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									                                SECURITIES REGULATION
                                    Fall 2004– Anand


Course Focus - what does the corporation do?
 Survival - how does the corporation raise capital
 Obligations - to investors (public) and s/h  who get rights under the Act
 Breaches
 Emphasis on the fiduciary duties of the directors/senior officers through the raising of capital
   by issuing securities


How can a corporation raise capital?
 Bank loans
 Issuance of debt/equity securities to the public  gives up some interest in co. to purchaser

Obligations to investors
 Disclosure obligations- Quarterly; Yearly (AIF); TOB; Prospectus; - Disclosure obligations
   are assumed to correct certain asymmetries in the market
           1. because retail investors will have less information than company!
 This can and does move markets
 Info is disclosed via SEDAR

Why regulate disclosure to public?
 Information efficiency! If market were perfectly efficient, at any given point in time, the
  price of the securities will reflect all information there is about company
 Atlas - disclosed negative info on thanksgiving weekend (i.e. at a point when the stock was
  not monitored as closely) – Court: no dice! this underscores the importance of disclosure of
  info as it is reflected in share price

    (a) purpose of the act is to protect investors from unfair, improper and fraudulent practices
    (b) foster fair and efficient capital markets and confidence in capital markets
         to ensure that companies are able to operate easily w/in the regulatory system

s. 2.1: principles the Commission will consider when implementing policies
        o (2): highlights the importance of
                i. timely, accurate, and efficient disclosure
                ii. restrictions on fraudulent and unfair market practices
                iii. requirement of high standards of fitness and honest and responsible
                   conduct by participants
        o (6): requires balancing costs to the business against the significance of the of the
            regulatory objective (needs of business against needs of investor)

Asbestos      2001 SCC
held: statutory and PP goals of regulation include investor protection, capital market efficiency,
       and public confidence in capital markets
What happens when a company or an individual breaches securities regulations?
 Enforcement between the Act and the CCC  GOAL IS deterrence
 Each time a statutory provision is looked at the inquiry should begin with establishing the
  purpose of the requirement (usually it boils down to either fairness - are investors protected -
  or efficiency - is raising capital facilitated)

 these are markets for new issues of securities, which occur by way of a PUBLIC OFFERING
 here managers of business firms, and government units issue new securities to raise funds to
   finance their expenditures
 theses securities may be purchased directly by financial institutions or other lenders who
   have funds to invest – however, most new issues of private long-term securities are initially
   purchased by investment bankers or UNDERWRITERS (intermediary)
    after underwriter has purchased securities, they are resold in market and any profit to
       underwriter will be determined by spread between initial purchase price and resale price

    these are markets for existing claims (financial assets)
    since original issuers are not obligated to redeem securities until maturity, these markets
      allow investors to exchange securities for money before they mature.
    E.g. The free trading of securities on a stock exchange

CAPITAL and MONEY Markets:
 definition: “composed of institutions and individuals engaged in transferring funds from
               those in surplus to those in deficit and in facilitating changes in ownership of
               financial claims that that process inevitably creates”
 more generally, a capital market is a space for purchase and sale of shares (i.e. where capital
  is being bought and sold)
 capital markets are for longer-term debt instruments and stocks –capital market securities are
  those that mature in more than one year or that have no maturity dates, as in case of stocks
 primary purpose of capital market is to channel saving into investment; capital markets
  facilitate this process in two ways:
      1)       savers may buy newly issued long-term instruments that provide business firms
               with funds to finance capital expenditures;
      2)       financial institutions and others use savings of individuals and business to acquire
               capital market securities

Money Markets
  Place where short term instruments are traded. Generally, these are instruments with one
  year or less remaining until maturity.

History of Securities Regulation
 initially focussed mostly on investor protection, now see s. 1.1
 Williamson excerpt in chap 1: dates unimportant, but 1844 (England) was first date of
   investor legislation, and Canada didn‟t follow suit until late 1800s
       o pre-1945 history is themed:
                full disclosure – essentially this gives investor the information she needs
                   before purchasing – 1890 saw the imposition of liability for untrue statements
                blue sky laws – refers to official consent granted before the sale of securities
                   is commenced
                anti-fraud theme – obligation placed on traders who were trading securities on
                   behalf of investors (“dealers” in CA and “broker-dealers” in US, or
                   registrants) to be registered … duties as well
 post-1945, Kimber report (1966) – framework became the new Securities Act

Constitutional Issues (Division of Powers)

Division of power:
1. s91 – POGG; regulation of trade and commerce; criminal law
2. s92 - property and civil rights, which includes regulation of securities market transactions

Manitoba Case (1929)
 Prov Sec legislation does not give provs power over sales of securities of federally regulated
 This trend has NOT been continued in subsequent jurisprudence

Maryland and Mercury Oils
 s. 9 of Security Fraud Prevention Act granted power to examine any person to determine
  whether they have committed any fraudulent act
 I - Was prov legislation UV b/c of CC fraud provisions?
 H - There is no encroachment on exclusive legislative power of feds over crim law
 As long as a fed company is registered in a province, prov securities legislation applies to it
  as well (this counteracts Manitoba)
 This left a window re: enforcement provisions

R. v. Smith
 F: argument that the provincial SA conflicted with the CC – accused charged respecting
    giving false information knowingly given under provincial legislation, and crim code
    contained same provisions
 Does the prov securities act (re false information knowingly given) conflict with the CC?
        o 2 similar provisions between prov act and CC conflict w/ prov legislation having a
            crim/quasi-crim effect?
 Held: prov legislation was not an infringement b/c there was no actual conflict
        o paramountcy not at issue because there was no actual conflict – one provision would
            have to say yes, criminal action, where the other said no, no conflict – if repugnancy,
            then Dominion leg would trump but irrelevant here
        o Need to determine whether or not the matter of the provincial legislation is so related
            to the substance of the Dominion legislation so as to be brought w/in the ambit of
            criminal law – if there is, the Fed Leg will trump (and here, it does not!)

Multiple Access (1982)
 Facts: provincial and federal legislation both regulate insider trading
 I - are either of these these UV?
 Held - no UV in either instance
 NO good reason for paramountcy in this case - b/c in pith and substance they were similar,
  but there is no conflict in the provisions they are duplicative and can operate concurrently
       o Mere duplication without conflict isn‟t enough.
 Lederman - where there is no conflict and the provisions are identical then there is no
  repugnancy, QUITE THE OPPOSITE  it is the utmost of harmony


 Facts: Broker is based/registered in ON and is trying to sell securities in MAN - in order to
  sell in a province you must be registered in that province
 I - does the legislation in trading in one province regulate trading in another province?
 Held: b/c the solicitation occurs in MAN, MAN securities regulation applies
       o Policy Rationale - comprehensive system of sec reg required throughout the country
       o Prov securities legislation is NOT designed to regulate interprovincial trading
           therefore there is no infringement on Fed T&C power
 IE: The court sidesteps the issue by looking to the INTENT of the legislation
                Anand  it may not infringe by purpose, but it does by effect, so court is
                   shirking the real question!!!
 IN SUM: a province can regulate a broker located outside the province if broker transacts
  with people in that province

Where the pith and substance of the provincial legislation is not extra-territorial, incidental or
consequential effects on extra-provincial rights will not render the enactment ultra vires.

 Publicly traded TSE company - controlled by single SH in Ontario (GD). PQ wants of
   nationalize the company. PQ purchased GDs shares thus becoming the majority
   SH. Minority SH complained (most of whom lived in ON) to OSC.
 Question at OCA was whether a PQ crown corp is subject to the securities laws of another
 H - the OSC does have jurisdiction in the case - if a Company operated in the province‟s
   capital markets (ie. If there are even minority SH there), it is subject to the securities laws of
   that province
 The court rejected the closest connection test in favour of a broader connection test
 The problem with this is that every undertaking can have an indirect effect on residents of
   several provinces this can expose companies to any number of prov laws, some of which may
   be contradictory  CREATES CONFLICT OF LAWS PROBLEM!!!

Global securities – from text
-BC co ordered by BC Sec C to produce documents to US SEC;
-can province do this? (basically, enforcing foreign law)
-COURT: Assisting foreign powers is incidental to the Commission‟s power to regulate
provincial securities markets under s. 92(13)

-THIS is ok; as long as there is a dominant intra-provincial purpose – ie purpose to protect
someone/market, etc within your province.

-misrep by BC company that violated OSA;
-which statute applied? Distribution in Ontario
-sanction attaches depending on where distribution occurred.


Sebastian v Sask SC
-temporary; issued cease trade orders; didn‟t get a hearing; later forced to testify at hearings; then
charged after those hearings; argued 11 c, d and 7 were violated
-S SC: no dice; Charter is not retroactive; can‟t apply before 83; 7 can‟t apply to economic
rights; things weren‟t penal so 11 did not apply either.

BCSC v. Branch – not covered in class – but Anand said to look at them
 The British Columbia Securities Commission commenced an investigation into a company
  following a report by the company's auditors disclosing questionable expenditures. The
  appellants, two of the officers of the company, were served with summonses compelling their
  attendance for examination under oath and requiring them to produce all information and
  records in their possession relating to the company. The summonses were issued pursuant to
  s. 128(1) of the province's Securities Act. When the appellants failed to appear, BSCC
  charged contempt; dudes asked for declaration that s. 128(1) violates ss. 7 and 8 of the
  Canadian Charter of Rights and Freedoms. The application was dismissed. The superior
  court judge rejected the appellants' claims in respect of the privilege against self-
  incrimination and of a right to remain silent under s. 7. He also concluded that the seizure
  authorized by s. 128(1)(c) of the SA is not "unreasonable" within the meaning of s. 8.
 SCC: An inquiry of this kind legitimately compels testimony as the Act is concerned with
  the furtherance of a goal which is of substantial public importance, namely, obtaining
  evidence to regulate the securities industry
      o In our opinion, persons involved in the business of trading securities do not have a
          high expectation of privacy with respect to regulatory needs that have been generally
          expressed in securities legislation.
      o Therefore, we conclude that those who are ordered under s. 128(1) of the Securities
          Act "to produce records and things" can claim only a limited expectation of privacy in
          respect of these materials – REP under s. 8 – business  less!
      o In our view it does not (infringe). We have already mentioned that in a highly
          regulated industry, such as the securities market, the individual is aware, and accepts,
          justifiable state intrusions. All those who enter into this market know or are deemed
          to know the rules of the game. As such, an individual engaging in such activity has a
          low expectation of privacy in business records
 test for compellability: is there a legitimate public purpose, or is the main purpose for the
  evidence to incriminate the person compelled?

Holoboff v. Alberta
 Alberta SC seeks cease trade order against unregistered dudes; dudes don‟t show up, despite
   notice; Board issues cease trade orders for life against both; dudes brought Charter challenge
 Alt CA: held the Charter did not apply to these proceedings as they were not the sort of
   “offence” proceedings to which ss. 11 and 13 of the Charter were applicable

       o The proceedings before the Board did not expose the appellants to any criminal or
         quasi-criminal charges. They were not prosecutions and the remedies available did
         not include incarceration or monetary fines.
       o The paramount objective of the Act is to protect the public.
       o This protective role, common to all securities commissions, gives a special character
         to such bodies which must be recognized when assessing the way in which their
         functions are carried out under their Acts.
       o Where disqualifications are imposed as part of a scheme for regulating an activity in
         order to protect the public interest, disqualification proceedings are not the sort of
         "offence" proceedings to which s. 11 is applicable

ANAND: Thus, in terms of future Charter challenges, much will depend on the enforcement
route taken by regulators and others. If the proceeding is criminal or quasi-criminal, it may be
that s. 11 and s. 13 will be activated.

-appellant denied ability to CE investigator;
-Court retains discretion to interfere; do not necessarily get right of CE

Asbestos again
-SOR for OSC is likely reasonableness
-given the right of appeal; relative expertise; purpose of act about public protection; nature of q

Cardaway resources
-sanctions are not penal  they‟re about deterrence
-market participants are rational actors – know what they‟re getting into.
-OSC has expertise to decide appropriate sanctions.



       └ refers to the rules of operation of stock exchanges, Investment Dealers‟ Association of
       Canada, Broker-Dealer‟s Association of Ontario, and to a lesser extent various
       associations of financial intermediaries


Why Does Government Intervene?
1. To uphold the Fundamental Purpose s. 1.1: To protect investors while still maintaining
   efficient markets
2. To control the economic stability of the country by using their control over financial
   variables such as money supply.
3. Capital Markets are not perfectly efficient: Remove impediments to efficiency (a liquid
   market  the ability for a shareholder to easily sell and purchase shares in a market)
4. Also regulation must ensure that the investor is protected.

    There is a tension then (balancing efficiency and investor protection  Greater
   regulation means greater protection but greater costs and lower efficency.
    There will come a point where more regulation is negative
    The law assumes that investors are unsophisticated (goes to the lowest
   Common Denominator)
5. Increase Confidence in the market through the duo-goals of s. 1.1
      a.  This duo purpose was established through the Kimber Report (but enacted in

 1965, Ontario commissioned committee to re-examine regulation of capital markets.
   Findings of committee contained in Kimber Report
 Report discussed dual purposes underlying regulation of capital markets:
      1)      Protection of Investors; and
      2)      Market Efficiency (within which businesses can
      operate, and capital can move easily between
      investors, and issuers and investors)
 these purposes now enshrined in OSA:
      s.1.1: “ purposes of this Act are:
              a)      to provide protection to investors from unfair, improper or fraudulent
                      practices; and
              b)      to foster fair and efficient capital markets and
                      confidence in capital markets.”

   there is tension between these goals
        o investor protection usually means greater regulations – greater regulation usually
            results in lesser market efficiency (such that legislation impedes market efficiency)


How Does Government Regulate?
     └ various approaches are:
           a)     disclosure (e.g. prospectus requirements);
           b)     stipulating prohibited activity;
           c)     directly influencing flow of funds

2. The Four Levels of Government Regulation
    1. Legislature
    2. The Act
    3. OSC
    4. Self-Regulating Organizations


 PROVINCIAL, not federal government, as provinces have jurisdiction over property and
    civil rights
 Caselaw: exclusive power for prov to regulate business transactions (see above)
 BUT: DO NOT assume that SR has ALWAYS been prov and that there is no dispute over

#2.     ACT
 Core of securities regulation in all of provinces is legislation – their respective Securities Act
    (for Ontario, hereinafter OSA)
 Once Act/provisions are enacted, provincial leg is out of the picture (temporarily)
 Regulations contain subordinate rules in all of same areas, as well as text of many forms to
    be followed in preparation of documents (such as prospectuses or insider reports) that are
    required to be used or filed
 What does Act say about powers of body that administers it?
        o s.3 of SA – OSC is a corporation without share capital
                 (3) – (5) – structure; term limitation (5yrs)
                 (7) duties of the chair – chair is essentially CEO of corporation
                 (9) commissioners are not liable – this is a new section, has not been litigated;
                    unclear what its purpose is just yet other than to encourage people to “come
                    onboard”  also unclear the extent of the exemption
                 (12) – arms length crown corporation – thus, OSC is self funding
                         salaries of employees not tied to govt structure
                         retains fees from capital market participants
                         separate from prov revenue
        o s.3.2 – powers of the OSC -re. s.15 of CBCA – powers of natural person; responsible
            for administration of act!
                 (2) –OSC is responsible for administration of OSA and associated duties.
                         refers to individuals! thus, establishes dividing line between duties of
                            the commission and s.3.6, which is their ability to employ STAFF to
                            carry out their functions; thus: read (2) and 3.6 together!
                 (3) OSC has the power to make bylaws
        o 3.4 – sets out procedure re. income.
                 consolidated revenue fund – OSC has to pay certain money into this fund
        o 3.5 – V Important – SC is a body with multiple functions.
                 HAS the power to hold hearings; also joint hearing with other prov
                 (4) – MOST IMPORTANT SECTION – no member who exercises a power or
                    performs duty except under 17 shall sit on a hearing that deals with the matter
                 normally, commissioners will hear hearings – but if they are involved in the
                    investigative stage, they CANNOT sit on the hearing without express consent
                         THUS: creates a legal separation b/w the investigative power of
                            SC and enforcement powers of SC
                 this separation leads admin scholars to argue no RAB of SC, as multiple
                    functions are separate. Note that this is a controversial position though.
        o 3.6 – Commission staff can be hired (lawyers, articling students, janitors, etc)
        o Part 6, Section 11 of SA– SC may appoint one or more persons to make an

#3.      OSC
 primary actors in regulating our capital markets are securities commissions – administrative
    bodies created by provincial securities acts to implement securities law (in Ontario, OSC)
         o these bodies act as administrators, adjudicators and even as legislators; they also act
           as supervisors and appellate tribunals for SROs
 OSC is a two-tiered structure: Commission and Staff
 OSC has been primarily responsible for both development of securities policy in Ontario and
    its embodiment in Act and Regulations
 One of principal vehicles for change in securities regulation in Ontario has historically been
    promulgation by OSC of POLICY STATEMENTS (National, Uniform, or Local)
         o policy statements serve a number of functions, including articulation of standards and
           principles and of way that Act or other securities rules will be interpreted by
           Commission or its staff
         o however, more controversially, policy statements have also been used by
           Commission to change, often fundamentally, the rules applicable in all of basic areas
           of securities regulation
                this power of OSC to promulgate policy statements did not originate from
                   statute, but was created by securities commissions to enable themselves to act
                   in so-called “PUBLIC INTEREST”
 The lack of official delegated power to do this became a controversial issue, and was
    successfully challenged in Ainsley

Ainsley Financial Corp. v. Ontario (Securities Commission)
Issue: Whether OSC had authority to issue Policy Statement 1.10 (a policy which regulated the
sale of penny stocks in Ontario – even though called “policy”, was basically a rule!)
Held: Court stated following:
1. OSC has the authority to issue NON-binding statements or guidelines intended to inform and
    guide those subject to regulation (without any specific statutory authority for doing so); BUT
2. there are limits on such authority: ** OSC‟s policies cannot be elevated to status of law;
    they are not to be treated as legal pronouncements absent legal authority.
         i.e. a non-statutory instrument cannot impose mandatory requirements enforceable by
            sanction…that is, regulator cannot issue de facto laws disguised as policy guidelines
         Policy Statement 1.10 had no statutory authorization…it was mandatory; had
            coercive overtone (threat of OSC sanctions)…and it was thus invalid

Ontario responded to Ainsley case by forming Ontario Task Force on Securities Regulation
(“Daniels Task Force”)…. Task Force recommended that the OSC be given explicit powers to
create general policies and a new power to enact mandatory rules
         alternatives could have been: no rulemaking power; rulemaking power with heads of
           authority; basket rulemaking
         why give rulemaking power? speed (vs. leg); efficiency; expertise;

Following Daniels Task Force recommendations, Ontario introduced s.143 into the OSA…now
OSC has the ability to make Rules…for every Rule, there must be:
       a)     142.2(2) – notice must contain rule, statement of purpose, alternatives, etc.
       b)     143.2(4) - an initial comment period of 90 days;
       c)     143.2(7) - a re-publication of Rule (if there are material changes); and
       d)     143.3 SC must submit for Ministerial approval – he has 60 days.

NOTE: s. 143(20) Commissions may make rules relating to exemptions from the prospectus
requirements under the Act

Anand: Gives the SC a LOT OF POWER!! Reformulation project – took all legislative
instruments and reformed them to accord with rulemaking system

National instrument – there is meant to be unanimous signing-on, making it binding
National policy – must be implemented by the Province
Multilateral instrument – intended to be binding although not all provinces have signed

#4.    self-regulatory organizations (SROs)
 securities commissions are only one of many organizations that create and enforce rules to
    ensure integrity of capital markets
 these other bodies devolve from securities commissions, and are known as self-regulatory
    organizations (SROs)…examples include:
       a)      STOCK EXCHANGES;
               o * S. 21(1): No person or company can carry on as an exchange w/o
                   recognition of the OSC.
               o S. 21(2) - Test: if OSC satisfied that recognition is in the public interest!
               o S. 21(4) – can regulate the standards/conduct of its members
               o S. 21(5): Commission Oversight: OSC bears responsibility to make sure that
                   the SRO is behaving appropriately
       b)      SRO‟S proper (e.g. Investment Dealers Association of Canada) (IDA)
               o s.1 – defines SRO –“a person or company that represents registrants (ie.
                   dealers) and is organized for the purposes of regulating the operations and the
                   standards/pratice/business conduct of its members and their representatives
                   with a view to promoting the protection of investors and the public interest”
               o s. 21.1: MAY recognize upon application, if in the public interest
                         * does not need to be recognized, however if it chooses to be
                           recognized, it will be subject to “commission oversight”

   “COMMISSION OVERSIGHT”(see various “oversight subsections” under s.21 of OSA):
    securities commissions are, however, still responsible for supervision of SROs, and may
    hear appeals of their decisions (although they will show considerable deference for
    expertise of particular SRO under review)
   Recognition is nonetheless important  gives legitimacy to SRO‟s!

   although SRO‟s fall at the bottom, they enable the OSC to do its job more effectively
    because there‟s delegation from regulator to SROs and Stock Exchanges

Parties for Securities Regulation:

 OSA: s.1(1): a long and complicated definition, boiling down to “a person or company who
  issues or proposes to issue, a security”
               A) has issued securities in respect of which a prospectus was filed
               B) has filed a prospectus
               C) securities were listed on a recognized SE
                OSC can deem a company to be a RI under s.83.1
   BC leg – an issuer that has filed a prospectus and is listed and posted for trading on a SE
   Q: what motivates the various primary borrowers (corporations, government and
    individuals) to issue primary securities?
         e.g. expansion plans may exceed internal funds available, requiring access to external
           funds through issue of primary securities

 people who facilitate the purchase and sale of shares
 on purchase-side of shares, these intermediaries generally provide better quality investment
   decisions (i.e. capital allocation decisions) than individuals would acting on their own
 on sale-side of shares, ultimate borrower recognizes significant cost advantages in selling
   large blocks of securities to a few financial intermediaries rather than to many small investors

 there are two types of investors in Canadian Securities Market:
      1.      INDIVIDUALS;
               these bodies hold majority of securities traded in Canadian capital markets
               institutions consist primarily of banks, trust companies, life insurance
                   companies, pension funds, investment companies and mutual funds
 BUT: no distinction in Act between types of investors!
      o So, although no distinction, some types of investors may be more likely to benefit
          from provisions of SA due to the resources they are able to access by virtue of their
          size, strength vs. individual investors
      o some suggest there should be a distinction made in SA to empower retail SH
 Recall: Most companies in Canada tend not to be widely held
       we have many companies that are family held or have controlling SH holding
          interests in companies
      o THUS: importance of minority SH rights in Canada!

