part of a specified disposition of securities, within 90 days of the end of the calendar year.
            (2) An insider is exempt from the requirement under subsection (1) if, at the time the report is due,
                       (a) the insider has ceased to be an insider; or
                       (b) the insider is entitled to an exemption from the insider reporting requirements under an exemptive
                          relief order or under an exemption contained in Canadian securities legislation.
  o 5.4 Specified Disposition of Securities - A disposition or transfer of securities acquired under an automatic securities
      purchase plan is a "specified disposition of securities" if
            (a) the disposition or transfer is incidental to the operation of the automatic securities purchase plan and does
                not involve a discrete investment decision by the director or senior officer; or
            (b) the disposition or transfer is made to satisfy a tax withholding obligation arising from the distribution of
                securities under the automatic securities purchase plan and either
                       (i) the director or senior officer has elected that the tax withholding obligation will be satisfied through
                          a disposition of securities, has communicated this election to the reporting issuer or the plan
                          administrator not less than 30 days prior to the disposition and this election is irrevocable as of the 30th
                          day before the disposition; or
                       (ii) the director or senior officer has not communicated an election to the reporting issuer or the plan
                          administrator and, in accordance with the terms of the plan, the reporting issuer or the plan
                          administrator is required to sell securities automatically to satisfy the tax withholding obligation.
 Part 6 – Reporting for Normal Course Issuer Bids
  o 6.1 Reporting Exemption - The insider reporting requirement does not apply to an issuer for acquisitions of securities
      of its own issue by the issuer under a normal course issuer bid.
  o 6.2 Reporting Requirement - An issuer who relies on the exemption from the insider reporting requirement contained
      in section 6.1 shall file a report, in the form prescribed for insider trading reports under securities legislation, disclosing
      each acquisition of securities by it under a normal course issuer bid within 10 days of the end of the month in which the
      acquisition occurred.
 Part 7 – Reporting for Certain Issuer Events
  o 7.1 Reporting Exemption - The insider reporting requirement does not apply to an insider of a reporting issuer whose
      direct or indirect beneficial ownership of, or control or direction over, securities of the reporting issuer changes as a
      result of an issuer event of the issuer.
  o 7.2 Reporting Requirement - An insider who relies on the exemption from the insider reporting requirement contained
      in section 7.1 must file a report, in the form prescribed for insider trading reports under securities legislation, disclosing
      all changes in direct or indirect beneficial ownership of, or control or direction over, securities by the insider for
      securities of the reporting issuer pursuant to an issuer event that have not previously been reported by or on behalf of the
      insider, within the time required by securities legislation for the insider to report any other subsequent change in direct or
      indirect beneficial ownership of, or control or direction over, securities of the reporting issuer.




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Takeover Bid Regulation
 Regulation of transactions in which a party acquires a major economic interest in a reporting issuer
    o   What’s so special about this
               It is a matter of the integrity of the financial markets
                         Remember the purposes of securities regulation
                                 o Protection of the public
                                 o Integrity of the markets
   Deals with issues of a bunch of somewhat uninformed security holders being given a limited time to make a decision on
    whether or not to sell  If they don’t accept they could be frozen out, if they don’t accept in time the market pros, those
    close to the market would be the only ones on the uptake of the deal  about fairness
    o Because if they do not tender to the deal they could be left in a minority position
               Could they then be forced out or could they be in a less attractive position
               OSC and other commissions want to ensure that everyone is treated equally and fairly
   For each of the major sections that we deal with there is one key section in the OSA  for takeover bids it is s.95
   S.95 - Subject to the regulations, the following rules apply to every take-over bid and issuer bid:
   Delivery of bid
    o 1. The bid shall be made to all holders of securities of the class that is subject to the bid who are in Ontario, and
        delivered by the offeror to all holders, whose last address as shown on the books of the offeree issuer is in Ontario, of
        securities of that class and of securities that, before the expiry of the bid, are convertible into securities of that class.
               All shareholders of the class are given a copy of the bid  the same bid
               Notice that the distinction is based on class of shares  the offer is made by class of shareholder
   Minimum deposit period
   The offeror shall allow at least 35 days from the date of the bid during which securities may be deposited pursuant to the bid.
   When taking up prohibited
    o 3. No securities deposited pursuant to the bid shall be taken up by the offeror until the expiration of 35 days from the
        date of the bid.
   Withdrawal rights
    o 4. Securities deposited pursuant to the bid may be withdrawn by or on behalf of a depositing security holder,
               i. at any time where the securities have not been taken up by the offeror,
               ii. at any time before the expiration of 10 days from the date of a notice of change or variation under section
                   98, and
               iii. if the securities have not been paid for by the offeror within three business days after having been taken up.
   Exception
    o 5. The right of withdrawal conferred by subparagraph ii of paragraph 4 does not apply,
               i. where the securities have been taken up by the offeror at the date of the notice,
               ii. where a variation in the terms of a bid consists solely of an increase in the consideration offered for the
                   securities subject to the bid and the time for deposit is not extended for a period greater than that required by
                   subsection 98 (5), or
               iii. in the circumstances described in subsection 98 (6).
   Notice of withdrawal
    o 6. Notice of withdrawal of any securities under paragraph 4 shall be made by or on behalf of the depositing security
        holder by a method that provides the depositary designated under the bid with a written or printed copy and, to be
        effective, the notice must be actually received by the depositary and, where notice is given in accordance with this
        paragraph, the offeror shall return the securities to the depositing security holder.
   Proportionate take-up
    o 7. Where the bid is made for less than all of the class of securities subject to the bid and where a greater number of
        securities is deposited pursuant thereto than the offeror is bound or willing to acquire under the bid, the securities shall
        be taken up and paid for by the offeror proportionately, disregarding fractions, according to the number of securities
        deposited by each depositing security holder.
   Effect of market purchases
    o 8. Where an offeror purchases securities as permitted by subsection 94 (3), the securities so purchased shall be counted
        in the determination of whether a condition as to the minimum number of securities to be deposited in the bid has been
        fulfilled, but shall not reduce the number of securities the offeror is bound under the bid to take up.
   When securities must be taken up and paid for
    o 9. Subject to paragraphs 10 and 11, the offeror shall take up and pay for securities deposited under the bid, where all
        the terms and conditions of the bid have been complied with or waived, not later than ten days after the expiry of the bid.
   Same
    o 10. Any securities that are taken up by the offeror under the bid shall be paid for by the offeror as soon as possible, and
        in any event not more than three business days, after the taking up of the securities.
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 Idem
    o    11. Any securities deposited pursuant to the bid subsequent to the date on which the offeror first takes up securities
         deposited under the bid shall be taken up and paid for by the offeror within ten days of the deposit of the securities.
   Extension restricted
    o 12. A bid may not be extended by the offeror, where all the terms and conditions thereof have been complied with
         except those waived by the offeror, unless the offeror first takes up all securities deposited thereunder and not withdrawn.
   Same
    o 12.1 Despite paragraph 12, if the offeror waives any terms or conditions of a bid and extends the bid in circumstances
         where the rights of withdrawal conferred by subparagraph 4 ii are applicable, the bid shall be extended without the
         offeror first taking up the securities which are subject to such rights of withdrawal.
