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					Securities Regulation Summary – Lastman                                                                                                                                           14/10/2011



I.        GOING PUBLIC ................................................................................................................................................. 5
     1.  THREE OBJECTIVES OF SECURITIES REGULATION .............................................................................................. 5
           Protecting the investing public ...................................................................................................................... 5
          a)
           Ensuring the efficient operation of the Capital Markets ................................................................................ 5
          b)
           Increase & Maintaining Public Confidence in the Capital Markets and People operating in that system ... 5
          c)
     2. THREE METHODS USED TO ACHIEVE THESE OBJECTIVES ..................................................................................... 5
       a) Registration Requirements ............................................................................................................................. 5
       b) Disclosure Requirements – (Prospectus Requirements) ................................................................................ 6
       c) Remedies ........................................................................................................................................................ 6
     3. MAKING THE DECISION TO GO PUBLIC ............................................................................................................... 6
       a) Pros: why go public? .................................................................................................................................... 6
       b) Cons: Potential Disadvantages..................................................................................................................... 6
     4. PROSPECTUS REQUIREMENTS: HOW DOES IT WORK? ........................................................................................... 7
       a) General Rule .................................................................................................................................................. 7
                     S.25: Registration for Trading & S.53: Prospectus Requirement ................................................................................... 7
          b)         Process – How do we know that s. 25 of the Act applies? ............................................................................. 8
               (i)          Does the transaction consist of a SECURITY? ...................................................................................................... 8
               (ii)         Does the transaction involve a TRADE? ................................................................................................................ 8
               (iii)        Does the trade amount to a DISTRIBUTION? ....................................................................................................... 8
          c)         Definitions ..................................................................................................................................................... 8
               (i)      What constitutes a Security? ................................................................................................................................... 8
                   Pacific Coast Coin Exchange (1977- SCC) ..................................................................................................................... 8
                   Howey (1946 - US) .......................................................................................................................................................... 9
                   Hawaii Market Centers (1971 - US)................................................................................................................................ 9
               (ii)     What constitutes a Trade?..................................................................................................................................... 10
                   S.1(1): Definition of “Trade” or “trading” includes, ................................................................................................... 10
               (iii)    What constitutes a Distribution? ........................................................................................................................... 11
                   S.1(1): Definition of “Distribution” is EXHAUSTIVE .................................................................................................. 11
     5.        PROSPECTUS – S.56(1) ..................................................................................................................................... 12
          a)     What is a Prospectus? ................................................................................................................................. 12
                     S.56: Full, true and plain disclosure ............................................................................................................................ 12
          b)         What goes into a prospectus? – Form 45-501 F1 ........................................................................................ 12
          c)         Dual Role of the prospectus: (i) Sales Document; (ii) Liability Document) ................................................ 13
          d)         Policy statements ......................................................................................................................................... 13
          e)         Future Oriented Financial Information (FOFI): ......................................................................................... 14
               (i)      Forecast ................................................................................................................................................................ 14
               (ii)     Projections ............................................................................................................................................................ 14
               (iii)    National Policy Statement #48: Financial Forecasts:............................................................................................ 14
                   Rules and Key Elements of NP48: ................................................................................................................................. 15
          f)         Preliminary Prospectus – S.54 .................................................................................................................... 15
               (i)       Requirements: ....................................................................................................................................................... 15
               (ii)      Warnings: ............................................................................................................................................................. 15
               (iii)     Certifications: [s. 58 & s 59] ................................................................................................................................ 16
                   S.58, S.59: Certifications............................................................................................................................................... 16
                   S.130: Strict Liability for Misrepresentation ................................................................................................................ 17
               (iv)      Receipt for Preliminary Prospectus: ..................................................................................................................... 17
                   S.54 & S.55 - Receipt of Preliminary Prospectus ........................................................................................................ 17
          g)         Waiting Period ............................................................................................................................................. 17
               (i)       General: ................................................................................................................................................................ 17
                   SS.65, 66, 67 - Waiting Period ..................................................................................................................................... 18
               (ii)      Advertising During the Waiting Period: ............................................................................................................... 18
                   OSC Rule 47-601 – Limits on advertising during waiting period ................................................................................. 19
                   National Policy Statement 42 – Advertising of Securities on Radio or Television ........................................................ 20
               (iii)     MATERIAL CHANGE during the WAITING PERIOD – only adverse changes need be reported .................... 20
                   S.57 - Amendment to Preliminary Prospectus on Material Change ............................................................................. 20
                   S.1(1) - Definition of Material Change ........................................................................................................................ 21
          h)         Receipt for Final Prospectus ....................................................................................................................... 21
                     S.61(1) & (2): Issuance of Receipt (Not in the Public Interest & Other Reasons for Refusal) .................................... 22



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Securities Regulation Summary – Lastman                                                                                                                                         14/10/2011


        i)         Closing the Transaction ............................................................................................................................... 23
             (i)      Material Change between receipt and closing ...................................................................................................... 23
                 S.57(1): Amendment to Final Prospectus on Material Chnage .................................................................................... 24
             (ii)     2-Day cooling off period: ..................................................................................................................................... 24
                 S.71(2): Withdrawal From Purchase ........................................................................................................................... 24
        j)         Statutory Rights of Purchaser ...................................................................................................................... 24
             (i)      Cooling Off Period - Sample Question 1 .............................................................................................................. 24
             (ii)     Cooling Off Period - Sample Question 2 .............................................................................................................. 24
                 S.130: Liability for Misrepresentation in a Prospectus ................................................................................................ 25
                 S.133: Liability of Dealer or Offeror............................................................................................................................ 25
        k)         Liability for a Misrepresentation ................................................................................................................. 25
                   S. 130 (1) Liability for misrepresentation in a prospectus – ........................................................................................ 25
                   S. 130 (1) Action against who? ................................................................................................................................... 25
                   S. 130(8) Liability is joint and several, but can seek contribution from the other parties, unless the court find that
                   contribution is not warranted ........................................................................................................................................ 26
                   S. 130 (10) - No derogation of rights .......................................................................................................................... 26
        l) Damages ...................................................................................................................................................... 26
        m) Defences to Misrepresentation .................................................................................................................... 27
                   S.130: Defences to Misrepresentation .......................................................................................................................... 27
                   S.132.1: Defence to Liability for Misrepresentation .................................................................................................... 29
                   Escott v. Barchris Construction (1968 – US) ................................................................................................................ 29
                   Kerr v. Danier Leather Inc. (2004 – Ont CA) .............................................................................................................. 30
   6.        SAMPLE PROSPECTUS AND UNDERWRITING AGREEMENT ................................................................................ 31
        a)     Sample Underwriting Agreement: ............................................................................................................... 31
II. AFTER GOING PUBLIC ................................................................................................................................. 32
   1.        CONTINUOUS DISCLOSURE OBLIGATION .......................................................................................................... 32
        a)     Regular Financial Disclosure (at timely intervals) ..................................................................................... 32
        b)     Timely Disclosure ........................................................................................................................................ 33
                 S.75(1) & 75(2): Report of Material Change ............................................................................................................... 33
                 Royal Trustco v. Campeau (2004 – Ont CA) ................................................................................................................ 33
             (i)      Complete public disclosure: ................................................................................................................................. 34
             (ii)     Incomplete Disclosure: ......................................................................................................................................... 34
             (iii)    Confidential Report: ............................................................................................................................................. 34
                 S.75(3): Confidential Report ........................................................................................................................................ 35
        c)         Early Warning System ................................................................................................................................. 35
                   S.101(1): Securities, Reports of Acquisitions ............................................................................................................... 36
                   S.101(3): Restrictions on Acquisitions ......................................................................................................................... 36
                   S.101(2): Change in Material Facts ............................................................................................................................. 37
                   S.102: Outstanding Takeover Bid.................................................................................................................................. 37
        d)         Insider Reporting ......................................................................................................................................... 37
                   S.1(1): Insider – Statutory Definition ........................................................................................................................... 38
                   S.107: Insider Report ................................................................................................................................................... 38
        e)         Insider Trading ............................................................................................................................................ 39
             (i)      Insider Trading Regulation ................................................................................................................................... 39
                 S.134(1): Liability where material fact or change undisclosed .................................................................................... 39
             (ii)     Insider Trading Offense – Special Relationship (S.76(1)) .................................................................................... 39
                 S.76(1): Trading where undisclosed change ................................................................................................................ 39
                 S.76(5): Definition of “Special Relationship”.............................................................................................................. 40
             (iii)    Insider Trading Offense – Tipping (S.76(2)) ........................................................................................................ 41
                 S.76(2): Tipping ........................................................................................................................................................... 41
                 Borderline “Tipping” Examples: ................................................................................................................................. 41
                 Takeover Bids and Insider Trading: ............................................................................................................................ 41
                 Example 1: .................................................................................................................................................................... 41
                 Example 2: .................................................................................................................................................................... 41
                 Example 3: .................................................................................................................................................................... 42
                 Example 4: .................................................................................................................................................................... 42
                 Royal Trustco v. Campeau (2004 – Ont CA) ................................................................................................................ 42
                 Necessary Course of Business Exception (NP 51-201): .............................................................................................. 42
                 Barbara Danuke (???? – Ont ?) .................................................................................................................................. 42




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Securities Regulation Summary – Lastman                                                                                                                                        14/10/2011


             (iv)    Defences to Insider Trading – Reg 175(2)............................................................................................................ 43
                1. Chinese Wall Defence .............................................................................................................................................. 43
                2. Unsolicited Order Defence – Reg. 175 (2)(a)............................................................................................................ 43
                3. Automatic Dividend Investment Plan Defence - Reg. 175(2)(b) ................................................................................ 43
                4. Legally Binding Obligation - Reg. 175(2)(c) ............................................................................................................ 43
                5. Both Parties Have the Same Info. .............................................................................................................................. 43
                6. Reasonable Belief in Disclosure Defence .................................................................................................................. 44
                Texas Gulf Case (???? – ON) ...................................................................................................................................... 44
                National Sea Case (???? – ON) ................................................................................................................................... 44
             (v)     Why is the term ―insider trading‖ a misnomer? .................................................................................................... 44
III. PRIVATE PLACEMENT EXEMPTIONS ..................................................................................................... 45
   1.     POLICY REASONS FOR PPE’S ............................................................................................................................ 45
   2.     TYPES OF EXEMPTIONS ..................................................................................................................................... 45
        a) Exemptions Based on Wealth and/or Sophistication ................................................................................... 46
             (i)      Accredited Investor .............................................................................................................................................. 46
             (ii)     $150,000 Exemption............................................................................................................................................. 46
                 NI 45-106 S.10: Minimum Amount Invested................................................................................................................. 47
        b)         Limited Offering Exemptions ....................................................................................................................... 47
             (i)     Government Incentive Securities Exemption ....................................................................................................... 47
                 OSC Rule 45.501 – S.2.1 – Government Incentive Security .......................................................................................... 48
             (ii)    Founder and Family Exemption ........................................................................................................................... 49
                 OSC Rule NI 45-106 – S.2.7 – Founder, Control Person and Family ........................................................................... 49
        c)         Private Issuers – OSC Rule NI 45-106, S.2.4 .............................................................................................. 49
                   R. v. Piepgrass (1959 - Alta.CA) ................................................................................................................................... 49
                   SEC v. Ralston Purina (1953 - US) ............................................................................................................................... 50
        d)     Isolated Trade .............................................................................................................................................. 50
        e)     Discretionary Rulings .................................................................................................................................. 50
   3.        OFFERING MEMORANDUM ............................................................................................................................... 51
                   Jones v. Deacon Hodgeson (1986 - ON) ....................................................................................................................... 51
        a)  Registration Requirement Exemption .......................................................................................................... 51
   4.     RESALE RULES ................................................................................................................................................. 52
        a) Resale Rules for Non-Control Persons ........................................................................................................ 52
             (i)     Securities acquired pursuant to a prospectus are freely tradable unless the seller is a ―control person‖. .............. 52
             (ii)    If securities are acquired pursuant to a private placement exemption, the seller cannot resell them unless one of four
             conditions are satisfied: ..................................................................................................................................................... 53
             (iii)   Four Resale Rules Scenarios ................................................................................................................................ 54
        b)         Resale Rules for Control Persons ................................................................................................................ 54
             (i)           Advance Notice Route .......................................................................................................................................... 55
        c)         Shelf Prospectus: ......................................................................................................................................... 55
IV. TAKEOVER BIDS ............................................................................................................................................ 57
   1.        FUNDAMENTAL CONCEPTS – WHAT IS A TAKEOVER BID? ............................................................................... 57
   2.        OBJECTIVES OF TAKEOVER BID LEGISLATION ................................................................................................. 57
   3.        MECHANICS OF TAKEOVER BID LEGISLATION ................................................................................................. 58
                   S.89(1): Definition of Takeover Bid .............................................................................................................................. 58
                   S.90(1): Deemed Beneficial Ownership ........................................................................................................................ 58
                   S.92: Indirect Offers ...................................................................................................................................................... 59
        a)         Takeover Bid Circular ................................................................................................................................. 60
                   S.95: Takeover Bid Rules .............................................................................................................................................. 60
                   S.97(1,2); S.104(2): No Collateral Benefit .................................................................................................................... 61
                   S.96: Conditions in a Bid .............................................................................................................................................. 62
                   S.98: Variations in a Bid ............................................................................................................................................... 62
                   S.99: Directors Circular ............................................................................................................................................... 63
                   S.94(5): Pre-bid Integration .......................................................................................................................................... 63
                   Pre-Bid Integration Example:...................................................................................................................................... 63
                   S.94(6): Post-bid Integration ........................................................................................................................................ 64
                   S.94(2): Restrictions on acquisitions during take-over bid; S.185(1): Lockup Agreements .......................................... 64
        b)         Exemptions to the Takeover Bid Rules ......................................................................................................... 64
                   S.93(1): Exempted Takeover Bids ................................................................................................................................. 64