 Latest: - Anand did not cover
 U.S. recently passed Sarbanes-Oxley Act to make Boards more responsible to investors;
   Act provides for following:
       →        top management have to certify financial statements – this ensures that disclosure
                going out to public is accurate
       →        companies cannot extend personal loans to top management – this ensures that
                company is separate from people who operate it
       →        protection for whistle-blowers
       →        recapture of executive bonuses and profits
       →        audit committees must be in place for public companies (no longer optional)
       →        committers of fraud are liable for up to 25 years in prison
 Canada (Brown of OSC) is now asking whether we need similar legislation (i.e. stronger
   laws in Canada)
 NOTE: All Canadian companies that are listed in the U.S. must comply with this new


 Canadian securities legislation can be characterized into four areas:
1)   REGISTRATION (requirements and exemptions)
      this regulatory vehicle is used to police persons or companies that
             (i) trade in securities (dealers) or
             (ii) act as advisors or underwriters
2)   PROSPECTUS (requirements and exemptions and closed system)
      a prospectus is a comprehensive disclosure document (booklet) that is intended to
        provide “full, true, and plain disclosure” of all material facts relating to securities
        offered by it… the prospectus describes securities being offered for sale, and tells a
        lot about issuer (financial info, etc)
3)   DISCLOSURE (continuous and timely disclosure requirements; reporting requirements;
     prohibitions and penalties for violations)
     o for reporting issuers, securities legislation requires compliance with a number of
        material disclosure requirements intended to give investors and potential investors
        equal timely access to financial and other information likely to significantly affect
        market price of any securities of a reporting issuer
     o Insiders must also disclose any trading;
     o Must disclose WRT takeovers accomplished through securities purchases
4)   BIDS (takeover and issuer bids)
     o aims of these rules include:
             (a) equal and fair treatment of all shareholders of a target;
             (b) disclosure by offeror of material info relating to bid in order to permit
                offeree shareholder to make an informed decision as to whether or not to
                accept bid;

   our securities regime is TRANSACTION-BASED (as opposed to an issuer-based
    regime)….i.e. there is a focus on buying and selling of securities (issuer obligations are part
    of this regime)
         note: new BC model differs from Ontario – In BC, each time an issuer wants to issue
             securities, it does NOT need to file a prospectus IF it has an established body of
             disclosure (BC continuous market access rules)
   securities legislation is very similar to consumer protection legislation, consumers in this
    case being investors
         each provincial securities statute promotes policy of consumer protection by
                  (i) licensing market participants and
                  (ii) policing kind of information investors receive

What is a security?
 A financial claim which gives the holder a legal claim over the earnings of the issuer and a
  further claim over the assets of the issuer in the event that the issuer is wound up
       o This is a LEGAL entitlement!
 demonstrates the legal relationship between corporate statute and securities law because
  entitlement is found in s. 24(3) of CBCA – right to vote, to receive dividends, receive
  property on dissolution

       o OBCA differs in proxy solicitation and going private transactions but otherwise

Securities fall into 2 categories
 Debt - instruments issued under a K with corporation, which promises debt-holders interest
   that the debt-holder will receive; AND certain payments on the principal AND full payment
   of the debt on the maturity date of the instrument – includes debentures
            1. Secured = the issuer‟s non-payment of principal – “I loan you this money if you
                promise to give me certain assets if you don‟t repay me”
            2. Unsecured = there‟s no such payment in case of default
            3. Note - convertibles - debt that can be converted to equity
 Equity - shares - they present the owners of the shares with a right over the earnings stream
   (see above); they are set into 2 broad categories
            1. Common Shares – most common type - SH claim to dividends stands last in
                priority over the earnings stream. After prior claims are paid, all residual profits
                go to the common SH (IF the dirs elect to distribute)
                     Typically carry the right to vote and make proposals.
                     Emphasize: Dividends are discretionary! These dudes are last in line!
            2. Preferred Shares - fixed claimants that have a one-shot payment per annum, but
                they‟re sure to get paid (typically the amount paid for shares and any unpaid,
                accrued dividends)– they have preference over the common shares; they have a
                prior claim on assets upon winding up
                     Typically, Pref SH do not have a voice/right to vote in a corporation

 Section 53(1) of OSA provides that:
       “No person or company shall TRADE in a SECURITY on his, her or its own account or
       on behalf of any other person or company, where such trade would be a DISTRIBUTION
       of such SECURITY, UNLESS a preliminary PROSPECTUS and a prospectus have been
       filed and receipts therefore obtained from the Director.”
 fitting into s. 53 triggers the Act, requiring
  - prospectuses (prepare and distribute)
  - disclosure of material information
  - insiders to disclose all trading
  - disclosing takeovers accomplished through securities purchases
 this basic prohibition contains three terms which need to be examined:
               a)       SECURITY;
               b)       TRADE;
               c)       DISTRIBUTION

 first concept to consider is that “IF A SECURITY IS FOUND, ACT WILL BE
  TRIGGERED”  thus, we need to determine how to define a security…
 yes, it is a FINANCIAL CLAIM, but we need to get more complex now…
 OSA defines security (see s.1 – Definitions)
      o very long definition: any document instrument or writing commonly known as a
           security; document or evidence indicating… etc. Very LONG and BROAD
      o Most caselaw has focused on what constitutes an “investment contract”.
 E.g. income trusts,

       o Viattical settlements (terminally ill individual assigns their benefits to the insurance
         company for less than they‟re worth to get money up front; when individual dies,
         company recovers policy),
       o Options (instrument giving the holder the right to buy (call) / sell (put) an underlying
         interest from a stated issuer at a stated price, on a stated date)
       o Futures: financial contract that requires the sale of financial instruments or physical
         commodities for future delivery; buyers “bet” what the value of an index or
         commodity will be at some future point (except commodities futures, which are diff)
       o Derivatives: securities whose value depends upon that of the underlying security /

What Qualifies as a Security? – THEMES OF JURISPRUDENCE
 a) Result-oriented Cases – results sought by judge drive the reasoning, rather than reverse.
 b) Investor Protection – If court determines that person buying interest is in need of
 protection, interest likely to be defined as a security.
 c) Expectation of Profit – Security will be found when person secures the use of money of
 another on the promise of profits.
 d) Risk Factor – Some degree of risk is sufficient. Generally, the more risk the purchaser is
 exposed to, the more likely it is court will find legislative protection necessary.
 e) Purchaser‟s Degree of Control – Less control=greater risk=court finding interest to be
 f) Independent Value – Even if subject of contract has value independent of success of
 enterprise, it may still be interpreted as a security. E.g. real estate property has been deemed by
 courts to be a security.
 g) Substance over Form – Indicates that even if document clearly denies that interest is
 security, court may find it to be anyway.
 h) U.S. cases – may usefully be cited in Canada in arguing whether interest is a security.
 i) Explicit Exclusions – Certain other interests are already covered by other legislation and
 thus don‟t fall under ambit of OSA (e.g. evidence of deposit issued by bank (bank book)

LEGISLATION – S. 1 definition

 a security includes “any document, instrument or writing commonly known as a security”
 issue is determining common knowledge
 relevant communities for where it might be commonly known are LEGAL and
     FINANCIAL COMMUNITIES (i.e. not world at large)

 a security includes “any document constituting evidence of title to or INTEREST IN capital,
     assets, property, profits, earnings or royalties of any person or company”
 cases usually turn on whether an appropriate document exists…

Ontario (Securities Commission) v. Brigadoon Scotch Distributors
 Respondent company was a private company which acted as a broker or agent in sale of
   whisky or warehouse receipts; OSC alleged that whisky warehouse receipts were in fact
   securities under definition of securities in the OSA: “any document constituting evidence of
   title to or interest in capital assets,…”
 COURT: held that wording of this definition section (of securities) was extremely wide, and
   could conceivably include any document of title to any property

       o whisky warehouse receipts could be included in this definition, as they were being
         sold for investment purposes (i.e. to make a profit), not as inventory or for
       o this clause is very broad; usually the court will ask whether the individual was
         making an investment or purchasing a commodity

Swain v. Boughner
 in this case, court held that a one-half interest in a pair of breeding chinchillas was a security
   where vendor kept animals, agreeing to breed them and share profits with purchaser
 OntCA: Yes, it IS a security!
      o focused on actual wording of OSA, as opposed to appearance of transaction
                property NEED NOT remain in another person or company
      o basis test is whether the document shows some form of investment or speculation
           indicating transfer of interest (note, this formulation reflects securities regulatory
           system‟s design to protect the investing public)
      o the intentions if the business venture are also key; they intended to profit;

Anand: problem - if all that is required is a document indicating an interest in property, then
ANY bill of sale could be seen as a security! Or a deed, mortgage, lease, etc
 SO: something more than a simple property interest must be needed!
 Maybe – a property interest entered into with objective of earning a profit!!!
     o OR: the interest could be characterized as investment contract

 Basically covers any document evidencing an interest in any type of security in the definition
 STOCK OPTIONS give the holder right to buy or sell a security by some determined time
     for a set exercise price
 SUBSCRIPTIONS are “sign-up” forms for purchasing securities
 “Other interest” makes this subparagraph of definition almost infinitely broad.

 this is a straightforward branch of definition
 excluded items in this branch of definition include insurance contracts and bank, credit union
     and trust company deposits (which are governed by different legislation)
 most common, but least controversial.

 this covers mutual funds and some variable annuity contracts

 this is considered redundant because of the investment contract section

 this subparagraph includes “any investment contract, other than an investment contract
     within meaning of Investment Contracts Act”
 this branch has generated more debate and jurisprudence than any other...(and
     common law has elucidated what the term means)…

SEC v. C.M. Joiner Leasing Corporation and C.M. Joiner (U.S. Case)
 D00d purchased a number of leases of potential oil bearing property, conditional on him
  drilling test wells, and then raised money to conduct a drilling program by re-selling some of
  lease rights (retained right to drill test wells to determine land value)
 Issue: whether interests sold constituted securities under U.S. Securities Act
 Court: held that they were securities because:
      o (a) defendant was selling the hope of a profit, not just a leasehold
      o (b) legislative policy is investor protection; and
      o (c) substance (not form) governs
 court provided a foundation (CHARACTER TEST) for interpreting „securities”:
      o “ test is what character the instrument is given in commerce by the terms of
          offer, plan of distribution, and economic inducements held out to prospect”
      o SO, have to look at HOW your client plans to distribute the thing at issue; and
          WHAT the economic inducements are that they held out.
      o IE: A Security when someone trying to raise money somehow and doing so with
          selling the hope of profit.

SEC v. W.J. Howey Company and Howey-In--Hills Service Inc. (U.S. Case)
 D‟s corporation was trying to raise money for cultivating citrus crops by selling land to
  purchasers; when buying land, defendant also urged purchasers to enter into service contracts
  with company‟s subsidiary (to service the crops – most buyers knew nothing about farming)
 Issue: Did the combined deeds giving title to land and service contracts constitute securities?
 Held: They were securities because “they are offering an opportunity to contribute money
  and to share in profits of a large citrus fruit enterprise managed and partly owned by
  respondents…such persons have no desire to occupy land or to develop it themselves; they
  are attracted solely by prospects of a return on their investment…A common enterprise
  managed by respondents or third parties with adequate personnel and equipment is therefore
  essential if investors are to achieve their paramount aim of a return on their investments…
  resulting transfer of rights in land is purely incidental”
      o company is offering something more than just fee simple interest in land; they‟re
          offering opportunity to contribute money and share in profits of a larger enterprise
              an investment contract (and therefore a “security”) thus exists if there is:
              (a)     a “contract, transaction or scheme”
              (b)     “whereby a person invests his money”
              (c)     “in a common enterprise” (between the investor and the promoter)
              (d)     “and led to expect profits”
              (e)     “solely from efforts of promoter or a third party” (other than $)
 Neither certificates nor other tangible evidence of shares in an enterprise is required
 FURTHER: If test is satisfied, it is IMMATERIAL whether speculative or not, or whether
  the sale of property is with or without intrinsic value

Hawaii (State), By Its Commissioner of Securities v. Hawaii Market Center, Inc.
 D operated retail store; to raise money, they recruited “founder members”; either distributor
  or supervisor; paid a lot up front, but then received purchase authorization cards that enabled
  purchasing items at store at lesser rate; then these founders could distribute cards to others; if
  those people then purchased goods, members received a commission (or if these customers
  became members themselves)
      o D argued Howey test req‟d purchasers to be lead to expect profits SOLELY from
          efforts of promoter; here, founder members have to themselves “do work”
   Issue: Whether “Founder-Member Purchasing Contract Agreements” constituted securities
    within the meaning of the Securities Act
   Held: They were securities
   However, instead of relying on Howey test (which court found too narrow, too mechanical),
    court set out a broader test known as RISK CAPITAL (HAWAII) TEST:
   An investment contract is created whenever:
        (a)     an offeree furnishes initial value to an offeror, and
        (b)     a portion of this initial value is subjected to risks of enterprise, and
        (c)     furnishing of the initial value is induced by offeror‟s promises or
                representations which give rise to a reasonable understanding that a valuable
                benefit of some kind, over and above initial value, will accrue to offeree as a
                result of the operation of the enterprise, and
        (d)     offeree does not receive the right to exercise practical and actual control over
                managerial decisions of enterprise
   HERE: – even though they did recruiting, investor has no MANAGERIAL control over the
    enterprise! SO, the rights of the “founding members” were held to be securities.
   KEY: purchaser has undertaken some risk and has no managerial control over the enterprise

Pacific Coast Coin Exchange of Canada v. Ontario (Securities Commission)
 PC offered bags of silver coins for sale (sack with $ on side); could be bought by cash or “on
   margin”; “on margin” means borrowing money, using an asset as leverage with some debt;
   promotional literature suggested coins as an investment that was resistant to inflation; OSC
   ceased trade of scheme; transaction could be completed by paying purchase price by a
   particular time and receiving the bags, or by selling them;
 Issue: Whether ability to sell futures constituted investment contracts
 Held: They were securities – applied BOTH Hawaii AND Howey!
 court (SCC) (in looking at tests) stated as follows:
       o “I have examined the facts in sole light of the Howey and Hawaii tests…however, I
           would be inclined to take a broader approach. It is clearly legislative policy to
           replace the harshness of caveat emptor in security related transactions and the Courts
           should seek to attain that goal even if tests carefully formulated in prior cases prove
           ineffective and must continually be broadened in scope. It is policy and not
           subsequently formulated judicial test that is decisive…”
       o NOTE: modification: does not have to be “solely” from efforts of 3rd P. (this
           was a concern in Hawaii case)
                 SCC: Whether the efforts made by those other than the investor are the undeniably
                   significant ones, those essential managerial efforts which affect the failure or success
                   of the enterprise”.
                  Also, does not have to be actual vendor  just a “3rd party”
   Anand  court seems to focus on the dependence of the investors –which was part of Risk
    Capital Test (to some extent)
       o ie. way in which investors were dependent on those who had managerial control to
           make money for them
       o but, also part of CE Test – “making profits from actions of others”
       o KEY: investors were dependent on PC; key to success is efforts of promoter; doesn‟t
           matter that relationship is based on object
   Anand: SO, what is the test then, exactly? Recall Hawaii rejected Howey!
       o We still need to do both a Howey AND a Hawaii analysis to determine whether or not
           is a security
       o Ryan: Perhaps the toning down of “solely” reconciles the cases?
Albino case
 F: executive was awarded “phantom stocks,” or incentive units which were equivalent to
   one common share, and which would pay out the difference between the price of stock when
   awarded and the price when encashed
 Securities? Court split, and decided on basis of another issue;
 1) NO: not commonly known as securities; insufficient nexus between the market and the
   payout; significant restraints on liquidity
 2) YES: legislation must be read broadly and purposively (dicta from Pacific); they were
   derivative stocks; and this was seriously prejudicial to investor confidence in the market

 Issue: when will a financial claim be classified as a security so that legal obligations in SA
  are triggered
 Purpose: to protect investors against imposition of unsubstantial schemes (Hawaii)
 KEY: Must be an expectation of a profit (common to both tests)
 KEY: Security will be found when one secures money of another on promise of profits
 KEY: Risk is a key factor – to be characterized as a security, it need not be speculative or
  high risk –SOME degree of risk is sufficient (Hawaii)
 Anand: really appears as though cases are result oriented!!!!!
 QUESTION: so, why isn‟t a Costco membership a security? Maybe just b/c they haven‟t
  been litigated yet! OSC is concerned primarily with investor threats… so if the threat is low,
  they probably won‟t investigate.


s. 25: trader registration
- (1) no person or company shall
           a) trade in a security or act as an underwriter unless the person or company is
           registered as a dealer, or is registered as a salesperson or as a partner or as an officer
           of a registered dealer

      „Trade‟ is another key term in determining the application of OSA
      Definition of trade in s.1 (Definitions) of OSA can be broken down into 4 categories:

   (a) Sale for Valuable Consideration;
    actual consideration is not required; contemplated consideration is sufficient – i.e. a
       “trade” may occur before consideration has ACTUALLY been exchanged between
       parties…it also may occur even without a completed contract of offer and acceptance
    EXCLUDES GIFTS (see Re Huntingford and Anchor Machine & Manufacturing
       Ltd.)…assumption that there are no investor protection concerns here (little risk of donor
       taking advantage of donee)
    securities used as loan collateral are also exempt, except if you‟re a control person (see d)

   (b) Participation as a trader in any transaction in a security through a SE or other
       quotation and trade reporting system

      these registrants (buyer and seller of securities) are regulated as they offer advice and
       their activities can have a fundamental impact on investor relations
      Sales of shares for traders will always constitute a “trade”

   (c) Any receipt of an order to buy or sell securities
    (“registrant” = e.g. broker is a registrant; somebody registered to buy/sell securities –
       typically public can‟t buy directly from company) – brokers activities are trade
    policy: protection! can‟t just regulate sellers; have to regulate those who negotiate and
       help structure terms of sale

   (d) Transfers, pledges (transfer of securities to a lender to ensure a loan) are ONLY
   included as “trades” IF:
    1-if the trade is not in good faith – disguising a sale transaction as a loan transaction will
       not avoid the Act
    2-if the pledge / grant is made by a grantor who is a “control person” – SO if you‟re a
       control person and you‟re seeking to secure a loan thru using shares, you fall w/in “trade”
            CP is one owning a sufficient number of shares to materially affect the control of
               the issuer (can be as little as 20%)
            CP cannot use their shares as a pledge, etc., because smaller public investors can
               be disadvantaged if we allow CP to use their block as security for debt even if
               loan transaction is made in good faith – defaulting could have a very serious
               effect on the corporation
            CP is also considered an insider for the purposes of insider trading
            Policy: protect other SH – control peoples‟ actions can have serious effect on
               market price!

   (e) Open-ended Definition of „Trade‟ (catch all clause)
    “any act, advertisement, solicitation, conduct or negotiation directly or indirectly in
       furtherance of any of the foregoing”
    even if the trade doesn‟t actually happen! (also, see above (a))
    mere solicitation constitutes a trade because the concern is that sales pitches will pressure
       investors or make misrepresentations that will not be caught because it is prior to the
       actual trade
    Anand: this is pretty incredible! A lot of discretion to define something as a “trade”.
    Re World Stock Exchange – 2000 Alt SC: registered in Caymans, solicited to AB via
       internet, not recognized by AltSC; Court: soliciting over internet is a trade in jurisdiction
       where trade is solicited.
    See: NP 47-201 – trading using internet and other electronic means

Q: are there trades that are not distributions?
 Yes: But are still subject to regulation under the Act; anyone engaged in trading must
    register; this requirements help ensure the actions of registrants are “proper”

 This is the third key concept on which securities regulation is based
 Policy behind regulating distribution: protecting investing public by ensuring they receive
   relevant information
 KEY: if an issue of securities involves all three („security‟, „trade‟, and „distribution‟)
   then a prospectus must be filed (WITH EXEMPTIONS)

OSA (s.1 – Definitions) defines „distribution‟ in seven parts:
  (a) KEY: a trade in securities that were not-previously issued;  THE MOST COMMON
  (b) A trade by issuer in its own previously issued securities;
  (c) KEY: a trade by a control person in previously issued securities;
      o (a trade that can materially effect the control of the issuer)  any person/company
           with 20% or greater is deemed to have control unless otherwise proven.
  (d) and (e) deal with pre-1981 stuff…
  (f) KEY: the first trade of previously exempt securities under OSA, s.72(4), (5), (6), and (7)
      – if no further exemption is available;
  (g) any transaction (or series of transactions) involving a purchase/sale or a repurchase/sale
      in course of a distribution or incidental to a distribution

   basically, these parts can be broken down into three categories:
        1)      Trades by Issuers;
        2)      Trades by Control Persons; and
        3)      Trades of Restricted Securities


   IE. “what you need to do if you trade in securities, where that trade is a distribution”

SEDAR WEBSITE-www.sedar.com
 creation of SEDAR ( „System for Electronic Document Analysis and Retrieval‟) by CSA has
  also helped to reduce filing costs, and to expedite the prospectus filing process
       SEDAR facilitates electronic filing and public dissemination of certain disclosure
          documents required to be filed under securities legislation of provinces and territories
       SEDAR provides for the transmission, receipt, acceptance, review and dissemination
          of documents filed in electronic format
       once securities regulatory authority reviews electronic format filing, then electronic
          filing becomes publicly available as soon as securities regulatory authorities changes
          status of filing from „private‟ to „public‟
 prospectus is a lengthy document that sets out details of company, business, management,
  finances, existing securities and securities being qualified
 9 out of 10 times, the issuer will use an underwriter for their issuance.

UNDERWRITERS – key party
 underwriter acts for the company (hired by co); performs jobs for company; these services
  also are beneficial to investors
 they are the “gatekeeper” of information – relay info about the company, its future, its
  securities, etc to the public; act as liaison between company and public, basically.
 provides/interprets info to potential investors about company and gives security (ie comfort)
  to investors that their investment is sound  based on info in prospectus
   main: corrects information asymmetry between companies information about themselves and
    information investors have about the company;
   Must sign on prospectus that it contains FTP disclosure.
   YBM Magnex– underwriter must go beyond the statements by the issuer‟s directors, officers
    and counsel, even though the issuer‟s directors have better access to information, because the
    underwriter stands between the issuer and the investor as an independent 3rd party
   NI 33-105: Have also heightened disclosure responsibilities in event of conflict

      3 types of underwriting:
i)     Best Efforts: Underwriter as sales agent. Collects commission on only those securities
       that it sells to third-parties. Very popular in Canada. Less costly and more attractive.
ii)    Firm Commitment: Underwriter purchases entire issue of securities. If unable to sell,
       tough luck! Profit comes from buy/sell differential of issued securities.
iii)   Bought Deal. Special subcategory of the firm-commitment underwriting. Only possible
       where a prospectus can be filed quickly. Normally underwriting agreement signed shortly
       BEFORE the final prospectus is filed. Here, agreement is signed at time of preliminary
       prospectus. Does not occur in the US.
                 i. RISKY to UW: if you have a contract signed BEFORE the prelim prosp is
                     even filed, you have MUCH less info about the extent of investor interest in
                     this offering
                ii. NOTE: do have a “market out” or “disaster out” options.
               iii. underwriter has 2 days to solicit interest before preliminary prospectus filed
                     NI 44-101 (p. 998)
               iv. Kerr v. Danier leather: remedy of recission is not available in the context of a
                     bought deal, because the underwriter is a purchaser, not an agent of the issuer


   as stated in section 56 of OSA, prospectus must provide “full, true and plain disclosure of
    all material facts relating to securities issued or proposed to be distributed…”
   What is a “material fact” ?…Definition: A “fact that would reasonably be expected to have
    a significant effect on market price or value of securities”
   Misrepresentation in this case is not only an untrue statement of a material fact, but also
    “omission to state a material fact that…is necessary to make a statement not misleading in
    light of circumstances in which it was made.”
         Signatories to prospectus are civilly liable under s. 131.
   certain facts are mandatory, such as the background of issuer, its officers and directors;
    prospectus must contain both financial and non-financial information
   representatives of issuer, underwriter and auditor must CERTIFY truth and accuracy of
    their portion of prospectus (see ss. 58 & 59 of OSA). This means it must be signed by
    “chief executive officer, chief financial officer and any two directors of issuer, other
    than foregoing and ay person or company who is promoter of issuer.”

   There are two stages to the prospectus process. S. 53 of Act requires :
       1)      Preliminary Prospectus;
       2)      Final Prospectus

Page 849, Form 41-501F1 outlines the information required in a prospectus.

 First stage of prospectus process is to file a preliminary prospectus with OSC.
 This document is filed with regulators to get initial feedback and approval on form and
  content of prospectus

   s.54(1): “A preliminary prospectus shall substantially comply with requirements of Ontario
    securities law respecting form and content of a prospectus, except that report or reports of
    auditor or accountant required by regulations need not be included.”
        o (Substantial compliance is what distinguishes preliminary from final prospectus)
        o 41-101 – s.2.1 outlines the content requirements; warning; etc.
        o 41-501 – 13.2

   s.54(2): “A preliminary prospectus may exclude information with respect to price to
    underwriter and offering price of any securities and other matters dependent upon or
    relating to such prices.”
        o For a new company, determining price will be very difficult!
        o The establishment of price is typically very contested as between UW and company!
            UW wants a low price, so as to more easily sell to investors; C obviously wants a
            higher price! Intense negotiation! Prices often go up once hit secondary market!

   Will include info such as: resolution of the Board of Directors authorizing the filing;
    underwriting agreement; financial statements; certification by senior officers

   S. 55: Once the Commission receives a preliminary prospectus from issuer, it immediately
    issues a RECEIPT (in line with s.55 of OSA) – outlines when final is due.
        o Rarely, if ever, denied. YBM Magnus – company with ties to Russian mafia did not
            disclose those ties in prospectus; fbi was investigating; receipt was issued regardless;
            OSC said there wasn‟t enough evidence to warrant denying receipt
   then, Commission examines preliminary prospectus and provides the issuer with a
    DEFICIENCY LETTER – this letter outlines any problems in preliminary prospectus

   s.56 – requires full true and plain disclosure of all material facts relating to securities issued
    or proposed to be distributed
   s. 57 states that where a material adverse change occurs after a receipt is granted, filer must
    file an amendment within 10 days.
         o KEY: refer back to definition section: “material change” – TEST: when used in
             relation to an issuer other than an investment fund, a change in business operations of
             issuer that would reasonably be expected to have a significant effect on market price
             or value of securities
   s. 65: waiting period (1) at least 10 days between the issuance of the receipt for the
    preliminary prospectus and the issuance of the receipt for the final prospectus


Form 41-501: General Prospectus Requirements (page 849)
 1.1 – prospectus will be filed in accordance with this and 41-501F1
 3.1, 3.2 - info in prospectus shall be in narrative form; descriptive headings; shall include
 4.1 – shall contain financial statements; statements of income; balance sheet; etc

Form 41-501F1: Information required in a Prospectus (page 879)
 These requirements are what the deficiency letter would address! Once all deficiencies are
   dealt with and changes incorporated into prospectus, final version is filed
 Instructions: the objective of the prospectus is to provide information concerning the issuer
   that an investor needs in order to make an informed investment decision – sounds like s.56!
        THUS: Form essentially tells you what constitutes “full true and plain disclosure”
 s. 1. 1 – required warning!
 s. 1.3 – IPO or new issue or secondary offering; amount of shares to be offered; price;
 s. 1.4 – distribution information.
        1.4(3): if distribution is to be on best efforts basis, provide totals for both minimum
           and maximum subscriptions, if available
 6.1 – narrative description of business;
 6.2, 6.3, 6.4 – specific information for different types of issuers (e.g. .3 deals with mineral
 7–use of proceeds(what they‟re gonna do w/ $); how funds will be accessed; what‟s available
 8 – financial information – e.g. dividends; GAAP
 10 – describe the securities themselves! (Anand, uh… well, of course!); e.g. types of equity,
   types of shares, which have voting rights, etc
 15 – info about existing principal shareholders and selling security SH
        e.g. if daddy warbucks owns 85% of existing shares, need to know this
        ie. disclose the SH dispersion in the company
 16 – list details re. directors and officers
        (Anand – doesn‟t this info sound kind of like what‟s in a proxy circular?)
 18 – level of debt of directors and execs; has company lent money to them, and how much?
 20.1 – KEY – what are the RISK factors associated with this issuer?
        e.g. re above, “do they have ties with mafia!?!”
        TEST: risks material to issuer that reasonable investor would find relevant
                 goes toward full disclosure!
 22.1 – any legal proceedings enacted against issuer
 27.1 – disclose any material contracts
 33.1 – need certificate  in essence, signatures to a properly worded statement in the prosp.
   that says “this prospectus provides full true and plan disclosure of all material facts”

 s. 58, 59 of SA – requirement for certain individuals to provide certificates – ie. Putting their
  name on the line that prospectus constitutes FTP disclosure.
       58(1) –outlines form for certificates; who has to sign (CEO, CFO, 2 directors, any
          promoters); (2) and (3) have diff permutations
       59 – UW must sign as well! but, has caveat “to best of our knowledge, information
          and belief” slightly muted obligation in comparison.
               ANAND: note: you have to provide certificates for both prelim and final.