   News release
    o 13. Where all the terms and conditions of the bid have been complied with or waived, the offeror shall forthwith issue a
         notice by news release to that effect, which news release shall disclose the approximate number of securities deposited
         and the approximate number that will be taken up
   But what exactly is a takeover bid  look to the definitional section for this portion of the OSA  s.89
   Takeover Bid  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 per cent or more of the outstanding securities of that class of securities at the date of the offer to acquire
   Offerror’s securities  securities of an offeree issuer beneficially owned, or over which control or direction is exercised, on
    the date of an offer to acquire, by an offeror or any person or company acting jointly or in concert with the offeror
What is jointly and in concert?
 S.91(1) - For the purposes of this Part, it is a question of fact as to whether a person or company is acting jointly or in concert
    with an offeror and, without limiting the generality of the foregoing, the following shall be presumed to be acting jointly or in
    concert with an offeror:
    o 1. Every person or company who, as a result of any agreement, commitment or understanding, whether formal or
        informal, with the offeror or with any other person or company acting jointly or in concert with the offeror, acquires or
        offers to acquire securities of the issuer of the same class as those subject to the offer to acquire.
    o 2. Every person or company who, as a result of any agreement, commitment or understanding, whether formal or
        informal, with the offeror or with any other person or company acting jointly or in concert with the offeror, intends to
        exercise jointly or in concert with the offeror or with any other person or company acting jointly or in concert with the
        offeror any voting rights attaching to any securities of the offeree issuer.
    o 3. Every associate or affiliate of the offeror
What is beneficial Ownership?
 S.90(1) - For the purposes of this Part, in determining the beneficial ownership of securities of an offeror or of any person or
    company acting jointly or in concert with the offeror, at any given date, the offeror, person or company shall be deemed to
    have acquired and be the beneficial owner of a security, including an unissued security, if the offeror, person or company is
    the beneficial owner of any security convertible within sixty days following such date into such a security or has the right or
    obligation, whether or not on conditions, to acquire within such sixty days beneficial ownership of the security whether
    through the exercise of an option, warrant, right or subscription privilege or otherwise
    o Also interconvertibility
    o S.89(3) - For the purposes of this Part,
              (a) a security shall be deemed to be convertible into a security of another class if, whether or not on conditions,
                  it is or may be convertible into or exchangeable for, or if it carries the right or obligation to acquire, a security
                  of the other class, whether of the same or another issuer; and
              (b) a security that is convertible into a security of another class shall be deemed to be convertible into a
                  security or securities of each class into which the second-mentioned security may be converted, either directly
                  or through securities of one or more other classes of securities that are themselves convertible
   Offer to acquire  includes,
    o (a) an offer to purchase, or a solicitation of an offer to sell, securities,
    o (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;
   Class of securities  a series of a class of securities
   Issuer bid  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,


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    but does not include an offer to acquire or redeem debt securities that are not convertible into securities other than debt
    securities
   Offeror  a person or company who makes a take-over bid, an issuer bid or an offer to acquire and, for the purposes of
    section 101, includes a person or company who acquires a security, whether or not by way of a take-over bid, issuer bid or
    offer to acquire
   Equity Securities  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
   When you get to the 20% threshold you are making a takeover bid  must take into consideration the securities owned by
    the offerror and any other parties acting with it
   What is not covered
    o What if the issuer does a rights offering and there is a shareholder with a 19.9% holding and that holder accepts but no
         other shareholder accepts so that the 19.9% holder now has a 22% holding
               Is this a takeover bid  probably not
   Example
    o Have a company with a dual class share structure
               Class A is a super voting  10 votes per share and Class B is 1 vote per share
               If you offer to buy all of the Class A shares do you have to make the same offer to the Class B shareholders 
                   no because you have not offered to buy any of the class B shares
                         Remember the OSA goes on a class by class basis
               However this would be unfair and there are protections for shareholders
               Called “coattail provisions” and implemented by the TSX
                         If an issuer has a dual class share (or more class) structure and wants to list on the exchange they will
                             not be allowed to unless they undertake a covenant promising that if they submit to a takeover bid that
                             the same offer will be extended to all shareholders
                                  o There is an issue of privity here however  cannot get the holder of the super voting shares
                                       to just promise to the other shareholders to give them the same deal because they will sell
                                       their shares and the new shareholders will no longer be in contractual privity  so get the
                                       holder of the super voting shares to pledge to a trustee that they will abide by this promise and
                                       if they transfer their ownership that the transferee will also undertake this pledge
                         Example is the Canadian Tire Case
                                  o Commissions take these promises very seriously
   The OSC is only allowed to deal with actions affecting people in Ontario and that is why the provision for takeover bid says
    that it deals with people in Ontario  constitutional issues
   But what if an offeror says that it is only going to offer its deal to people in one province and not another
   Rule 62-201
   – Cease Trade Orders - If a take-over bid or issuer bid is made to security holders of a target company in one or more
    jurisdictions, but is not made to security holders in one or more other jurisdictions, the Canadian securities regulatory
    authorities in the jurisdictions in which the bid is made may issue cease trade orders in respect of the bid. The Canadian
    securities regulatory authorities will generally not issue a cease trade order without providing the offeror an opportunity to
    address whether the bid offends the public policy considerations reflected in this Policy and any other relevant considerations
   As for the 20% threshold once you reach it – go one share past it – you are making a takeover bid – unless you can find an
    exemption (s.93)
    o The rules about convertibility – s.90(1) and interconvertibility (s.89(3)) are clearly about anti-avoidance
               Don’t want someone to say that “yes I had these but I did not know that they counted as securities”
    o In calculating the 20% it is important to consider who is working with the offeror  jointly and in concert  s.91(1)
               Example
                         Have a company with a 10% shareholder, 8% shareholder and 7% shareholder
                         They agree to work together to shake up management to increase share value
                         The moment any of them purchase a single security you have a takeover bid
                                  o Regardless of whether their deal is formal or informal
   When an offer is made then all securities holders shall be offered the same price for their securities
   S.97(1) - Subject to the regulations, where a take-over bid or issuer bid is made, all holders of the same class of securities
    shall be offered identical consideration
   In addition there shall be no collateral arrangement with any holder of any securities of the issuer
   S.97(2) - If an offeror makes or intends to make a take-over bid or issuer bid, neither the offeror nor any person or company
    acting jointly or in concert with the offeror shall enter into any collateral agreement, commitment or understanding with any
    holder or beneficial owner of securities of the offeree issuer that has the effect of providing to the holder or owner a
    consideration of greater value than that offered to the other holders of the same class of securities
   The issuer also needs to have the funding in place for the bid prior to making the bid  however it need not be definitive
    funding because what funding comes without conditions of some sort
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 S.96 - Where a take-over bid or issuer bid provides that the consideration for the securities deposited pursuant to the bid is to
    be paid in cash or partly in cash, the offeror shall make adequate arrangements prior to the bid to ensure that the required
    funds are available to effect payment in full for all securities that the offeror has offered to acquire
    o Staff Notice 62-304  It is the normal practice in Canada for bid financing arrangements to have some conditions. CSA
         staff have previously taken the position that some conditionality is acceptable, provided that the conditions are
         customary and minimal. However, earlier this year an Ontario court issued a judgment that has raised some uncertainty
         regarding the legal status of financing conditions  CSA staff consider that an offeror has complied with the bid
         financing requirement if the offeror reasonably believes the possibility is remote that it will not be able to pay for
         tendered securities because of a financing condition not being satisfied. In these circumstances, there is sufficient
         assurance that the funds are available to complete the purchase even though there is some conditionality in the financing
         arrangements. Staff will continue to interpret the financing requirement in this manner
   There are disclosure requirements similar to that for a prospectus for a takeover bid as well
    o However you do not have to clear it first with the commission
               Would be weird if you did  kind of breach confidentiality if you had to do that first
   S.98 - An offeror shall deliver, with or as part of a take-over bid or issuer bid, a take-over bid circular or issuer bid circular,
    as the case may be
    o Must include information on Form 32
               Information includes
                         Name of offerror  Staff Notice 62-303  Where a take-over bid is made by a wholly-owned entity,
                            CSA staff regard the entity's parent to be a joint offeror. In that case, both parties must sign the circular
                            as offerors. If the named offeror is not a wholly-owned entity, CSA staff will consider whether the
                            primary party is a joint offeror under the bid by examining its role in that bid
                         Have to say what the offeror now owns
                         Have to say what the offeror has purchased in the previous six months
                         Have to describe funding arrangements
                         Have to describe anything material that the offeror knows about the offeree
                                 o Bidder may actually know something about the target company that the target company does
                                      not know  this stipulation exists so that the shareholders of the target company are given a
                                      full and fair opportunity to understand and value their holdings in the company
                         Have to disclose any valuation that you have done
                                 o But don’t do a valuation  if you do one have to disclose and if you disclose and offer less
                                      than the valuation then will probably face the heat
                                 o Can always do a statistical analysis to try to determine what the company is worth
                         Have to disclose your intentions for the company
                                 o E.g. what will you do if you don’t get all of the shares
                                            What will you do with the minority shareholders  will you force them out or will
                                                you keep them
                         Securities of the offeror to be issued in exchange for those of the oferree
                                 o Is a distribution
                                 o Would have to have information substantially similar to that as in a prospectus
                                 o NI – 45-106
                                 o s.2.16(1) - The dealer registration requirement does not apply in respect of a trade in a
                                      security in connection with a take-over bid or issuer bid.