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Securities Regulation Summary – Lastman                                                                                                                                         14/10/2011


                     Canadian Tire Example: .............................................................................................................................................. 65
                     Example – Private Agreement Exemption ................................................................................................................... 67
          c)         Maintaining Control: Voting & Non-Voting Shares .................................................................................... 67
                     Canadian Tire (1986) .................................................................................................................................................... 68
          d)         Defensive Tactics in the Face of a Hostile Bid ............................................................................................ 69
               (i)       Examples: ............................................................................................................................................................. 69
                   Unicorp v. Union Enterprise Utility Co. ....................................................................................................................... 69
                   Onex bid for Labatts...................................................................................................................................................... 69
                   Mac’s Milk and Beckers. ............................................................................................................................................... 69
                   TorStar bids for Sun Media. .......................................................................................................................................... 69
               (ii)      Defensive Tactics ................................................................................................................................................. 69
                   1) Golden Parachutes.................................................................................................................................................... 69
                   2) Poison Pill and Rights Plan ...................................................................................................................................... 70
                   3) Sell the Crown Jewels ............................................................................................................................................... 70
                   4) Find a White Knight .................................................................................................................................................. 70
                   5) Enlist the Aid of the Law ........................................................................................................................................... 70
                   6) Advise Shareholders Not to Tender ........................................................................................................................... 70
                   7) Pac-Man Defence...................................................................................................................................................... 70
                   8) Issue Shares into Friendly Hands ............................................................................................................................. 70
                   9) Institute Break-up Fees ............................................................................................................................................. 70
           Dealing with Defensive Tactics of Hostile Takeover Bids – NP 62-202 ...................................................... 71
          e)
     4.  ISSUER BIDS – NOT EXAMINABLE THIS YEAR...................................................................................... 72
       a) EXEMPTIONS from ISSUER BID REQUIREMENTS: ............................................................................... 72
     5. INSIDER BIDS – NOT EXAMINABLE THIS YEAR .................................................................................... 73
V.        VIDEO - CORPORATE ETHICS IN AMERICA.......................................................................................... 74




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Securities Regulation Summary – Lastman                                                                    14/10/2011




                                               I. Going Public
       When a person invests in a company, a person receives in return a piece of paper and that paper is the security
        – a share certificate – evidencing that you own a piece of a company. When a private company goes to the
        public to raise money and issues securities in exchange for money, that private company has become a public
        company – ―has gone public‖. If I own a private company, essentially I’m free to do what I want with the
        company with very limited exceptions and there’s very little information in the public that you could gather
        on that company. But after taking a company public, the Securities Act kicks in. Wants to make sure that
        investors are making informed decision and know what they’re buying into. Therefore before you can sell the
        public securities, you have to provide them with full true and plain disclosure of all material facts – tell them
        everything they need to know before they buy into this company. And the document that a private company
        has to deliver to us before they take our money, that explains the business and the risks, is known as a
        prospectus. Statutory obligation on company to warn the investor before buying shares but no warning to
        consumer regarding product before consumer purchases product.
       Recall: course is how businesses can raise money from the public in exchange for shares.

1. Three Objectives of Securities Regulation
a) Protecting the investing public
       Essential function of the regulators to protect those who invest in the market in order to ensure continued
        investment which will create confidence in the market
       Don’t allow people to make investments unless they’re informed, but it’s very paternalistic and goes beyond
        that – Act might, for example, protect people from themselves

b) Ensuring the efficient operation of the Capital Markets
       Access to investing capital is necessary to insure global competitiveness – inherent tension w/ (1) – first 2
        objectives not always consistent
       Important to country and economy that there be a capital market that works. Important that there will be
        investors to give companies money to help them grow and compete in the global market.

c) Increase & Maintaining Public Confidence in the Capital Markets and People operating in that
   system
       Capital markets must maintain a level of integrity if there is to be continued investment – retain capital flow.
       If you don’t have confidence in the capital markets, you won’t participate

2. Three methods used to achieve these objectives

The Securities Act provides three fundamental methods to achieve these objectives:

a) Registration Requirements
       Regulate market participants: make sure that those people in the business of trading securities are regulated
        (have a license and if you misbehave, they take away your license and you’re out of business. This meets the
        third objective) Gen. Rule: cannot trade (sell) securities unless registered under the Act [min education,
        bonding] = ensure public confidence.
       Exceptions: OSA recognizes a number of exceptions from registration requirement: a) trading gov’t
        securities (i.e. Canada Savings Bonds – so safe, that not everyone who sells them are registered), b)
        institutions regulated by some other body. Rationale for exemptions is that either the institution is already
        regulated by some other statute so to impose other regulations by Securities Commission is unnecessary or
        that the securities are so inherently safe that regulation is unnecessary




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Securities Regulation Summary – Lastman                                                                    14/10/2011


b) Disclosure Requirements – (Prospectus Requirements)
       If you want to sell securities to the public, we want to regulate sale, so tell buyer everything he needs to know
        so he can make an informed decision. Gen. Rule: co. cannot distribute shares w/o prospectus and as a
        reporting issuer a co. has a continuous disclosure requirement (Financial Disclosure, Timely Disclosure
        (obligation to immediately inform the world when there’s a change), Insider Trading (if you have info that
        is not in the public domain, you can’t buy or sell securities and you can’t time other people to buy securities
        either), Insider Reporting, Early Warning System (Designed to give early warning to the marketplace that
        someone is accumulating a significant amount of stock).
       Can’t sell securities w/o FULL, TRUE and PLAIN DISCLOSURE OF ALL MATERIAL FACTS, i.e. a
        Prospectus, filed with Securities Commission (public record) and once you’re filed the prospectus, you go
        from a private company to a public company. Once you become a public company, you have an ongoing
        disclosure obligations to report changes, have to file and distribute financial information so that investors
        know what’s going on.
       Exemptions: b/c prospectus requirements are onerous and can’t expect ALL companies who need money to
        go through the time, effort and expense to do a prospectus:
                           a) closely held issuer and b) accredited investor exemption

c) Remedies
       civil and criminal remedies available for breach of first two requirements

3. Making the Decision to Go Public

Open Market/Capital Market Two Functions:
       a) Primary Markets - company raises money from the public; sale of shares from the company to all of us
           and the company gets the money (access to capital for new or existing business)
       b) Secondary Markets - allows continued marketability of those shares – sale of shares between investors
   Both aspects are critical to the open market
   3 Ways to raise capital: borrow money, through a private placement exemption or to become a public company

a) Pros: why go public?
   1)     Raising Capital - to achieve operating objectives by having money, Working Capital, decrease debt,
          expand/diversify the operations
   2)     Future Growth - access to more capital (i.e through restructure of financing – easier to borrow when
          debts are paid off)
   3)     Employee incentives - stock options – public companies know what their stock is worth every day –just
          check the newspaper! Cheaper tax rate too (stock vs. paycheque)
   4)     Enhanced Corporate Image - increase corp. profile
   5)     Acquisitions - Easier to buy things because you have 2 ways to purchase: cash and stock
   6)     Shareholder Liquidity - Can sell interest in stock market and is tangible measure of success (at least for
          that moment in time). Private company: can’t sell a piece of business and no market to sell.

b) Cons: Potential Disadvantages
   1) Loss of confidentiality - required to make full and continuous disclosure (i.e. loss of competitive advantage -
      competitors can read information on your co.) whereas with a private co., no one needs to know what you’re
      doing.
   2) Reduced Flexibility - owe fiduciary duty to the public – have to account to s/h, require their approval. Can’t
      react to opportunities. Gives Lastman a headache (ha ha). As a private co., want to show lowest income for
      lowest tax; public co. wants to show highest co. to maintain value of stock. End up managing shares instead
      of managing business.
   3) Focusing on wrong things: e.g. Managing Share Price - compromise LT profitability in favour of ST
      strategies
           o Bad decisions can be made when you are focused on the wrong thing
   4) Loss of Control



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Securities Regulation Summary – Lastman                                                                                   14/10/2011


                o Have to answer to shareholders, have to answer to regulators
                o Potential for hostile takeovers, removed from management
          5) Expense
                a) initial cost to go public: lawyers, I-banks, accountants, etc…
                         U/W’s fee – 5-7% of gross proceeds
                         Non-commission issue –1-3%
                         Internal cost of management’s time in preparation
                b) continuous disclosure: interim reports, hire pr, investor relations, meetings, etc.
                         becoming more onerous and expensive over time
                         ongoing liability

4. Prospectus Requirements: How does it work?
a) General Rule

No person shall trade in a security unless that person is registered and, if such a trade is a distribution,
without preparing and filing a prospectus in respect to those securities.

                            S.25: Registration for Trading & S.53: Prospectus Requirement
             25. (1) No person or company shall,                        Essential elements:
                                                                         What constitutes a ―trade‖?
                       (a) trade in a security or act as an              What constitutes a ―security‖?
                       underwriter unless the person or company is       How does one become a ―registered dealer‖?
                       registered as a dealer, or is registered as a
                       salesperson or as a partner or as an officer
                       of a registered dealer and is acting on behalf
                       of the dealer; or

                       (b) Repealed
S.25(1)




                       (c) act as an adviser unless the person or
                       company is registered as an adviser, or is
                       registered as a representative or as a partner
                       or as an officer of a registered adviser and
                       is acting on behalf of the adviser,

             and the registration has been made in accordance with
             Ontario securities law and the person or company has
             received written notice of the registration from the
             Director and, where the registration is subject to
             terms and conditions, the person or company
             complies with such terms and conditions.


             53. (1) No person or company shall trade in a                 When does a trade involve a ―distribution‖?
             security on his, her or its own account or on behalf of
S.53(1)




             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 therefor obtained from the Director.