   S. 65: WAITING PERIOD is length of time between the issue of receipt for preliminary
    and receipt for final – it must be at least 10 days
   allows regulators time to vet prospectus, and also allows prospective purchasers to study
    merits of security issue and permit underwriters to test market.
        o UW can do NOTHING before receipt of prelim.
   during waiting period, certain LIMITED promotional activities are allowed, despite
    prohibition on trading…
   under s.65 of OSA:
        “it is permissible during waiting period,
        a)      to distribute a notice, circular, advertisement or letter to or otherwise
                communicate with any person or company identifying security proposed to be
        b)      to distribute a preliminary prospectus; and
        c)      to solicit expressions of interest from a prospective purchaser if… a copy of
                preliminary prospectus is forwarded to him, her or it.”

   s.66 of OSA allows for a dealer to send a preliminary prospectus to potential
    investors…however, s.67 requires a list to be kept of those people to whom a preliminary
    prospectus is sent, in case there is an amendment or material change to prospectus.
        o Anand: this may be out of date in internet age!
   Underwriters must assure that anyone underwriter speaks to about offer is immediately sent a
    prospectus. This prevents underwriter from publicizing to a large group of people
   S. 70, director can cease trade if provisions are breached.

 law allows very little flexibility for „testing waters‟ (or, for issuers to determine their
  marketability in assessing whether to go public) before any prospectuses filed.
       in „testing the waters‟, definition of trade would be activated (thus, requirements
          would kick in – e.g. REGISTRATION requirement [see s.25 of OSA])
       definition of distribution would also be activated…and, every non-exempt
          distribution requires a prospectus!!! (s.53 of OSA)
 THUS: a preliminary prospectus would have to be filed before ANY testing of waters could
  take place…because:
  a) Primary reason: danger of INSIDER TRADING
       the select few canvassed about shares would have an unfair advantage over others.
       if a firm is already public an issuance of new shares will affect the price
              o ** But, as stated by Anand, this might possibly be an artificial rationale
                  (insider trading laws already prohibit this type of behaviour)
  b) Less important reason: Enables securities regulators to step in at any early stage to
      prevent any sort of wrong doing. (This reason is weaker, as there is little wrongdoing that
      could occur in testing the waters…i.e. no hard selling.)
 in a BD, there is a further exception to the rule about testing the waters. In the agreement,
  the UW is given a 2 day window between the signing of the agreement and the issuance of a
  receipt for the prelim under which they can solicit expressions of interest.
      o BUT: agreement has to be enforceable and receipt MUST be obtained in that time

   Thus, only material allowed distribution during this period is that under s.65 (2) (e.g. “notice,
    circular, etc., identifying security proposed to by issued, stating price thereof and name and
    address info about potential purchaser.)

 May 16 – Preliminary Prospectus; May 17-June 12  advertisement campaign (said how
  great of a company C was); when contacted by OSC, they stopped everything; lawyers didn‟t
  advise them not to stop (punk assed bitches at Stikemann and pre-cursor to Gowlings had
  probably gave it to a 2nd year summer student to handle); cease trade ordered
 Court: pwn3d. Advertising is confined to alerting the public of the existence of the
  preliminary prospectus; advice as to where to find the prospectus information; and the ability
  to solicit expressions of interest
 Anand: OSC staff – will look to whether the adverts fall under „acts in furtherance of a trade‟

 Is the insider trading rationale for limiting “Testing the waters” problematic for IPO‟s?
 This is a good example of investor protection vs. efficiency – and the balance sought
 NOTE – BC legislation
       o If you are an issuer that wants to sell in BC only you do not need to file a prospectus
           if you are already a public issuer – only a press release is required – the public relied
           on the existing disclosure documents
       o BC model also seems to recognize the place of institutions
 The argument (Lowest Common Denominator) shifts to a risk analysis – i.e. protect the least
  sophisticated the most


s. 64: order to furnish information
    - (1) Director may order the issuer to supply the control person with the information
        necessary to make a distribution
    - (2) or may waive prospectus requirement if satisfied that best efforts have been made to
        comply and no one will be prejudicially affected

s. 61: RECEIPT
    - (1) Director shall issue a receipt unless it appears it is not in the public interest to do so
    - (2) Director will refuse receipt where
          o a) prospectus
                  fails to comply in any substantial respect
                  contains misleading, false, or deceptive information
                  contains misrepresentation
          o b) unconscionable consideration has/ will be paid for promotional purposes or
             acquisition of property
          o c) proceeds, together with the other resources of the issuer are insufficient for the
             purpose as stated in the prospectus Loki Resources Ltd
          o d) the issuer won‟t be financially responsible
          o e) based on past conduct, the issuer won‟t act in the best interests of its security-
             holders Tricor (association with convicted felon)
          o …
          o h) there‟s a problem with a finance company‟s prospectus
            o i) the Director doesn‟t like the people who signed the prospectus
    -   (3) – can‟t refuse to issue receipt without giving person/company hearing though!

s. 62: lapse date
    (1.1) no distribution of the securities shall be completed if 12 months have elapsed from
        initial offering unless a new prospectus has been filed
    (2) distribution may continue if
             a pro forma prospectus is filed w/in 30 days prior to lapse date
             new prospectus is filed w/in 10 days of the lapse date
             receipt is obtained w/in 20 days of the lapse date
    (4) failure to refile results in the purchase being cancelled at the option of the purchaser w/in
        90 days of her first knowledge of the failure
    (5) Director may grant an exemption to the RI where it is in the public interest to do so

   in addition, under s.70 of OSA, Commission has authority to order that distribution of
    securities under prospectus ceases (if circumstances so warrant)

s. 71: right to withdraw
    - (1) dealer not acting as agent must deliver final prospectus to purchaser w/in 2 days
    - (2) purchaser may evidence intention not to be bound by agreement if made in writing
        w/in 2 days of receiving prospectus

CROSS-COUNTRY OFFERING (MRRS – Mutual Reliance Review System)
 Canada has 13 different securities jurisdictions with 13 different SA‟s
 Traditionally, case has been that each issuer must send prospectuses to every SC and respond
  to every SC. This can be a logistical nightmare
 Now, Canada Securities Administrators have established MRRS (mutual reliance review
  system). Essentially, this system allows issuers to deal with one regulator only.
 43-201 – rules for MRRS
       1.3 – although issuer will generally only deal with principal regulator, the local
          securities leg in each jurisdiction in which materials are filed are still applicable to the
       3.2 – a/b – how to establish your principal regulator
              (a) – if head office in jurisdiction where participating regulator is located,
                  default to that (BC, AB, SK, MB, ON, QC, NS)
              (b) – if head office not where participating primary regulator is located, filer
                  can select another as their principle regulator if they have reasonable
                  connection to jurisdiction
       Part 4 – filing of materials
              4.1 – indicate on cover of SEDAR filing who the Principle Regulator is
              4.2 - fees and docs must be filed with Principle Regulator (NOTE – all fees,
                  from all jurisdictions are still applicable, even though they can be filed with
                  the principle regulator)
       Part 5
              5(1)–PR is responsible for reviewing ALL materials –resolving comments, etc
              5(2) –comment letter within 10 working days
              NOTE –non-principal regulators have an additional 5 days to make comments
                       The period can be as long as 15 days
                 5(3) If short Form Prospectus – ONLY 3 DAYS
        Part 6
                 6.1 – non-principal regulators can OPT OUT at any time prior to the principal
                    regulators issuing a final review of the materials
                 NOTE – very few commissions actually opt out
   This works because most Canadian jurisdictions are generally unified as far as issuing
    prospectus scenario goes.
   Some problems include:
     i) fact that this is NOT a mandatory system, thus issuers cannot rely entirely on it.
     ii) Unclear how much time principal regulator must take in order to reply.
     Iii) still subject to local rules!


   IN GENERAL: an issuer has two options when first going public:
            a) Go public under s. 53(1) or b) follow exempt market rules.
   Regulatory regime can affect how much money an issuer must pay out to do an issuance of
    securities (i.e. regulatory regime can affect an issuer‟s transaction costs)
   COST: expensive to compile all of the information that is required in a traditional prospectus
   such transaction costs can also be influenced by windows of opportunity or macroeconomic
    conditions that affect time at which an issuer goes to market  and market fluctuates!!
   as a result, there are mechanisms available for issuers (from CSA) to go to market quickly
    (rather than issuing a traditional long-form prospectus), and thereby take advantage of
    windows of opportunity

 Rationale: Because macro-economic climate fluctuates and sometimes offer time-sensitive
  windows of opportunity, issuers can benefit from expediting the prospectus process.

   S.63/NI 44-101 (page 1043) deals with this
        this national instrument sets out the premise that short-form prospectus mechanisms
          are intended for larger issuers about whom significant information is already widely
          available in market (i.e. no need to duplicate information that is already out there in
          market by requiring these issuers to file long-form prospectuses)
        under this national instrument, EACH issuer is required to file an ANNUAL
          INFORMATION FORM (AIF); also, file renewal AIF every year!
               this form provides base information that would normally be provided in a
                  prospectus concerning business of issuer and people running business
               e.g. reference to financial statements, etc.
        this national instrument sets out the eligibility criteria to use a short-form prospectus
          mechanism…. In addition to filing AIF, issuer must be one of following:
               BASIC ISSUER
                       An issuer with a minimum of 12 months reporting history
                       market value of $75 million
               SUBSTANTIAL ISSUER
                       reporting issuer (but no 12 month requirement)
                       market value of $300 million

 Intended for larger issuers about whom a significant body of information is already published
  and available in the public domain  typically those who are repeat issuers.
 Short form system speeds the clearance of prospectus (which would normally take about 60
  to 75 days) by allowing issuer to use an abbreviated, or “short-form” prospectus
       NP 43-201, s. 5.3 – Principal regulator will use his “best efforts” to comment on the
          short prospectus w/in 3 days, so much shorter review period
 Disclosure that would be provided in the usual long-form prospectus (but which is lacking in
  short-form prospectus) is provided instead by build up of a base of disclosure through
  financial statements, proxy circulars, material change reports and ANNUAL
 because most of the information about the business has already been included in the AIF (and
  in any other disclosure documents incorporated by reference in AIF), there is a much smaller
  amount of information contained in the short-form prospectus and thus a much shorter
  document for securities administrators to vet…
       have to include information on the plan of distribution, the intended market, the
          intended use of proceeds, rights arising from the securities, and other relevant
 RATIONALE is that larger issuers have already made info available in AIF and that a long-
  form prospectus would in many ways be redundant.

 issuer files short-form prospectus that would be filed under POP/short form system (with the
   AIF incorporated by reference)…
 however in this case short-form prospectus can omit information that would normally be
        Information that relates to a specific portion of securities to be distributed
        Information that will vary from one portion to another, e.g. price
                That does not require review  so can get out to market PDQ
 approved short-form prospectus would be “shelved” for up to 25 months…then, when a
   portion of securities cleared under short-form prospectus is issued, issuer would (must)
   provide a prospectus supplement which contains the omitted information
        THUS: only one review required! Supplemental info not reviewed.
 Issuer must be eligible both at filing of the original and at the issuance of the amendment.

 Available to ALL issuers; more directed than SHELF; ONLY for a specific offering for a
   single type of security. In contrast, shelf can be used for multiple type of securities
 Can only be on shelf for 90 days; can be extended by providing a supplement though.
 these procedures allow for the pricing of securities to be distributed under a prospectus after
   a receipt for the final prospectus has been obtained
        thus, when filing the prospectus, issuer would leave bullets/blanks where price is
           supposed to be
    once the issuer obtains the receipt for final prospectus, it would file a supplement to
       include prices in the prospectus (must be done within 2 bd‟s of determining price- 4.8)

   these procedures are intended to reduce the risk associated with fluctuations in market prices
    between the time the final prospectus material is provided and the time the receipt for the
    final prospectus is issued

MJDS System
 Established in 1991 as an initiative b/w Canada and the US to be able to cross the border and
  issue shares  In reality very few US firms use it but MANY Canadian firms do
 It allows issuers to use the disclosure from the home jurisdiction in order to issue in another
       o TRUE mutual recognition/reliance/delegation
 Similar to a shelf prospectus, based on the same policy considerations as for a short form
  prospectus, specifically, that considerable information about the issuer is already available in
  the market.
 Requirements: be RI in US; 36 month history; listed in USSE for 12 months or 75 million US
  in equity;
       o Need to file prelim P in all Cdn jurisdictions it intends to make distributions (must
          comply with local rules); select principle; principle will issue receipt when
          registration statement declared effective by SEC; can then receive receipts from other
          Cdn jurisdictions; then it‟s go time.
 NI 71-101 & CP
       o 71-101 CP
       o 2.1 – remove obstacles to cross-border trade/investment.
       o 2.2 – applies to offerings and TOB‟s under future legislation
       o Of the existence of MJDS; The basics of how it works
       o Q – why can we do this, but not come up with mutual recognition w/I our own


 what are the threshold rules re disclosure in a Prospectus
 Full, True and Plain Disclosure of ALL „material facts‟
      o The focus is on the idea of material facts
      o 1(1) – material fact definition
               Market Impact Test – Fact that would reasonably be expected to have an
                 effect on the market price or value of the securities
               The investor is an economic being, and materiality must be viewed from the
                 perspective of the trading markets,
                      that is, the buying, selling or holding of securities.
      o Under the US system information is material if
               Reasonable Investor Test –There is a substantial likelihood that a reasonable
                 investor would consider it important when making an investment decision
      o The difference is
               MI – will the info affect the price of the securities themselves?
               RI – more focused on the individual – is this an important fact to the
                 individual when making decisions? (but arguably, this will lead to MI!)
      o 5 year review – 41-101.
               There is really no difference b/c the MI test is embedded in the RI test
                  B/c the decision of the individual will affect the price of the securities
                  Nevertheless the 5 year review committee. suggested that we change – in
                   order to increasingly harmonize legislation w/ the US

   S. 57(1) addresses material change – s. 56(1) addresses material fact
   What is a Material Change?
        o 1(1) – a CHANGE in business or operations that would reasonably be expected to
           have an impact on the market price of the securities
        o IE. The changing of facts; the creation of Material Facts that need be disclosed!
   Pezim: material change exists where:
        o a) there is a change in relation to the issuer
        o b) in its business, operations, assets or ownership
        o c) which is material (would reasonably be expected to significantly affect the market
           value of the stock)

   What is the difference b/e MF and MC
      o MF appears to be broader than MC -covers more than just business/operations
      o When MF not disclosed, leads to civil liability to investors under s. 130
      o When MC not disclosed, insiders are liable if they trade on the basis of this info
      o Kerr v. Danier Leather: The obligation to update the prospectus specifically under s.
           57(1) extends only to material changes and not to material facts. Material fact is
           broader than material change. Material changes include changes in the business,
           operation, assets or ownership of the issuer. It is doubtful that a change in financial
           results by itself is such a change. Although not determinative, NP 40 lists changes in
           financial results separately from changes in business and operations, changes in
           capital structure (i.e. assets), changes in corporate structure (i.e. ownership), and
           acquisitions and dispositions (i.e. assets or ownership).
                BUT: A change in financial results that is a result of a change in the
                   business, operations, assets or ownership of the issuer would be a
                   material change.
      o YBM MAGNEX – file amendment. within 10 days.

FOFI - Forward Oriented Financial Information
 Issue – does FOFI constitute a MF? (issue from Danier Leather)
 Predictive in nature – is predictive information subject to rules re materiality in the same way
  as „pure‟ facts?
      o Governed by NP 48
               POLICY NOT A RULE
               Therefore no REQUIREMENT of including FOFI
                      However if you DO include it you must follow NP 48
                      4.2 – period covered by FOFI
                      4.4 FOFI disseminated must be set out in the prospectus
                      7.1 if FOFI changes then you must report the change
                      7.2 must update FOFI when the change occurs
 Issuers are not required to include forecasts, but if they do, then the forecast and other FOFI
  become material facts and as a result liability for misrepresentation or failure to disclose a
  material fact or change can be imposed:

Kerr v. Danier Leather
 1st securities class action certified in ON – affected 5 million investors; 1998, Danier issued a
   prospectus (IPO). Right afterwards, they issued FOFI revising the anticipated 4th quarter
   revenues downward (28% less revenues expected than stated in Prospectus)
        o Argued: this is only a forecast, not a fact!!!
 I – Is the forecast a misrep?  If so then civil Liab
 R – If inaccurate/incorrect it IS a misrep b/c investors will imply that the forecasts represents
   managements best judgment; Court says is IS essentially a fact!! (a thing assumed as the
   basis for argument)
 Analysis
        o Even thought there was cautionary language used (para 68,69) this was not enough;
           BUT doesn‟t close door that REALLY STRONG cautionary language could suffice.
         Given that the Forecast was made in the context of an IPO prospectus, the risk of
           misleading the reader is increased, as the Prospectus was the only source of publicly
           available information regarding the potential value of the shares of Danier.
         This changes what people can put in to reduce civil liability
         THE problem is that „what liability attached to FOFI is under question‟
         Part 7 of NP 48 establishes the obligations of the issuer with respect to updating
           FOFI. Subsection 7.1(1) contains an obligation to disclose a change in the events or
           assumptions used to prepare FOFI that has a material effect on such FOFI. –
                o SO, should have disclosed sooner!!!
         Materiality is a matter of judgment in the particular circumstances and should
           generally be determined in relation to the significance of an item to investors, analysts
           and other users of financial information. An item is considered material to an issuer if
           it is probable that its omission from the financial information would influence or
           change a decision.
         SO: you better be damn sure about your forecast numbers before you publish them,
           or be very on the ball to issue revisions.


   Definitions of „security‟, „trade‟ and „distribution‟ are important because they enable us to
    understand very central provision of s.53(1) of OSA – i.e. that an issuer must file a
    preliminary prospectus and a final prospectus before it can distribute securities
   a prospectus is a long and involved document that is expensive to prepare; thus, it is not very
    attractive to issuers to have to prepare these documents – issuer may want to raise money in
    capital markets, but not prepare a prospectus


   System of distributing securities is CLOSED – I.E. AN ISSUER CANNOT DISTRIBUTE SECURITIES
   as stated by MacIntosh:“ system is „closed‟ because there are limited number of ways of
    escaping prospectus requirement.”
   a principle objective of the closed system is to prevent securities that have been exempted
    from prospectus requirements or that are held by a control person from entering into and
    trading in secondary market without appropriate disclosure by issuer.

                   Section 53(1) of OSA: “No person or company shall
                   trade in a security….unless a preliminary prospectus and
                   a prospectus have been filed, receipts obtained”

                                   HOW TO “GET OUT”

          #1                    #2                      #3                       #4
     By filing a        By qualifying for an   Exemption order is         Distribution of
   preliminary and      exemption in s.72 of     obtained – OSC         securities through
final prospectus and      OSA ( “exempt            may grant an        facilities of a stock
 thereby complying           market”)          exemption where it         exchange OR
     with s.53(1)                              is in public interest     control persons
                                                     to do so

          (a)                          (b)                      (c)
Purchaser does not need     Particular Policy Goals   Regulated under another
 protection of Act to                                  regulatory regime or
obtain information (i.e.                                   safe security

  Accredited Investor         Closely Held Issuer     e.g. banks, loan and
      Exemption                   Exemption           trust companies, take-
     **See Below                 **See Below          over bids

CLOSELY HELD ISSUER EXEMPTION – enabled under OSA 72; 45-501 2.1
 where an issuer meets requirements to be considered a closely-held issuer, that issuer may
  distribute securities with a total value of up to $3 million without the need to produce a
  prospectus. ASK YOURSELF:
      o (i) WHO QUALIFIES: is this company a closely-held issuer; then
      o (ii) CONDITIONS: can this issuing company use the CHI
 OSC Rule 45-501: ONLY ONTARIO!!!
      o s. 2.1: ss. 25 (registration) and 53 (file prospectus) do NOT apply to trade in a
          security of an issuer if
               issuer is (or will be) a CHI, and
               if, following the trade, the aggregate amount raised does not exceed 3 million,
               there is no selling / promotional expenses paid/incurred in connection to the
      o ALSO, DISCLOSURE required:
               seller must provide an information statement (brief, and doesn‟t require
                  prospectus level of info)

   Definition of a CHI:
       o OSC Rule 45-501, definitions defines a CHI as an issuer whose
                shares may be transferred ONLY with approval of directors or shareholders
                outstanding securities beneficially owned by not more than 35 persons or
                    companies (ie. Thus, closely held!!)
                         35 holder limitation excludes shareholders that are accredited
                           investors, current or former directors, officers or employees of issuer
                               o holding corporation/trust/partnership is counted as one holder,
                                   so long as it‟s formed for some other purpose than just holding
                                   securities (if it is, ALL PERSONS in it are counted)
                         at any point in time, holder number has to be 35 or under in order to
                           qualify for this exemption. Ie. If end up distributing to more than this
                           number, can no longer use the exemption. Must seek another
                           exemption or wait „till seasoning period over.
   Why 35? Why $3 million?  to limit risk to SH!
   NOTE: required form (form 1) to 45-501 – statement from issuer alerting of risk!
   To avoid exploitation of this new exemption, Rule 45-501 imposes 4 qualifications:
       (1)     No promoter or issuer may have acted as a promoter of another issuer that relied
               upon CHI exemption within previous year (don‟t want to abuse 35 person
               restriction by promoters seeking to rely on the exemption for successive sales);
       (2)     No selling or promotional expenses may be incurred in connection with exempt
               trade, other than for services of a registered dealer;
       (3)      $3 million limit is calculated after taking into account all trades made in
               purported reliance on exemption (i.e. it is not possible to raise more than $3
               million in total in reliance on exemption);
       (4)      seller must provide purchasers with an information statement at least four days
               before exempt trade – but issuer is not required to deliver statement if after the
               exempt trade, issuer will have five or fewer beneficial owners of securities

   QUESTION: what happens if you want to distribute in multiple jurisdictions?
     this exemption replaces the Private Company Exemption in Ontario, but the rest of
      Canada still has this
     you might be destroying the goal of getting issuers to market quickly if they have to
      amend their articles to comply with the exemption (efficiency problem)
     the ON exemption and the old (other) provincial exemption are in conflict: other
      provinces require a statement in corporation‟s articles saying they WILL NOT distribute
      to the public in order to distribute like this; but this is NOT the case in ON
     Companion policy to ON‟s rules says you can choose either:
          o not to distribute under the private company exemption in other provinces, or
          o keep prohibition on distribution to the public in your constating documents and
              just distribute to people who are not members of the public under the CHIE in ON

**NOTE:        Exemptions (more than 1) can be used at same time

 PI = one who is not a RI, and whose securities
         o who securities are subject to restrictions on transfer in constating docs
         o are owned by not more than 50 people
         o and has only distributed securities to those who fall under s. 2.1

   MI 45-103 – ONTARIO HAS NOT SIGNED ONTO THIS YET THOUGH – their position
    is that the existing rules in Ontario are sufficient themselves.
   May use offering memorandum under 45-103: disclosure document; must contain risk
   45-103: 2.1: Exemption is available if issuer is Private Issuer and purchaser purchases
    security as principal and is a director/officer/employee/founder/controlperson of the issuer
    OR a parent, grandparent, brother, sister, child of they or their spouse.
         o Also: (k) a person or company that is “NOT the public “
   Private issuer – is NOT a reporting issuer (not listed on an exchange, and haven‟t issued
    under a prospectus) and whose number is less than 50
         o CHIE is cap on the number of investors you raise money from under that exemption,
             whereas this cap is on the total number of SH that can result after a distribution.
   Who is “not the public”?
         o caselaw contains 2 tests:
                  Ralsten v. Purina: shares of a co. were sold to EEs in different states and at
                     different levels, and USSC said these EEs were members of the public
                     because these investors are the kind of individuals that need to know the
                     information that would be contained in a prospectus
                          IE: Do the persons offered the security require the kind of information
                             a prospectus would provide?
                  Pipegrass: Alt CA: Common bonds test
                          promoter of the company knows farmers from previous dealers and
                             raises 50,000
                          the court found that whether they were members of the public was
                             based on the question of whether there were common bonds between
                             the issuer and the investors, because it‟s less likely that issuer will take
                             advantage of people w whom it has common bonds, and these people
                             will likely have access to the necessary information from other sources
                          IE: Are the persons offered the security close enough to the
                             issuer/seller that they are not likely to be taken advantage of?