                                 o (2) The prospectus requirement does not apply to a distribution of a security in the
                                      circumstances referred to in subsection (1)
   Bid circular must be certified (as with a prospectus) as containing full true and plain disclosure
    o Must be signed by 2 directors and by the CEO and CFO
    o The takeover bid circular will also engage civil liability penalties under s.131 as with a prospectus for all parties subject
         to the due diligence defence for all except the offeror
   The procedural rules for doing a takeover bid are to be found in s.95  combined with s.97 (the bit about all security holders
    of securities of the class receiving identical consideration)
   Also s.98 deals with the need to deliver a takeover bid circular
   What happens if the takeover bid circular contains defective disclosure
   Similar to a prospectus, where a material change has occurred there is a requirement to amend the takeover bid circular
   S.98(2) - Where, before the expiry of a take-over bid or issuer bid or after the expiry of the bid but before the expiry of all
    rights to withdraw the relevant securities, a change has occurred in the information contained in a take-over bid circular or
    issuer bid circular or in any notice of change or notice of variation that would reasonably be expected to affect the decision of
    the holders of the securities of the offeree issuer to accept or reject the bid, a notice of the change shall be delivered to every
    person or company to whom the circular was required to be delivered and whose securities were not taken up at the date of
    the occurrence of the change
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    o    S.98(3) - Subsection (2) does not apply to a change that is not within the control of the offeror or of an affiliate of the
         offeror unless it is a change in a material fact relating to the securities being offered in exchange for securities of the
         offeree issuer
   Similarly, if there is a variation in the terms of the bid there must be a notice provided  s.98(4)
   There is also an obligation in the OSA on directors of the target company to respond to any takeover bid with a directors’
    circular
    o They must do so within 15 days of the bid being made
   S.99(1) - Where a take-over bid has been made, a directors’ circular shall be prepared and delivered by the board of directors
    of an offeree issuer to every person and company to whom a take-over bid must be delivered under paragraph 1 of section 95
    not later than 15 days after the date of the bid
   As a part of this circular it is incumbent upon the board to make a recommendation either in favour, or against the bid, and
    where they fail to make a recommendation, to provide reasons for not making a recommendation
   S.99(2) - The board of directors shall include in a directors’ circular either a recommendation to accept or to reject a take-
    over bid and the reasons for their recommendation, or a statement that they are unable to make or are not making a
    recommendation and if no recommendation is made, the reasons for not making a recommendation
    o Normally, when a takeover bid is made there will be a premium attached to it – premium over the market price – and if
         the directors are not supporting it they better have good reasons for not doing so
               Such as they don’t feel it is full value – explaining why – or that they have other options  such as a White
                   Knight
               Directors will often form a committee in order to search out other strategic options, including finding a white
                   knight
    o For some investors, such as fiduciary investors (pension funds etc.) it is hard to resist a takeover premium such as 20 –
         25% over market price  better have pretty good reasons for turning down the bid
   Directors also face the possibility of civil liability for improper disclosure in the directors’ circular
   S.131(2) - Where a directors’ circular or a director’s or officer’s circular delivered to the security holders of an offeree issuer
    as required by Part XX, or any notice of change or variation in respect of the circular, contains a misrepresentation, a security
    holder has, without regard to whether the security holder relied on the misrepresentation, a right of action for damages
    against every director or officer who signed the circular or notice that contained the misrepresentation
Pseudo-simulation of the process of a takeover bid process from the beginning
 There is nothing in the OSA to stop a potential acquirer from going into the market and gaining an initial “toehold” in the
    potential target company
    o Remember from insider trading rules that a potential acquirer is not in a special relationship with the issuer
               There is nothing to stop the offeror from using their knowledge of their intention to make a takeover bid to
                   purchase securities in the target company
   First thing that happens  “bells go off”
   At the 10% threshold s.101(1) kicks in
   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 any class of a reporting issuer that, together with such offeror’s securities of
    that class, would constitute 10 per cent or more of the outstanding securities of that class,
    o (a) shall issue and file forthwith a news release containing the information prescribed by the regulations; and
    o (b) within two business days, shall file a report containing the same information as is contained in the news release
         issued under clause (a).
   Note that this 10% includes securities falling under the “jointly and in concert” definition
   You can usually tell that something is going on leading up to this point
    o Usually have one or two brokerages that are really active in the shares of the target company
               Price has been going up steadily, volume has been going up steadily
   After this initial threshold the offeror can still accumulate shares but they need to make a filing whenever they acquire an
    additional 2% of the securities of the class and they also need to stop accumulating any more securities for one full trading
    day
   S.101(2) - Where an offeror is required to file a report under subsection (1) or a further report under this subsection and the
    offeror or any person or company acting jointly or in concert with the offeror acquires beneficial ownership of, or the power
    to exercise control or direction over, or securities convertible into, an additional 2 per cent or more of the outstanding
    securities of the class or there is a change in any other material fact in such a report, the offeror,
    o (a) shall issue and file forthwith a news release containing the information prescribed by the regulations; and
    o (b) within two business days, shall file a report containing the same information as is contained in the news release
         issued under clause (a).
   After the 10% threshold the next magic number is the 19.99% threshold
    o It is here that a determination needs to be made
    o Sort of like a prospectus  what do you want to do, do you want to make a takeover or do you want to sit tight
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                 Or maybe look for some exemption that will allow you to accumulate more securities
 Assuming that you are at the 19.99% threshold there are two ways that you could initiate a takeover
    o    Use s.100(2) - A take-over bid may, and an issuer bid shall, be commenced by delivering the bid to the security holders
         referred to in paragraph 1 of section 95 in accordance with subsection (6).