Must determine: If it involves a SECURITY, If it is a TRADE, and if that trade involves a DISTRIBUTION . If
all three involved then NEED A PROSPECTUS (unless exemption used)




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Securities Regulation Summary – Lastman                                                                    14/10/2011


b) Process – How do we know that s. 25 of the Act applies?

(i) Does the transaction consist of a SECURITY?
          If a transaction does not consist of a security, then it is outside the scope of the Ontario Securities Act
          If YES, then …
(ii) Does the transaction involve a TRADE?
          If not a trade, then Act does not apply
          If YES, then …
(iii) Does the trade amount to a DISTRIBUTION?
          If trade in a security is NOT a distribution, then a prospectus is not required.
          If YES, then subject to the Act’s prospectus requirements
          WHY? To ensure that the public has all of the information necessary to make an informed investment
             decision.

Only where there is a “trade” in a “security” which amounts to a “distribution” does the
requirement to prepare a prospectus apply.


c) Definitions
(i) What constitutes a Security?
     Interpretation - s. 10 of the Interpretation Act - every act is deemed to be remedial; ―large and liberal
       interpretation in order to achieve the objectives of the Act.‖
       o As such, the objectives of the Securities Act being protecting the investing public and the maintenance of
            the capital markets, requires broad interpretation and must be read in an economic context (substance
            over form)

    (i) Security:
         Section 1(1): “Security”- 16 sub-definitions and not an exhaustive list:

         a) a document or instrument commonly known as a security – as by the most sophisticated securities
            lawyer
         b) any document evidencing title to or interest in capital assets, property, profits, earnings of any person or
            company
                  Too broad a definition – courts have limited to only apply to instruments intended for
                     investment are securities and not instruments bought and sold for other commercial purposes
                  If investing in paper with hope that it will increase in value = security; if purchasing the
                     underlying commodity = not a security. The ―paper‖ is only a security if you don’t receive the
                     underlying commodity
         n) investment contracts – ―any investment contract‖: definition is extremely ambiguous and requires
            interpretation of the court
                  We determine if a particular instrument is a security by asking whether “the person
                     invested on the premise that another person’s expertise will create profit” - in these
                     situations investor need full disclosure of all relevant information

Pacific Coast Coin Exchange (1977- SCC)
An investment falls under the definition of a security
Facts:
Pacific Coast was in the business of selling bags of silver coins. There were 2 ways to buy bags of
coin: one way was to just walk in and buy a bag, the second way was on margin (a fancy way of
saying that I‟ll pay $35 today, $65 later for a $100 bag of coin and the co. holds the purchase as
security until you pay the balance. Margin purchasers had 5 years to pay the balance) – Investors
effectively entering into current account commodity contracts w/ PC. How did PC make
money? PC never had the coins put aside, they hedged their exposure. PC knew 5 years down



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Securities Regulation Summary – Lastman                                                     14/10/2011


the road the purchasers would get the rest of the money so they guessed as to what the future held
in silver and entered into contracts to buy or sell silver from other people at different prices down
the road, and the money used to buy these future contracts was the $35 from the margin contracts.
Crucial to the success of PC was their ability to gauge when to buy and not buy silver. PC goes
broke and a whole bunch of these purchasers lose their money.
             o Majority of purchasers were margin purchasers.
             o Majority of margin purchasers never actually possession of the commodity (the
                silver); took cash instead when price of silver went up

Significance:if this was an investment contract, therefore a security (that amounted to a distribution) then a prospect

Issue:was there an investment contract; hence a security? was a prospectus required?

Held:Contracts were securities under investment contract branch of the definition and because there was no prospec

Rationale: Court relied on two US tests: Hawaii and Howey. A strict interpretation of the word
“solely” would not serve the purpose of the legislation – in this case a strict interpretation would
mean that PC had no control over the price of silver, as such this would not be a security b/c they
were not solely responsible for the success or failure. Court adopted a more realistic test - the key
to the success of the venture is the efforts of the promoter alone – 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.

Howey (1946 - US)
Common Enterprise Test
Facts:
 investors were given an opportunity to buy a specific track of land in an orange grove in Florida
   – could tend the land themselves or enter into a management contract with Howey to harvest
   and sell the oranges and send them the profits. Investment went bad – only way to get their
   money back was to claim it to be a security and that it was a security without a prospectus thus
   give money back.
Ratio:
 Court devised the Common Enterprise Test to determine if something is a security:
       1. money was invested
       2. in a common enterprise
       3. with the expectation of profit
       4. to be derived solely from the efforts of others
               o Pacific Coin – met this test as a security
               o Very broad – what if minimal effort made by the investor too??


Hawaii Market Centers (1971 - US)
Risk Capital Test
Facts: Pyramid sales operation
Issue: Were memberships in a store an investment.
Ratio:
Court criticized Howey test, so came up with own test
Risk Capital Test – Something is a security if:
        1. An offeree furnishes initial value to an offeror
        2. A portion of that value is subjected to the risks of the enterprise
        3. The money was given on the promise that some profit or benefit would accrue
        4. The investor does not have the right to exercise practical and actual control over the
             managerial decisions of the enterprise



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Securities Regulation Summary – Lastman                                                                         14/10/2011


        These tests are too broad – effectively call whatever you want a security
        Legislative policy replaced caveat emptor in securities related transactions
        The SCC is bending over backwards to uphold the objectives of the Act
        Knowing what a security is matters because it’s a question with consequences: can’t sell securities without a
         prospectus, so you have to know if something is a security to determine if a prospectus is required


OSC will find there is a security when there is an investment made on the premise that someone else’s expertise
will create a profit and those who invest require information in order to make an informed decision. If
labelling an investment contract a security will achieve the policy objectives of the Act, a contract will be
classified as a security.


Whenever an investor should reasonably have certain questions about the expertise of the entity managing their
investment, then the Securities Act will intervene to make sure the investor is fully informed of the expertise
(and other factors) by requiring full disclosure in the form of a prospectus.

Example: Exam Q of grade 6 kid taking 5 dollars from friends to buy hockey cards and selling them at higher price to
make profit and he doesn’t do well and the friends want their money back – it is likely a security
        o before giving the 5 dollars, should have asked a lot of questions
        o if I just go to a store and buy hockey cards, the receipt I get is not a security because I am just buying a
             pack of hockey cards BUT when I give the kid 5 dollars and you get a receipt from him, you are not
             buying hockey cars, I am buying his expertise and there is a lot I need to know before doing that and it is
             a security – need a prospectus to require that information to be distributed (policy)
   o There is no buyer beware clause in securities (the way there is with everything else)
   o When buying a condo to live in, it is NOT a security so no prospectus required
        o but when buying a condo and relying on someone else’s managerial expertise to run it, then there is a lot
             of stuff I need to know so there has to be a prospectus so it IS a security

(ii) What constitutes a Trade?
                                 S.1(1): Definition of “Trade” or “trading” includes,
       (a) any sale or disposition of a security for valuable Why not a purchase?
       consideration, whether the terms of payment be on        Policy of the Act requires it to catch the sale of a security.
       margin, instalment or otherwise, but does not include
                                                                A purchase of a security cannot be considered a trade b/c
       a purchase of a security or, except as provided in
       clause (d), a transfer, pledge or encumbrance of         the Act cannot impose on a buyer the obligation of
       securities for the purpose of giving collateral for a    providing a prospectus (policy of Act is to protect the
       debt made in good faith,                                 purchaser). The only reason we care what a trade is, is to
                                                                know whether or not the co. needs to prepare a
                                                                prospectus; and the only reason we need a prospectus is so
                                                                that the buyer is fully informed. So of course a trade
S.1(1)




                                                                could only be a sale of security.
       (e) any act, advertisement, solicitation, conduct or      It is not necessary to sell a security in order for it to
       negotiation directly or indirectly in furtherance of any      be considered a trade – simply trying to sell is enough
       of the foregoing;
                                                                 Securities legislation is proactive. One of the main
                                                                     objectives of the Act is to protect the integrity of the
                                                                     Capital Markets and this objective must be balanced
                                                                     w/ the protection of the investing public, which
                                                                     requires a proactive approach. Tries to stop bad
                                                                     transactions before they occur. As such, the Act can
                                                                     regulate a trade before the sale of a security.


        Example: X offers to sell to Y and Z shares of Company A which X owns – Z purchases
         o three trades – 1) offer to Y; 2) offer to Z ; and 3) sale to Z.




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Securities Regulation Summary – Lastman                                                                    14/10/2011


(iii) What constitutes a Distribution?
                               S.1(1): Definition of “Distribution” is EXHAUSTIVE
        (a) a trade in securities of an issuer that have       A prospectus is only required where a security is
        not been previously issued,                                issued for the first time by the company.
                                                               Policy - prospectus is required for primary market;
        (b) a trade by or on behalf of an issuer in                secondary market is protected by continuous
        previously issued securities of that issuer that           disclosure and previous prospectus on record.
        have been redeemed or purchased by or donated
        to that issuer,
        (c) a trade in previously issued securities of an issuer from the holdings of any person, company or
        combination of persons or companies holding a sufficient number of any securities of that issuer to affect
S.1(1)




        materially the control of that issuer, but any holding of any person, company or combination of persons or
        companies holding more than 20 per cent of the outstanding voting securities of an issuer shall, in the absence
        of evidence to the contrary, be deemed to affect materially the control of that issuer,
        (d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as
        underwriter, prior to the 15th day of September, 1979 if those securities continued on that date to be owned by
        or for that underwriter, so acting,
         (e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as
         underwriter, within eighteen months after the 15th day of September, 1979, if the trade took place during that
         eighteen months, and
         (f) any trade that is a distribution under the regulations,


In General, three things will amount to a distribution:
    1) Trades by issuers;
    2) Trades by control persons;
    3) Sales of restricted securities held by exempt purchasers.

Note: Two kinds of shares:
        1) Issued and outstanding (shares that have been sold to people)
        2) Treasury shares (shares that were made and are available in the treasury but never given out)




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Securities Regulation Summary – Lastman                                                                                 14/10/2011




5. Prospectus – S.56(1)

How are Securities sold to the public?
           1) Direct Issue
           2) Offer to sell
                o through an Underwriting Agreement with an Investment Banker
                o Pursuant to the agreement, the Underwriter buys the securities from the company and re-sells
                     them to the public
                o Binding agreement between underwriter and the company to buy the securities whether or not
                     they can re-sell them
           3) Best Efforts Underwriting
                o Agreement with Investment Banker, but not obligated to purchase securities
                o Less risk, but less reward for the underwriter

a) What is a Prospectus?
                                                S.56: Full, true and plain disclosure
              Full, true and plain disclosure                             Full, true and plain disclosure
                                                                          All Material Facts
              56. (1) A prospectus shall provide full, true and           Must comply with rules and regulations of the Act
S.56(1)




              plain disclosure of all material facts relating to the
                                                                          Corollary - there is civil liability if there is a
              securities issued or proposed to be distributed and
                                                                           misrepresentation in the prospectus
              shall comply with the requirements of Ontario
                                                                          Misrepresentation defined in s.1(1) - “untrue statement of a
              securities law.
                                                                           material fact or an omission of a material fact” – have to
                                                                           make sure you haven’t forgotten to say something.

              Supplemental material
S.56(2)




              (2) The prospectus shall contain or be accompanied by such financial statements, reports or other documents as are
              required by this Act or the regulations.