 MI 45-103 – NOT APPLICABLE IN ONTARIO – p.1256
 45-103 3.1: Exemption is available to persons/companies if the purchaser purchases the
  security as principal and is: a director/senior officer/controlperson or affiliate of issuer;
  family of theirs or their spouse; close personal friend/business associate;
      o Unlike the private issuer exemption, the use of this exemption does not restrict the
          numbers of investors to whom securities may be sold. However the CP to 45-103
          notes at s.3.2 that “if the issuer sells securities to a large number of persons under this
          exemption, this may create a presumption that not all of the purchasers are family,
          close personal friends or close business associates and that the exemption may not be
 There is no prohibition on advertisements, etc: But if advertising or finder‟s fees are paid to
  find purchasers under this particular exemption, an adverse implication will be drawn.
 S.1.3 of the Companion Policy clarifies that sellers are responsible for determining whether
  an exemption is available. – suggests get signed statements, etc.
 PROBLEM: how do regulators purport to define the categories of “close personal friends”
  and “close business associates”? SUBJECTIVE?!?
      o Thus, referring again to the CP to 45-103, it notes that a “close personal friend is an
          individual who has known d00d well enough and for a sufficient period of time to be
            in a position to assess their capabilities and trustworthiness”. Furthermore, an
            individual is not a close personal friend “solely because the individual is a relative or
            a member of the same organization, association or religious group”.
   According to MI 45-103, s.7.1, issuers distributing securities under this exemption are
    required to “file a report in the local jurisdiction in which the distribution takes place on or
    before the 10th day after the distribution”. Or get a “signed risk acknowledgement” (Sask)

ACCREDITED INVESTOR EXEMPTION enabled under OSA s.72; 45-501

   45-501: s. 2.3: ss. 25 and 53 do not apply to a trade in a security if the purchaser is an
    accredited investor
   this is a concept based on premise that certain investors that are sophisticated do not need
    protection from the OSA
   Accredited Investors are purchasers of securities who are sophisticated or are deemed to be
    sophisticated because of certain characteristics they possess….these people include: (see
    Rule 45-501, Definitions) – 45-501 IS ONLY ONTARIO
        (m-n) Persons who meet INCOME or ASSET TESTS (**see below)
        (p)      A promoter of the issuer or an affiliated party
        (r)      Controlpersons of that issuer (20%)
        (s)      An issuer that is acquiring its own securities
        (u)      or who are otherwise recognized by OSC as accredited investors
                         -based on their trading activity. E.g. trades over 150k
   Asset Test for Individuals:
        o under this test, purchasers may qualify as accredited investors if they beneficially
             own, either individually or with their spouse, financial assets (i.e. cash, securities,
             certain insurance contracts) exceeding $1 million
   Income Test for Individuals:
        o under this test, an individual may qualify as an accredited investor with a new
             individual income before taxes of more than $200,000 in each of two most recent
             years, or combined with spouse‟s income of more than $300,000 IF individual has a
             reasonable expectation of exceeding same net income level in current year
   Asset Test for Companies:
        o under this test, a company, limited partnership, limited liability partnership, trust or
             estate, other than a mutual fund or non-redeemable investment fund, can qualify as an
             accredited investor if it had net assets of at least $5 million as reflected in its most
             recently prepared financial statements

s.72 is primary place to start when seeking prospectus exemption. It also holds other examples
of exemptions.
 s. 72(f) -exemption for trades of securities
     (i) of its own issue that are distributed to its own holders as a stock dividend
     (iii) where issuer has granted right to exchange securities under debenture / preferred
        shares – it‟s assumed you already know the information, having held debt
 s. 72(h) rights offerings
     granting of rights to issuer‟s security-holders to purchase additional securities
       securities transferred on the exercise of a pre-existing right to purchase / convert /
     issuer must give notice to the Commission and if it has not replied w/in 10 days, they
        may proceed
     CSA would likely impose restrictions where
             o rights offerings will increase outstanding securities by 25%
             o the financing is used to re-finance a dormant company
             o where it‟s for financing a new undertaking
             o where exercisable securities are a new class
     must be accompanied by a rights offering circular – NI 45-101
   s. 72(i) – trade in security of a company that is exchanged by or for the account of such
    company with another company or the holders of that company in connection with a statutory
    amalgamation or arrangement….  MERGER
     amalgamation is governed by corporate statute, so assumption that there‟s no need for
        Securities law to provide prospectus-level disclosure
   s. 72(q) – the trade is made from one registered dealer to another registered dealer where the
    registered dealer making the purchase is acting as principal.

 Once securities are distributed, system is still closed in sense that those securities cannot be
  sold at any random time to someone
 Process of selling securities once they have been initially purchased is referred to as
 MI 45-102 --which Ontario HAS signed on to. Do not differ between provinces, unlike
  exemption rules which do
 in order to resell securities, purchaser must either:
      a)      Provide a PROSPECTUS before reselling (unlikely!!!);
      b)      Resell to a person in respect of whom an EXEMPTION from prospectus
              requirement is available (i.e. use same or another exemption to resell); or
      c)      Must hold on to the securities for a certain amount of time called a “HOLD
              PERIOD” (usually the case!!!)

   Why do we have hold periods??
      (a)    Prevent Back Door Underwriting
                  securities regulators don‟t want you to be able to effect what is essentially
                    a public offering through back door. i.e. buyer one purchases shares under
                    exemption and then resells them.
                  This is essentially a public offering without having to prepare a prospectus
      (b)    Protection of investors through disclosure, and allowing build up of
             disclosure. in relation to non public issuers – there may be little/no published
             information about such an entity; SO, we should try to insure that there is SOME
             information out there for outsiders.
      (c)    Incentive to complete public offerings

 Either 1 or 2 hurdles must be crossed.
      o 1-Seasoning period: All public companies must have been a reporting issuer for 4
          months preceding the date on which P1 intends to resell her securities
                “reporting issuer” – one who is listed on a SE
                this 4 month period is called “seasoning period”
                SO: many companies (e.g. Nortel), will easily meet this.
                      BUT: new companies will not!
       o 2-Restricted period. Relates to how long P1must hold onto securities before they
         can re-sell
             rule: whether 4 months have elapsed since the distribution date – ie. the date
                 that they actually purchased the shares in reliance on an exemption
             rationale: protect against backdoor underwriting.
             NOTE: this hurdle only applies in certain circumstances with regard to
                 certain exemptions

Multilateral Instrument 45-102 (p.1235)
 Part 2 Key trades: Key sections are 2.5, 2.6
 s. 2.5 – unless the conditions in (2) are satisfied, a trade specified by 2.3 (which refers you to
  appendix D which lists all of exemptions it applies to) is a distribution if:
       o 3 primary conditions are:
               Seasoning period: issuer has been reporting issuer in Canada for 4 months
               Restricted period: at least 4 months have passed since distribution date (Date
                  securities were distributed in reliance on exemption)
                       NOTE: if date is on or after march, 2004 – certain language req‟ts
               Can‟t be a control distribution (20%)
               no unusual effort has been made to prepare the market
                       what does this mean?  don‟t want to create demand for securities in
                          investors that do not have any information!
                              o again, b/c this is under the exempt market!
 s.2.6 – contains only:
       o Seasoning period: issuer has been reporting issuer in Canada for 4 months
       o Can‟t be a control distribution
       o No unusual effort to prepare the market

   s. 2.8 Exemption for a Trade by a Control Person (Anand DNC)
        o 1) issuer is and has been a reporting issuer in a jurisdiction of Canada for the four
            months immediately preceding the trade;
        o 2) the selling security holder has held the securities for at least four months;
        o 3) no unusual effort is made to prepare the market;
        o 4) no extraordinary commission or consideration is paid;
        o 5) selling security holder has no reasonable grounds to believe that the issuer is in
            default of securities legislation.
        o 6) Specific filing requirement must also be met under the provision.

IE: unless these conditions are satisfied, the re-sale of securities bought under exemption
to a non-exempt person/co will be deemed a “disposition” and will require prospectus, etc.

   SO: how do we know which exemptions fall under 2.5 and which are under 2.6!?!?!?
       o s.2.3 – must look to appendix D to see which trades are subject to 2.5
              Clauses 72(1)(a), (b), (c), (d), (l), (m), (p), (q) of OSA! and 72(1)(f)(iii)
       o s.2.4 – must look to appendix E to see which trades are subject to 2.6
              Clauses 72(1)(f), (i)
   45-501 exemptions
       o 6.2 – s.2.1 trades – Closely Held Issuer- are subject to s.2.6 of 45-102
               ie. Seasoning period only
               Policy reason? CHIE already has limitations built into it – amount that can be
                 raised, number of investors, etc.
       o 6.3– s. 2.3 trades –Accredited Investor-s. 2.5 of 45-102
               ie. Seasoning period + Restricted period

   e.g. If we‟re talking about a PRIVATE company that is issuing shares under an exemption:
        o Basic rule: can always re-sell at any time if P2 also falls under an exemption!
        o IF they go public: s.2.6(2) of 45-102 : the first trade of securities issued by a private
             company, after the issuer has ceased to be private, is a distribution UNLESS the
             conditions in (3) (seasoning period) are satisfied
                 ie. if they go public, they must wait 4 months to use exemptions to issue new

Reason: again, always trying to guard against backdoor underwriting – each type of exemption
will present different challenges to this


1) Can investors form a company or a partnership to be counted as a single individual in order
   to avoid 35 person shareholder maximum requirement for closely held issuer exemption?
   ANSWER: No, they cannot, under rule 45-501
2) If you are 35th person to own shares in above scenario, can you sell half of your shares to
   another essentially making them a 36th person? Yes, you can if buyer is an accredited
   investor, under 1.1(b)(i) of Rule 45-501. But regardless, example shows it is difficult to
   monitor the secondary sales.


   once securities have been issued under a prospectus, they are „freely tradable‟ – in other
    words, investors may sell securities they hold without providing a prospectus or any other
    information about securities or issuer to purchaser
        o purchaser must rely on „PUBLIC RECORD‟, which consists of the prospectus and
            all of the information issuer has been required to deliver to shareholders or file with
            OSC pursuant to “continuous disclosure” regime in OSA
   thus, the term continuous disclosure generally refers to the information that public companies
    and, in certain cases, their shareholders, are required to file with securities regulatory
    authorities and/or to send to shareholders
    OSA requires reporting issuers to comply with rules relating to 2 basic types of continuous
    disclosure obligations:
        o Regular or periodic disclosure of, inter alia, annual and quarterly financial
            statements, annual reports and information circulars in connection with soliciting
            proxies for shareholders‟ meetings.
        o Timely disclosure of material business developments when they occur.

   WHY IS THIS IMPORTANT? Due to securities existing in secondary market transactions
    (with no prospectus-level disclosure), continuous disclosure protects investors in secondary
    market (note that 95% of all trading activity occurs in secondary market; 5% in primary
    market, exempt market, etc)
   NOTE: BC requires disclosure of ALL MATERIAL INFORMATION (eliminates
    distinction b/w MF and MC). Seems good, as provides lots of info, but:
        o May be excessively onerous; existing law is probably ok; may be problematic to

REPORTING ISSUER: - WHO must disclose!!
 continuous disclosure requirements apply to REPORTING ISSUERS
 this term is defined in OSA as “an issuer that has issued securities under a prospectus or
  has its securities listed and posted for trading on an exchange in Ontario”
 Can apply to be one, if in the public interest – s.83.1 OSA
 requirement of continuous disclosure from a reporting issuer stems from idea that issuer‟s
  securities are being sold to those investors who are presumed to need to know, and need
  access to information that must be disclosed

 Continuous disclosure obligations of a reporting issuer stem directly from the purpose of
  OSA (as enunciated in s.1.1 of OSA)…
             s.1.1: “ purposes of this Act are,
                     (a)    to provide protection to investors from unfair, improper or
                            fraudulent practices; and
                     (b)    to foster fair and efficient capital markets and confidence
                            in capital markets.”
 as a means for achieving purpose (a) under s.1.1, s.2.1(2) of OSA sets out following:
             s.2.1(2):“ primary means for achieving purposes of this Act are,
                     (i)    requirements for timely, accurate and efficient disclosure of

CD requirements of a reporting issuer can be divided into two categories:
            1)      PERIODIC DISCLOSURE; and
            2)      TIMELY DISCLOSURE

NI 51-102 Continuous Disclosure Obligations _ NEW LAW ON CD
    Companies must have written disclosure policies
    Senior officer or committee must have oversight of the policy
    Policy must specify financial, operation and structural data that companies must release
      in a fair and careful manner
    All information on SEDAR website should be immediately posted on company website
    Issuers should be cautious in circulating analysts‟ reports to investors  can be seen as
      endorsement of the report
    Issuers filing on SEDAR are required to file certain information in SEDI [System for
      Electronic Disclosure by Insiders]: lists of security designations, corporate event


   periodic disclosure requires a reporting issuer to update its public disclosure record from time
    to time (e.g. by issuing quarterly and annual financial statements and by filing an AIF)
   periodic disclosure consists of:
                a) financial statements;
                b) MD&A (Management Discussion and Analysis) and AIF;
                c) proxy circular

  Financial statements must relate to both the most recently completed financial year and that
    immediately preceding it. These statements include:
            a) Balance Sheet
            b) Income statement
            c) Statement of retained earnings
            d) Cash flow statement
 Most often, these statements must be reviewed by issuer‟s audit committee, approved by
  board of directors and signed by 2 directors. Also, must be in accordance with GAAP of
  s.77 of OSA sets out requirements of a reporting issuer to file INTERIM (QUARTERLY)
  s.78 of OSA sets out requirements of a reporting issuer to file ANNUAL COMPARATIVE
  EXEMPTIONS from these financial reporting requirements are available, upon an order of
    OSC, where the commission is of the opinion that granting the exemption would not be
    prejudicial to public interest… available exemptions fall roughly into following categories:
        o 1-deviations from GAAP;
        o 2-conflicts with laws of other jurisdictions;
                 i.e. where requirements of the incorporating or organizing jurisdiction
                    conflict with the requirements of the provincial securities act
        o 3-detriment to the issuer; and
        o 4-consistency of reporting
                 i.e. where information is disclosed by reporting issuer in a different form or at
                    different times than required by applicable provincial act
                 an order might be granted in such circumstances in order to provide
                    consistency and thus comparability of financial statements over time

 51-102 – p.1451 –
     o s.4.1 – RI must file ANNUAL financial statements; explains exactly what needs to
         be included in financial statements!
              (1)(a) Income statement, Statement of retained earnings, Statement of
                 cashflow, balance sheets  for the most recently completely year & the
                 immediately preceding year
              (1)(b) Balance sheet for same periods
              (1)(c) Notes to the above
              (2) Must be accompanied by Auditor‟s report
     o 4.2 set the dates for ANNUAL financial statements as:
                90th day after completion of fiscal year;
                4.2(b): earlier of 120th day after YE and date of filing in foreign jurisdiction
       o   s.4.3 – rules relating to INTERIM financial statements
                (2) – contains more context for what is required in interim financial statements
                        balance sheet, income statement, earning statement, cashflow
                            statement, comparisons between last interim
                (3) – disclosure of auditor review of interim financial statements
                        Must disclose if there is (a) no auditor review; (b) that auditor did not
                            finish review & reasons why; (c) written report of auditor expressing
                            any reservations
                        very important! a relatively new development
                (4) pertains to SEC issuers – reconcile reporting, file restated FS
       o   s. 4.4 – dates for INTERIM financial statements
                (a) before the 45th day of interim period
                (b) before 60th day for venture issuers
       o   s.4.6 – delivery of financial statements – must be delivered ONLY to those who
           actually request them (but they have to be sent request form)
                Anand: isn‟t this incredible!? why? Because we have SEDAR now, and they
                   will be posted on SEDAR; can get them at any time!
       o   Also have to disclose changes in corporate structure, changes in auditor (and why),
           voting results on different things (11.3), etc

 Originally, AIF‟s were required only from those issuers wishing to make use of the POP
   system. This has since changed, however and today…
 an AIF is intended to enhance an investor‟s understanding of an issuer‟s business by
   providing supplemental analysis and background material to allow a fuller comprehension of
   the nature of an issuer, its operations and known prospects for the future
 AIF must include a Management Discussion and Analysis (MD&A) section which includes a
   reporting issuer‟s financial condition and results of operations
 Similar to prospectusvery detailed info about the history, operation and financial affairs
 NI 51-102,
       o s. 6.1: AIF required for all non-venture reporting issuers
       o s. 6.2: Must be filed within 90 days of FYE
       o No requirement to send directly to SHs
 MI 52-110, s.1.2: AIF must disclose text of audit committee‟s charter, name of each member
   and whether or not they are financially literate
 Must disclose any oversight issues, e.g.:
       o If a recommendation of audit committee not accepted to nominate or compensate an
           external auditor was not adopted by the board, the AIF must state that fact & explain
           why (s. 7)
       o Must disclose “Audit Fees” and “Audit-Related Fees” for last two years; “Tax Fees”
           for tax compliance, tax advice & tax planning; and “any other fees”
 NI 51-102: Expressly includes disclosure of social & environmental policies; risk factors
   such as environmental & health risks and political considerations
 Anand: NI 51-102 will enhance disclosure through more systematic and consistent
   dissemination of financial and operational information about issuers, even if smaller
   companies are having difficulty fulfilling requirements (expensive!)

 MD&A is a supplemental analysis by management and explanation that accompanies a
  reporting issuer‟s audited financial statements and sets forth, in narrative form, both the
  current financial situation of the issuer and its future prospects
 MD&A must disclose those trends, commitments, events and uncertainties known to
  management that might reasonably be expected to have a material impact on issuer‟s
  business, financial condition or results of operations
      o Any legal action; important transactions; obligations; changes in management, etc
      o Whether regulatory approval needed for any transactions; whether it‟s been obtained
      o Must also disclose capital structure (s.5.4)
          COMMITTEE [s. 5.5, NI 51-102]
 Historically, was only for big companies. 51-102 broadens this!
      o Very important for junior companies that lack history of profitable operations
      o 5.1(1): Must be filed relating to annual and interim financials
      o 5.1(2): must be filed at deadlines for financial statements
      o 5.3: additional disclosure for Venture issuers without significant revenue
      o 5.5: MD&A must be approved by the board
      o 5.6: only send to SH if requested
      o form 51-102FI - p.1507 – Material change report
               Item 4 is the key. “brief but accurate summary of nature/substance of MC”
 NOTE: In 2000-2001, BC required over 40% of 1800 reviewed companies to amend or refile
  their MD&A  lawyers must have loved this!

 Annual general meetings (at least every 15 months) and special meetings…in many widely
  held companies SH cannot attend, due to fact that they live in broad geographic area. As
  such, law permits these shareholders to appoint others to act as proxies. Public companies
  must solicit proxies (ask if shareholders wish for a proxy) from shareholders in connection
  with each meeting.
 Three Components of Proxy Solicitation Rules:
  1) Proxy solicitation by management is mandatory
  2) Proxy solicitation requires “information circular”
  3) Content of information circulars are subject to specific regulation.
 this is governed by ss.85 (mandatory solicitation of proxies-must be sent) and 86
  (information circulars) of the OSA
           basically, management (or dissidents) must send a form of proxy and information
           circular to each shareholder in advance of every shareholder meeting – circular must
           provide shareholders with information to help them make informed judgments about
           matters being voted on at a meeting… circular also must contain information about:
                a) director and executive compensation;
                b) indebtedness of officers and directors;
                c) interests of insiders in material transactions; and
                d) details relating to management contracts
                EXEMPT IF UNDER 15 SH
 Where shareholders are not provided with adequate information, any resolutions passed at
 meeting at which shareholders voted by proxy may be declared void.

   NI 51-102, s. 9 [Proxies]
         o 9.1 Sending of Proxies & Information Circulars
                 (1) Management must provide proxies w/ notice of upcoming meeting
                         (a) Management proxy information circulars must be send to each SH
                             whose proxy is solicited w/ notice of the meeting
                 (2) (b) Outsiders must send an information circular to each SH whose proxy
                    is solicited w/ or before the solicitation
         o 9.2 Exemptions: if beneficial owner; where <15 proxies solicited
         o 9.4 Content of Form of Proxy and IC
                 (1) Proxy must identify if it is management or not
                 (2) Info. Circ. Must identify if it is management or not
                 (3) If proxy for contains a designation of a named person it must also provide
                    an option to designate someone else
                 (4) Proxy must provide an option for the SH to specify if the shares are to be
                    voted for or against each matter
                 (8) Proxy may confer discretionary authority
                 (9) Proxy must not confer authority (a) for election of any person unless a
                    bona fide proposed nominee is named in the IC; or (b) at any meeting other
                    than the one specified
         o 9.5 – exempt if following substantially similar legislation in another jurisdiction
   s. 131-132, CBCA (2001)
         o Permits electronic SH meetings & voting through new techs; new provisions for SH
            proposals and revised proxy rules

COMMENTARY: Kirkby Report
 Reporting the present proxy system is “unsatisfactory, frustrating, costly, and time-
 “The Canadian proxy rules … create substantial barriers to this kind of continued, informal
  communication among shareholders.”
 Rules were designed to protect investors from being misinformed, misled or manipulated by
  proxy solicitation by management or outsiders
         o Required preparation, distribution and filing of a dissident proxy circular 
             included disclosure about his organization, investment intent & trading history
         o Each communication, be it a letter, advertisement or speech, triggers a dissident
             proxy circular obligation  too onerous; discourages these activities.

Re Pacifica Papers
[2001](BCCA) Finch CJ
 F:) Appeal by Cerberus from an order that approved a plan of arrangement between the
   respondents Pacifica and Norske. Cerberus was the largest shareholder in Pacifica and held
   18% of its shares. Under the arrangement each Pacifica shareholder would receive 2.1
   Norske shares or one Norske share and $7.50 for each Pacifica share. Cerberus opposed the
   plan because the process to obtain shareholder approval was illegal. Pacifica shareholders
   would not receive maximum value for their shares. The judge decided that the arrangement
   was fair and reasonable. He also found that the proxies were solicited in a manner that
   contravened the CBCA. However, he concluded that this was a mere technical non-
   compliance. It was insufficient for him to refuse his discretion to approve the arrangement.
 I:) Whether the TJ erred in finding that the illegal solicitation of proxies did not invalidate
   the arrangement.
 H:)Appeal dismissed; It may be possible to solicit proxies prior to mailing of proxy circulars.
   R:) The CA held that s. 192(4) grants a broad discretion and that the judge's finding that the
    arrangement was in all respects fair and reasonable was a finding of fact, and that there was
    ample evidence to support that finding and no basis on which it could be set aside.
           However, the CA expressed two reservations. The judge's interpretation of s.
           150(1)(b) of the CBCA to require the dissidents' proxy circular to have been sent out
           prior to solicitation of proxies imported a restriction on proxy solicitation that the
           language of that section, on a plain reading, did not bear. However, regardless of his
           interpretation of that section, the judge did not err in concluding that the alleged
           contravention of s. 150(1) WAS NOT FATAL to the exercise of his discretion to
           grant approval of this arrangement.


   Driven by events, rather than procedure. In other words, certain changes will require the
    company to disclose in a timely manner.
   timely disclosure requires the immediate public dissemination of information (from
    reporting issuer) regarding material developments that could reasonably be expected to affect
    market price or value of issuer‟s securities
   NOTE: Insider trading can be seen as a timely disclosure issue! Disclosing you‟re an insider

   s. 75, OSA [Publication of material change] – OLD LAW
     (1) Subject to (3), where a material change occurs in the affairs of a reporting issuer, it
        shall forthwith issue and file a news release authorized by a senior officer disclosing the
        nature and substance of the change
     (2) shall be done as soon as practicable and in any event within ten days
            o Form 27: Material Change Report
     (3) RI may file a report w/ the Commission marked confidential in lieu of (1) if:
            o (a) in the opinion of the RI, and if that opinion is arrived in a reasonable manner,
                the disclosure required by (2) would be unduly detrimental to the interests of the
                RI, OR
            o (b) the material change would be under s. 1(1), “material change” (a)(ii) and
                senior management has no reason to believe that persons with knowledge of the
                material change have made use of such knowledge in purchasing or selling
                securities of the issuer, - ie. Board approval is coming, but not yet
     (4) Must advise the Commission every 10 days to keep the report confidential until (1) is
        done or the board has rejected the decision
     (5) Even if (3) is done, the (1) obligation remains
     there are 2 standards of materiality in Act:
            o 1) material FACTS; and
            o 2) material CHANGE

   NI 51-102 [Continuous Disclosure Obligations] – MOST CURRENT LAW
       o 1.1 “material change” means
           o (a) SAME AS s.1(1) “material change” (a)(i), OSA
           o (b) SAME AS s. 1(1) “material change” (a)(ii), OSA
       o 7.1 Publication of Material Change
              o (1): Subject to (2), if a material change occurs, the RI must
                      (a) immediately issue and file an news release authorized by a senior
                        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
                o (2): (1) does NOT apply if:
                         (a) ESSENTIALLY SAME AS s. 75(3)(a) – unduly detrimental
                         (b) ESSENTIALLY SAME AS s. 75(3)(b) – can make confidential
                o (3) specific provisions re. Quebec.
                o (4) If RI relies on (3) then RI must comply with (1) when the circumstances
                    that justify non-disclosure cease
                o (5) ESSENTIALLY SAME AS s. 74(4)
                o (7) If a report has been filed under (2) or (3), the RI must do (1)(a) upon
                    becoming aware or having reasonable grounds to believe that persons are
                    purchasing or selling securities of the RI with knowledge of the undisclosed
                    material change
   SO: 51-102  News release IMMEDIATELY; then MC Report within 10 days.
        o Form 51-102F3 Material Change Report
        o Item 4 + 5: brief but accurate summary that relays significance; impact; etc
   These provisions of NI 51-102 are aimed at harmonization of material change reporting in
    jurisdictions across Canada.