               Question is  how do you get the bid delivered to the security holders
               Answer  you need a list of the security holders  get it by asking the target company
                         Once you ask for it there is a pretty good chance (read absolute) that they will know what is coming
                             and it gives them time to prepare for the bid, because the clock (the 35 day minimum bid period) will
                             not start until the bid is delivered
    o Use s.100(7) – An offeror may commence a take-over bid by publishing an advertisement containing a brief summary of
         the bid in at least one major daily newspaper of general and regular paid circulation in Ontario, or by disseminating the
         advertisement in a prescribed manner, if,
               (a) on or before the date of first publication or first dissemination of the advertisement, the offeror, or a person
                   or company acting on its behalf, files the bid and delivers it to the offeree issuer’s principal office, and files the
                   advertisement;
               (b) on or before the date of first publication or first dissemination of the advertisement, the offeror, or a person
                   or company acting on its behalf, requests from the offeree issuer a list of the security holders referred to in
                   paragraph 1 of section 95; and
               (c) within two business days of the receipt by or on behalf of the offeror of a list of the security holders
                   referred to in paragraph 1 of section 95, the bid is delivered to those security holders in accordance with
                   subsection (6).
               Benefits to s.100(7)  the clock on the minimum bid time (or whatever time you stipulate for your bid) begins
                   to run from the date you make the announcement  is quicker than under s.100(2)
   In either of these situations, once the bid is announced or delivered, it is quite likely that the deal will go through
    o Unless the directors can get another deal together
    o This is usually because there will be a shareholder with a significant holding that will have been approached by the
         offeror ahead of time and the shareholder will have signed a lockup agreement with the offeror at the offer price  will
         agree to sell at that price but if a better deal comes along then all bets are off
   One issue is what happens when the directors strike a committee to explore alternatives
    o Is there a potential conflict of interest issue
               Especially with officers of the company sitting on the board of directors
               There is always the potential (usually likelihood) that the officers will be out of a job when the deal goes
                   through
               Probably best to keep them off of the committee
   There may not be a positive obligation on boards to go through a formal auction process when their company is approached
    with an offer
    o Maple Leaf Foods v Schneiders Corporation (1998), 42 OR (3d) 177 (CA)
               Provided that the directors have acted honestly and reasonably the court ought not to substitute its own business
                   judgment for that of the Board
               An auction need not be held each time there is a change in control of the company
               The particular circumstances are important in determining the best transaction available and that a board is not
                   available, and that a board is not limited to considering the amount of cash or consideration involved as would
                   be the case with an auction
    o Board has an obligation to at least review and look at the best interests of the shareholders
   If you are at 19.99% and are not wanting to bid and if you are going to acquire any more securities you will be making a
    takeover bid unless you can find an exemption  s.93


Takeover Bid Exemptions
 There are five exemptions available under s.93(10 for takeover bids  and only a couple of them are really “interestingly”
    engaged
 S.93(1) - Subject to the regulations, a take-over bid is exempt from sections 95 to 100 if
 (a) - the bid is made through the facilities of a stock exchange recognized by the Commission for the purposes of this clause
    o   There are two types of exempt bids that can happen through the facilities of the stock exchange
             Normal course bid
                      Acquisition by someone of shares through a share transaction under the exchange rules
                              o Can acquire up to 2% in any month and up to 5% in any one year
                              o Can take out sell orders but cannot lead the market  cannot drive up the price with offers to
                                  purchase, can only buy what people put on the market to sell


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                           Would need to make insider filings as you are buying  would state “I am buying these securities, I
                            am an insider, but this is an exempt transaction”
                        Through this method it is possible to acquire control over the course of time
              Exchange bid
                        Could announce that on some specified date at least 35 days in the future you will have someone at the
                            exchange with an order book who will be available to purchase securities that are for sale at such and
                            such a price
                        Will need disclosure similar to a bid circular
                        Need to press release the disclosure
                        This used to be popular because there was only an 11 day period on them  very quick, but now that it
                            is 35 days it is not so popular
                                 o Also the stock exchange is unconditional and cash only
                                            Can’t say you will only buy the securities if you get control, you have to buy
                                                whatever is offered
 (b) - the bid is for not more than 5 per cent of the outstanding securities of a class of securities of the issuer and,
  o (i) the aggregate number of securities acquired by the offeror and any person or company acting jointly or in concert
       with the offeror within any period of twelve months in reliance upon the exemption provided by this clause does not,
       when aggregated with acquisitions otherwise made by the offeror and any person or company acting jointly or in concert
       with the offeror within the same twelve month period, constitute in excess of 5 per cent of the outstanding securities of
       that class of the issuer at the commencement of the twelve month period, and
  o (ii) if there is a published market for the securities acquired, the value of the consideration paid for any of the securities
       acquired is not in excess of the market price at the date of acquisition determined in accordance with the regulations plus
       reasonable brokerage fees or commissions actually paid
              In some ways this one is equivalent of (a) but is not done through the exchange
              Why a public company but shares not listed
                        Could have a company that does not meet the minimum listing requirements of the exchange
                        Or could be a company with a dual class share structure and you are bidding for unlisted securities
                                 o Note that if you make a takeover bid for the unlisted shares and it is not exempt then you will
                                      have a takeover bid that will trigger the coattail
 (c) all of the following conditions apply,
  o (i) purchases are made from not more than five persons or companies in the aggregate, including persons or companies
       outside of Ontario,
  o (ii) the bid is not made generally to security holders of the class of securities that is the subject of the bid, and
  o (iii) the value of the consideration paid for any of the securities, including brokerage fees or commissions, does not
       exceed 115 per cent of the market price of securities of that class at the date of the bid determined in accordance with the
       regulations
              This is the big one  the private issuer agreeement exemption
              What is a market price  regulation s.183(1)
              S.183(1) - For the purposes of Part XX of the Act, “market price” of a class of securities, as to which there is a
                  published market, at any date, is an amount equal to the simple average of the closing price of securities of that
                  class for each of the business days on which there was a closing price falling not more than twenty business
                  days before that date
              This could end up amounting to a significant transaction such as change of control of the company
              Who is a person for the first part of the definition in (i)
              S.93(2) - For the purposes of clause (1) (c), where an offeror makes an offer to acquire securities from a person
                  or company and the offeror knows or ought to know after reasonable enquiry that,
                        (a) one or more other persons or companies on whose behalf that person or company is acting as
                            nominee, agent, trustee, executor, administrator or other legal representative has a direct beneficial
                            interest in those securities, then each of such others shall be included in the determination of the
                            number of persons and companies to whom the offer to acquire has been made, but, where an inter
                            vivos trust has been established by a single settlor or where an estate has not vested in all persons
                            beneficially entitled thereto, the trust or estate shall be considered a single security holder in such
                            determination; or
                        (b) the person or company acquired the securities in order that the offeror might make use of the
                            exemption provided by clause (1) (c), then each person or company from whom those securities were
                            acquired shall be included in the determination of the number of persons and companies to whom the
                            offer to acquire has been made
  o What if you buy the securities from a hedge fund for example  is that one person or a number of persons
              Depends on the structure of the hedge fund
                        If it is a corporation no problem  has separate legal identity