             S. 56 also says: mere technical compliance with the Act is not sufficient (can’t just follow the form) – you
              have an obligation to anticipate other questions that are not provided in the act
             S.58 says must certify in writing that the prospectus constitutes full disclosure of material facts
             S.71 says must tell purchasers they can sue you due to misrepresentation
                   Misrepresentation: untrue statement of material fact; includes omissions

b) What goes into a prospectus? – Form 45-501 F1
         A prospectus is created by anticipating what an investor wants to know.
         What does an investor want to know?
              o What does the company do?
              o What experience does the company have?
              o What are the company’s assets?
              o What are the uses of the proceeds? (what does the company need your money for?)
              o What debt does the company have?
              o Historical financial performance
              o Who are the competitors?
              o Who is the management of the company?
                        Who are the directors?
                        Who are the officers?
                        How much does the management own?
                        How much is management paid?
                        (big discussion right now in Canada about disclosing executive compensation)
              o Any lawsuits pending against the company?
              o How can I re-sell the securities?


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Securities Regulation Summary – Lastman                                                                   14/10/2011


        o    Does company pay dividends?
        o    Who are major shareholders?
        o    What material contracts exist?
        o    What is the future of the company?
        o    What is the upside potential for the company?

o   a prospectus is supposed to answer all of these questions: before you get into a business, better know what
    that business does. The prospectus tells you that.
o   it’s not that difficult to prepare a prospectus: all you’re doing is telling a story – anticipating what people
    want to know about your company, and telling them.

c) Dual Role of the prospectus: (i) Sales Document; (ii) Liability Document)
       Tension exists between these two functions
       Two distinct and significant purposes of a prospectus
         Only document you can use as a selling tool to sell securities to the public
             Can’t make fancy brochures, can’t advertise, can’t make ―Coles Notes‖ version
             Want to obviously cast in most favourable light
             The prospectus is the only sales document company can use to sell the securities to the public,
                therefore it is critical to make sure it works – encourages people to invest
       Balance
            o Must strike a balance between liability and selling
                      tension is implicit (most apparent wrt to future oriented information) and regulators
                          vacillate (prior to 1982, the solution to the problem with future predictions was that Future
                          Oriented Financial Information was not permitted to be included in a prospectus).
                      Lawyers shouldn’t try to legislate against every eventuality – will result in a document that
                          is not commercially viable!
                      Challenge for lawyer is to strike balance between legitimate right of the document as a
                          selling document and legitimate need for the document as a liability document

       When preparing a prospectus, lawyer has an obligation to the public, to legal bar, and to client
       Lawyer must strike balance between two roles: have to encourage people to buy but also have to protect
        client from lawsuits

d) Policy statements
   Policy statements are articulated statements by OSC of how they intend to behave – technically they do not have
   the force of law
   Because OSA is a policy, and because the decision makers are also policy-based, it is good practice to explain to
   the world how discretion will be exercised in certain circumstances, and these appear in the form of policy
   statements.

Three types of Policy Statements:
        1) OSC policy statements: statements of policy articulate by the Ontario Securities Commission
        2) Uniform Act Policy Statements – policy statements of: BC, Sask, Man, Alta, ON together, of how
            they’re going to collectively deal with certain issues
        3) National Policy Statements – all the provincial jurisdictions articulate a common theme on certain
            issues (there is a movement towards a federal regulatory body)




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Securities Regulation Summary – Lastman                                                                   14/10/2011



e) Future Oriented Financial Information (FOFI):
   Problem with not including FOFI - FOFI is essential to selling securities and necessary information required to
    make an informed investment decision. Reading a prospectus that doesn’t include FOFI is useless.
   Financial Forecasts can also be potentially viewed as misrepresentation (e.g. Danier Leather)
   Note: Form 45-501F1 doesn’t require the inclusion of FOFI; prior to 1982 it was NOT ALLOWED to be
    included
    o Investors need to know what the company’s vision of the future looks like to make an informed decision!
   National Policy Statement 48 (see below) (soon to be replaced by 52-41(???)
   FOFI ―info about the prospective results operations, financial position, or changes in financial position, based on
    assumptions about future economic conditions and courses of action. Future oriented Financial Information is
    presented as either a forecast or a projection.

(i) Forecast
 A forecast is a written estimate of the most probable results of operations of a company for some point in the
    future based on most probable set of economic conditions
 onus on company (writer) to use the most probable set of assumptions – no latitude with forecasts.
 This means that a company is trying to decide how it’s going to perform next year – they need to base this on
    assumptions. i.e. to use a forecast you have to base it on certain assumptions; these assumptions are based on
    previous years’ information. Operative thing in a forecast is that within the realm of reasonableness, always have
    to choose the most probable assumption.

(ii) Projections
 Projections are written estimates that follows any set of reasonable assumptions
     o Since there is a “range of reasonableness,” the onus of reasonableness of the assumptions is left up to the
         reader – reader has to decide most probable set of assumptions
     o Assumptions reflecting the entity’s planned course of action for a period, along with one or more hypotheses.
     o Company can get better results with projections.

   Hypothesis: “assumptions that assume a set of economic conditions or course of action that are consistent with
    the issuer’s intended course of action and present plausible circumstances.”

(iii) National Policy Statement #48: Financial Forecasts:

   Deals with the use of future oriented data in prospectuses (proposed that NP48 be changed to NI51).

    ―the purpose of this policy statement is to specify the manner in which Future Oriented Financial Information
    in General Purpose Documents shall be prepared…the decision whether to publish FOFI and the responsibility
    for published FOFI rests with the issuer. Issuers who choose to publish FOFI shall comply with this policy
    statement…”

   Commission doesn’t care if they are included or not, but if they are included, they must comply with NP#48. If
    FOFI is not included in prospectus, then prospectus CANNOT talk about the future
        o Can’t have it both ways
   Policy steps in to balance the selling feature with protecting the investor
   Overlying talking about the future is fear of being sued over misrepresentation
        o To prove a misrepresentation - requires showing that the assumptions on which they were based were
             unreasonable at the time (difficult to prove).
        o Once credibility is lost it may never be regained. It is because of credibility that it’s important to follow
             all the rules. The real concern isn’t a lawsuit; the real concern is the loss of credibility.




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Securities Regulation Summary – Lastman                                                                  14/10/2011



Rules and Key Elements of NP48:
    1) Can use FOFI – if used must comply w/ NP48 – if don’t use forecast in prospectus then can’t discuss
        anywhere else (media, public speech, etc).
    2) If you use FOFI in prospectus it MUST be by way of FORECAST
         Policy: protect the investor by providing most accurate future information
         Exception: if company has been in operation for less than 24 months can use PROJECTION or forecast
                 o A forecast by definition is more reliable than projection, but if company doesn’t have a long
                      history it is very difficult to determine most probable set of assumptions on limited data
                      therefore a forecast is too onerous to require
    3) Cannot provide a Forecast and a Projection in the same document
         Why? policy, b/c the very existence of forecasts will lend credibility to projections – protect public
            against themselves
                 o reduce possible confusion (Lastman – not sure if he agrees with the logic. Paternalistic: we’re
                      being told what we can see, we’re not free to make our own decisions. In the media, this would
                      amount to censorship.)
    4) FOFI must be prepared in good faith in accordance with CICA guidelines and audited in accordance with the
        CICA auditing standards, and must be accompanied by an auditor’s report [Translation: VERY
        EXPENSIVE!]
    5) Information must be updated regularly, reviewed quarterly and any changes that are material must be
        reported – continuous disclosure. Must be updated between preliminary and final prospectus.
    6) If the issuer provides prospectus that contains a projection, it must also include a cautionary note
        highlighting the fact that the projection is a hypothesis and the significance of relying on the projection.
    7) FOFI cannot be extended beyond that amount of time the commission deems reasonable – they say no
        longer than 24 months into the future. Anything beyond that is deemed to be too speculative (too unreliable).
         Exception: where info in FOFI can be relied upon beyond 24 months in some circumstances – such as
            real estate projects.

Lastman’s general advice: Be smart. Don’t be so conservative in the projections as to make the prospectus
unattractive, but don’t make it too exuberant so as to be sued!

f) Preliminary Prospectus – S.54
Looks exactly like a prospectus, but does not include price or underwriter’s compensation or any other matter
related to price of the securities

41-501(f)1 and 41-101: look at both of these

(i) Requirements:
 S. 54 (1) PP form = substantially the same as the P - can omit reports of the auditor or accountant required by the
    regulations
 S. 54 (2) preliminary prospectus can look like (final) prospectus, but can omit price of securities, the
    underwriter’s compensation and any matters relating to price and price to the u/w
    o Rationale b/c can only get indications of intention to buy and not final sales
    o Allows the underwriters to assess the market and determine the price – can’t anticipate in advance
    o OSC shall give a receipt for a preliminary prospectus as long as document complies with the act

(ii) Warnings:
 Rule 41-501F1 item 1.2 says the preliminary prospectus must have a statement printed in RED INK and italics
     on the outside front cover at the top: [regulation 50] – “Red Herring”
              i) Identifying the document as a preliminary prospectus
              ii) Stating it is not complete
              iii) Stating that securities may not be sold until a receipt for final prospectus is obtained




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(Aside: Prospectus can only include graphic displays/pictures of the product you are selling. OSC told Four Seasons
to take picture of a chef out of their prospectus. After weeks of debate, they let it go through)

Regulation 1.1 of 41-501F1 - Both preliminary and final must include a statement on the front cover that says that
“no securities regulator has in any way passed upon the merits of the securities being offered..” [reg. 51] – this is not
true (!) OSC vets the document and offers opinion on the merits in the form of a receipt.
 Why is this statement included? Public needs to know that OSC is not there as a real safeguard for them; public
     has to protect themselves
          o OSC can’t possibly scrutinize every prospectus they receive with that much detail – can’t possibly do
              more than a cursory review

Note: Preliminary prospectus is not a draft document.
 There is civil liability for misrepresentation in a prospectus
 From a business perspective, making changes to preliminary prospectus, or having a sloppy prospectus will result
    in loss of credibility in the marketplace

(iii) Certifications: [s. 58 & s 59]

                                                   S.58, S.59: Certifications
          Certificate by Issuer                                         Requires the CEO, CFO and two other directors of the
                                                                         company must certify in writing at the bottom of the
          S.58(1) Subject to subsection (3) of this section and          prospectus that “the prospectus constitutes FULL, TRUE
          subsection 63 (2), and subject to any waiver or                and PLAIN disclosure of all material facts relating to the
          variation consented to in writing by the Director, a           securities offered under this prospectus…”
          prospectus filed under subsection 53 (1) or subsection        This effectively creates STRICT LIABILITY for a
          62 (1) shall contain a certificate in the following            misrepresentation
          form, signed by the chief executive officer, the chief
S.58(1)




          financial officer, and, on behalf of the board of
          directors, any two directors of the issuer, other than
          the foregoing, duly authorized to sign, and any person
          or company who is a promoter of the issuer:

          The foregoing constitutes full, true and plain
          disclosure of all material facts relating to the
          securities offered by this prospectus as required by
          Part XV of the Securities Act and the regulations
          thereunder.
          Certificate of Underwriter                                    Note: since just to the underwriter’s knowledge means that
                                                                         the underwriter can escape liability if they prove a certain
          S.59(1) Subject to subsection 63 (2), where there is an        degree of due diligence, there are defenses available to
          underwriter, a prospectus shall contain a certificate in       exculpate their liability (these defenses are not available to
          the following form, signed by the underwriter or               the CEO, CFO and directors).
          underwriters who, with respect to the securities
          offered by the prospectus, are in a contractual
S.59




          relationship with the issuer or security holder whose
          securities are being offered by the prospectus:

          To the best of our knowledge, information and belief,
          the foregoing constitutes full, true and plain
          disclosure of all material facts relating to the
          securities offered by this prospectus as required by
          Part XV of the Securities Act and the regulations
          thereunder.