   ALSO: NI 51-102, s. 8 [Significant Acquisitions]
      o 8.2: Must file a Business Acquisition Report if RI completes a significant acquisition
      o 8.3(2) Required Significance Tests (listed – see section if needed)

 material fact is defined in s.1(1) OSA as follows:
           “where used in relation to securities issued or proposed to be issued, means a fact
          that significantly affects, or would reasonably be expected to have a significant effect
          on, market price or value of such securities”
 any “fact” (specifically related to issuer or not) will be a “material fact” if it significantly
  affects (or would reasonably be expected to have a significant effect on) the market price or
  the value of the securities being issued‟
 “expected” - thus: rather than focusing on issue of change, the focus is on whether
  issue/event COULD significantly effect the market price/value of securities.
           ie. BEFORE an anticipated event has occurred, disclosure is necessary
           there is tension between regulatory view (more dis is better – if you think a change
          will happen, then disclose) vs. issuer view (don‟t disclose too early if could have
          negative effect on stock prices)
 Mostly relates to prospectus (and insider trading); after a preliminary prospectus has been
  filed, an issuer‟s disclosure record is driven by “material changes”…

MATERIAL CHANGE - no comprehensive list!
 material change is defined in s. 1(1) OSA as follows:
          “where used in relation to affairs of an issuer, means a change in the business,
         operations or capital of issuer that would reasonably be expected to have a
         significant effect on market price or value of any of securities of issuer and includes
         a decision to implement such a change made by board of directors of issuer or by
         senior management of issuer who believe that confirmation of decision by board of
         directors is probable”
 concept of “material change” drives issuer‟s disclosure in three ways:
            1) if a material adverse change occurs after a preliminary prospectus has been filed,
            an amended preliminary prospectus must be filed;
            2) after the final prospectus has been filed, until the time that offering is “out of
            distribution”, issuer must file an amended prospectus if any material change occurs;
            3) CD requirements in OSA + 51-102 require issuer to issue a press release and
            file a material change report when any material change occurs
   Kerr v. Danier Leather: is doubtful that a change in financial results by itself is such a change… A
    change in financial results that is a result of a change in the business, operations, assets or ownership
    of the issuer would be a material change…. (*but really, come on! Financial results will ALWAYS
    have this impact! Won‟t they?)

 how does a material change differ from a material fact?.
            1) there must be a „change‟ (as opposed to existence of a „fact‟);
            2) „change‟ must be in the actual business, operations or capital of issuer (a material
           „fact‟ can be unrelated to an issuer‟s business, operations or capital so long as it has a
           significant effect on the market price or value of securities being issued);
            3) threshold for a material „change‟ is only forward looking – change in business,
           operations or capital of issue must be one that would reasonably be expected to have
           a significant effect on market price or value of any of securities of issuer (contrast
           this to material fact, which is situated in the present tense, as well as the future tense)
 e.g. commencement of a major law suit may be a material „fact‟ (discloseable in a
   prospectus) but not a material „change‟ because it does not constitute a change to issuer‟s
   business, operations or capital whereas a material fact does not need to relate to those
   things specifically
 US TEST: “Reasonable investor test” substantial likelihood that the fact would have been
   viewed by investor as having significantly altered total mix of information made available.
 However, in Canada, we use the ”Market impact test” (considered more objective, due to
   fact that one need only look at the event, not the investors‟ POV)
 So, which test should we have in Canada? Has been pointed out that for most part, the
   “market impact test” already includes reasonable investor test.

The distinction between material fact and material change has been criticized, exemplified by
contentious ruling of case below:

Pezim v. British Columbia (Superintendent of Brokers)
 issue in this case was as to whether favourable drilling results on a drilling property
   constituted a material change in the reporting issuer so as to disclose
 CofA held not a material change
 SCC held that CofA was wrong…but did not erase the issue of establishing a difference
   between „material fact‟ and „material change‟
           A prospectus relating to a public distribution of securities must disclose all material facts
            relating to the issuer: ss. 44(1), 45(2), 49(1) and 50(1). However, the prospectus need be
            amended only when a material change occurs: ss. 47(1), (2) and 48(1).
             Material Change:(a) "in relation to the affairs of an issuer", (b) "in the business,
            operations, assets or ownership of the issuer" and (c) material, i.e., would reasonably be
            expected to have a significant effect on the market price or value of the securities of the
            Undisclosed material facts concerning a reporting issuer may not require timely
            disclosure... although they do restrict trading". Under the timely disclosure provision

           of the Act, s. 67, only material changes require that a press release be issued and that
           a report be filed. In contrast, under the insider trading provision, s. 68, a person who
           is in a special relationship with a reporting issuer is prohibited from buying or selling
           securities of the issuer when the person knows of either a material change or a
           material fact which has not been publicly disclosed.
           facts may be a material fact without being a material change. A material change, on the
           other hand, will always also be a material fact.

 Anand laid out 4 policy issues:
      1) not clear when value of securities would be affected without a corresponding
       effect on price;
      2) maybe “internal corporate development” too narrow for purposes of disclosure
      3) definition of material change limited to matters that require approval of
       Board…BUT NOTE: not all important decisions require Board approval (but these
       decisions could constitute material changes);
      4) no liability for misrepresentation in continuous disclosure documents…these
       documents are what investors in secondary market rely on – but no liability for


 this is Canadian test
 under OSA, both “material change” and “material fact” are defined with reference to
  whether change or fact would reasonably be expected to have a significant effect on market
  price or value of a security
       this is known as market impact standard of materiality

 this is test used by U.S. (not statutory; has evolved through CL)
 under the reasonable investor test, information is material if there is a substantial likelihood
  that a reasonable investor would consider it important in making an investment decision
 some people argue that harmonizing Ontario (and ultimately Canadian) securities law with
  U.S. securities law will eliminate some of complexity issuers currently face in fulfilling their
  disclosure obligations, particularly issuers whose securities are traded in both Canada and
  U.S. (Note: this is what 5yr Review Committee advocates for)
 other people make argument that there is really no difference between two tests since a
  “reasonable investor” will only be concerned with whether a fact or change would affect
  value of security



STEP #1:      is this person in a special relationship/insider?
STEP #2:      Was there a purchase or sale of security?
STEP #3:      Does the person have knowledge of the material fact or change?
STEP #4:      Has the material fact or change been disclosed?
STEP #4:      Applicable defences?


   s.1(1) of OSA defines an insider as:
         ”insider or insider of a reporting issuer means,
                (a) every director or senior officer of a reporting issuer;
                (b) every director or senior officer of a company that is itself an insider or
                 subsidiary of a reporting issuer;
                (c) any person or company who beneficially owns, directly or indirectly,
                 voting securities of a reporting issuer, OR who exercises control or direction
                 over voting securities of a reporting issuer OR a combination of both carrying
                 more than 10 per cent of voting rights attached to all voting securities of
                 reporting issuer for time being outstanding other than voting securities held
                 by person or company as underwriter in course of a distribution; …

 Insider trading (trading by “insiders”) IS permissible in some cases where disclosed in the
  applicable time period and where NOT on the basis of material undisclosed information
 REPORTING REQUIREMENTS: found in ss.107(1)and (2) of OSA:
 s. 107, OSA [Timing of filing]
       Within 10 days:
               (1) Upon BECOMING an insider  must file a report disclosing any direct or
                  indirect beneficial ownership or control over securities of the RI
               (2) Upon ANY CHANGE in their direct or indirect beneficial ownership or
                  control  insider must file a report disclosing the change
               (3) Applies (2) to those who become insiders via s.1(8) or (9), OSA

   s. 101 SA- Early Warning Reports -
         (1) EVERY purchase that amounts to 10% or more of issuer‟s securities (ie in
          addition to what is already held) must be disclosed
                 news release filed forthwith s. 101a
                 file report within 2 business days – s.101b
         (2) Every subsequent purchase amounting to 2% of the issuer‟s securities must be
          disc in the same way
                 To prevent against CREEPING TAKEOVER.

   62-103 [Exemption]– an exemption from reports of acquisitions are available for investors
    who have filed an early warning report AND do not have knowledge of a material fact or
    change OR where D/O/subsidiaries normally would not have access to insider information

   NI 55-102 [Filing on SEDI]
        Insiders must file ITRs w/ the Commission & on SEDAR
        Requires insiders & issuers to file “insider profiles” & “issuer profiles”
   NI 55-101 [Exemptions from ITR] – DNC IN CLASS
        s. 2.1: Blanket exemptions if:
               issuer makes blanket change which affects all security-holders, although
                  issuer must file w/in one business day
               Commission can grant this on its own motion where “just and convenient”
               interested person may apply for relief, which will be granted if there‟s
                  “adequate justification”
        s. 2.2: Exemption not available if:
               (a) in the ordinary course, receives or has access to information as to material
                  facts or material changes…before they are generally disclosed
               (b) is a D/O of a major subsidiary
               (c) is an insider of the RI in a capacity other than as a D/O of the subsidiary
   SEDI: System for Electronic Disclosure by Insiders
        Anand: are current time requirements too long now? Maybe 4 days should be the
         norm, as opposed to 10!


   Key section s. 76(1)-(5)
   ss.76(1) and (2) of OSA prohibit TRADING and „TIPPING activity by persons or
    companies that are in a “SPECIAL RELATIONSHIP” with a reporting issuer
        o specifically, Act prohibits:
                (1) INSIDER TRADING: Trading of securities of a reporting issuer by
                   persons or companies in a special relationship with reporting issuer who have
                   knowledge of a material fact or material change with respect to reporting
                   issuer before it has been generally disclosed to the public
                (2) TIPPING : Sharing of information with respect to a material fact or
                   material change, where such information has not been generally disclosed
                        Does not require the actual trading! Just the giving of “tips”.

 this term is defined in OSA under s.76(5):
 s. 76(5), OSA [Special relationship]
       o (a) - a person that is an insider, affiliate or associate of:
               (i) the RI
               (ii) person proposing to make a TOB of the RI
               (iii) person proposing to became a party to a reorganization, amalgamation,
                  merger or similar arrangement with the RI
       o (b) - a person engaging in or proposes to engage in business or professional activity
          with or behalf of the RI or (a)(ii) or (iii)
       o (c) - D/O/E of RI or of (a)(ii) or (iii) or (b)
       o (d) - person that learned of the material fact or material change while the person was
          (a) (b) or (c)
       o (e) - person that learned of the material fact or material change from (a) (b) (c) or (d)
          AND knows or reasonably ought to know that the other person was in a special
          relationship (Anand: “ie. Everybody else!!”)
2. MATERIALITY – revisited
 Undisclosed material facts concerning a reporting issuer may not require timely disclosure... although
    they do restrict trading". Under the timely disclosure provision of the Act, s. 67, only material
    changes require that a press release be issued and that a report be filed.
   In contrast, under the insider trading provision, s. 68, a person who is in a special relationship with a
    reporting issuer is prohibited from buying or selling securities of the issuer when the person knows
    of either a material change or a material fact which has not been publicly disclosed.
   facts may be a material fact without being a material change. A material change, on the other hand,
    will always also be a material fact.

Re. Donnini
   trader at underwriter/broker firm run by Patterson (chairman); have client; client comes to
    firm and says that it is thinking of doing a second financing; Donnini discusses this with
    chairman with firm (ie. emp talks to chair re. client‟s option); day after, D goes out and trades
    shares of client‟s stock in a very high volume;
   OSC: Donnini insider traded; his actions could not be excused on reasonable mistake
        o OSC brought action against him on public interest power; he was hit with 15 year ban
            on trading (effectively ruined career); he appealed; TJ lowered the sentence to 4 years
            but still found he insider traded; case is currently on appeal!
   issue: whether a contingent event can be a MF? – b/c transaction for financing hadn‟t
   Held by OSC: this CAN be a fact
        o PROBABILITY AND MAGNITUTE TEST: para 132: Since the potential
            magnitude of the financing was highly significant for the value of shares; as a result, a
            lower probability of occurrence than we determined to have occurred would STILL
            have lead us to conclude that the financing, the negotiation and the potential
            size/price of financing constituted a material fact
        o REASONABLE EXPECTATION TEST para 137 – effect on market price.
                 Essentially incorporates US Market Interest test into RET: para 138 –
                     concludes there would be a substantial likelihood that disclosure of the
                     financing information would have been viewed by investors as important
                     information in deciding whether to buy
   Disagreed with “3 minute hallway conversation” - was more than a common worker;
    Patterson‟s right hand man; extensively involved with client;
   ANAND: SO:
        o have an objective test: effect on value
        o but also subjective: whether reasonable investors would see this information as
            having an effect on market value

 generally discloses: require assessment of
      o 1-whether info has been released to public
      o 2-whether enough time for public to digest it!
 NP 51-201, s. 3.5 [Generally Disclosed] - Codifies the common law – p.1554
      o 3.5(2) Information has been generally disclosed if:
              (a) information has been disseminated in a manner calculated to effectively
                 reach the marketplace; AND

                 (b) public investors have been given a reasonable amount of time to analyze
                  the information
   Harold Conner– established test; not embodied in 51-201 and has been used in Pezim
       o Information must:
                Be “disseminated to the trading public” AND
                The public must be given sufficient time to “digest such information given its
                  nature and complexity.”
   Pezim (1994) (SCC)
       o As long as the material information is adequately disclosed prior to the transaction,
           there will be no possibility of insider trading
       o A firewall (preventing directors from accessing inside info) does not erase the duty
           imposed on directors to inquire about material changes
   OSC suggests insiders wait one full trading day following the release before trading

 s. 76(2)  how are 76(1) and (2) different?
      o (2) has a built in defence – requirement to know or OUGHT to have known that
           person was in special relationship
      o but: seems like (1) deals with one particular fact situation – where there is an issuer
           and a person who is in a special relationship with them; and that person trades on
           basis of material undisclosed info
      o (2) seems to deal with situation where reporting issuer; person in SR with RI; that
           person provides info to another person before it has been generally disclosed – ie.
           “tips them off”. They don‟t have to trade; it‟s the passing of info we care about.
 Requirements of tipping?
      o X must be in special relationship with RI
                see definition (e); tippee would be more likely liable under 76(1) though;
      o Informs the other party (Y), not in the Ordinary Course of Business
      o The information as not generally disclosed to the public
 NOT AGAIN: 76(5)(e) Y must know or ought reasonably to know that the tipper is in a
   special relationship
 the further you are from the initial transfer of information, the harder it is to show tipping


       1. Statutory/Harold Connor defence
       2. Reasonable mistake of fact
       3. Tipper disclosed information in the necessary course of business.

1. Statutory defence
 s.76 does not create an absolute liability offence – instead, provision allows for a defence to
   be made (s.76(4)):
       o s.76(4): “No person or company shall be found to have contravened subsection
          (1), (2) or (3) if person or company proves that person or company reasonably
          believed that material fact or material change had been generally disclosed”

   there are two points to draw from this defence:
        o 1) accused must prove that he/she had a REASONABLE BELIEF info was disc.
        o 2) what does GENERALLY DISCLOSED mean????...

Harold Connor (1976 OSCB)
 director‟s meeting; they decide to issue press release re. 3rd quarter financials; meeting went
   late; issuance of press release was earlier than usual; typically, press releases would be filed
   right after meeting; but because meeting went late, press release was not filed right after
   meeting, but rather next day; on that day, the def sold 1000 shares in company; ie. sold on
   morning that press release filed
       o D believes that info had been disclosed before he traded his shares; He assumed the
            information had been disseminated to public the night before, as was usually the case
 Court: doesn‟t matter that D had no CONSCIOUS wrongdoing or when exactly press release
   was filed; he made the trade at 1030 the next morning; this was NOT enough time for info to
   be reasonably digested.
 this case sets out that for a material fact or material change to be generally disclosed,
       o a) information must be disseminated to trading public; AND
       o b) public must be given a sufficient amount of time to digest information (an insider
            should wait a minimum of one trading day before trading)
 51-201 : Codifies this result: has info been released; has enough time passed

2. Reasonable mistake of fact
 the acc can argue that he should not be found guilty of IT because he made a reasonable
   mistake of fact
 Lewis v. Fingold: dude is director of company; 4th quarter results are issued and are
   disappointing; were not generally disclosed at time dude sold shares; he claims that he did
   not think the results were material; his reasons included F‟s long involvement w/ the Co., the
   reputation of its managing D; and F‟s belief in the viability of its long term projects
       o TJ: had established RMF in believing 4th quarter results would not have a significant
           effect on market price
       o CA: dismissed! upheld TJ.
                F had a long history with the company and faith in its CEO, leading to a
                   reasonable belief that 4th Q results would not significantly affect market value
 R v. Harper: dude was president of company; despite his knowledge of material facts about
   soil samples, he continued to send out positive press releases to the public; indicated in these
   that there were no other reports; stock price increased, but fell when info was released to the
   public; dude had sold most of his shares in company at high price as opposed to low!
       o dude argued that information was not material, and even if it was, that he a genuine
           and reasonable belief that it was not; claimed to rely on initial geologist opinion that
           said the samples were not significant
       o Court: information WAS material; clear that his belief was not genuine  he sold all
           his shares! He had many opportunities to release info to public, but did not.
                A reasonably competent geologist would NOT have given this opinion
                TEST: Did H demonstrate on a balance of probabilities an honest and
                   reasonable mistaken belief to refute his knowledge of the facts?  Objective-
                   Subjective test:
 Green v Charterhouse: ∆ bought shares after becoming aware that a possible takeover bid
   would bring a much higher price; Π was generally advised of the possibility, but sued once it
   materialized (seeking imposition of civil liability)
       o did ∆s "made use of" specific confidential information?
       o COURT: YES: Once it is proven that an insider had confidential info and purchased
         shares from one who lacked it, the onus shifts to the insider to prove no liability
              mere disclosure that confidential information exists is insufficient to
                 discharge the onus

3. Tipper disclosed information in the necessary course of business.
 NP 51-201 – 3.3 p. 1558 – provides particularities of what “necessary course of business”
   means (although of course, note, this is a policy)
 in order to fall within this defence, you should try and fall into one of these categories; BUT
      o Anand: how would you go about arguing an “analogous ground”?  good question!
 NP 51-201: 3.3 Necessary Course of Business
      o (1) The “tipping” provision allows a company to make a selective disclosure if doing
          so is in the “necessary course of business”. The question of whether [it is]…is a
          mixed question of law and fact. … Insider trading and tipping prohibitions are
          designed to ensure that anyone who has access to material undisclosed information
          does not trade or assist others in trading to the disadvantage of investors generally.
      o (2) …the “necessary course of business” exception would generally cover
          communications with:
               (a) vendors, suppliers, or strategic partners on issues such as R&D, sales &
                   marketing and supply contracts;
               (b) employees, officers and board members;
               (c) lenders, legal counsel, auditors, UWs, and financial & other professional
                   advisors to the Co.;
               (d) parties to negotiations
               (e) labour unions and industry associations;
               (f) government agencies and non-governmental regulators; and
               (g) credit rating agencies (provided the information is disclosed for purpose
                   for formulating a credit rating AND the rating‟s generally are or will be
                   publicly available)
      o (3) Securities legislation prohibits any person or company that is proposing a TOB,
          become party to a reorganization, amalgamation, merger, arrangement, etc. from
          informing anyone of material information that has not been generally disclosed. An
          exception to this prohibition is where the MI is given in “necessary course of
          business” to effect the TOB, business combination or acquisition
      o (4) Disclosures…in connection with a private placement may be in the “necessary
          course of business” for the company to raise financing. […] Nevertheless, [...]
          material information that is provided to private placees and controlling SHs should be
          generally disclosed at the earliest opportunity.
      o (5) “necessary course of business” exception would not generally permit a Co. to
          make selective disclosure to an analyst, institutional investor or other market
      o (6) There may be situations where an analyst will be “brought over the wall”…the
          analyst becomes a “person in a special relationship”…and is subject to the
          prohibitions against tipping and insider trading.

Royal Trustco v. OSC (1983) (Ont. Div. Ct.) [Info for Counter-TOB not “necessary course of
business” – doesn‟t have to be certain]
 Ds disclosed to RBC that they knew or had reason to believe that 60% of the shares would
   not be tendered in the TOB to encourage that tippee not to tender
       o IE: Royal Trustco disclosed material information about itself to Toronto Dominion in
           an attempt to defend against a takeover
 ISSUE: does disclosing information in the “necessary course of business” include defending
   against bids? (ie disclosing info as a defence)
 The fact “that the respondents could not guarantee that the known holders…would not sell
   or deposit the shares does not reduce the disclosure to a level less than fact.”
 The term “fact” should not be read supercritically…the information was sufficiently factual
   or a sufficient alteration of circumstances to be a material “change” to fall within the section
 Regulation of the securities industry is the function of the OSC, not the court  court should
   be slow to intervene unless the OSC was seriously in error in law or fact


   Anand set out 3 possible reasons for having IT rules…
       o 1) Unfair Access
               insiders have unfair access to information
               must have laws to ensure investors and insiders are on equal footing (i.e.
                 investor protection
       o 2) Economic Harm
               investors will refuse to purchase securities if they feel that insiders can freely
                 trade without laws to regulate them – this in effect will have an impact on
                 capital market
       o 3) Misappropriation of Information Causing a Breach of Fiduciary Duty
               insiders “stealing” from company
               premise that value of information belongs to company and not to individual
   Reasons to Permit Illegal Insider Trading
       o Rewards insiders for their work  can take advantage of information before it‟s
          publicly disclosed  gives incentive for their continued performance
       o D/Os benefit from their positions in many other ways (stock options, etc) 
          preventing them from benefiting from information obtained in their position is
          inconsistent with other law
       o IT regulation is very expensive to enforce & detections are difficult and rare
   BUT: OSC is no longer a Crown Corp, and budget has increased substantially!
       o given low frequency, conclusions are either that all insiders are law abiding or that
          the law is doing a poor job

   McNally and Smith, “Do Insiders Play by the Rules?” (2003)
      o Two obstacles face estimation of illegal insider trading:
               Lack of disclosure makes their detection difficult
               Even if disclosed, proving that they were made on the basis of undisclosed
                 information is difficult
      o Arguments against insider trading restrictions:

               Harris (2003): unrestricted insider trading makes prices more informative b/c
                they move stock prices toward their fundamental value
                     COUNTER: This benefit only occurs to the extent that firms are slow
                        in releasing information to the public
              Expensive to enforce b/c it is difficult to prove that insiders have material
                information  If convictions are rare, then unethical individuals will not be
                     COUNTER: Convictions are rare b/c prosecutions often rely on
                        circumstantial evidence
                     COUNTER: Previously, OSC‟s enforcement efforts were restricted b/c
                        of limited resources  since 1998, OSC‟s budget has tripled, number
                        of employees has doubled & the enforcement staff has doubled
              If there is no enforcement then the only limited to violations of the law are
                those that market participants impose on themselves
                     Two cases where the penalties imposed were less than the profit
                        generated by the crime:
                             o Bennetts  fine of $667k on $2 million profit
                             o MCJC Holdings  fine of $1 million on $10 million loss
       o Examined 1,812 repurchase programs (1987-2000)
              Only 25% reported identical numbers to the OSC & TSX
              TSX reports were generally higher than OSC  speculate that it‟s b/c TSX
                can delist the Co. & OSC has never prosecuted a Co. for non-compliance w/
                repurchase disclosure regs
              > 99.1% of firms comply with the TSX monthly repurchase restrictions
              12.6% of repurchase trades were @ a price higher than the last independent
                board lot  contrary to TSX price rules
              Found no difference in volume of shares repurchased over the 22 trading days
                before & after positive announcements
              Insiders do 16.7% (2.1%) of their buying (selling) in the 5 days preceding
                good news announcements  one would expect postponement if insider
                trading rules were followed
       o Results show that insiders do not avoid trading prior to the announcement of material


s. 53 – Basic prospectus requirement.
s. 56(1) States that prospectus must give “full, true and plain disclosure of all material facts.”

If not met, there is liability, as below:
 S. 130: liability for misrepresentation in a prospectus (whether long-form or short-form) is
    set out in section 130 of OSA – applicable to EVERY WORD
 this liability can apply to OMISSIONS as well as FALSE STATEMENTS in a prospectus

Two main consequences:
 1-common law - allows recovery for loss on basis of misrepresentation for which a person
  may receive damages or recision
 2-statutory law  s. 130.  probably better, because DEEMS reliance!!!
 REMEDIES: most people choose damages over rescission, and you‟re limited to the offering
  price (if the share was trading at $15, and it‟s currently trading at $10, your damages are $5)
      o prima facie the damages are the price paid less the post-misrepresentation price -
          Kerr v. Danier

   plaintiff must only prove:
        (i)      a purchase of security offered under prospectus;
        (ii)     that the purchase was made during period of distribution (What is distribution
                 period? The window of days during which securities will be sold. But secondary
                 issue is also included within the distribution period.); and
        (iii) that there was a misrepresentation (false statement or omission of material fact) in
    plaintiff does not have to prove reliance – instead, plaintiff is deemed to have relied on
    misrepresentation if it was a misrepresentation at time of purchase of securities
   subject to various defences that can be raised by defendant, plaintiff is then entitled to
        o Note: 180 day limitation period.