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                            If a limited partrnership no problem  all assets are in the name of the general partner
                            If a trust it would depend upon whether or not the investors had any role in directing the investments
                                   o If they did then it would be tricky, if they did not then hedge fund would probably be just one
                                        person
  o When does this section get used
               Not likely that a controlling shareholder is going to sell for only 15% above market price
               Gets used when you have someone with say 25% and someone else with another sizeable chunk of around 8%
                  who wants to sell  they won’t get a 15% premium in the market but the 25% holder will get a benefit from
                  holding 33%
               Also see it in situations where a financial institution has received an interest in securities through a loan default
                  and just wants to unload the interest in a hurry to someone  even a sizeable interest
               Also see it where you have an aggressive hedge fund that wants to get paid taking a position and agitating for
                  changes  in the US get the company buying them out but in Canada this is not allowed so may get a major
                  shareholder buying them out instead
 (d) - the offeree issuer is not a reporting issuer, there is not a published market in respect of the securities that are the subject
  of the bid, and the number of holders of securities of that class is not more than fifty, exclusive of holders who are in the
  employment of the offeree issuer or an affiliate of the offeree issuer, and exclusive of holders who were formerly in the
  employment of the offeree issuer or an affiliate of the offeree issuer and who while in that employment were, and have
  continued after that employment to be, security holders of the offeree issuer
  o This is probably the most used one of the exemptions
               This is really the private issuer exemption
               Private issuer wants to sell the shares of the company instead of selling the assets
               Need this exemption to be able to do this if you want to do a share acquisition transaction for any private
                  business
 (e) - the number of holders, whose last address as shown on the books of the offeree issuer is in Ontario, of securities of the
  class subject to the bid is fewer than fifty and the securities held by such holders constitute, in the aggregate, less than 2 per
  cent of the outstanding securities of that class, the bid is made in compliance with the laws of a jurisdiction that is recognized
  for the purposes of this clause by the Commission, and all material relating to the bid that is sent by the offeror to holders of
  securities of the class that is subject to the bid is concurrently sent to all holders of such securities whose last address as
  shown on the books of the offeree issuer is in Ontario and filed
  o This one is rooted in the fact that the OSC is not really interested in doing anything about takeover bids occurring in
        jurisdictions outside of Ontario and not impacting Ontario in any way
  o Why bother
  o For example if a US company is buying a US company why should the OSC get involved unless there is a major impact
        in Ontario
  o Recognition Order 62-904
               OSC only recognizes the securities commissions of the other Canadian jurisdictions, the US, and England
 (f) - it is exempted by the regulations
  o the OSC can grant exemptions through regulations
               For example if there is a takeover bid in Mexico that has an impact on Ontario residents then the OSC may have
                  to vet it for some reason or exempt it depending upon the circumstances.


Takeover Bid Defences
 In this area we see a major intersection between corporate law and securities law
    o In terms of the duties of directors and their loyalty to the company
    o Many of the cases in this area are fought over the duty of the directors to the company
   When directors act aggressively in the face of a takeover the question is why
    o Is it because they are worried about protecting their own position
    o Or is it because they are looking out for the best interests of the company
   If the latter then it is no big deal  that is what they are supposed to be doing anyways
   Teck and Miller case (from Corporate Law)
   If the directors reasonably attempted to isolate themselves from the conflict is one big issue
    o But how can they do this  how can they show that they did this, or tried to do this
    o Formation of a special committee of the board is one way
   Five key steps that a board should undertake to fulfill its duty to shareholders
    o Form an independent committee
                All directors will have some form of conflict  generally if a deal goes through they will all be out of a job
                          However outside directors will have less to lose than inside directors such as the CEO and CFO
    o Conduct a credible process to bring forward a non-conflicted result
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                  This can occur in many ways
                  Look at the Maple Leaf and Schneider case
                         If a board of directors has acted on the advice of a committee composed of persons having no conflict
                             of interest, and that committee has acted independently, in good faith, and made an informed
                             recommendation as to the best available transaction for the shareholders in the circumstances, the
                             business judgment rule applies
                         There was also a complaint that the Board breached its duty by allowing the CEO to be involved in
                             some portions of the negotiations etc. on behalf of the special committee
                                  o The special committee had no prior experience in dealing with a takeover bid and did not
                                       have the in-depth knowledge of Schneider that Dodds did. It was therefore appropriate for the
                                       special committee not to conduct the negotiations with the potential bidders directly
               Need to look at the overall process  cannot just look at a microcosm of it and say that because of one
                   microcosm the whole process is flawed  look at Schneider
                         If you need to involve the inside people because of their particular expertise you can – Schneider – but
                             you better be careful that you do not involve them any more than is necessary to avoid the appearance
                             of impropriety
    o As you act you need to be able to show that you believed that what you were doing was in the best interests of the
         company
               And you need to be able to back this up with some type of objective evidence
               What is the best interests of the company
                         A line of US cases equates the best interests of the company with the best interests of the shareholders
                             of the company
    o Need to show that you met your duty of care throughout the process
    o Directors are entitled to the protection of the business judgment rule
               If you did all of the right things and provided that you met the duty of care (exercised due diligence, exercised
                   care etc.) then you are entitled to be wrong
                         The courts are not entitled to substitute their judgment of what the correct decision should have been
                             for the decision of the directors
    o There is no positive duty on directors to auction the company
               In the US there is such a duty  Revlon case
               Maple Leaf says otherwise
                         Sunrise REIT supports this decision
                         However there is an obligation on directors to seek the best possible value that is reasonably available
                                  o This is a lesser duty on the directors
                                  o May involve a duty to at least canvass the market for potential alternatives to the proposed bid
                                       to see if there is someone who is willing to pay more for the company
   Those are the obligations on directors in the face of a takeover bid  pretty much covers all eventualities
   Penalties could be significant for directors should they not live up to their obligations under corporate law
   Why would securities law even care about takeover defences then when there is a significant regime already in place
   Go back to the beginning  fostering confidence in the markets
    o Can’t have boards acting in an inappropriate fashion and have confidence in well functioning capital markets at the same
         time
   NI 62-202  is the source of the power to deal with improper defences in response to takeover bids
   1.1. – Defensive Tactics
    o (1) The Canadian securities regulatory authorities recognize that take-over bids play an important role in the economy by
         acting as a discipline on corporate management and as a means of reallocating economic resources to their best uses. In
         considering the merits of a take-over bid, there is a possibility that the interests of management of the target company
         will differ from those of its shareholders. Management of a target company may take one or more of the following
         actions in response to a bid that it opposes:
               1. Attempt to persuade shareholders to reject the bid.
               2. Take action to maximize the return to shareholders including soliciting a higher bid from a third party.
               3. Take other defensive measures to defeat the bid.
    o (2) The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona
         fide interests of the shareholders of the target company. A secondary objective is to provide a regulatory framework
         within which take-over bids may proceed in an open and even-handed environment. The take-over bid provisions should
         favour neither the offeror nor the management of the target company, and should leave the shareholders of the target
         company free to make a fully informed decision. The Canadian securities regulatory authorities are concerned that
         certain defensive measures taken by management of a target company may have the effect of denying to shareholders the
         ability to make such a decision and of frustrating an open take-over bid process.