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Securities Regulation Summary – Lastman                                                                                        14/10/2011



                                            S.130: Strict Liability for Misrepresentation
           Liability for Misrepresentation in the Prospectus                 “a purchaser who purchases a security offered thereby during
                                                                             the period of distribution or distribution to the public shall be
           130. (1) Where a prospectus, together with any amendment          deemed to have relied on such misrepresentation if it was a
           to the prospectus, contains a misrepresentation, a purchaser      misrepresentation at the time of purchase and has a right of
           who purchases a security offered by the prospectus during         action for damages
           the period of distribution or during distribution to the public   against…”
           has, without regard to whether the purchaser relied on the        a) The issuer or selling security holder
           misrepresentation, a right of action for damages against,
                                                                             b) Each underwriter who signed the certification pursuant to s.
                                                                                  59
           (a)   the issuer or a selling security holder on whose behalf     c) Every director at the time the prospectus or amendment was
                 the distribution is made;                                        filed
           (b)   each underwriter of the securities who is required to
                 sign the certificate required by section 59;
                                                                             d) Experts – but only wrt to their opinions or statements made
S.130(1)




           (c)   every director of the issuer at the time the prospectus          by them
                 or the amendment to the prospectus was filed;
           (d)   every person or company whose consent has been filed
                 pursuant to a requirement of the regulations but only
                 with respect to reports, opinions or statements that
                 have been made by them; and
           (e)   every person or company who signed the prospectus or
                 the amendment to the prospectus other than the
                 persons or companies included in clauses (a) to (d),

           or, where the purchaser purchased the security from a person
           or company referred to in clause (a) or (b) or from another
           underwriter of the securities, the purchaser may elect to
           exercise a right of rescission against such person, company
           or underwriter, in which case the purchaser shall have no
           right of action for damages against such person, company or
           underwriter.



(iv) Receipt for Preliminary Prospectus:

                                       S.54 & S.55 - Receipt of Preliminary Prospectus
           54. (1) A preliminary prospectus shall substantially comply           when commission receives a preliminary prospectus, the
           with the requirements of Ontario securities law respecting             commission SHALL issue a receipt as long as it
           the form and content of a prospectus, except that the report           substantially complies with the regulations (limited
           or reports of the auditor or accountant required by the
                                                                                  discretion)
S.54




           regulations need not be included.
                                                                                 then WAITING PERIOD begins.
               (2) A preliminary prospectus may exclude information              Easy to get preliminary prospectus (no harm, no foul since
           with respect to the price to the underwriter and offering price        can’t actually trade securities based on preliminary
           of any securities and other matters dependent upon or                  prospectus)
           relating to such prices.
           55. The Director shall issue a receipt for a preliminary
S.55




           prospectus forthwith upon the filing thereof.




g) Waiting Period

(i) General:
 Three Reasons for a waiting period:
                  1.   Gives the solicitor and accountant assigned by the commission time to review and provide comments
                       for deficiencies (deficiency report)
                  2.   Provide investors time to read the document without the pressure of having to decide whether to
                       buy or not
                  3.   Gives underwriters time to assess the market, determine demand and assign the appropriate price
                       to the securities before the underwriter has to enter into underwriter agreement


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                                                   SS.65, 66, 67 - Waiting Period
        S.65(1) – Definition of Waiting Period                                 must be an interval of at least 10 DAYS between receipt for
        ―waiting period‖ means the interval, which shall be at least            PP and receipt for final (but note that in the Act there’s
        ten days, between the issuance by the Director of a receipt             nothing written about ―final‖ prospectus – just called
        for a preliminary prospectus relating to the offering of a
        security and the issuance by the Director of a receipt for the
                                                                                ―prospectus‖)
        prospectus.
        S.65(2) – Distribution of Material During Waiting Period               It is permissible during the waiting period to:
        Despite section 53, but subject to Part XIII, it is permissible
        during the waiting period,                                         a)   To distribute a notice, circular, advertisement, letter or
                                                                                otherwise communicate …identifying…price…name and
        (a) to distribute a notice, circular, advertisement or letter to        address of whom the securities may be purchased from.
        or otherwise communicate with any person or company
        identifying the security proposed to be issued, stating the        b)   To Distribute a Preliminary Prospectus
S.65




        price thereof, if then determined, the name and address of a
        person or company from whom purchases of the security
                                                                           c) To solicit expressions of interest from prospective
        may be made and containing such further information as                  purchasers
        may be permitted or required by the regulations, if every
        such notice, circular, advertisement, letter or other
        communication states the name and address of a person or
        company from whom a preliminary prospectus may be
        obtained;
        (b) to distribute a preliminary prospectus; and
        (c) to solicit expressions of interest from a prospective
        purchaser if, prior to such solicitation or forthwith after the
        prospective purchaser indicates an interest in purchasing the
        security, a copy of the preliminary prospectus is forwarded
        to him, her or it
        S.66 – Distribution of Preliminary Prospectus –                        during waiting period you can solicit “expressions of
        Expressions of Interest                                                 interest” but no sales – expressions have no legal
                                                                                consequence, and can deliver copies of preliminary
        Any dealer distributing a security to which section 65
S.66




        applies shall, in addition to the requirements of clause
                                                                                prospectus to anyone who wants one.
        65 (2) (c), send a copy of the preliminary prospectus to               Note: Absolutely no legal obligation tied to an expression
        each prospective purchaser who, without solicitation,                   of interest.
        indicates an interest in purchasing the security and
        requests a copy of such preliminary prospectus.
        S.67 – Distribution List                                               the underwriter must keep a record of all names and
                                                                                addresses of anyone who received a copy of the preliminary
        Any dealer distributing a security to which section 65                  prospectus.
s.67




        applies shall maintain a record of the names and addresses of
        all persons and companies to whom the preliminary                      Need to know who has received a copy of it, in order to
        prospectus has been forwarded                                           know who to send amendments to.
                                                                               Everyone who receives a PP must receive any changes or
                                                                                clarifications made to the doc, hence the necessity of a list

(ii) Advertising During the Waiting Period:
 During the waiting period type of materials that can be distributed to the public is extremely limited
 S. 1(1)(e) ―trading includes … any act, advertisement, solicitation, conduct or negotiation directly or indirectly in
     the furtherance of any of the foregoing…”
           Since trading is not allowed during the waiting period, advertising is not allowed
           Policy: Protect the public and maintain the integrity of the capital markets
           No advertising can accompany the PP upon distribution if PP during the waiting period – policy: don’t
              want to distract/influence the reader w/ a glossy brochure.
           Problem: not advertising may effectively exclude the majority of investors and deny some people the
              opportunity to participate
           If advertise? Commission will cease allowing you to trade
           Issue: What constitutes an advertisement?
                       o Example: Canwest Global– when they went public had to fight the OSC in order to include
                            the fact that they were going public in their newscast.
           Policy question: No rules on advertisement in UK. Why does Canada need to protect the public to such
              an extreme? In reality, the public doesn’t read prospectuses and doesn’t have equal access to the capital



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               markets – public depends on the public media/advertising. Would public participate more in the capital
               markets if they had more information?
              Other side of the argument: Need to protect against putting the capital markets into disrepute. OSC
               doesn’t have the resources to oversee advertising in the public markets. Compromise is to ban
               advertising altogether. Common good that needs to be met even if it denies the public equal access to the
               capital markets
              Question: Does this mean that if a company makes a public offering you have to stop advertising?
                        o OSC has said that corporate image advertising is ok even during the waiting period, as long
                             as it is not in furtherance of the sale of securities.
              Bottom Line: Since the prospectus itself must act as a liability document, it must be balanced in
               content between a selling document and a liability document.

                           OSC Rule 47-601 – Limits on advertising during waiting period
         [I]t is permissible during the waiting period between the
         issuance of the receipt for the preliminary prospectus and the        limits what kind of advertising is permitted during the
         receipt for the final prospectus to advertise specific matters         waiting period
         concerning the securities proposed to be offered. Newspaper
         advertisements can:                                                   Newspaper ad allowed that identifies the security, states
               ―identify" the security;                                        the price if known, and tells people where to get a copy of
               state the price of such security, if then determined;           the prospectus
               state the name and address of a person or company              You cannot promote the offer. You can also continue
                from whom purchases of securities may be made; and
                                                                                regular corporate promotion, unrelated to securities/going
               solicit expressions of interest in the securities.
                                                                                public, etc.
         The administrators are of the view that the "identification"
         of the security does not permit an issuer or dealer to include        Advertisement must include the following statement:
         in the advertisement a summary of the commercial features
         of the issue. These details are set out in the preliminary        A preliminary prospectus relating to these securities has been filed with
         prospectus which is intended as the main disclosure vehicle       securities commissions or similar authorities in certain provinces of
         pending the issuance of the final receipt. The purpose of the     Canada but has not yet become final for the purpose of a distribution to
47-601




         advertisements permitted by the legislation during the            the public. This advertisement shall not constitute an offer to sell or the
         waiting period is essentially to alert the public to the          solicitation of an offer to buy, nor shall there be any sale or any
         availability of the preliminary prospectus.                       acceptance of an offer to buy these securities in any province of Canada
                                                                           prior to the time a receipt for the final prospectus or other authorization
         For the purpose of identifying a security, the administrators     is obtained from the securities commission or similar authority in such
         consider that the advertisement may only:                         province.
              indicate whether a security represents debt or a share in
               a company or an interest in a non-corporate entity (e.g.
               a unit of undivided ownership in a film property) or a
               partnership interest;
              name the issuer if the issuer is a reporting issuer; or
              name and describe briefly the business of the issuer if
               the issuer is not already a reporting issuer. The
               description of the business should be cast in general
               terms and should not attempt to summarize the
               proposed use of proceeds;
              indicate, without giving details, whether the security
               qualifies the holder for special tax treatment; and;
              indicate how many securities will be made available.




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             National Policy Statement 42 – Advertising of Securities on Radio or Television
        Part III – Statement of Policy

            No person or company shall promote, by radio or television broadcast, investment in specific securities other than
             those exempted securities.
            “It is appropriate that the securities regulation restrict advertising of securities on the basis of investor protection,
             so long as the restrictions are not unduly restrictive”
            WHY? “A brief advertisement of securities…although it may not be intentionally false…it cannot by its nature give
             appropriate cautions or address the issue of suitability”
            “This policy stmt is not intended to affect advertisements by issuers in respect to publicity campaigns that are aimed
             at either selling products or raising public awareness…”
        Part IV -- Exempted Securities

        The following securities are exempted from this Policy Statement:

        1.   Bonds, debentures or other evidences of indebtedness,
                  a.   of or guaranteed by the Government of Canada or any province of Canada; or
                  b. of any municipal corporation in Canada, including debentures issued for public, separate, secondary or vocational school
NP 42




                       purposes, or guaranteed by any municipal corporation in Canada, or secured by or payable out of rates or taxes levied
                       under the law of any province of Canada on property in such province and collectable by or through the municipality in
                       which such property is situated; or
                  c.   of or guaranteed by a bank to which the Bank Act (Canada) applies, or by a trust company or loan corporation licensed
                       or registered under provincial or federal regulatory statutes.
        2. Certificates or receipts issued by a loan or trust company registered under a provincial or federal regulatory statute for
             moneys received for guaranteed investment.
        Part V – Permitted Advertisements

        Advertising of specific securities as permitted in Part III, other than exempted securities, is restricted to giving the
        following information:
        (a) the name of the issuer of the securities;
        (b) a concise statement of the nature of the business of the issuer;
        (c) the specific type of securities offered (e.g., common shares, subordinated shares, bonds, etc.), the number offered
             for subscription and their price;
        (d) a concise statement of whether the securities are qualified for special tax treatment;
        (e) the name of the registrant, if any, placing the advertisement; and
        (f) instructions for obtaining a copy of the prospectus or preliminary prospectus.