   Steps to follow (or questions to ask) are as follows:
    1) Does the document (prospectus) contain a misrepresentation?
    2) Who might be liable? (look to s.130(1))
    3) Does the defendant have any defences? (see below…)

Statutory Civil Liability
 s. 130, OSA [Misrepresentation in prospectus]
   o (1) If prospectus (together with amendments) contains a misrepresentation, a purchaser
       who purchases during the period of distribution is deemed to have relied on the
       misrepresentation and has a right of action for damages against
          o (a) issuer/selling SH on whose behalf the distribution is made
          o (b) each UW who is required to sign the certificate
          o (c) every D of issuer @ time of prospectus filed
          o (d) every person/co. whose consent had been filed pursuant to a requirement of
              the regs but only with respect to reports, opinions or statements that have been
              made by them
          o (e) every person or company, other than (a) to (d) who signed the prospectus
                   note also: s. 58 OSA – requires issuer to place a particular certificate in a
                      prospectus. “the foregoing constitutes full true and plain disclosure” 
                      signatories are attesting to this!
                   S. 58(3) – directors must sign; also CEO; CFO  holding selves out liable
    (2) … there is a right of rescission against:
          o (a) the issuer/selling SH
          o (b) each UW who is required to sign
          o (c) any other UW of the securities
    (3) If purchaser elects rescission then no right to damages
 s. 131, OSA [Misrepresentation in circular] – covered later on in TOB section

       o (1) Where a TOB circular, every SH shall be deemed to have relied on the
         misrepresentation & may exercise a right of action for rescission or damages against
         the offeror or a right of action for damages against: everybody who signed as a D;
         experts; anybody else who signed the certificate in the circular
       o (2) Where a D‟s or a D/O‟s circular or any notice of change contains a
         misrepresentation, every SH shall be deemed to have relied on the misrepresentation
         and has a right of action for damages against every D/O who signed
       o (3) Everything in (1) also applies to an issuer bid circular
       o (4) DEFENCE: Not liable under (1), (2) or (3) if you can prove the SH had
         knowledge of the misrepresentation

 only allows recovery for misrepresentation in prospectus; BUT: NO recovery/liability for
  misrep in the OTHER continuous disclosure documents (e.g. MC reports, quarterly financial
  statements), even though it could have effect on market price
      o NOTE: the new BC legislation DOES provide a cause of action for this, once it
          actually comes to force
      o NOTE: remember there is s.131 for takeover bid circular

   Bill 198: Ontario Legislation: proposed and passed in April 2003 in response to US
    legislation; assumption that there was a grave danger/lack of confidence in capital markets
        o contains statutory civil liability for misrep in CD documents
        o IF this legislation is passed, investors in secondary market can sue issuers, directors,
             experts for making public, material misreps written or oral about the company or for
             failing to comply with CD obligations;
        o will NOT have to show reliance
        o liability is centred on whether misrep was KNOWINGLY MADE
                   if WAS knowingly made, liability will not be capped!
                   if was NOT knowingly made, will be capped!
                   provides extensive defence options.
   this is currently not in force, but Anand will keep us advised.


   defences we are looking at are set out in ss.130(2) – (5) of OSA

 s.130(2) defence states that “No person or company is liable under subsection (1) if he, she
   or it proves that purchaser purchased securities with knowledge of the misrepresentation”
        focuses purely on knowledge of purchaser.
 Defendant proves purchaser had knowledge when he purchased
        s. 130(2), OSA [Only D issuer can use]
        s. 130.1(2), OSA [Only D control block issuer can use]
        s. 131(4), OSA [Only D an offeror can use]

2-SECTION 130(3): No person or company, other than issuer or selling security holder, is
liable under subsection (1) if he, she or it proves…”

 s. 130(3)(a): KNOWLEDGE: Prospectus was filed WITHOUT THE KNOWLEDGE OR
    CONSENT of one of parties listed in 130; and upon knowledge of it being filed, they gave
    reasonable notice that it was so filed. (but haven‟t they signed it???)
        o Defendant must have promptly given reasonable general notice that the document has
            a misrepresentation
        o POLICY RATIONAL: Defendants unaware of a misrepresentation should not be
            punished for it
                 COUNTER: Raises the question of the extent of the investigation one must do
                    to become aware of potential mistakes
                 COUNTER: Also seems to reward a lack of attention to the business of the
 130(3)(b): CONSENT: Can WITHDRAW CONSENT during the time between the issue of
    receipt of the prospectus and the purchase of securities by purchaser. . THIS withdrawal
    must occur:
        o After the issue of receipt of the prospectus AND
        o Before the purchase of securities AND
        o As soon as the defendant becomes aware of the misrepresentation AND
        o Defendant must provide “reasonable general notice” of the withdrawal and the
            reasons why
                 Unclear how and to whom it must be provided but like it must be provided to
                    investors or those individuals who purchased on the basis of the
                 Since an individual is unlikely to know who such purchasers are, “general”
                    seems to mean by dissemination in a public manner
 s. 131(5), OSA [Circular]; s. 131(5)(b), OSA [Circular]

 relates to reliance on expert opinions (auditor, law firm, engineering company, etc).
 Defendant must prove:
        a. He had no reasonable grounds to believe there was a misrepresentation or inaccurate
            representation in the expert‟s report
        b. He did not believe there had been a misrepresentation or inaccurate representation in
            the expert‟s report
 s.130(3)(c): the defendant had no reasonable grounds to believe, and did not believe, that
    there had been a misrepresentation in the expert‟s report; or that the copy/extract of their
    opinion in the prospectus was not a fair representation of their report/opinion/statement
 s. 131(5)(c), OSA [Circular]

s.130(3)(e): (an extention to (c) for gov‟t )regarding any false statement by an “official person”
or contained in what purports to be an extract from a public official document, defendant thought
(i) correctly + fairly reflected official statement; (ii) defendant believed it to be true; (iii)
defendant had no reasonable grounds for believing otherwise

2.3-EXPERT‟S DEFENCE – if expert is the D

   in process of transferring info from expert to issuer, there was some inaccuracy in portion of
    report inserted into prospectus – (e.g. Some tosser articling student misread the expert‟s
    fucking report when drafting the prospectus)
   s.130(3)(d): non est factum defence: where info in the prospectus inaccurately/unfairly
    reflected the info that the expert furnished → no liability if they establish
        o (i) person did a REASONABLE INVESTIGATION and had reasonable grounds to
            believe and did believe that the part of the prospectus was a fair representation of
            their opinion or report (ie. expert thought it was a fair representation) OR
        o (ii) after becoming aware of the mistake/that it did not fairly represent their work, the
            defendant expert advised the OSC of the incorrect use and gave general notice that it
            would not be responsible for error
   s. 131(5)(d)(i) and (ii) OSA [Circular]


For experts:
 s.130(4) defence states “No person or company, other than issuer or selling security holder,
   is liable under subsection (1) with respect to any part of prospectus or amendment to
   prospectus purporting to be made on his, her or its own authority as an expert or purporting
   to be a copy of or an extract from his, her or its own report, opinion or statement as an
   expert unless he, she or it,
        (a)    failed to conduct such REASONABLE INVESTIGATION as to provide reasonable
               grounds for a belief that there had been no misrepresentation; or
        (b)    believed there had been a misrepresentation.”

For directors
 s.130(5) is most often used by directors and states that: Defendant will face no liability
   unless he/she failed to conduct a reasonable investigation.
 s.130(5):“No person or company, other than issuer or selling security holder, is liable under
   subsection (1) with respect to any part of prospectus or amendment to prospectus not
   purporting to be made on authority of an expert and not purporting to be a copy of or an
   extract from a report, opinion or statement of an expert unless he, she or it,
       (a)     failed to conduct such REASONABLE INVESTIGATION as to provide reasonable
               grounds for a belief that there had been no misrepresentation; or
       (b)     believed there had been a misrepresentation.”
 IE: no liability unless the defendant FAILED TO CONDUCT such REASONABLE
   INVESTIGATION as to provide BELIEF that there had been no misrepresentation
       o THUS: as long as Def conducts a reasonable investigation, OR does not ACTUALLY
           believe that there had been a misrep, they can avoid liability.
 Anand: not clear who bears the onus of proof.
       o Kerr v. Danier Leather – suggests plaintiff (investor) does!
       o Anand: But does this seem fair? Makes more practical sense to be shifted to
 Anand: joint and several liability.

 The standard of reasonableness is that required of a prudent person in circumstances of
    particular case
   this standard effectively means that test for determining reasonable grounds for BELIEF and
    REASONABLE INVESTIGATION will differ, depending on one‟s function (i.e. subjective
        o e.g. depending on circumstances such as size and nature of the issuer and access to
            information, a CEO immersed in day-to-day operations would undoubtedly be held to
            a higher standard than a director who is not an officer or involved in continual

 “due diligence” is described as conducting an appropriate and REASONABLE
    INVESTIGATION of all material facts and matters relating to an issuer and its securities to
    be rationally satisfied in one‟s own mind that prospectus contains no misrepresentation and
    that certificate in prospectus is accurate (i.e. that prospectus constitutes full, true and plain
    disclosure of all material facts, without omission, relating to offered securities)
 proper due diligence provides a defence to signatories of prospectus and others in the event
    of an action for misrepresentation – there must be a requirement on part of defendant to do
    an INVESTIGATION to use this defence (see the reasonable investigation qualifiers in
    ss.130(2)-(5) defences of OSA)
 Note:         The actual issuer and any selling security holder cannot escape liability for a
    misrepresentation, notwithstanding that they conducted due diligence investigations (RYAN:
    this might not be correct – see below enforcement section)

 following case is a leading authority on what constitutes a “reasonable investigation” for due
    diligence purposes…

Escott et al. v. BarChris Construction Corp. et al. (U.S. case)
 BarChris was in the business of construction of bowling alleys. Policy of payment to
   company for service was a periodic payment plan by clients; Due to payment system, co ran
   into financial difficulty, and needed additional working capital… proceeds of sale of
   debentures were to be devoted to fill that need; Company eventually went bankrupt and
   defaulted on payment of interest on the debentures
       o Plaintiffs alleged that registration statement (which contained a prospectus as well as
            other information) with respect to the debentures (that was filed with SEC),
            contained material false statements and material omissions regarding financial
            affairs/status of company
 Court applies a predominantly objective test.
 Court examined question of whether each defendant had proved their DUE DILIGENCE
1)      CEO (Russo)
             Held that as CEO, Russo was thoroughly aware of BarChris‟ stringent financial
                 condition at time of registration statement
             Held that Russo could not have believed that there were no untrue statements or
                 material omissions in prospectus
             Thus, Russo had no due diligence defence
2)      President and Vice President – Directors (Vitolo and Pugliese)
             Court held that each of these men were of limited education; and that it was not
                 hard to believe that the prospectus was difficult reading for them
             HOWEVER, the court held that this was irrelevant…
          Rather, liability of a director who SIGNS a registration statement does not
           depend upon whether or not he read it or, if he did, whether or not he
           understood what he was reading
        Court held that these two men were part of BarChris‟ executive committee, and
           they must have known what was going on (certainly they knew of the inadequacy
           of cash)
        Also, there was nothing to show that they made any investigation of anything
           which they may not have known about or understood
        thus, Vitolo and Pugliese had no due diligence defences
3)   CFO (Kircher)
        Kircher‟s contention was that he had never dealt with a registration statement
           before,, and that he did not know what it should contain, and that he relied on
           experts ( lawyers, etc.) to guide him
        HOWEVER, court held that Kircher was thoroughly familiar with BarChris‟
           financial affairs…he read prospectus and understood it…he knew what it said
           and what it did not say
        The court held that Kircher had reason to believe that the expertised portion of
           prospectus was in part incorrect, and that he could not shut his eyes to facts and
           rely on others
        and, as to the rest of prospectus, the court held that Kircher did not have a
           reasonable ground to believe it to be true – on contrary, he must have known that
           in part it was untrue; and under these circumstances, Kircher was not entitled to
           sit back and place blame on lawyers for not advising him about it
        thus, court held that Kircher had no due diligence defences
4)   Controller [not a director] (Trilling)
        court held that Trilling was familiar with BarChris‟ finances and with its books of
           account…thus, Trilling could not have believed entire prospectus to be true
        but even if he did, court held that Trilling did not establish his due diligence
           defences – he did not prove that as to the expertised parts of prospectus he had no
           reasonable ground to believe that it was untrue; he also failed to prove, as to non-
           expertised parts of prospectus, that he made a reasonable investigation which
           afforded him a reasonable ground to believe that it was true
        Trilling did what was asked of him and assumed that others would properly take
           care of supplying accurate data as to other aspects of company‟s business
        court held that as a signer, he could not avoid responsibility by leaving it up to
           others to make it accurate
        thus, court held that Trilling had no due diligence defences
5)   Lawyer and Secretary of Company (Birnbaum)
        court held that, as a secretary of company, Birnbaum was informed a
           considerable extent about company‟s affairs…thus, even though Birnbaum did
           not know many of inaccuracies in prospectus, he must have appreciated some of
        in any case, court held that Birnbaum made no investigation and relied on others
           to get it right
        court also held that, as a lawyer, he should have known that he was required to
           make a reasonable investigation of truth of all statements in unexpertised
           portion of document which he signed – having failed to make such an
           investigation, he did not have reasonable ground to believe that all these
           statements were true
        thus, court held that Birnbaum had no due diligence defences
6)     New Outside Director (Auslander)
          court held that as to the audited figures, Auslander believed them to be correct
             because he had confidence in the auditors – he had no reasonable ground to
             believe otherwise
          thus, as to the expertised portion of document, Auslander had a defence
          HOWEVER, as to the non-expertised portions, court held that Auslander made no
             investigation of accuracy of prospectus – he relied on assurances of Vitolo and
          court held that [section 11 of U.S. Securities Act] imposes liability in first
             instance upon a director, no matter how new he is…he is presumed to know his
             responsibility when he becomes a director…he can escape liability only by
             using that reasonable care to investigate facts which a prudent man would
             employ in management of his own property…a prudent man would not act in
             an important matter without any knowledge of relevant facts, in sole reliance
             upon representations of persons who are comparative strangers and upon
             general information which does not purport to cover particular case
          thus, court held that Auslander had no due diligence defences with respect to
             misstatements and omissions in those portions of prospectus other than audited
             1960 figures
7)     Underwriters
          court held that underwriters are just as responsible as company if prospectus
             is false…and prospective investors rely upon reputation of underwriters in
             deciding whether to purchase securities… purpose of [section 11] is to protect
             investors…to that end, underwriters are made responsible for trust of
             prospectus…if they may escape that responsibility by taking at face value
             representations made to them by company‟s management, then inclusion of
             underwriters among those liable under [section 11] affords investors no
             additional protection…in order to make underwriters‟ participation in this
             enterprise of any value to investors, underwriters must make some reasonable
             attempt to verify data submitted to them…they may not rely solely on
             company‟s officers or on company‟s counsel
          thus, court held that underwriters had no due diligence defences (except as to
             1960 audited figures)
8)     Auditors (Peat, Marwick)
          court held that there were enough danger signals in materials to require some
             further investigation on part of auditors
          court held that generally accepted accounting standards required such further
             investigation under these circumstances…it is not always sufficient merely to
             ask questions
          thus, court held that Peat, Marwick had no due diligence defences

YBM CASE (Canadian) – test seems to waffle between subjective and objective!
Facts: Prior to offering, USAG investigated re. ties to Russian mafia; Board was aware of this
and set up Special Committee to investigate allegations; SC deliberates and says concludes no
disclosure necessary as the allegations of connections to crime are not clear; Magnet making
company issued a prospectus and failed to disclose possible links to Russian mafia or any of the
SC deliberations (though did mention it vaguely in AIF). This was thus omission.

Held: YBM‟s documents did not contain full, true and plain disclosure of all material facts.
Sections on Eastern Europe were overly opaque in describing the precise risks facing YBM and
factual basis for those risks.
Issue: Was material information withheld? Did the individuals breach 130? Defences?
 policy consideration: para 89: disclosure protects investors! ensures free/open manner; that
    security will correspond to its actual value  supports informational efficiency!
 A “material fact” is defined as: a fact that would reasonably be expected to have a
    significant effect on market price or value of securities.
            o we cannot simply assess individual risks here; we have to assess the broader
                factual context and question what the disclosure of ALL the risks would mean for
                the investor; (ie. the whole may be greater than just the sum of its parts)
            o when taken together with other facts, there was sufficient confirmation of the aspects of
               the [U.S. Government's] investigation [into YBM] to assess whether these facts are
               material within the meaning of the Act.
            o when things are considered all together, evidence indicates YBM was subject to a
                set of risks and these risks were not disclosed
                MATERIALITY TOGETHER. Not as separate issues!!!!
   Court will consider “reasonableness of respondents;‟ diligence and their belief from
    perspective of a prudent person in circumstances. This entails both objective and
    subjective considerations including their degree of participation, access to information and
   good faith reliance upon legal advice that is fully informed, ostensibly credible and within
    the lawyer‟s area of expertise is consistent with the exercise of reasonable care
   1. Mitchell, underwriter, chair of SC --> Objective
            o First, there was a conflict of interest! Chair + UW!
            o His experience + conflicted position could not justify belief that YBM had made
                FTP disclosure; they had an obligation to make investigation; investigation
                conducted was not reasonable!
            o Anand: seems like a more objective standard: ie. You ought to have known as
                chair of SC! Knew about offering, had investigated the facts; NOTE: one of
                main criticisms of this case is that the OSC has been unpredictable as to whether
                it applies a subjective or an objective test!
            o Mitchell had no reasonable basis for his belief that YBM had made full, true and
                plain disclosure.
   2. Davies, was on SC  objective
            o Outside director who had been visited by the FBI and didn‟t tell the board about
                this fact. This was the point that the OSC focused on.
            o Claimed a belief in the legitimacy of the business; despite this, it did not justify a
                reasonable basis for his belief that YBM made FTP disclosure of all MF
            o Having regard to his skill & business experience he failed to act prudently
            o A D‟s belief cannot be considered reasonable when he is aware of circumstances
                of such a character, so plain, so manifest, that a person with any degree of
                prudence would not have acted in this manner
                      He had positive duty to act when the info was thrown at him!!! (re FBI)
   3. Schmidt, was on SC; Yes DD  subjective!
            o he‟s a member of the SC, but he did not receive a visit from the FBI; young and
                inexperienced, thus reasonable to rely on experienced counsel and advisors;

               seems to have had a belief in the legitimacy of the business; had no knowledge
               not known to directors, generally  SUBJECTIVE
           o Did not have the special knowledge that Davies did. Let off.
   4. Peterson – BM; Yes DD  objective
           o Also let off hook. Why? Court seems to reason that since Peterson was simply a
               figure head and therefore did not have sufficient knowledge.
           o Anand: why is this relevant?!?!?!?
           o OSC concludes he meets DD test; chastises him for not providing more leadership
           o Anand: WTF. He‟s a MEMBER OF THE BOARD! S was required to make
               reasonable investigation, why not him?
   5. A+G – BM; Yes DD  subjective
           o Each brought different skills, but had no material role in financing; relied on
               counsel to draft disclosure (no drafting themselves); given their skill, reliance on
               the experts was reasonable.
                    A believed audit would uncover any wrongdoing
                    G had no specific understanding of the investigation
           o Anand: but, if people can just sit back on whatever level of knowledge they have,
               then there is very little required under DD defence!
   6. Gatti – BM; Yes DD  subjectiveish
           o Relied on SC; relied on experts; participated in conference call; after prospectus
               signed, q is whether there is information to suggest he believed it was true
           o he had a reasonable belief that the prospectus was true and no material facts were
               omitted; OSC says he proved DD but just barely!
           o Anand: how do you “just barely prove” DD?

NOTES: Globe and Mail article of July 4, 2003 addresses the failure of the OSC to vet the YBM
corp. As stated by author, “Why approve a prospectus for a company that is being investigated
by U.S. government? OSC said that „it is not staff‟s duty to perform due diligence.‟”
 Anand: crucial point: OSC knew FBI was investigating YBM BEFORE it approved the
   prospectus!!!! SO, WHY did the OSC approve a prospectus that IT KNEW might contain
   failure to FTP disclose all MF!??!
       o Debate: what exactly DID the OSC know
                 OSC: argues: its own behavior was irrelevant; attacking a regulator CANNOT
                    excuse the failure to make FTP disclosure
                         Anand: this doesn‟t make any sense!
       o BUT: can you totally rely on whether OSC approved or not? Can you rely on them to
            check every MF?
                 Anand: 56(1) read explicitly; does NOT say that OSC approval will mean FTP
                 BUT: raises bifurcation issue: is there a perceived bias in the sense that the
                    OSC is reviewing the case!? A person investigating a matter cannot hear it;
                    there is a fairness issue at stake here!
 Anand: These points have not really been litigated:
       o 1) what is the meaning of the receipt;
       o 2) What is the obligation of the OSC in reviewing prospectuses
 BUT REMEMBER: company has more info available to it than the OSC WRT this issue
       o OSC is now making it a policy to disclose its investigations to the public; what does
            this do to a share price; what does it do to materiality? The extent to which the OSC
            gets involved can affect the share price!
                 investor protection issue! vs. company‟s desire to max share price
                 companies: lay off, WE know what is material!

                  recall fiduciary duty: business judgment rule; board is operating under views
                   of 1) acting in best interest of company 2) courts will be reluctant to interfere;
                  But, once you layer securities law onto this, it gets tricky
                  note: the OSC is not on trial here! Are they responsible for making disclosure?
                        be aware of tensions:
                               o company wants to issue right away  market window
                               o OSC – pressured by company to expedite review, approval
                               o Anand: this is an example of when things go wrong!
                  Also: structure/function of OSC; how separate are their bodies? does this
                   raise a perception of bias? – Has been approved by SCC though.
                  Anand: open question  can investors sue the OSC? Not clear! This
                   question has come up following YBM

Kerr and Danier Leather
 D is going public; issues prospectus pursuant to an IPO; sets out a FORECAST of its
   revenues in the prospectus; cautionary language in prospectus saying assumptions used to
   create forecast MAY be inaccurate, no guarantee projects would be met; shares are issued for
   11.25; CFO then realizes the forecast was falling short; BUT, did not investigate b/c they
   thought it would still be met; offering closed; D issues new forecast after it closes, reveals
   lower revenues; shares drop to 8.90 (ie. this is the effect of the failure to meet target on price
   of shares --usually IPO‟s are underpriced!); BUT, forecast was eventually met by year end!
 Issue: whether financial projects relating to financial results were inaccurate so as to
   constitute a misrep under 130; if there WAS a breach of s.130, did W and T (officers)
   qualify under DD defence
 Court: Yes, there was a breach of s.130; NO DD defence!
 Analysis
       o 1-was the forecast a MF? Court says YES! B/C the forecast could reasonably be
           expected to have an effect on the market price – even despite disclaimer!
                FOFI would be an untrue statement of material facts if:
                        Management no longer subjectively believes the forecast, OR
                        Management‟s subjective belief is no longer objectively reasonable,
                        The results tend to seriously undermine the accuracy of the Forecast in
                           the prospectus
                NP 48:
                        A change in the events or assumptions used to prepare FOFI that has a
                           material effect on FOFI must be reported in a manner identical as
                           when a material change occurs
                does not matter that eventually forecast was met by year end.
                Anand: this seems to be saying: you can‟t make forecasts in prospectus; if so,
                   you‟re holding yourself out to a high standard when you make forecasts!
                Anand: if they had issued an amendment before IPO closed, it may have been
                   an out for them
                Anand: KEY: this is a hard line decision; places high onus on companies
                   going public to say that financial forecasts have to be very close to accurate.
                   ALSO, if you act quickly enough to amend, you can mitigate damages.
                here, not entirely clear what they knew and when; this will be a factual issue
                   that courts will have to consider
                        e.g. cautionary language re. disclaimer: what does this imply?

       o 2 – DD defence: these guys were intimately involved with processing IPO; had
         access to knowledge of all relevant financial info; reasonable to expect they would
         have made a more complete investigation
              Doesn‟t matter that they subjectively believed they‟d meet target; others in
                 company did not
              Objective! - The May 16th Analysis is not sufficient to establish that Wortsman and
                  Tatoff's subjective belief that the Forecast was still achievable, was also an
                  objectively reasonable belief.
                       Up to May 20, 1998, Wortsman and Tatoff failed to conduct the very
                           analysis that they performed after the IPO closed and after they experienced
                           the poor sales results from the Victoria Day Sale. Had they conducted the
                           same review before the Victoria day sale, they would have discovered the
                           problem that lead to the decreased forecast (the weather)
                       The intra-Q4 1998 results tended to seriously undermine the accuracy of the
                           Forecast, and Wortsman and Tatoff's subjective belief in Danier's ability to
                           achieve Forecast in the face of the departure the IPO Plan, which was derived
                           from the Forecast, and the factors enumerated above, was objectively
                       Disclosure of the intra-Q4 1998 results was necessary to make the Forecast
                           not misleading. I find, therefore, that the Prospectus contained a
                           misrepresentation at the time of purchase
                       The information in the May 16th Analysis was of a nature that could not
                           reasonably be said to be clearly not material and, therefore, Wortsman and
                           Tatoff's failure to disclose this information to Danier's board of directors,
                           counsel, underwriters and auditors fell below the standards expected of them.
                       KEY: As an inside director and senior officers intimately involved with
                           processing the IPO and with access to and knowledge of all the relevant
                           financial information, it was expected that they would have made a more
                           complete investigation, which a reasonably prudent person in their position
                           would have conducted
        o Damages:
                The prima facie measure is the depreciation in the price of the security 
                  price paid less the post-misrepresentation price
                Defendant may further reduce the damages by proving:
                        Depreciation in price was caused in all or in part by factors other than
                          the misrepresentation
                        The depreciation in price is not reflective of the depreciation in value
                Post-misrepresentation price should be adjusted to eliminate the effects of
                  price stabilization and any abnormal price movements  eliminate the effects
                  of panic selling
   THUS: this case indicates that the test of reasonableness is more strict than the YBM
    standard, which appears to be all over the place
        o implies a continuing obligation to disclose changes in information and to do this as
           soon as possible
   Question: does this mean we have an objective standard?
        o Anand: still not clear; does bring an objective standard to forefront, but still have
           YBM (which admittedly is a tribunal decision!)