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    o    (3) The Canadian securities regulatory authorities have determined that it is inappropriate to specify a code of conduct
         for directors of a target company, in addition to the fiduciary standard required by corporate law. Any fixed code of
         conduct runs the risk of containing provisions that might be insufficient in some cases and excessive in others. However,
         the Canadian securities regulatory authorities wish to advise participants in the capital markets that they are prepared to
         examine target company tactics in specific cases to determine whether they are abusive of shareholder rights. Prior
         shareholder approval of corporate action would, in appropriate cases, allay such concerns.
    o (4) Without limiting the foregoing, defensive tactics that may come under scrutiny if undertaken during the course of a
         bid, or immediately before a bid, if the board of directors has reason to believe that a bid might be imminent, include
               (a) the issuance, or the granting of an option on, or the purchase of, securities representing a significant
                   percentage of the outstanding securities of the target company,
               (b) the sale or acquisition, or granting of an option on, or agreeing to sell or acquire, assets of a material
                   amount, and
               (c) entering into a contract other than in the normal course of business or taking corporate action other than in
                   the normal course of business.
    o (5) The Canadian securities regulatory authorities consider that unrestricted auctions produce the most desirable results
         in take-over bids and they are reluctant to intervene in contested bids. However, they will take appropriate action if they
         become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a take-
         over bid or to a competing bid.
    o (6) The Canadian securities regulatory authorities appreciate that defensive tactics, including those that may consist of
         some of the actions listed in subsection (4), may be taken by a board of directors of a target company in a genuine
         attempt to obtain a better bid. Tactics that are likely to deny or limit severely the ability of the shareholders to respond to
         a take-over bid or a competing bid may result in action by the Canadian securities regulatory authorities.
    o (7) As a general rule, the Canadian securities regulatory authorities will not advise parties as to the propriety of proposed
         action in a particular case except in the context of a meeting or proceeding of which interested parties have been given
         notice
   What this policy is aimed at in essence is the result of defensive tactics
    o If the result is to drive away the bid and if no other bid materializes as a result then the commissions will be interested
    o However if the defensive tactics result in a higher bid then who really cares
               Example Hiram Walker Resources
                         Bidder comes along and HRW has three subsidiaries – Consumers Gas, Home Oil & Distillery
                         Bidder is interested in the first two and the Distillery is valued at $2 billion
                         HRW gets a deal to sell the Distillery for $3.5 billion
                         Bidder goes to the commission saying that they wanted the Distillery  bid trouble (asset sale)
                         If no other bidder comes along would be an issue
                         But other bidders did come along and drove up the price of the overall deal so it was not an issue
   Even situations that abide by corporate law and securities law would engage the ire of the commission
    o Canadian Tire for example
               Although the deal met the legal test it was just unfair  especially since it had long been promised to the non-
                   voting shareholders that such a thing would not occur
               Commission was able to exercise its power under s.127 to block the transaction even though it was technically
                   legal
   If the effect of the transaction is to drive away the bid then the regulators will get involved
    o This is especially troubling for the directors when their intention was to either
               Get the bidder to raise their bid, not walk away
               Get another to come on board with a better bid
   What types of things will the Commissions look at under NI 62-202
Share issues
 Bidder comes along and company issues a bunch of shares to a friendly shareholder  makes it harder for the bidder to gain
  control of the company
  o If the company can show that it had some valid reason for issuing the shares – such as a need for financing – then it will
      probably be okay (this is the fact scenario from Teck v Miller)
            This is because there was objective information to back it up
            And because of the protection of the business judgment rule
            But the commission would probably not like it very much
 Example
  o Bidder comes along and bids $12/share for the company
  o Company goes to another who offers to buy the company for $13/share provided the company issues them 10% of the
      shares at $12
            OSC would probably say okay since the shareholders would be getting a better bid
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              But what if the initial bidder would have bid more?
                    Would that change things at all
 One thing to remember in all defensive tactics is that the action taken by the company must be proportionate to the threat that
  the company is facing and the action taken cannot be such that it forecloses the possibility of a better deal
Break fees
 Bidder comes forward and offers to buy the company but board doesn’t like the deal
 Board solicits other bids but potential bidder will only come forward if they get a break fee so board agrees
 The fee is only paid if the deal is unsuccessful  issue with break fees is not the fees themselves it is that it makes it more
  expensive for the initial bidder to come back – takes money from the shareholders if the initial bidder makes a higher offer
  for the company
 CW Shareholdings
  o CanWest offered to buy WIC (Western International Communications) but WIC went to Shaw instead and negotiated a
       deal including a break fee and a deal to sell some radio stations if the deal with Shaw did not go through.
  o CanWest went to the Commission complaining about the deal
  o Commission  the quantum of a specific fee could result in the agreement to pay such a fee amount to an improper
       defensive tactic. However a break fee in an appropriate amount could be properly agreed to be a target company if it
       were necessary to agree to it in order to induce a competing bid to come forward
  o (Court decision) Break fees are appropriate in such circumstances where
             They are necessary to induce a competing bid to come forward
             That represents better value for the shareholders and where
             The break fee represents a reasonable commercial balance between its potential negative effect as an auction
                inhibitor and its potential positive effect as an auction stimulator
 One thing to bear in mind in relation to break fees (and asset sales) is the ability of the commission to exact remedies  the
  most effective remedies they have are to deny exemptions, cease trading and to levy fines
  o The fines are small, and the rest aren’t very effective for these types of transactions so their ability to exact any type of
       penalty is rather limited
Asset sales
 See the Hiram Walker example above
 Company could sell assets as a way of getting out from under the bid
 Was another aspect to the CanWest – WIC – Shaw deal as well
    o    Commission  a particular asset option may or may not be an improper defensive tactic depending upon whether it is
         necessary to obtain a competing bid and whether it has the effect of depriving shareholders of the ability to respond to a
         takeover bid or a competing bid or is likely to deny or limit severely the ability of the shareholders of the target company
         to respond to a takeover bid or competing bid
    o    Court  may be an acceptable measure for a target corporation to adopt as a competitive bid stimulating inducement
         where it strikes a reasonable commercial balance between its potential negative effect as an auction inhibitor depressing
         shareholder value and its potential positive effect as an auction stimulator enhancing shareholder value. Factors to
         consider include
               Whether the process by which the directors of the target company exercised their duty to maximize shareholder
                  value complied with their duties as target corporation directors
               Whether the overall commercial balance and proportion between the auction inhibiting and auction stimulating
                  effect of such an agreement in the circumstances has been struck, i.e. whether the agreement is likely to
                  preclude further bidding, in the sense of harming or significantly dampening the auction process, and thus
                  deprive the shareholders of potential additional value
               Whether the price for the optioned asset is within the range of reasonable value attributed to that asset, or
                  whether it represents such a discount that it would result in a disproportionate erosion in the value of the
                  corporation making it uneconomical for others to bid
               Whether the competing bid induced by the asset lock-up agreement provides enough additional value to the
                  shareholders to justify the granting of the option
Shareholder Rights Plans  poison pill defenses
 Allow for the directors to preclude someone from conducting a creeping takeover of the company
 When this happens the pill is triggered and a rights option is triggered where shareholders get the option to buy more
  securities at low prices effectively flooding the market with shares and making it prohibitively expensive for a potential
  bidder to buy the company
 Is an effective tool for buying time  issue is about how it is used
 If the plan is voted on by shareholders then the commissions are more likely to give the directors more time to find options
  o If the plan has been adopted by the board in the face of the bid then they are unlikely to get as much time
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    o    In either case the most that can be hoped for is an additional 35 days to find a suitable option
 Bidder will have to negotiate with the Board to get them to lift the plan  if the board does not do so voluntarily then the
  bidder can go to the commission to get the plan lifted by it
  o Commission will want to see that the target board is taking positive steps or else they will likely lift the plan
 Royal Host REIT
  o Made a takeover offer for CHIP which had a shareholder rights plan  wanted the plan lifted
  o Some factors to consider in whether the plan should be lifted
            Whether shareholder approval of the plan had been obtained
            When the plan was adopted
            Whether there was broad shareholder approval for continued operation of the plan
            The size and complexity of the target company
            The other defensive tactics, if any, employed by the target company
            The number of potential viable offerors
            The steps taken by the target company to find an alternative bid or transaction that would be better for the
               shareholders
            The likelihood that, if given more time, the target company will be able to find a better bid or transaction
            The nature of the bid, whether it is coercive or unfair to the shareholders of the target company
            The length of time since the bid was announced and made
            The likelihood that the bid will not be extended if the rights plan is not terminated
 Producers Pipeline
  o Had a rights plan and had a shareholders meeting  but a lot of market pros had moved into the stock so the company
      did not put the plan to a vote at the meeting
  o The bidder went to the commission and complained about the plan and the commission said that it should have been
      voted on at the shareholders meeting
  o Lifted the plan as a result of the lack of vote

 Commissions are very interested in poison pill defences  they could very easily drive away bids and allow directors to keep
    control of companies forever if left unregulated
 Under NI 62-202 the key issue is whether the Board has used its available defences in such a way as to drive away the bid
    o  If it has and no other bid has come forward then the Board is likely in trouble
    o  However if alternative bids have come forward then likely there is no real issue  maximization of shareholder value is
       what it is really all about
 In defending against takeovers the board usually only has 35 days to respond  minimum bid period
  o Unless there is a poison pill which may allow for up to an additional 35 days depending upon the circumstances
 At the end of the day the board needs to make a recommendation to the shareholders about whether or not to accept or reject
  any takeover bid
  o In either case they need to state their reasons for their recommendation
  o If they recommend rejecting a bid that is a premium bid – 20-25% above market – there is a good chance that the market
       will ignore their advice anyways and accept the bid due to the large number of institutional investors who have fiduciary
       obligations (pension plans, trusts etc.)