(iii) MATERIAL CHANGE during the WAITING PERIOD – only adverse changes need be reported
 Where an adverse change in the business, operations or capital of the issuer would reasonably be expected to
      have a significant effect on the market price or value of the securities of the issuer (―material change‖) occurs
      during the waiting period, the issuer must:
      1) File an amendment with the OSC as soon as practicable and no later than 10 DAYS after the change has
          occurred
      2) Deliver a copy of the amendment to each and every recipient of the PP in accordance with the distribution
          list under s. 67.

                       S.57 - Amendment to Preliminary Prospectus on Material Change
        S.57(1)
                                                                           if a material change occurs during the waiting period and
        Subject to subsection (2), where a material adverse change          that change is adverse, then the company must file an
        occurs after a receipt is obtained for a preliminary
                                                                            amendment with the commission and deliver to everyone to
        prospectus filed in accordance with subsection 53 (1) and
        before the receipt for the prospectus is obtained or, …             whom prospecus was delivered ASAP and in any event
S.57




                                                                            within 10 DAYS of the date of change.
        S.57(3)                                                            Must deliver to everyone who received a copy of the PP
                                                                           If change is not adverse than it is optional – why? because
        An amendment to a preliminary prospectus referred to in
                                                                            they will get the info in the final prospectus and deal is not
        subsection (1) shall, forthwith after it has been filed, be
        forwarded to each recipient of the preliminary prospectus           final until 2 days after receipt, therefore investor already
        according to the record maintained under section                    protected




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                                            S.1(1) - Definition of Material Change
            ―material change‖,
                 (a) when used in relation to an issuer other than an investment fund, means,
S.1(1)




                     i)    a change in the business, operations or capital of the issuer that would reasonably be expected to have a
                           significant effect on the market price or value of any of the securities of the issuer,
                     ii)   a decision to implement a change referred to in subclause (i) made by the board of directors or other
                           persons acting in a similar capacity or by senior management of the issuer who believe that confirmation
                           of the decision by the board of directors or such other persons acting in a similar capacity is probable

h) Receipt for Final Prospectus
        Issuance of receipt for FP gives the issuer of the security the ―go ahead‖ to distribute
        Reg 51: Prospectus must say on front “the OSC has not reviewed the merits of the securities being offered”
                   BUT, broad discretion under S. 61 - the OSC reserves the right to refuse receipt, the OSC has a
                       mandate to review not only the disclosure requirements have been met, but also to review the
                       merits of the securities being offered
        Side note: Only a limited number of subscribed securities issued for sale, and every time you want to issue more
         you need to issue another prospectus




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       S.61(1) & (2): Issuance of Receipt (Not in the Public Interest & Other Reasons for Refusal)
         S.61(1) Public Interest
                                                                                    The OSC has taken broad discretionary powers, with
         Subject to subsection (2) of this section and subsection 63 (4), the        the right and mandate of protecting the investing
         Director shall issue a receipt for a prospectus filed under this Part
                                                                                     public
         unless it appears to the Director that it is not in the public
         interest to do so.                                                         More than ensuring that the disclosure requirements
                                                                                     are met, the OSC commonly reviews the merits of the
         The administrators are of the view that the "identification" of the         security – if deemed too risky they won’t issue a
         security does not permit an issuer or dealer to include in the
                                                                                     receipt.
         advertisement a summary of the commercial features of the issue.
         These details are set out in the preliminary prospectus which is           Revalda - OSC refused to issue a final receipt for a
         intended as the main disclosure vehicle pending the issuance of             junior mining company because it felt the directors
         the final receipt. The purpose of the advertisements permitted by           were too inexperienced
         the legislation during the waiting period is essentially to alert the
         public to the availability of the preliminary prospectus.                  Lake Forest Fund - wouldn’t issue a receipt because
                                                                                     they didn’t like the fee structure (even though it was
         For the purpose of identifying a security, the administrators               freely disclosed).
         consider that the advertisement may only:
              indicate whether a security represents debt or a share in a          Deprenyl - OSC wouldn’t issue a receipt for final
               company or an interest in a non-corporate entity (e.g. a unit         prospectus because success depended on FDA
               of undivided ownership in a film property) or a partnership           approval of a drug and thus too risky – company made
               interest;                                                             this very clear on the face of the document that drug
              name the issuer if the issuer is a reporting issuer; or               was not permitted in Canada and needed FDA
              name and describe briefly the business of the issuer if the           approval – finally OSC approved – ended up getting
               issuer is not already a reporting issuer. The description of          FDA approval (I: what would happen if no approval)
               the business should be cast in general terms and should not
S.61




               attempt to summarize the proposed use of proceeds;                             Policy: Paternalistic approach? – why not
              indicate, without giving details, whether the security                          force them to give the straight facts but let
               qualifies the holder for special tax treatment; and;                            the public decide?
              indicate how many securities will be made available.
                                                                                              Other side: Cost to our society is that people
                                                                                               will not invest in our markets if we don’t -
                                                                                               quite frankly, the OSC doesn’t care about
                                                                                               you or me specifically, only care that if
                                                                                               enough people lose money, then no one will
                                                                                               invest, and then we all lose. Need to take
                                                                                               steps to protect the economy even against
                                                                                               individual people who think they know
                                                                                               better.
                                                                                              Reality today is that there are no true
                                                                                               economic borders – Canadians can invest
                                                                                               anywhere in the world – if our government
                                                                                               doesn’t protect our capital markets, then
                                                                                               investors will go elsewhere, and if investors
                                                                                               go elsewhere, we are bankrupt as a country
                                                                                              Comforted by the fact that an objective 3rd
                                                                                               party is looking after the capital markets –
                                                                                               someone with a greater interest
                                                                                              Note: in vast majority of cases, public
                                                                                               interest aspect is not imposed




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        S.61(2) Refusal of Receipt – other reasons                             Policy:
                                                                                        These people are just lawyers and accountants –
        (a)    Did not substantially comply with the Act ; Has                           why should they decide what we invest in – they
               statements, promises, estimates or forecast that is                       don’t have any particular industry expertise –
               misleading, false or deceptive ; Contains a
               misrepresentation (pure disclosure)
                                                                                         this is offensive
        (b)    Unconscionable consideration paid to the promoter –
                                                                                        HOWEVER, someone has to look after the
               (review of the merits), even if you disclosed such                        greater good – the commission wants to
               consideration                                                             maintain the integrity of the capital markets
        (c)    Insufficient Proceeds for the purpose set out in the                      and if the listed securities on the exchange are
               prospectus (recall, you have to say what the money is for)                too risky it will erode company’s ability to
        (d)    Financial condition of company or those running it                        raise capital particularly through international
               suggests it is too risky or irresponsible – financial                     investment.
               responsibility
        (e)    Past conduct of                                                    In the opinion of the OSC, not allowing unnecessary
               issuer/officers/directors/promoters/anyone holding                  risk into the capital market is a small price to pay in
               significant interest in company suggest lack of integrity           order to protect the investing public and maintain the
               and will put markets in disrepute - bad faith, fraud (not           integrity of the capital markets
               concerned about murder)
        (f)    If escrow arrangements are not satisfactory – (the
               economic risks of going public must be shared by the
               founders and the investors alike) (National Policy 46-201)
                    Escrow is a fancy way of ensuring by contract that I
                     am not going to sell you securities in my company
                     and sell them out at the same moment. Investors are
                     comforted by the fact that the founders have
                     economic risks. If you go public for the first time,
                     you have to agree with the OSC that you won’t sell
                     more than a third of your shares per year over the next
                     three years – so new investors know you aren’t
                     bailing.
        (i)   If someone involved in the process is an unacceptable
              professional (certification) (e.g. your lawyer is a crook)




i)   Closing the Transaction
    Once company receives receipt, the underwriters deliver the prospectus and obtain binding agreements for
     purchase and sale
    HOWEVER - there is typically a three week lapse between issuance of receipt and closing of the transaction.
    There is a risk that a material change occurs in the affairs of the company within that time frame

(i) Material Change between receipt and closing
Issue: What happens if there is a material change between receipt for FP and closing?
     If there are any material changes (negative or positive) an amendment must be filed as soon as practical and
        no later than 10 DAYS and deliver a copy to all those who received a final prospectus (S.57(1)) – except
        those people whose two day cooling off period has ended.
     Why positive or negative? Because Final Prospectus is the only document that will pick this info up
             o Unlike waiting period after PP where only negative info is required because any positive changes
                  will be reflected in the FP.
             o After final receipt and before closing, there is no document that is going into the public domain that
                  can clarify the situation, therefore to make sure the final document is complete, ANY change must
                  be made to ensure the record is complete
             o The marketplace needs to know everything in order to make an informed decision, and there is no
                  other forum for that to occur. In the waiting period, if there is a positive change it will be included
                  in the final prospectus, but we want to make sure people know about negative changes so they are
                  not buried in the final prospectus.




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                             S.57(1): Amendment to Final Prospectus on Material Chnage
             S.57(1)
S.57(1)




             Subject to subsection (2), … or, where a material change occurs after the receipt for the prospectus is obtained but prior to
             the completion of the distribution under such prospectus, an amendment to such … prospectus, …, shall be filed as soon
             as practicable and in any event within ten days after the change occurs.


(ii) 2-Day cooling off period:
 Agreements of purchase and sale are not binding until midnight of the second day after the purchaser has receipt
     of the latest prospectus and amendments to that prospectus. Purchaser has right of rescission
 Rationale: Investors must have 48 hours with ALL the information before they are bound to buy
 Policy: the Act wants to make sure the purchaser has made an informed decision and that the purchaser has had
     the opportunity to re-think and re-consider the agreement to purchase the securities

                                              S.71(2): Withdrawal From Purchase
             S.71(2)

             An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser, if the dealer from
S.71(2)




             whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the
             purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day,
             exclusive of Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any amendment
             to the prospectus. R.S.O. 1990, c. S.5, s. 71 (2).


j)        Statutory Rights of Purchaser
         In addition to a Common Law right of action for fraudulent and negligent misrepresentation the Act provides for a
          statutory right of action.
         S. 60 - every prospectus shall contain the a statement of the rights provided by S. 71 & 130
         S. 71 (1) – Cooling off period
          o Once someone says they want to buy securities, after final receipt, the broker must deliver a copy of the
               prospectus and any amendments to that person within 48 hours.
          o Purchaser then has 2 days (48 hour period) to decide what to do (S.71(2))
          o Note: If prospectus is never delivered, 48 hour period never expires and purchaser can get out of agreement
               at any time.

(i)       Cooling Off Period - Sample Question 1
         Day 1 – You say you want to buy
         Day 4 – Receive copy of prospectus
         Day 6 – Bound to buy
          o What if there is a fire on Day 5 and amendment made on Day 9?
          o What is the policy behind cooling off period? To give the investor 48 hours with all of the facts to make an
              informed decision.
          o In this scenario, they will only have 48 hours with all the facts on day 11.
          o Key factor is: need 48 hours with all the information!

(ii)      Cooling Off Period - Sample Question 2
         Day 1 – Receive unsolicited prospectus
         Day 4 - You say you want to buy
         Day 5 – Fire
         Day 9 – Amendment
               By policy, you had more than 48 hours with all the information, so no cooling off period.




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                              S.130: Liability for Misrepresentation in a Prospectus
        S. 130 provides for civil statutory liability for all involved in preparing a prospectus if there is a misrepresentation in it.
        Right to sue for a misrepresentation. A misrepresentation is a misstatement of material fact or an omission of a material
        fact. (At common law of contracts would have been liable for misrepresentation only if fraudulent or negligent in
        misstatement of facts)
             
S.130




                  Three Parts to S. 130 (1) Liability of the parties; (2) Damages; (3) Defences
                 Selling Securities: When company wants to sell securities they issue a prospectus. Company gets proceeds
                  (called IPO). Sometimes significant shareholder of co. wants to realize part of their investment. When certain
                  shareholders wants to sell it’s called secondary offering and they are called Selling Security Holders. This
                  means that people who held shares when co. was private are going to sell shares instead of the co. selling its
                  shares so the SSH make money too.