Matter of Securities Act and in Matter of A.E. Ames & Co. Ltd.
   He must make such independent investigation as will entitle him to say “to best of my
       knowledge, information and belief…”. Certainly underwriter will have to, and is
       entitled to, rely on issuer and its officers at many points in investigation, but such
       reliance cannot be an easy, automatic thing resulting in blithe acceptance at all points.
       Some matters and some circumstances will call for question, challenge and thorough


   TOB are just one type of transaction; there are many ways companies can acquire others
   methods of acquisition
       o 1-takeover bid – governed by Part XX of Act
       o 2-asset purchase agreement/deal – ie. purchasing their assets as opposed to their
          securities; must be a friendly deal, ie. a merger.
       o 3-arrangement – CBCA; requires court approval; requires SH vote by meeting; so
          have to issue proxy circular;
               this is a very flexible tool; CAN be TOB; CAN be any other type of
               Lawyers like this much more flexible than Part XX
               Debate: should arrangements be regulated like TOB, b/c they are much more
                  prevalent! No move has been made to do this though
       o 4-amalgamation – C establishes sub; sub and target merge


    Act does not prescribe any particular form for the takeover bid…rather, it defines what the
    duties of the bidder are to the SH in event of a TOB.
   Definition: a TOB is made when a corporation ( offeror) makes an offer to purchase
    outstanding shares of another corporation ( target)
   under securities legislation, such a purchase is a takeover if it would on its own, or in
    combination with shares already owned, give the offeror 20 per cent or more of target‟s
    outstanding voting or equity securities
                 ie. enough to give it “control”.
                 s. 89(1): offer to acquire 20% or more of outstanding voting or equity
                    securities of that class of issuer‟s securities

   a takeover BID is a book of information that sets out why the bid is being made, intentions
    of the offeror, and how the target shareholders will benefit from takeover
    Board of the target company in a TOB has a duty to distribute a circular to its shareholders.
    A circular with also be distributed by the company seeking to take over.
   when bid is made, the TB has a meeting to determine what response will be made to bid (a
    SPECIAL COMMITTEE is usually then comprised, with at least one independent director –
    note that a special committee is not required by law) A Special Committee would be deemed
    independent of Board and able to make unbiased decisions for company….

    Board often has conflicting views: on one hand, Board is supposed to act in best interests
    of company; but on other hand, Board members will lose their positions if TOB proceeds
    (i.e. they are motivated by self-interests)
          hence, conflicting views of “Management Entrenchment v. Shareholder Interests”
   therefore, some bids are Hostile (target Board does not approve of bid), while other bids are
    Friendly (target Board does approve of bid)
   Target shareholders have a choice to tender or not tender shares to the offeror‟s bid
   SC might decide to seek another bidder (known as a White Knight bidder)
   DEAL STRUCTURE: TOB‟s can be for cash (**) or shares; or bid can be for cash and
    shares (I.e. example of cash is “A company” offering to pay cash to the shareholders of “B
    Company” for their shares. Example of deal with shares: “A Company offering to pay in
    shares for the shares owned by shareholders of “B Company.”
          bids can be full (offeror acquires ALL of shares; not just 20% [or another
             percentage]) or bids can be partial (offeror only bidding for a percentage of shares –
             20%, 30%, etc.)
          in partial bid situation, minority shareholder stand to be potentially disadvantaged –
             their shares may not be taken up (purchased); this is seen as unfair


   motivations for TOBs are rooted in following:
       1)     INEFFICIENT MANAGEMENT-I.e. belief that the acquiring firm‟s management
              can do a better job than target‟s management.
       2)     BUSINESS SYNERGIES: advantages for taking over a “like” business. The
              whole of the two companies is greater than sum of parts.
       3)     MARKET POWER: if you take over a competitor, you take over more
              market power. I.e. reduced competition.
       4)     TAX CONSIDERATIONS. One company may have losses which would be of
              use to other, profitable company. Losses are of course beneficial for tax purposes.
       5)     UNDERVALUATION of Target‟s shares: if a TOB occurs, target‟s shareholders
              will reap more value, and the share prices in market will increase.
       6)     HUBRIS: pride of offeror. Hypothesis implies that managers seek to acquire
              firms for own, personal motives.

 the OSC and Courts as regulators! OSC, administers Act; Courts, supervise OSC
 Anand: note the interplay between these two for adjudicating takeover bid issues!
      o OSC: has view that the FD of the board in a TOB is to act in best interests of SH!
             ie. achieve highest value
      o Courts: do not hold this as strongly.
             some believe courts are not equipped with expertise to deal with TOB
             thus: adjudicators often favor to bring disputes before OSC instead; in
                addition to expertise, action is often more timely!
 WIC (OSC level): TOB came before OSC; Counsel for SH argued OSC was appropriate
  forum whereas WIC argued it was the court; cease trade application:
      o OSC view: it‟s clear that something which, for corporate law purposes may constitute
        a breach of fiduciary duty … the question is not whether the Commission can look
        into the matter, but whether it is in the best interests of the public that the OSC look
        into the matter”
               SO: purely FD questions could better be dealt with by courts
               OSC duty: to regulate corporate conduct
       o note: line between court and OSC‟s role is hard to draw
       o OSC: job is not to define breach; but to regulate conduct for purpose of regulating
          corporate securities markets
       o PRO OSC: If a clear abuse of investors is demonstrated, the Commission should not
          be forced to rely on a single minority shareholder to initiate legal proceedings on
          behalf of all.
               OSC has flexibility; expertise;
       o Citing In the Matter of Canadian Tire (1987): A purported sale of control…where the
          rights of holders of some 83 million Class A shares are concerned, is not a private
          matter…This is demonstrably a public matter…The Commission, accordingly, has
          alwayas played a major role in overseeing such transactions
   Anand: be aware of tension between courts and regulators!
       o speaks to a tension between corporate and securities law!
       o we have to question who is the appropriate regulator?
               in recent years: growing power of securities regulator but CBCA has not
               we need to think critically about who the appropriate type of law maker is
                  WRT these issues!
               FD is at least historically a corporate law issue; so they need at least some role
                  to play here


   Each province has its own TOB legislation.
   Part XX of OSA, and NP 62-202 deal with TOBs. Basically, a “how to” guide to takeovers.

 Legislation on TOBs has generally been directed to protection of target‟s shareholders
     o Must be given ample time to consider various bids
     o Must be given chance to change their mind & withdraw their shares after tending
     o Must be treated equally (pro-rata take-up rule)
 Note that legislation does not explicitly state above-noted objectives (these are implied
 Note 2: Anand asks why the shareholders of acquiring company not be protected as well?
  Possible answers include: I) Corporate law already covers this, II) fiduciary duty

 term take-over bid is defined under s.89 of OSA as follows
      o “take-over bid” means 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
          offeree issuer whose last address as shown on books of offeree issuer is in Ontario,
          where securities subject to offer to acquire, together with offeror‟s securities,
          constitute in aggregate 20 per cent or more of outstanding securities of that class of
          securities at date of offer to acquire.
 20% was deemed threshold amount by Kimber report as that which gives de facto control to
  offeror and any of its affiliates – s.90(2) of OSA

 OSA sets out a step-by-step procedure for TOBs which must be followed…

 TWO MAIN WAYS: either via advertisement or direct delivery
 1-by advertisement; put an ad in the paper!
      o s.100(7): an offerer may commence a TOB by publishing an advertisement containing
         a brief summary of the bid in at least one major daily newspaper or by dissemination
         the advertisement in a prescribed manner IF:
              (a) on/before this date, they file the bid and deliver to offeree‟s issuer
                 principal office
              (b) on/before this date, they request from offeree a list of the security holders
                 referred to in 95(1)
              (c) within TWO business days of the receipt by or on behalf of the offerer of a
                 list of the security holders referred to in 95(1), the bid is delivered to those SH
                 in accordance with subsection (6)
      o [Note that commencing TOB by advertisement gives shareholders opportunity to
         tender early]
 2-s.100(2) – TOB may be commenced by delivering the bid to SH referred to in 95(1)
      o s.100(3) – If choose (2), you have to deliver to offeree‟s issuer‟s principal office
      o any notice of change/variation has to be delivered as well
 Zimmerman committee: Bid to remain open for 35 DAYS – (see 95(2)
 REMEMBER: these offers CAN be varied; extended; etc (eg increase price)
 What does target do when TOB is made?
      o 100(5) – directors‟ circular – requirement to circulate this
      o Requirement for DC is at s.99
              99(2)- MUST make a recommendation: note, this is very closely related to
                 FD!  note: can also postpone/defer recommendation
              99(3) – objecting/dissenting director(s) can issue their own circular and make
                 their own recommendations.
      o Requires any person who acquires 10% of voting or equity securities to issue and file
         a press release  must identify the acquirer & the aggregate extent of their control
      o Every subsequent increase of 2% requires a press release and filing a report w/ the
         provincial regulator

           1. Equality
           2. Disclosure
           3. Timing

 s.95(7) – Proportionate Take-up:
      o “Where bid is made for less than all of class of securities subject to bid and where a
          greater number of securities is deposited pursuant thereto than offeror is bound or
          willing to acquire under bid, securities shall be taken up and paid for by offeror
          proportionately, disregarding fractions, according to number of securities deposited
          by each depositing security holder.”

        o [i.e. if you have a partial bid, and you have holders of shares that own more than
            percentage tendered to in bid, offeror has to take-up (purchase) proportionately all
            of shares tendered – so that no shareholders that tendered get left out in cold]
   s.97 – Identical Consideration:
        o (1) “Subject to regulations, where a take-over bid or issuer bid is made, all holders
            of same class of securities shall be offered identical consideration.”

 s.98 – Offeror‟s Circular:
       o (1) “An offeror shall deliver, with or as part of take-over bid or issuer bid, a take-
           over bid circular or issuer bid circular, as case may be.”
 S. 133: failure to send prospectus, takeover bid or circular, or issuer bid or circular gives rise
   to a right of purchaser to sue for damages

   s.99 – Director‟s Circular:
        o (1) “Where a take-over bid has been made, a directors‟ circular shall be prepared
           and delivered by 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 date of bid.”
        o (2) “ board of directors shall include in a directors‟ circular either a
           recommendation to accept or reject a take-over bid and 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, reasons why
        o (3) Individual O/D may make a recommendation
        o (4) If Ds are considering making a recommendation, it can advise SHs not to tender
           until further communication is received from Ds
        o (5) If doing (4), the recommendation (or lack thereof) must be delivered no later than
           7 days before expiration of bid
        o (6) If there is a change in the information contained in the Ds Circular or an
           individual D/Os Circular AND the bid/withdrawal period has not expired the
           recommendation can be changed
        o Can also defer/postpone recommendation
   What exactly is a circular?
        o if a bidder getting circular together, MUST follow Form 32 (p. 327 OSA)
        o recall proxy circulars: set out info about company/directors/officers that SH will need
           before annual meeting
        o Form 32 provides guidelines for circulars sent to target SH
                outlines names, etc
                Items 7: terms and conditions of the bid
                Item 8: payment for deposited securities
                Item 9: right to withdraw deposited securities
                Item 14 – Valuation - a process undertaken by independent 3rd party; by which
                   shares of target are valued as well as shares of bidder.
        o Anand: must read the OSA together with this form
                OSA requires a circular, but need the form to know what should be there!
        o Form 34: same thing, but for directors of target! p. 335 OSA
                Describes relationship between TB and bidder; Trading by D/O; material
                   changes in Target Company

                  Form 14: recommend acceptance/rejection of bid OR, if no recommendation
                   made, the reasons why not
                 cross reference with 99(1)
                 Anand: thus: form provides more guidance than OSC as to particulars
   (1) Where a TOB circular, every SH shall be deemed to have relied on the misrepresentation
    & may exercise a right of action for rescission or damages against the offeror or a right of
    action for damages against,
        o (a) every person who at the time of the offer, signed as a D
        o (b) experts who consented can be liable for errors in their portions
        o (c) anyone else (other than (a)) who signed the certificate in the circular
   (2) Where a D‟s or a D/O‟s circular or any notice of change contains a misrepresentation,
    every SH shall be deemed to have relied on the misrepresentation and has a right of action
    against every D/O who signed
   SEE DEFENCES UNDER (5) (mirror defences above)

 s.95(1) – Delivery of Bid:
      o “ bid shall be made to all holders of securities of class that is subject to bid who are
          in Ontario, and delivered by offeror to all holders, whose last address as shown on
          books of offeree issuer is in Ontario, of securities of that class and of securities that,
          before expiry of bid, are convertible into securities of that class.”
 s.95(2) – Minimum Deposit Period: - 35 day period!
      o “ offeror shall allow at least 35 days (not business days) from date of bid during
          which securities may be deposited pursuant to the bid.”
 s.95(3) – When Taking Up Prohibited:
      o “No securities deposited pursuant to the bid shall be taken up [purchased] by offeror
          until expiration of 35 days from date of bid.”
 s.95(4) – SH Withdrawal Rights:
      o “Securities deposited pursuant to bid may be withdrawn by or on behalf of a
              depositing security holder,
               (i) at any time where securities have not been taken up by offeror,
               (ii) at any time before expiration of 10 days from date of a notice of change
                  or variation under section 98, and
               (iii)if securities have not been paid for by offeror within three business days
                  after having been taken up.”
 s. 95(10) – Prompt payment:
      o Any securities taken up under the paid shall be paid for as soon as possible and in any
          event not more than three business days after the taking up of the securities
 s.95(12) – Extension Restricted:
      o “A bid may not be extended by offeror, where all terms and conditions thereof have
          been complied with except those waived by offeror, unless offeror first takes up all
          securities deposited thereunder and not withdrawn.”

Canfor Corp. (Re), (1995) (OSCB) – DNC in class, but in book
 B Co. made a bid for T Co.  transfer of control over T Co. required Minister‟s approval
   under Forest Act  B Co.‟s bid involved issuing a deposit receipt (DR) to SH for each T Co.
   share deposited  B Co. would have 100 days from expiry of bid to obtain Minister‟s
   approval  during this period, “Preservation Covenants” would provide T Co. an option to
    back out if they were violated  upon approval DRs redeemable for B Co. shares  DRs
    would be freely tradable  T Co. sought a cease trade order, arguing the DR structured bid
    violated SH withdrawal rights
   HELD: T Co. SHs would have much of the same protection as if they had withdrawal right
    except they would be unable tender to another bid  there may be other circumstances
    where structuring a bid this way would violate the public interest however, in the unusual
    circumstances (requiring Minister‟s approval) OSC was not satisfied the bid was so abusive
    of investors or the capital markets as to warrant intervention and in effect require the granting
    of a withdrawal right
        o KEY: taking up means the communication by the offeror of its irrevocable decision
            to complete the share purchase, which must take place at or before time of payment
   While the “Preservation Covenants” would likely have the effect of giving B Co. a complete
    “out”, at its option…and it seems that B Co. did not lean over backwards to be fair to the T
    Co. SHs…OSC did not consider this to be so abusive as to require intervention

 s.95(13) – News Release:
      o “Where all terms and conditions of bid have been complied with or waived, offeror
          shall forthwith issue a notice by news release to that effect, which news release shall
          disclose approximate number of securities deposited and approximate number that
          will be taken up.”
 s.96 – Financing of Bid:
      o “Where a take-over bid or issuer bid provides that consideration for securities
          deposited pursuant to bid is to be paid in cash or partly in cash, offeror shall make
          adequate arrangements prior to bid to ensure that required funds are available to
          effect payment in full for all securities that offeror has offered to acquire.”
      [Note that this is different than in United States]

   s.101 – Securities, Reports of Acquisitions:
        o (1) “Every offeror that acquires beneficial ownership of, or 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 outstanding securities of that class,
                (a) shall issue and file forthwith a new release containing information
                   prescribed by regulations; and
                (b) within two business days, shall file a report containing same
                   information as is contained in news release issued under clause (a).”

 all of this above TOB shit is expensive!
 s. 93(1)(a) OSA– stock exchange exemption- can do a TOB through a SE
       o recall: these are SRO‟s – BUT they will have rules re. TOB
       o Exchange rules require a notice similar to a TOB circular be registered w/ the
           exchange(s) and sent to all registered SHs of the class of securities subject to the bid
           & the terms must be communicated by advertising in a manner approved by the
           exchange(s) [press release]

        o Offeree Ds must also issue a press release indication recommendations & reasons or
           reasons for not making a recommendation
        o Exchange rules also provide for pro-rata take up
        o 21 days after the acceptance of the notice by the exchange, a book for the receipt of
           tenders may be opened
        o Offeror CAN‟T attach any conditions to an exchange bid other than the max number
           of shares sought and making the bid conditional upon the Director of Investigation
           and Research taking no action under the Companies Act.
        o rationale: if abiding by rules of another regulator, don‟t have to abide by these rules
           as well
   93(1)(b) – normal course purchase exemption – say own 19%; any 1% purchase would
    amount to a TOB
        o This allows a minimal amount of purchase of shares in a year and not fall under TOB
        o Can purchase under 5% of outstanding securities in any 12 month period; as long as
           they do not pay premium above market price!
                  will be called a “normal course purchase” and not a TOB
   93(1)(c ) – private agreement exemption/control block purchase: Transfers of control
    may benefit T Co.‟s SHs but might not occur if the controlling SH or group of SHs do not
    receive a premium  exemption permits small premiums to be paid to specific SHs
        o TOB rules do not apply if:
                 (i) purchases are made from no more than 5 persons in the aggregate
                 (ii) bid is not made generally to all SHs of the class subject to the bid
                 (iii) consideration paid, including brokerage fees/commissions, does not
                   exceed 15% of the market price

        o Anand: this tries to allow transfer of control in very limited circumstances
                 this seems to go against equality theme!
                 key is limitation on price – this is supposed to control negatives that
                   undermine equality
   93(1)(d) – CHI: if target is private company, do not have to comply with TOB rules
        o ie. b/c less of a public interest concern.
        o Exemption applies if
                 the offeree issuer is NOT a reporting issuer
                 there no more than 50 SHs exclusive of employees & former employees
                 there is no published market for these securities
   s. 93(1)(d):
        o exemption available where:
                 less than 2% of securities are held by residents of ON,
                 fewer than 50 holders of the securities resident in ON,
                 bid is made in compliance with laws of another recognized jurisdiction, and
                 material relating to bid is sent by offeror to all SH of the class sought who are
                   resident in the province
   s. 104(2)(c):
        o one may apply to the Commission for an exemption from TOB regulations where
            such and exemption would “not be prejudicial to the public interest”


    strategies target Board can adopt if it does not approve of TOB are known as DEFENSIVE
   Actions taken by board can give it more time before the bid or to thwart the bid altogether.
   these defensive tactics can be divided into ACTIVE v. PREVENTATIVE

What are the Duties of the Directors in the face of a TOB?

   Relevant U.S. law which has been adopted in Canada:
   Revlon v. McAndrew (p. 299)
       o Rule: When a break up or sale of a company is inevitable during a hostile bid, the
          duty of the board shifts from one relating to preservation of the company to the
          maximization of value for shareholders.
       o Has come to be known as ”Revlon Duties”.
       o In Canada there has been little to confirm this rule, as of yet: and NOT the rule in ON

 Canadian courts have struggled to delineate precise duties owed by directors in context of a
 In Teck v. Millar, directors who acted in what they considered to be best interests of
   company were held to have satisfied their fiduciary obligations…general rule that: “
   directors must act in good faith…there must be reasonable grounds for their belief”
 Ultimate deference was paid to the board of directors, with only stipulation being that the
   board must act within its fiduciary duties, under corporate law.
   Note: Despite fiduciary duties, courts in Canada have not historically held that directors have
   a positive duty to maximize shareholder value.

WIC Case (1998)
 Wic Corporation was being approached by CanWest…ended up reaching a lock-up
  agreement with Shaw, who was acting as White Knight; break fee plus crown jewel; serious
  financial repercussion!
 Rule: In context of hostile bid, the directors should obtain independent legal/financial advice
  and form Special Committee; they must also conduct a market auction in order to protect the
  best interests of the shareholders.
 Best Judgment Rule: no duty on management to make the best decision - court will be
  reluctant to interfere where the business decision was made in reasonable and informed
  reliance on the advice of independent financial and legal advisors
 no Nancy Reagan defence in Canada – Board cannot “just say no”
 Note: This case seems to reinforce Revlon rules, but that was clarified by Schneider.

Maple Leaf Foods v. Schneider Corp. (1998) (Court of Appeal)
 Facts: Maple Leaf wanted to take over S; S controlled by Schneider family; offered
  19/share, increased to 22; sought out Smithfield (white knight); Smithfield made offer for 25;
  S didn‟t like ML; ML increased offer to 29; S had lockup agreement (contract) with
  Smithfield (other company) – promise to purchase in return for a break fee if agreement
  broken; S accepted Smithfield‟s bid (lower price)
 Issue: Was Schneider obliged to take the higher bid from Maple Leaf as it was the higher bid
  and thus in the “best interests” of the shareholders?
   Held: YES! Was in best interest of Corp; Court will not interfere!! It is not law in Canada
    to maximize shareholder wealth (ie. REVLON IS NOT LAW IN ONTARIO) – there may be
    a difference between what is in best interest of corporation versus what is in best interests
    of shareholders;
             courts highly deferential to decisions of Board even when Board has not acted to
                maximize shareholder wealth:
             “provided decision taken is within a range of reasonableness, court ought not
                to substitute its opinion for that of board even though subsequent events may
                have cast doubt on board‟s determination” [this is known as “reasonable
                analysis of the situation test”….]
                     If acting on advice of Independent Committee, business judgement rule
             court stated following with respect to duties of Board to conduct an auction:
                “when it becomes clear that a company is for sale and there are several bidders,
                an auction is an appropriate mechanism to ensure that the board of a target
                company acts in a neutral manner to achieve the best value reasonably
                available to shareholders in the circumstances…when board has received a
                single offer and has no reliable grounds upon which to judge its adequacy, a
                CANVASS OF MARKET to determine if higher bids may be elicited is
                appropriate, and may be necessary”
   NOTE: Court stated that Revlon is not the law in Ontario. An auction need not be held
    EVERY time a bid is made. Just a canvass!
        o in Ontario, could accept lower offer if it was reasonable otherwise. Overall duty is to
            the best interest of the corporation, and things other than $ may affect this.


   NP 62-202 speaks to FIDUCIARY DUTIES of target Board… POLICY sets out when it is
    legitimate for the target Board to adopt defensive tactics


   Essentially, s. 1.1 of National Policy recognizes inherent conflict of interests involved in a
    TOB but it is permissive, in that it outlines the options available to issuers in the face of a
    TOB. Defensive tactics are sanctioned.
        (1) – TOB play an important role in the economy b/c they act as a discipline on corporate
        management (ie. inefficient management); means of reallocating economic resources (ie.
        endorsement of free market)
   Thus, the interests of target shareholders and the economic efficiency arguments made in
    favour of TOB, are balanced.
   S. 1.1(1) Management‟s interest may differ from SHs  management may:
         1. Attempt to persuade SHs to reject the bid
         2. Take action to maximize return to SHs including soliciting bid from a third party
         3. Take other defensive measures
   S.1.1(2) of policy sets out primary objective of TOB legislation: TO PROTECT BONA
    shareholders cannot be denied the ability to make decisions. Emphasis is on the knowledge
    of the target shareholders.
         S. 1.1(3) states there is no code of conduct for the directors of a target company.
           S. 1.1(4) states that particular defensive tactics will be watched more closely by the
                 i) issuance or granting of an option,
                 ii) sale of material asses (crown jewel) ,
                 iii) or any other type of contract, including a merger bid.
         S. 1.1(5) states that the OSC will intervene in circumstances where it feels that the
            shareholders are not being treated fairly.
   National Policy indicates that the OSC will watch carefully during the TOB process.
   there are several “maxims” that are set out in Beck article that correspond to provisions of

Royal Host – p.51 – though deals only with poison pills; says when they are acceptable
 some of factors listed here would apply to other defensive tactics though
      o SH approval of rights plan/ when adopted; continued support; size/complexity of
          target; other tactics; other offerers; length of time since bid made;
      o PP is an acceptable way to buy time while the board searches for alternatives.
               vs. in US – to purely defeat a TOB

 Maxim #1: Takeover Bids have an important role in economy, for both economic and legal
      o this maxim corresponds with s.1.1 of policy which states that there are two potential
          benefits that flow from TOBs…these are “as a discipline on corporate management
          and as a means of reallocating resources to their best uses”
      o there are economic gains to be realized by taking over company, ousting existing
          management and replacing it with an effective one, thereby raising stock values
          through increased earnings
      o if management knows that poor performance, as reflected in a depressed share price,
          will make it vulnerable to a takeover, it will conduct itself appropriately so as to keep
          market price high
      o also, by acting as a discipline on management, takeovers (or potential for them)
          encourage management to live up to its duties of care and loyalty
 Maxim #2: Target management is in a conflict of interest situation when facing a hostile bid
      o jobs and careers are often at stake
      o nowhere in policy is assertion made that defensive tactics necessarily flow out of
          management‟s conflict of interest position, or that they are undertaken only when
          management‟s interests differ from those of its shareholders
 Maxim #3: primary objective of takeover bid legislation is protection of the bona fide
  interests of target company‟s shareholders. A secondary objective is to provide regulatory
  neutrality between offeror and target management
      o these objectives (as stated above) are set out at s.1.1(2) of policy
      o thus, from perspective of securities legislation, target management ought not to
          justify defensive tactics on grounds other than best interests of target company
 Maxim #4: Target company shareholders have the right to make take-over bid decision. As
  such, target management has no valid reason to (unilaterally) deny them that right. Target
  management motivation effectively becomes irrelevant.
      o this does not mean that target management has no role at all – on premise that
          shareholders should be able to make fully informed investment decisions, target
          management can (and must) render assistance in that area
         o this maxim instead refers to idea that management good faith is irrelevant to
             defensive tactic debate, when tactics obstruct shareholder access to takeover
             premium – proper role of target management is not to substitute its opinion for that
             of its shareholders in terms of an opportunity to tender to bid
         o there are, however, two possible justifications for target management intervention:
                   1) possibility of UNDERVALUED STOCK – management can act in best
                      interests of shareholders through use of defensive tactics to block undervalued
                   2) PRESSURE TO TENDER problem (coercion inherent in TOB process) –
                      justifies target management intervention into TOB process through use of
                      defensive tactics
    Maxim #5: appropriate regulatory approach to takeover bids is to encourage unrestricted
         o this maxim is enunciated in s.1.1(5) of policy
         o belief in value of a competitive auction market –achievement of high takeover
             premiums to target shareholders (resulting in less chance of an undervalued bid) and
             ability of highest value bidder to gain control over assets of target corporation
    Maxim #6: It is inappropriate to design a specific set of rules regulating target director
     conduct, other than those imposed by corporate law fiduciary standards. However, even
     without specific rules, it is possible to develop presumptions as to what conduct may be
     proper or improper
         o see s.1.1(3) and s.1.1(4) of policy
         o presumptions:
                   1) prior shareholder approval of corporate action would, in appropriate cases,
                      allay concerns about tactics abusive of shareholder rights;
                   2) timing of defensive tactics may be relevant – regulatory scrutiny may be
                      activated when conduct occurs during course of a bid or immediately prior to
                      a bid if target board has reason to believe an offer might be imminent
                   3) by specifying certain kinds of conduct that may be subject to regulatory
                      review, there is a presumption that action has been used, or has special
                      potential for, abusive purposes

In summary, NP 62-202 holds that directors of a target corporation may not pre-empt
shareholders‟ decision; action that management might take that is likely to have that effect will
be subject to regulatory exclusion

         Seek out a friendly bid
         T Co. & white knight will often negotiate an agreement containing other tactics (e.g.
          break fees)
         E.g. Maple Leaf Foods v. Schneider [Must canvass the market]

         this is a tactic whereby target sells off one of its key assets (an asset that is of prime
          interest to offeror)
         Agreement w/ third party to sell a primary asset if a bid is successful
         E.g. WIC‟s response to CW‟s hostile bid:

             WIC signed a “pre-acquisition agreement” with S Co. giving S Co. an option
             on WIC radio broadcasting business w/ exercise price of $160 million
             sale of Crown Jewel will be reasonable where, viewed in the context of the
             entire negotiated transaction, 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.