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Enforcement
 OSC looks at bids and directors liability because of the issue of confidence in the capital markets
  o Look to NI 62-202
  o Commissions have an enforcement arsenal at their disposal to enforce violations of securities law
 Remember back at the beginning  five topics to securities law
  o Registration
  o Prospectus requirements  need one in order to trade in securities
  o Continuous disclosure requirements
  o Insider trading
  o Takeover bid regulation
 Where there is a violation of any of these five areas that is where enforcement comes into play
 There are four major methods of enforcement of securities law
Civil liability provisions of the OSA  s.130 – 138.1
 It is open to someone to sue for any of the various failures outlined in these provisions
  o Failure to make adequate disclosure
  o Failure to make ongoing disclosure
 However the right of action is limited and there is the availability of the due diligence defence
There are also statutory offences under s.122
 S.122(1) - Every person or company that,
    o (a) makes a statement in any material, evidence or information submitted to the Commission, a Director, any person
      acting under the authority of the Commission or the Executive Director or any person appointed to make an investigation
      or examination under this Act that, in a material respect and at the time and in the light of the circumstances under which
      it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the
      statement not misleading;
  o (b) makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial
      statement, information circular, take-over bid circular, issuer bid circular or other document required to be filed or
      furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances
      under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to
      make the statement not misleading; or
  o (c) contravenes Ontario securities law,
  o is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of
      not more than five years less a day, or to both
 This is a very strong provision  people wake up with the prospect of five years in jail or a $5 million fine
 However the problem with these provisions is more of enforcement than anything
  o These provisions are quasi-criminal  they are not prosecuted by the Commission but rather handed off to the police
      and the courts to prosecute  the police, in large measure, lack the resources and the expertise to deal with these types
      of offences
  o However, with the introduction of IMET this should be better
  o The key thing is to determine whether the OSC will investigate and prosecute the offence – using its powers under
      section 127 – or whether it will hand it off to someone else
             The lack of effective external actors limits the effectiveness of this enforcement mechanism
  o There is also a need for the Commission to approve any proceeding under s.122
  o S.122(7) - No proceeding under this section shall be commenced except with the consent of the Commission
 Also remember the s.122(4) penalties for insider trading
  o However the same dynamic is at play  must be externally enforced making it difficult to enforce and prosecute these
      types of crimes
Criminal Code provisions
 S.380(2) - Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the
  meaning of this Act, with intent to defraud, affects the public market price of stocks, shares, merchandise or anything that is
  offered for sale to the public is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen
  years.
 This provision, in many ways, corresponds to those provisions found in the OSA itself
  o Deals with situations such as pump and dump schemes
  o Winfall Oil company is an example
            Executives were on-site when a drill core was pulled up and danced around like it was all good, but it wasn’t
            Employees tipped the information to the market, the share price took off and the insiders sold their shares
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                 The executives were prosecuted and found guilty because it was determined that they had intended for the
                  employees to see them and for the employees to tip the information to the market
Public interest power of the OSC under s.127 of the OSA
 S.127(1) - The Commission may make one or more of the following orders if in its opinion it is in the public interest to make
  the order or orders:
  o 1. An order that the registration or recognition granted to a person or company under Ontario securities law be
       suspended or restricted for such period as is specified in the order or be terminated, or that terms and conditions be
       imposed on the registration or recognition.
  o 2. An order that trading in any securities by or of a person or company cease permanently or for such period as is
       specified in the order.
  o 2.1 An order that acquisition of any securities by a particular person or company is prohibited, permanently or for the
       period specified in the order.
  o 3. An order that any exemptions contained in Ontario securities law do not apply to a person or company permanently
       or for such period as is specified in the order.
  o 4. An order that a market participant submit to a review of his, her or its practices and procedures and institute such
       changes as may be ordered by the Commission.
  o 5. If the Commission is satisfied that Ontario securities law has not been complied with, an order that a release, report,
       preliminary prospectus, prospectus, return, financial statement, information circular, take-over bid circular, issuer bid
       circular, offering memorandum, proxy solicitation or any other document described in the order,
             i. be provided by a market participant to a person or company,
             ii. not be provided by a market participant to a person or company, or
             iii. be amended by a market participant to the extent that amendment is practicable.
  o 6. An order that a person or company be reprimanded.
  o 7. An order that a person resign one or more positions that the person holds as a director or officer of an issuer.
  o 8. An order that a person is prohibited from becoming or acting as a director or officer of any issuer.
  o 8.1 An order that a person resign one or more positions that the persons holds as a director or officer of a registrant.
  o 8.2 An order that a person is prohibited from becoming or acting as a director or officer of a registrant.
  o 8.3 An order that a person resign one or more positions that the person holds as a director or officer of an investment
       fund manager.
  o 8.4 An order that a person is prohibited from becoming or acting as a director or officer of an investment fund
       manager.
  o 8.5 An order that a person or company is prohibited from becoming or acting as a registrant, as an investment fund
       manager or as a promoter.
  o 9. If a person or company has not complied with Ontario securities law, an order requiring the person or company to
       pay an administrative penalty of not more than $1 million for each failure to comply.