                                           S.133: Liability of Dealer or Offeror
        S. 133 provides for a right for rescission or damages if the dealer or offeror failed to comply with the applicable
S.133




        requirements [i.e. s. 71(1)]



k) Liability for a Misrepresentation
S. 130 (1) Liability for misrepresentation in a prospectus –
          where there is a misrepresentation each purchaser is deemed to have relied on the misrepresentation =
             Strict Liability
          “a purchaser who purchases a security offered thereby during the period of distribution or distribution
             to the public shall be deemed to have relied on the misrepresentation..”
          What about a secondary market transaction during the period of distribution?

S. 130 (1) Action against who?
Public shall be deemed to have relied on such misrepresentation … and has an action against:
          a) The COMPANY;
          b) every DIRECTOR (at the time of the prospectus or amendment to the prospectus was filed) whether
               they signed the prospectus or not;
          c) any SELLING SECURITY HOLDER on whose behalf a secondary offering is made (the company will
               sell your securities as part of the prospectus);
          d) any OFFICER who signed the prospectus or amendment (e.g. CEO, CFO, 2 directors) – other officers
               who did not sign are not liable;
          e) each UNDERWRITER who is required to sign the certificate
          f) EXPERTS (but only wrt their reports, opinions and statements made by them) – anyone who brought
               expertise to the prospectus and is named in the prospectus
    Why do we hold all these people liable? Why not just the company?
    If all these people know that they are liable, they will be more careful and maybe there won’t be a
    misrepresentation.
    Purchaser can potentially sue all these people for damages or rescind their purchase – these rights are in addition
    to and not in derogation of any rights held under common law.
    Why do we impose so much liability on our brightest on our best? How do you get people to serve on the board
    of directors of public companies? Especially small companies – a lot of liability with little gain.
    Public relies on the integrity of the directors’ reputation. You are allowed to have no-names on your board
    initially, but can’t talk about ―real‖ directors you will add later as a loophole to avoid liability of the real directors,
    and still use them for their reputational value.
    Policy: You can’t be liable for the prospectus if you have nothing to do with the prospectus (so real directors can
    be added after closing with limited liability, but you will lose out on their reputational value before the closing)




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    Purchaser’s Election:
     o “the purchaser may elect to exercise the right of rescission against such person, company or u/w, in which
        case the purchaser will have no right of damages…”

S. 130(8) Liability is joint and several, but can seek contribution from the other parties, unless the court find that
contribution is not warranted
     The Act is pro-active.
     Policy: want to limit opportunity for misrepresentation by holding as many people liable as possible – more
         people that can be held liable the less likely a mistake will be made

S. 130 (10) - No derogation of rights
 rights of rescission or damages here are in addition to and w/o derogation from rights under common law.
     Common Law – liable for a fraudulent and reckless disregard for the truth
     Also, Hedley Burns established that negligent misrepresentation gives rise to liability
     Reverse onus: purchaser is deemed to have relied on misrepresentation unless defendant can prove otherwise
         (you don’t need to prove you relied on misrepresentation, company needs to prove you didn’t. Difficult
         onus.)
Policy:
 Protection of the investing public vs. efficient capital markets
 Who wants to be a director where there is such an opportunity to be sued?
 Argument is that the policy and statutes don’t encourage participation – doesn’t encourage the brightest and the
    best to serve on boards
 D&O insurance is too expensive and company indemnification is only good if company is solvent
 Easy to get directors for sexy companies, but it is the small inexperienced start-up that require the expertise and
    guidance of good directors
 Small business suffers b/c of the inability to attract the brightest and the best directors

Counter argument:
 People are investing based on the credibility of directors, therefore some liability must attach

Issue:
 For most co. being a director is hard work – have to balance that with the amount of liability imposed
 It is too easy for a director to say no
 Regulators are now requiring additional board independence – how are they going to get people to be directors?

l)   Damages
     What are you liable for?
     If P elects damages over rescission then generally what you can claim is the diminution in value of the securities
     resulting from the misrepresentation of the prospectus

s.130(7)
 D is not liable for any diminution in value that did not result from the misrepresentation (onus on D to prove this,
    which is almost impossible to prove)

S.130(6)
    Each underwriter is limited to amount underwritten by them

S. 130 (1)(d)
    Experts are only responsible for expertised portion of the prospectus (e.g. McCarthy Tetrault would only be
    responsible for the legal part of the prospectus)




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S.130(9)
 Limit on damages is whatever you paid for the securities; but

s.130(8)
 All the defendants who are liable are jointly and severally liable to the whole subject to the right to recover from
    the other defendants unless the court denies that right. This seems inconsistent with s.130(6) and s.130(1)(d), but
    it isn’t inconsistent because you can go after all the other parties for their amounts.


m) Defences to Misrepresentation
                                               S.130: Defences to Misrepresentation
           S.130(2) –Knowledge of misrepresentation                                  Strict liability for Company or selling security
                                                                                      holder
           No person or company is liable under subsection (1) if he, she or
                                                                                     ONLY DEFENCE available is if they can show that
S.130(2)




           it proves that the purchaser purchased the securities with
           knowledge of the misrepresentation                                         the purchaser purchased with knowledge of the
                                                                                      misrepresentation and onus is on company or selling
                                                                                      security holder to prove it.


           S.130(3) No person or company, other than the issuer or selling security holder, is liable under subsection (1)
           if he, she or it proves,
           (a) – Signed without knowledge or consent                                 Applies to Underwriters, Directors and Officers who
           that the prospectus or the amendment to the prospectus was filed           signed and the Experts
           without his, her or its knowledge or consent, and that, on
           becoming aware of its filing, he, she or it forthwith gave
           reasonable general notice that it was so filed;
           (b) – Withdrawal prior to purchase                                        after filing and no one buys – not liable if withdrawal
           that, after the issue of a receipt for the prospectus and before the       consent and give
           purchase of the securities by the purchaser, on becoming aware of
           any misrepresentation in the prospectus or an amendment to the            general notice to w/d before OSC [prior to any
           prospectus he, she or it withdrew the consent thereto and gave             purchase of securities]
           reasonable general notice of such withdrawal and the reason
           therefor;
S.130(3)




           (c) – Liability of Non-Experts for the Expert Portion                     Non-experts are not liable for misrepresentation in
           that, with respect to any part of the prospectus or the amendment          expert portion of prospectus if they had no reasonable
           to the prospectus purporting to be made on the authority of an             grounds to believe there was a misrepresentation
           expert or purporting to be a copy of or an extract from a report,          and that they in fact did not believe a
           opinion or statement of an expert, he, she or it had no reasonable
                                                                                      misrepresentation existed. This tells you that you
           grounds to believe and did not believe that there had been a
           misrepresentation or that such part of the prospectus or the               can’t just rely on the information in a prospectus. You
           amendment to the prospectus did not fairly represent the report,           have to actually believe that there wasn’t a
           opinion or statement of the expert or was not a fair copy of or            misrepresentation (subjective) and also there shouldn’t
           extract from the report, opinion or statement of the expert;               be grounds for a misrepresentation (objective)
                                                                                     The defendants have the burden of proving such a
                                                                                      belief and reasonable grounds, there is no additional
                                                                                      requirement (as there is in the case of the non-
                                                                                      expertised portion of the prospectus) for the
                                                                                      defendants to prove that a reasonable investigation
                                                                                      was undertaken to verify the accuracy of the expert’s
                                                                                      opinion




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           (d) – Liability of Experts for Expert Portion
           that, with respect to any part of the prospectus or the amendment
           to the prospectus purporting to be made on his, her or its own
           authority as an expert or purporting to be a copy of or an extract
           from his, her or its own report, opinion or statement as an expert
           but that contains a misrepresentation attributable to failure to
           represent fairly his, her or its report, opinion or statement as an
           expert,

           (i) the person or company had, after reasonable investigation,
           reasonable grounds to believe and did believe that such part of
           the prospectus or the amendment to the prospectus fairly
           represented his, her or its report, opinion or statement, or
           (ii) on becoming aware that such part of the prospectus or the
           amendment to the prospectus did not fairly represent his, her or its
           report, opinion or statement as an expert, he, she or it forthwith
           advised the Commission and gave reasonable general notice
           that such use had been made and that he, she or it would not be
           responsible for that part of the prospectus or the amendment to the
           prospectus

           S.130(4) No person or company, other than the issuer or selling            Due Diligence defence for Experts
           security holder, is liable under subsection (1) with respect to any
           part of the prospectus or the amendment to the prospectus
           purporting to be made on his, her or its own authority as an expert
S.130(4)




           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.
           S.130(5) – Due Diligence Defence                                       Available to all except issuer and selling security holder –
           No person or company, other than the issuer or selling security        not responsible if you can show three things:
           holder, is liable under subsection (1) with respect to any part of
           the prospectus or the amendment to the prospectus not purporting           Actual belief that there was no misrepresentation
           to be made on the authority of an expert and not purporting to be a         (subjective)
S.130(4)




           copy of or an extract from a report, opinion or statement of an
           expert unless he, she or it,                                               Reasonable grounds for that belief (Objective)

                (a) failed to conduct such reasonable investigation as to             Conducted such reasonable investigation to support
           provide reasonable grounds for a belief that there had been no              that belief
           misrepresentation; or
                (b) believed there had been a misrepresentation.
           S.132 – Standard of Reasonableness                                         What is reasonableness?
S.132




           In determining what constitutes reasonable investigation or                USELESS clarification, but still the perfect response –
           reasonable grounds for belief for the purposes of sections 130 and
                                                                                       can’t define what is reasonable in every circumstance
           131, the standard of reasonableness shall be that required of a
           prudent person in the circumstances of the particular case




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                                        S.132.1: Defence to Liability for Misrepresentation
              Defence to liability for misrepresentation                            Are not liable for a misrepresentation in forward-looking
                  132.1 (1) A person or company is not liable in an action          information in prospectus if can show:
              under section 130, 130.1 or 131 for a misrepresentation in
              forward-looking information if the person or company proves all
              of the following things:                                                       Document had reasonable cautionary language
                          1. The document containing the forward-looking                     There is a statement of material factors or
                          information contained, proximate to that information,               assumptions that was used
                                      i. reasonable cautionary language                      Person or company had a reasonable basis for
                                     identifying the forward-looking information
                                     as such, and identifying material factors
                                                                                              drawing conclusions or making projections
                                     that could cause actual results to differ
                                     materially from a conclusion, forecast or      Policy: The Act is proactive in that it sets out to ensure that
                                     projection in the forward-looking
S.130(2)




                                                                                         no misrepresentations are found in a prospectus. We
                                     information, and
                                                                                         want to deter the possibility of a misrepresentation
                                     ii. a statement of the material factors or
                                     assumptions that were applied in drawing a          before it the fact, therefore we impose liability on
                                     conclusion or making a forecast or                  everyone to establish a check and balance. However,
                                     projection set out in the forward-looking           protection of the investing public must be balanced
                                     information.                                        with the objective of efficient and effective capital
                          2. The person or company had a reasonable basis for            markets. The second objective requires that the people
                          drawing the conclusions or making the forecasts and            who sit on boards are good directors that bring good
                          projections set out in the forward-looking information.        management skills. Therefore the Act requires that
                                                                                         everyone who sits on a board do their own due
              Exception
                  (2) Subsection (1) does not relieve a person or company of             diligence and not rely on everyone else…you must
              liability respecting forward-looking information in a financial            verify the facts independently.
              statement or forward-looking information in a document released           This may be too onerous on directors to expect
              in connection with an initial public offering
                                                                                         them to verify every fact

Escott v. Barchris Construction (1968 – US)
Leading case in US - Attempted to define the level of DD required by various parties in the prospectus
Facts: Barchris constructed and equipped bowling alleys. Needed money so did a public offering in
1961. Company went bankrupt the next year. Shareholders sued for a misrepresentation in the
prospectus.