      Clause in agreement w/ white knight indicating that if merger does not occur, the
       white knight will receive a certain payment! (thereby reducing corporation‟s assets,
       making it less attractive; lower share value; plus, can indirectly play into overall
       financial consideration re. choosing bid)
      Anand, “Break fees: loathed but legal”
            sometimes payment of break fee is intentional so that target is less attractive
             to bidder – may be no intention to actually go with white knight
            Break fees are part of a K  OSC has no jurisdiction to strike down a K that
             SHs do not like
            If SHs do not like the break fee their options include:
                    Action @ SH meeting; Filing a derivative action; Oppression remedy
            OSC would likely only assert jurisdiction if a break fee would prevent SHs
             from receiving a higher offer
            Break fee must represent a reasonable balance between their effect as an
             “auction inhibitor” and an “auction stimulator”
            Caselaw says its legal: BUT are certain policies that must be adhere to
            CW v. WIC – para 51 (p. 38)
                    break fees are appropriate in certain circumstances where necessary in
                      order to induce a competing bid to come forward
                    represents better value for SH
                    break free represents a reasonable commercial balance between
                      negative effect as an auction inhibitor vs. its positive effect as an
                      auction stimulator
                    BF cannot PREVENT all other bids from coming forward; SHOULD
                      stimulate other bids coming forward

      this is a transaction whereby issuer repurchases its own shares to prevent TOB
      effect is that issuer can then offer a higher price than offeror – this pushes up price
        offeror must pay to win control; would ideally push price to a level where offeror
        must fail to persevere
      also could have effect of bolstering proportionate holdings of “white knight”

      whereby target Board seeks an injunction until litigation is resolved (known as a
        “show stopper” defence)

      Derogatory term for “Shareholder Rights Plans.” A preventative measure.
            Is a document that target Board adopts in advance of a TOB – typically, document
             says it “will permit bid to be made only on certain conditions….” For example,
             condition might be that bid will remain open for a period of 60 days and with board
            If bid does not comply with conditions, it will trigger contractual rights to all
             shareholders except bidder to purchase additional securities of company – in effect
             diluting the shares of bidder
            Purpose of this type of tactic is to make it extremely unattractive for a bidder to
             proceed with a bid without having convinced target company‟s Board to do away
             with rights plan
            Note that poison pills have never been triggered in Canada to the extent that a bid
             cannot be completed for not falling within conditions. This is not because there are no
             shareholder rights plans, but rather because these rights plans are solely meant to
             delay TOB…gives target Board more time to seek alternative offers). Five year
             review report labels these as “negotiation tactics.”
            A “tactical plan” is different, in that it is a plan passed by board of directors in
             response to a TOB and without the approval of the board. These incidents are viewed
             with much more scrutiny by the Commission.
            Status of Common Law on poison pills is illustrated in following case…

 Royal Host Case
  F: CHIP Board adopted unitholder rights plan w/o SH approval, shortly after receiving
     notice of the bid; Royal Host extended the bidding period; Royal Host sought an order
     terminating the SHRP
 Case lists a number of factors which the OSC will take into account when deciding whether a
  poison pill has outlived its usefulness:
  1. Has shareholder approval been given?
  2. When was the plan adopted?
  3. Given there was shareholder approval initially, is there broad shareholder support for the
     continued operation of the shareholder rights plan?
  4. Other defensive tactics which have been adopted.
  5. Any other viable options.
  6. Other potential bidders.
 Commission concluded that there can be no definitive answer as to when a pill has outlived its
  usefulness. This is b/c every bid is particular in its own factors.

 Producers‟ Pipelines: PP not approved by SH!
 defence must be reasonable in proportion to the threat posed; AND its purpose it must be taken
  in the best interests of the company
 SH were essentially deprived of their right to respond to any bid

  Lac Minerals
   OSC held that shareholder rights plans are legitimate, but there is a time when such plans are
     no longer in the public interest, and must be revoked (i.e. plans become illegitimate over
     time) – appropriate time will depend on circumstances of each case (e.g. when target Board
     is no longer seeking other bids, and is only seeking to thwart TOB on table)
   Note that 5YR Report recommends that OSC should consider preparing a policy statement
     setting out guidance as to when in a TOB a poison pill must be terminated


   s.11 – gives power to order investigations. scope of this power is very broad; can examine
    almost anything/anyone; assets; etc
        o Deloitte case – powers of OSC WRT this are very broad!
        o OSC investigations will not always be disclosed - discretion
   BUT: think about implications/effect if company is under investigation by OSC
        o practical effect: company share price will decreases significantly
        o ie. a charge/investigation can be almost as harmful as a conviction.
        o recalls tension: investor protection and market efficiency.
   s. 11, OSA [Investigation order]
        o (1) Commission may by order, appoint a person to make such investigations with
            respect to a matter as it considers expedient,
                 (a) for due administration of Ont. sec. law or the regulation of Ont. capital
                 (b) to assist in the due administration…
        o (3) SCOPE: persons appointed may investigate and inquire into,
                 (a) the affairs of the person/Co. in respect of which the investigation is being
                    made, including any trades, communications, negotiations, transactions,
                    investigation, loans, borrowings or payments…, assets or things owned,
                    acquired or alienated in whole or in part by the P/Co. or any other P/Co.
                    acting on behalf of or as agent for the P/Co.; and
                 (b) the assets at any time held, the liabilities, debts, etc. at any time existing,
                    the financial or other conditions at any time prevailing in or in relation to or in
                    connection with the P/Co. and any relationship that may at any time exist or
                    have existed b/w the P/Co. and any other P/Co…
        o (4) RIGHT TO EXAMINE: Investigator may examine any documents or other things,
            whether in possession of the person under investigation or someone else
   s. 17, OSA [Disclosure by OSC]
        o (1) OSC may disclose if it is in the public interest

 types of enforcement actions that can be brought can be classified as Criminal; Civil ( s.
   128); and Administrative (s. 127)


   Criminal actions are founded on Criminal Code provisions (note: rarely used)
       o at least 6 sections of CCC outline offences relating to trading in securities…for
       o Section 400: prospectus
                “an indictable offence liable to a maximum penalty of 10 yrs in prison to
                   make circulate or publish a prospectus, a statement or an account, whether
                   written or oral, [known to be] false in a material particular with intent:
                        i. to induce persons, whether ascertained or not, to become
                           shareholders or partners in a company;
                       ii. to deceive or defraud members, shareholders or creditors,
                        whether ascertained or not, of a company;
                     iii. to induce any person to entrust advance anything to a company; or
                     iv. to induce any person to enter into any securities for benefit of a
             a number of other provisions in CCC relate to market manipulation and fraud
                (sections 380-384)… specific acts targeted include:
                     a) affecting public market price of stocks or shares by deceit,
                        falsehood or other fraudulent means with intent to defraud;
                     b) manipulating price of traded securities;
                     c) committing certain acts with intent to make gain or profit by rise
                        or fall in price of stock of an incorporated or unincorporated company
                        (but without intending to actually acquire or sell shares)
       o Problem: required to prove mens rea! (KNOWINGLY)  difficult!!!

   Quasi-criminal sanctions are dealt with in s.122 of OSA – under this section, OSC brings
    action into Court
   basically, s.122 deals with 3 categories of penal offences:
        o 1) GENERAL OFFENCES;
        o 122 (1) Every person or company who is guilty of an offence is liable to a fine not
            less than $5 million or a sentence of 5 years less a day or both:
                 (4) Despite (1) and in addition to any imprisonment [but not the fine] imposed
                    for (1), a P/Co. who is convicted of contravening s. 76(1), (2) or (3)
                    (INSIDER TRADING) is liable to a minimum fine equal to the profit made or
                    the loss avoided and a maximum fine equal to the greater of
                         (a) $5 million; and
                         (b) the amount equal to triple the amount of profit made or the loss

 this category is further divided into three branches of offences:
      o 1) statements submitted to the Commission or its representatives which, in a material
          respect, are misleading, untrue or contain omissions (s.122(1)(a));
      o 2) statements made in any required documents (EG. PROSPECTUS) which, in a
          material respect, are misleading, untrue or contain omissions (s.122(1)(b)); and
      o 3) any contravention of provincial securities law (s.122(1)(c))
 language of first two encompasses statutory definition of misrepresentation
 third category is a “catch-all” – therefore, any contravention of any part of securities
  legislation could be pursued via a penal sanction
 R. v. Zelitt (2003) (Alta. Prov. Ct.)
      o Co. falsely claimed to have developed a new tech in its press releases, prospectus,
          AIFs and material change reports  the tech did not exist  charged w/ 11 counts of
          misrepresentation, failing to disclose material facts & changes and providing false or
          misleading info
      o Onus is on Crown to prove beyond a reasonable doubt

       o Expert evidence is not necessary to determine whether the untrue statements affected
         or could reasonably be expected to have a significant impact on the market price 
         “Common sense or a test of reasonableness”
       o Sentencing factors: deterrence; denunciation and protection of the public; behaviour
         over a period of time; breach of trust; magnitude and impact of the violations

   s.122(2) does allow for a defence against general offence provisions (see above) if person or
    company liable under s.122(1)(a) or (b) did not know, and in exercise of due/reasonable
    diligence could not have known that statement was misleading or untrue or that it omitted to
    state a fact that was required to be stated or that was necessary to make statement not
    misleading in light of circumstances in which it was made
   this is a DUE DILIGENCE DEFENCE – and, for defence to be available, accused must
    prove that he/she did everything reasonably possible to avoid committing offence
   although directors and officers are not explicitly given this defence in legislation, it seems to
    be available to them, both on policy and precedent grounds
   in addition, precautionary measures are not conditions precedent to a good due diligence
    defence but they are highly persuasive (Soper)
        o The courts will likely have sympathy for a corporation or directors or officers where
             a reasoned and well documented effort has been made
        o thus, companies should establish a process – in other words, issuer must put practices
             in place when decisions are made so that they can show that they made all decisions
             with caution and exercising due diligence (for example, will issuer establish
             guidelines? will it establish a review committee? will process be continually carried
             out and periodically?

Atlas cold storage (ongoing case at OSC – not in materials):
 company chose to reveal info to market over the labor day weekend (ie. when a lot of people
    would not be watching!); regulators caught on; stock did drop, but not until the next week –
    s. 122(1)
        o raises issue of continuous disclosure. (we discussed earlier)
        o Commission brought action against them for materially misleading financial
            statements under s.122 of the OSA
                 note: main difference between s. 122 and other provisions is that THIS IS a
                    quasi criminal power and is brought BY the commission at PROVINCIAL
                    court – s. 122(8)
        o the choice of means of litigation is crucial! e.g. s. 127 OSA would bring actions
            before the OSC itself – different rules of evidence would apply, etc
        o Anand: questions why more actions are brought under 127 than 122? Think about
            some differences: greater burden of proof; greater procedural/evidentiary protections
            accorded to accused; thus: a lot easier to use 127 procedure! only have to show
            actions were contrary to public interest under s.127!
                 Stratas: note – you can bring both if you want!
                 Criminal law power of province? Earlier case law says its ok. Purpose is not
                    criminal: its to protect investors, maintain confidence in capital markets.
                 Anand: is a lot of this law unnecessary? Reflects power grabbing and post-
                    enron paranoia.

 directors and officers who authorize, permit or acquiesce in commission of a general offence
  are liable for offence, regardless of whether their corporation or firm has been charged or
  found guilty (s.122(3))
 NOTE: may have DD defence – see previous page (Soper, etc)
 See 130 for prospectus misrep defences

 s. 122(4) persons or companies that are convicted of contravening s.76(1), (2) or (3) of OSA
   is liable to a minimum fine equal to the profit made or the loss avoided and a maximum fine
   equal to the greater of
        o (a) $5 million; and
        o (b) the amount equal to triple the amount of profit made or the loss avoided
 the most contentious part “by reason of the contravention”
 R v. Harper (2003) (Ont. CA) [s. 122(4)]
        o H traded in Golden Rule shares when had knowledge of MF not disclosed to market;
            in doing so, he avoided loss; court says this was by reason of the contravention
        o “by reason of the contravention” = “by virtue of the insider having engaged in the
            impugned trading”
                 NOT "by reason of the effect of the material non-disclosure on the market price of
                   the shares!!!! This was the TJ‟s position that the CA rejected!
       o The interpretation advanced here is also consistent with the scheme and object of the Act,
           which is to recapture profits made or losses avoided by insiders trading in contravention of
           Ontario securities law.  FAIRNESS!!!

 under s.128(1) of OSA, OSC “may apply to Ontario Court (General Division) for a
   declaration that a person or company has not complied with or is not complying with
   Ontario securities law”
 Remedies here are not exhaustive – if a court makes a declaration, it does not prevent the C
   from bringing an action under 122 or 127 as well.
       o THUS: can theoretically overwhelm a party with litigation!
 under s.128(3), court has a broad range of remedial powers (i.e. they can make a broad range
   of orders)…in this section, there are 16 types of orders listed. Some important ones:
       o an order the person comply with securities law;
       o order to submit a review of their practices to OSC;
       o order rescinding a transaction
       o order directing that a release, report, prospectus, etc, be provided to a person or be
       o order requiring the issuance, cancellation, purchase, exchange of securities.
       o order prohibiting the voting associated with securities.
       o  IE. Some of these are very intrusive
               if you think of OSA in conjunction with CBCA: and recognize one of the
                  most fundamental aspects of corporation and shareholders is to hold shares in
                  a company (as property); then you think of these broad powers under s.128 
                  can see how the rights in the corporate statute become diminished by OSA.

    burden of proof under s.128 is a CIVIL standard
   Once an order is made by Court, any violation will be a contempt of court (i.e. for court [not
    OSC] to worry about/deal with)
   NOTE: these provisions are RARELY used! BUT may be used more frequently in the future
   The extent/aggressiveness of OSC‟s activity in enforcement activity is very much a policy
    decision that the OSC makes and pursues
        o nothing in law that says the OSC MUST bring proceedings; their decision to pursue
           actions is internal!

Von Annholt – Nov 16th, 2004 - example
 had been subject to proceedings under the Commission already; had been ordered to cease
   trading shares in a certain company for 12 years due to s.127 litigation; they breached the s.
   127 order and began trading in the shares; SO, OSC seeks declaration they have not
   complied with the order and to prohibit them to exercise ANY rights attaching to their shares
   in this company!
 Anand: example of how rights to property can be infringed due to their actions in the capital


   The “meat and potatoes” of securities enforcement!
   securities commissions are given broad powers to impose sanctions where they consider it to
    be in PUBLIC INTEREST to do so
        o within the walls of Commission itself; it can make multiple orders; “in its opinion” –
            so, we‟re talking about a tribunal of commissioners, who themselves are not involved
            in the investigation, who is able to come to a decision about what is in the public
            interest  very low threshold!
   these powers of OSC to make orders „in public interest‟ are set out in s.127(1) of
    OSA…under this section, OSC has power to make following orders:
        o 1) an order that a person‟s or company‟s registration or recognition be suspended or
        o 2) a „cease trade‟ order; - can be PERMANENT
        o 3) an order that exemptions in Ontario securities law do NOT apply to a person or
        o 4) an order that a person resign as a director or officer of an issuer, and be prohibited
            from becoming or acting as directors or officers of any issuer;
        o 5) an order that a market participant submit to a review of her or his practices and
            institute changes ordered by Commission;
        o 6) if there is non-compliance with Ontario securities law, an order that a document
            be amended;
        o 7) an order that a company or person be reprimanded
   NOTE: OSC has no power to impose a fine under s.127 [other jurisdictions have this power
    (e.g. BC and Alberta)]
        o Donini: BE WARY OF COST ORDERS: An order for costs is simply a fine by another
           name, unless it is a true reflection of the actual and reasonable costs of the nature specified as
           recoverable in section 127.2 of the Act.

   Note that in s.127, it does not appear that you need an actual breach of securities laws –
    orders are instead made in “public interest”


Re Canadian Tire Corporation (1987)
 there was a TOB for one class of Canadian Tire‟s shares – OSC was concerned that TOB
   would result in a controlling shares SH having a substantial premium, while leaving other
   class of shares unprotected and SH without a voice; OSC ordered that TOB must apply to
   second class of shares as well, otherwise a „cease trade‟ order would be made; issued order
       o IE: OSC said TOB had to be made for all of the shares, not just the ones that would
           provide control
 Note: there was no overt breach of the Act here – thus, the issue became whether you need
   an overt breach of OSA to impose a sanction under s.127…
       o TOB law itself does not prevent TOB when interests of Min SH are not protected!
 Court: held that an overt breach of Act was not necessary
       o “ Legislature deliberately has given Commission a broad and unfettered power to
           move quickly to intervene in capital markets to stop a trade or a transaction which it
           deems to be contrary to public interest…A regulatory agency charged with oversight
           of capital markets must have capacity to move quickly to stop transactions which it
           considers to be injurious to capital markets…”
       o When the public market is sold some $100 million of Class A non-voting shares consequent
           upon a reorganization that, among other things, provides takeover protection to those shares
           and the controlling shareholders, some three years later, devise a scheme in conjunction with
           those who wish to obtain control of the Corporation, to circumvent the coattail while, in
           effect, receiving the full price for their shares, regulatory intervention to stop an abusive
           transaction is called for.
   So, WTF is up with “public interest”?
        o p.36: OSC focuses on nature of transaction: if the abusive transactions are allowed to
          proceed, confidence in markets will eventually suffer; this will affect markets,
          investors, etc and thus violate the public interest
               THUS: strong policy basis for this provision: to protect investor confidence
        o p.33: (last 3 paras, esp last); reference to Cable Casting case: Leg deliberately gave
          the OSC a broad mandate to respond to diverse circumstances in order to ensure
          confidence in capital markets! – where it is demonstrated such intervention is needed
               needs capacity to move quickly to stop actions that are injurious to public
                  markets and thus public interest
        o Anand: but think of the counterargument to this: it seems arbitrary! how can we
          predict what is “abusive” before the OSC has decided whether it is abusive!? No
               BUT some argue it has to be vague – you can‟t lay out all the transactions
                  which will be prosecuted, but you could lay out guidelines
               Ainsley – OSC was enforcing policy as if it was law – this was held to be
                  wrong – you can‟t do this
               this is the fundamental conflict in public interest jurisdiction! Is it necessarily
                  to have it so broadly conceived in order to protect public market!?
               BUT: note: most of the cases we read are pretty clear cut examples; but what
                  about borderline ones?
               Anand: OSC could at least publish some guidance/regulations – they are
                  typically willing to give out guidelines in other areas (e.g. investigation)

                   Doesn‟t this infringe the business judgment rule? (defer to business actions
                    taken by dir/officers)
   THUS: To invoke the public interest test of s. 123, particularly in the absence of a
    demonstrated breach…the transaction must clearly be demonstrated to be abusive of SHs in
    particular, and capital markets in general

Re Canfor Corp. (1995 OSC)
 this case re-emphasized decision in Canadian Tire Corp.: “it is clear that exercise of our
   cease trade power is not dependant on there having been a breach of Act or Regulation”

Donini – insider trading:
 found that he did insider trade and slapped guy with 15 year trading prohibition
        Anand: this highlights on of the danger of the public interest power: a severe ban can
            be meted out under s.127/the penalties under s.127 can be severe, overly severe?
        Think of philosophy behind sanctioning: 15 years has a very punitive overtone! Is
            this the proper motivation for s.127?
 HELD: Reduced; While the OSC is not bound to strictly follow its own precedents, its
   penalty decisions should generally adhere to some recognizable pattern  fairness requires
   that it generally follow its past decisions in order to avoid the appearance of arbitrariness
        Commission ought not to issue penalties which do not correspond with previous
            decisions – it prevents the accused from assessing whether to settle or proceed to a
        sanction should be reasonable, whether or not a person charged by the OSC settles or
            requires a hearing

2 cases that talked about MOTIVATION/PHILOSOPHY of public interest jurisdiction

Asbestos case:
 Quebec company; had SH in Ontario; OSC determined that TOB had deleterious effects on
   Ontario SH; wanted to exercise its PIJ on company outside its borders
       o SCC discussed scope of PIJ:
                recognizes that 127 power is broad; role of OSC is to protect public interest by
                   removing those whose conduct is so abusive as to warrant belief their future
                   actions will be contrary to markets interest  e.g. investor confidence;
                   HOWEVER, it is for the COURTS to punish past conduct!
                        THUS:L PIJ is NOT aiming to PUNISH;
                para 45: OSC has jurisdiction and broad discretion to intervene: BUT THE
                        THUS: SCC is saying it DOES have limits
 this discussion was not present in Canadian Tire; Cable Casting; other decisions discussed
   the BREADTH of the OSC power
       o have to consider protection of investors and public markets generally;
       o KEY!!!!!: The discretionary actions are preventative in nature and prospective in
           orientation! not intended to remedy past conduct. Test is based on deterrence!!!

Cardaway Case: very recent – p.46 – builds on Asbestos
 two dudes bought control of company; funneled mining claims into company; no disclosure
   from company that it was a mining company (ie. did not disclose change in nature of
      business); guys decided to do a private placement (distribution w/o prospectus); numerous
      conflicts of interest in transactions (para 18)
     BCSC brought action against these guys; found breach of prospectus requirement, lack of
      disclosure, etc. – under equivalent of s. 127
          o clear breaches of legislation
          o gave 100k penalty; BCCA: reduced penalty to 10k; said was not as egregious.
     SCC: upheld BSSC finding; and in doing so, considered purpose
          o the weight SecC gave to deterrence is reasonable and should not be disturbed by the
          o Deterrant penalties can be individual or general; should be imposed to discourage
              others from engaging in same offence/actions
          o para 55: General Deterrence has a role to play in determining what is in the public
              interest; and the severity of those orders
          o para 60: reference to Asbestos: reasonable to view general deterrence as an
              appropriate and even necessary thing in order to protect public interest.

  Anand: still comes back to question: What is appropriate scope of powers of the OSC
        -if you look at rulemaking powers in combination with enforcement in combination with
        lack of bifurcation; there are a number of areas of the law that allow OSC a BROAD
        power over the capital markets
        -Is this the appropriate way to police/regulate the capital market? for an arms length
        government agency to have such a broad power!?


     in summary, there are three methods through which OSC may exercise its enforcement
     1) prosecution of offences under s.122 of Act;
     2) exercise of its public interest jurisdiction under s.127 of Act (whereby staff of OSC
      initiates proceedings, then OSC determines, following a hearing, whether alleged conduct is
      contrary to public interest – and makes orders accordingly); and
     3) application to court for a declaration of non-compliance and a further order(s) of court
      under s.128 of Act

  there are basic principles which need to be considered when looking at enforcement-related
                ► OSC exercises its enforcement powers for primary purpose of providing
                   protection to investors, preventing future harm, and ensuring fair and efficient
                   capital markets and confidence in those markets
                ► it is critical to fulfillment of its mandate that OSC be perceived as having
                   meaningful powers that it is prepared to exercise in appropriate cases
                ► purpose of an order under s.127 of Act is to “restrain future conduct that
                   is likely to be prejudicial to public interest in fair and efficient capital
       4)      FLEXIBILITY:
                      ► OSC should have available to it a sufficiently broad range of remedies so
                        that it has flexibility to design appropriate remedy to address particular
                        circumstances of each case
                      ► because of new “borderless marketplace”, it is essential for securities and
                        other regulatory authorities to co- operate in their information gathering,
                        investigations and enforcement efforts


            in his article, Leon points to s.127 public interest jurisdiction of OSC, and says that “
             commission must be relied upon to distance itself from its enforcement staff and render an
             independent decision in respect of its opinion as to whether conduct in question is contrary
             to public interest…steps must be taken to ensure that process leading up to commencement
             of a hearing, and decision to issue a notice of hearing, is an objective and fair process”
            one step (Leon says) that should be taken is to enshrine in Act a provision for creation of
             position of a complaints committee or a complaints commissioner – independent complaints
             committee or commissioner would have to be satisfied, on a reasonable basis, that there is
             justification for taking matter to a hearing… idea is to add a screening function as a level of
             protection to potential respondents to increase confidence level that only matters reasonably
             considered to be contrary to public interest will proceed to a hearing


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