  o 10. If a person or company has not complied with Ontario securities law, an order requiring the person or company to
       disgorge to the Commission any amounts obtained as a result of the non-compliance
 Examples of the OSC using its public interest power
  o Donnini
             Had offered to settle with him for a five year ban (number 1) but he did not settle. After the hearing they
                 banned him for 15 years and he appealed to the courts. The courts reduced it to 4 years arguing that the public
                 interest power is not meant to be punitive. Also said that since his boss only got a 2 year suspension (he
                 cooperated) and the initial offer was 5 years, the 15 years was unreasonable
  o Nortel
             Because of the issues with the financial statements of the company it was not in compliance with securities laws
                  was a failure to meet continuous disclosure obligations
             OSC imposed a cease trade order on the ability of insiders to trade securities of Nortel (number 2.1) because it
                 would have been too punitive to have imposed a cease trade order on all of the shares (too punitive to all of the
                 other shareholders)
                       Justification for this
                               o Insiders may have had information that was not available to others
                               o Want to put pressure on the company to get it’s house in order ASAP
  o YBM Magnex
             OSC said that they felt that the lawyer for YBM had misled the OSC and that he should be called in and
                 reprimanded (number 6)  is a very serious thing, especially for a professional to have been reprimanded
                       Doesn’t happen often but it is effective against someone in this type of position
 Proceedings under s.127 are administrative proceedings
  o As a result the Statutory Powers Procedures Act (SPPA) applies to proceedings under s.127
  o Fairness and jurisdiction are issues that arise in these types of proceedings
 Public Interest Jurisdiction of the OSC under s.127
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    o    Asbestos case 2001 SCC
               The legislature clearly intended that the OSC have a very wide discretion in such matters
               in considering an order in the public interest, it is an error to focus only on the fair treatment of investors. The
                   effect of an intervention in the public interest on capital market efficiencies and public confidence in the capital
                   markets should also be considered
               The purpose of the Commission's public interest jurisdiction is neither remedial nor punitive; it is protective and
                   preventive, intended to be exercised to prevent likely future harm to Ontario's capital markets
               The role of the OSC under s. 127 is to protect the public interest by removing from the capital markets those
                   whose past conduct is so abusive as to warrant apprehension of future conduct detrimental to the integrity of the
                   capital markets
               Standard of review is reasonableness
    o Cartaway Resources Corp 2004 SCC
               May 8, 1996, Cartaway announced that it had found significant mineralization on the Voisey's Bay claims based
                   on a visual inspection of drilling samples. The share price jumped dramatically to $23, but later fell below $1
                   when an analysis of the samples failed to confirm these findings
               In imposing sanctions on Hartvikson and Johnson under ss. 161 and 162 of the Act, the Commission weighed
                   several important factors, including general deterrence, protecting the securities market, the settlement
                   agreements and the circumstances of the case
               Court recognized in Pezim, at pp. 593-94, that the Commission has special expertise regarding securities matters.
                   The core of this expertise lies in interpreting and applying the provisions of the Act, and in determining what
                   orders are in the public interest with respect to capital markets
               As I stated above, the application of s. 162 requires the determination of when an order is in the public interest,
                   and this calls for the Commission to apply its expertise
               It is therefore reasonable to assume, particularly with reference to the expertise of the Commission in regulating
                   capital markets, that general deterrence has a proper role to play in determining whether to make orders in the
                   public interest and, if they choose to do so, the severity of those orders.
               In my view, nothing inherent in the Commission's public interest jurisdiction, as it was considered by this Court
                   in Asbestos, supra, prevents the Commission from considering general deterrence in making an order.
               To the contrary, it is reasonable to view general deterrence as an appropriate, and perhaps necessary,
                   consideration in making orders that are both protective and preventative
               It may well be that the regulation of market behaviour only works effectively when securities commissions
                   impose ex post sanctions that deter forward-looking market participants from engaging in similar wrongdoing
               The weight given to general deterrence will vary from case to case and is a matter within the discretion of the
                   Commission.
               Protecting the public interest will require a different remedial emphasis according to the circumstances.
               Courts should review the order globally to determine whether it is reasonable.
               No one factor should be considered in isolation because to do so would skew the textured and nuanced
                   evaluation conducted by the Commission in crafting an order in the public interest
   OSC gets a high degre of deference from the courts because of its specialized knowledge  interpretation of its enabling
    legislation etc.
    o Will be unusual circumstances for the courts to say that the interpretation of the commission was unreasonable
   But look back to Donnini  where the court reduced the penalty to 4 years which was less than the 5 years that had been
    offered for settling the matter
    o Where does this fit in with the Staff Notice on Cooperation
               If you cooperate you may not even get punished, or may get reduced penalties
               But according to Donnini if you fight it through the courts you may get a lesser penalty anyways
   Canadian Tire
    o Case tells us that the OSC believes that the public interest power extends to areas where no securities laws have been
         violated at all
    o Bidders bring a deal to the controlling family but don’t make the same deal to the public shareholders
    o All along public shareholders and the market had believed that if an offer of more than 15% above market came along to
         the family then the public shareholders would get the same offer
               But a close reading of the coattail shows that the offer did not violate the coattail provision
               So technically there was nothing wrong with the deal
    o OSC felt that the transaction was abusive of the capital markets and brought the capital markets into disrepute
               Used its public interest power to halt the accumulation of shares by the bidder (2.1) of s.127
    o This case tells us that s.127 is broader than just regulating violations of securities law
   There are some that say if this case had been challenged in the courts it would have been overturned
    o But others say that, looking at Asbestos and Cartaway that is unlikely  it appears that the public interest power is very
         broad indeed

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Investigations
 There are also investigative powers under the OSA that have a bearing on the enforcement provisions
 S.11(1) - The Commission may, by order, appoint one or more persons to make such investigation with respect to a matter as
    it considers expedient,
    o (a) for the due administration of Ontario securities law or the regulation of the capital markets in Ontario; or
    o (b) to assist in the due administration of the securities laws or the regulation of the capital markets in another
         jurisdiction
   Note that there is no requirement of due process, no need to go before a judge etc.  is a very open-ended power
   Investigators can compel witnesses to testify and can force them to attend and give evidence
   S.13(1) - A person making an investigation or examination under section 11 or 12 has the same power to summon and
    enforce the attendance of any person and to compel him or her to testify on oath or otherwise, and to summon and compel
    any person or company to produce documents and other things, as is vested in the Superior Court of Justice for the trial of
    civil actions, and the refusal of a person to attend or to answer questions or of a person or company to produce such
    documents or other things as are in his, her or its custody or possession makes the person or company liable to be committed
    for contempt by the Superior Court of Justice as if in breach of an order of that court
    o This power ties into s.122  where someone lies under oath they are open to the remedy provisions and penalties of
         s.122
   Can also get search and seizure orders from a judge
   S.13(4) - A person making an investigation or examination under section 11 or 12 may apply to a judge of the Ontario Court
    of Justice in the absence of the public and without notice for an order authorizing the person or persons named in the order to
    enter and search any building, receptacle or place specified and to seize anything described in the authorization that is found
    in the building, receptacle or place and to bring it before the judge granting the authorization or another judge to be dealt with
    by him or her according to law
    o This is a very extreme power  very significant
   How does the OSC operate in this area
    o Usually begins with a tip from the TSX that something is going on  also may get tipped from someone else
    o OSC will do an investigation to see if there is any substance to the complaint
               But the issue then becomes whether to follow through with it
                         If it is straightforward then likely will prosecute
                         If it is part of an ongoing series of infractions will likely prosecute
                         If it is obvious that an infraction has occurred then likely will prosecute
                         If the violation is egregious will likely prosecute
                         But sometimes it is just not worth it
                                   o If the issue is just too complex to figure out, if it will take up too many resources then it is
                                        likely that the OSC will not go after it  just don’t have the resources to do it
               Also the issue of whether to keep it in-house or farm it out to the police  unlikely unless it goes to IMET but
                   there is still an issue of effectiveness even with them
                         As a result it is rare to see criminal prosecutions of securities violations




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