Issue: How to determine liability of all parties involved

Held:
           Company: Strict liability. No due diligence defence available.
           CFO: did not reasonably investigate and was in a position to know and must have known of the misrepresentation – di
           CEO: Signed prospectus, aware of relevant facts – no DDD available. (liable as an officer who
           signed the prospectus)
           President & VP (founders): despite limited expertise & education. Court held that whether or not
           you understood was irrelevant - they knew or OUGHT TO HAVE KNOWN all the relevant facts, and
           they signed it.
           Accountant: relied on others – should have known including expertised portion
           Outside Directors: obliged to do independent investigation = no DDD
           Underwriters: One underwriter did all the investigations, all others relied on him. He claimed that it
           was the company‟s responsibility to get it right. Court said cannot just rely on the company.
                    Policy: purpose of making the underwriters liable is to protect the investors, if allowed to
                     rely on mgmt then no extra protection for the public by inclusion of underwriters
           Young in-house Lawyer: he became a director after PP but before the FP (when he signed an
           amendment) but he wasn‟t an executive officer and did not participate in management of the
           company



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       court said he made no reasonable investigation and he relied on others and he should have
        known his reasonable legal obligations. No DD defense  liable

Ratio:
Reasonable due diligence seems to indicate an obligation to conduct independent
investigation to verify statements made by the issuer to ensure the prospectus constitutes
FULL, FAIR and PLAIN disclosure.
Policy Behind Due Diligence Defence:

            securities legislation is designed to be proactive by catching mistakes before they hit the market, by
             holding as many people liable as possible (joint & several) = make them more careful.
            Everything is judged in HINDSIGHT – if in hindsight we think you have been careful then the
             Defence of DD will be available.
Kerr v. Danier Leather Inc. (2004 – Ont CA)
Material fact vs. Material Change; not the place of the court to question a company’s business judgment
Facts: After seeing a drop in sales due to unseasonably hot weather, the company filed a revised
forecast with the OSC. This resulted in a significant temporary drop in share price. However, weather
later cooled and by end of fiscal year, Danier had substantially achieved its original forecast.
Shareholders sued claiming the original forecast was a misrepresentation.

Issue: Is a company required to disclose material facts between the date a prospectus is issued and
the date of closing? Even if these facts do not constitute a material change?

Held:
   Ont. Trial Div: Held Danier and senior officers liable for prospectus misrepresentation relating to
    earnings forecast in their prospectus, because:
                    th
        1. Poor 4 quarter revenue and earnings were material facts that Danier had to disclose.
        2. Prospectus explicitly provided that the forecast was true and accurate at time it was written
             and at time of closing
        3. Because they knew before closing that they were unlikely to meet the forecast and didn‟t
             disclose it, this amounted to a misrepresentation
   CA: Trial judge erred in three ways:
        1. Trial judge said there was a failure to disclose a material fact that occurred between filing of
             prospectus and closing. S.51 of SA only requires an amendment if there is a material
             change. There was no change in the business, therefore no obligation to file an
             amendment.
        2. Not a question of being “objectively reasonable”. When it was written the people believe it
             was right. The test should be subjective, not objective.
        3. Failed to give enough credence to “business judgment” rule. If directors and senior
             management of company genuinely believed they would meet their forecast, then judges
             can‟t exercise their own business judgment to override the business judgment of senior
             management of a company.
   No continuing obligation to disclose material facts occurring between date of prospectus and date of
    closing when no material change has occurred.
   Court looks to see that the directors made a reasonable decision, not a perfect decision. As long as
    the directors have selected one of several reasonable alternatives, deference is accorded to the
    board‟s decision.

Note: Leave to appeal to SCC was granted and now pending (as of November 2006)




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6. Sample Prospectus and Underwriting Agreement
a) Sample Underwriting Agreement:
    Selling securities by way of prospectus the company sells the securities to the underwriters and the underwriter
     sells to the public for a fee.
 Underwriting agreement dated at the same as the final prospectus and offering priced after the close of the market
     the day before the securities are sold.
 Underwriter agreement and prospectus both executed at the same time
Para 1  specifies dates in the respective provinces by which the company must get receipt for final prospectus –
company wants flexibility in case they miss and underwriter wants ASAP so they are on the hook to sell
Para 2  Due diligence provisions. Reps and warranties and certificates from senior officers saying prospectus is
true and accurate.
Para 3  want copies of prospectus so underwriter can distribute – start 2-day cooling off period
Para 5  if there is a material change between final receipt and closing, the company has to advise because
underwriters are liable for material change and have to do an amendment if there is a change
Para 8  tech issues including that u/w can only sell in province when they have final receipt
Para 10, 11  conditions of closing
Para 14  INDEMNITY CLAUSE – company will indemnify the underwriters for a misrepresentation
      Courts in Canada have never tested the enforceability of an indemnity clause
      US courts have found indemnity clauses to be unenforceable as against public policy – goes against the
          proactive nature of the legislation [Globus v. Law Research Services, Inc. (1968)] - to ensure that everyone
          in the process remains diligent, they have to place liability on everyone. [it is likely Canadian courts would
          find the same way]
Para 15  CONTRIBUTION CLAUSE– (if indemnity clause is unenforceable then) the underwriter will be able to
get contribution from the company for their proportionate share – Is this contractual contribution clause enforceable?
YES!
      Laventhol Krekstein Horowoth  US court held that contribution clauses are enforceable since they are not
          contrary to public policy – they in fact encourage people to be careful by ensuring liability on the company.
Para 17  Termination, typically known as: MARKET- OUT CLAUSE – gives underwriter right to terminate
their obligation to buy the shares if the state of the financial markets is such that the securities cannot be properly
marketed. Reappeared since 1987 market crash. Has to be serious and unforeseen catastrophe. [Note: Market-Out
clauses are not permitted in US, but are in Canada]
Para 18  company pays all of the expenses of the offering whether or not it is complete

Sample Prospectus:
   Warranty at the top                                         Who the Directors are and their compensation
   What is the offering – IPO and Secondary                     (top 5)
   Expert opinion – para 5                                     Escrow Arrangements
   Eligibility for investment (legal for life opinion)         Dividend policy
   Description of company                                      Market-out clause
   Use of proceeds – if don‟t have enough then                 Plan of distribution
    you have a s. 61 problem                                    Material Contracts and RISKS
   Financial Forecasts                                         O/S legal proceedings
   Management‟s Analysis                                       Cooling off period and statutory rights
   Capital Reorganization                                      Financial Statements
                                                                Certifications




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                                           II. After Going Public

1. Continuous Disclosure Obligation

   Must ensure info is kept current to facilitate the secondary market
   Recall that the prospectus tells everything you need to know at one moment in time
   Need to have a mechanism to keep information current: starts with prospectus and continues as events and time
    pass

Purpose:
 Protect the integrity of the capital markets by ensuring fairness and disclosure and equality of treatment and
    information upon which investment decisions are made
         o Ensure equality of access and informed investment decisions – for new investors
 Increase efficiency  accurate pricing in the market through ongoing mechanism
 Accountability technique and deterrent to fraud

Note: Not clear what remedies are available to an investor where the company has not met CD provisions

Bill 198
      January 1, 2006
      Imposes liability on directors for secondary market disclosure

Five Types of Continuous Disclosure:
    1) Regular Financial Disclosure: at predictable and fixed intervals. This is info. that is useful to the market to
        assess how the co. is doing. Very clear and certain, e.g. quarterly and annual reports.
    2) Timely Disclosure: at irregular and unpredictable intervals. This disclosure is created as a result of some
        material event that changes the nature of the co. such that the marketplace has to be informed. This change
        could be something that is planned (closing a building), or it could be unplanned (lawsuit, fire). This is the
        most difficult area of the disclosure requirement. The company must report events even if the public already
        knows through a newspaper etc.
    3) Early Warning: This is designed to give advance notice to the marketplace that someone is accumulating a
        block of stock – indication of a potential takeover bid.
    4) Insider Reporting: when insiders of a company buy or sell public securities, they have an obligation to
        disclose. This is important to let investors know what insiders think of their company and to stop insider
        trading. The fact that insiders are buying and selling is useful information in the marketplace.
    5) Insider Trading: Prohibits the use of information that is not in the public domain in the buying and selling of
        securities. If you buy or sell securities with inside information, you will go to jail.

Who is subject to Continuous Disclosure Regime?
    Continuous Disclosure regime only applies to ―reporting issuers‖ as defined by S. 1(1)  essentially you are
        a reporting issuer if you have filed a prospectus

a) Regular Financial Disclosure (at timely intervals)
       NI 51-102 says if you are a reporting issuer in Ontario you must file audited financial statements within 90
        days of your year end. And you must prepare interim quarterly statements (unaudited) within 45 days of the
        end of each quarter.
       S. 80 of the SA: exemptions from the requirements [NOT REQUIRED TO KNOW EXEMPTIONS FOR
        THIS COURSE]
       All this means is that at the end of every quarter, provide unaudited financial statements and at the end of
        every year, provide audited financial statements




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b) Timely Disclosure
 S. 75 must be read in conjunction with NI 51-201
 S. 75 (1): if there is a material change in the affairs of a reporting issuer you must make timely disclosure of
   change

Material Change is defined in S. 1(1) of the Act as:
   “…a change in the business, operations or capital of a company that would reasonably be expected to have a
   significant effect on the market price or value of any security of the issuer includes decision to implement such
   change made by the Board or senior mgmt who believe that confirmation of the decision by the Board is
   probable”

      Purpose of Timely Disclosure: Tell the investors what they need to know
      Difference between actual and proposed change: events that have occurred AND decisions to implement changes,
       so if you decide to make a change, i.e. close a plant in 6 months, that decision is a material change and must be
       reported, even if the actual change won’t occur for another 6 months.
      Material change is something that has happened or a decision by board to do something in the future or a
       decision to do something that management wants to do and they believe that the board will approve it
      Proposed Changes only become material when:
                1) Board of Directors decides to do something, or
                2) Senior Management decides to do something and they believe confirmation by board of directors is
                     probable

      Note that s.75 talks about material changes not material fact

Material Changes v. Material Facts
 Has to have a significant impact on market price or value
 The act differentiates: S.75 says you have to disclose ―material changes,‖ while S. 76 –Insider Trading – says you
   have can’t trade with ―material change‖ or ―material fact‖

                                           S.75(1) & 75(2): Report of Material Change
          Publication of material change
             75. (1) Subject to subsection (3), where a material change occurs in the affairs of a reporting issuer, it shall forthwith issue and file a
          news release authorized by a senior officer disclosing the nature and substance of the change.
S.75




          Report of material change
             (2) Subject to subsection (3), the reporting issuer shall file a report of such material change in accordance with the regulations as
          soon as practicable and in any event within ten days of the date on which the change occurs.

Royal Trustco v. Campeau (2004 – Ont CA)
Material fact vs. Material Change
Facts: Directors of Royal Trustco knew that 60% of shareholders were not going to tender to
Campeau‟s bid. Bid was unsuccessful and Campeau sued, because if they had known they would not
have wasted money on the takeover bid

Ratio: “there is no timely disclosure issue in the case at bar b/c there was no material change”. The
company hadn‟t changed. What the shareholders intended to do didn‟t change the operation of the
company. Material facts don‟t trigger disclosure requirement under the Securities Act.

Policy Balance – timely information vs. confidentiality and market manipulation (markets can’t function properly
if there is too much speculation - premature disclosure)
            Premature disclosure is a problem because can screw around with market – doesn’t create confidence in
               capital market
            You are in a gigantic disadvantage if you had to disclose every time you are about to make a deal – only
               want to announce a deal when you know the deal is final.
                         Tension between investor protection and efficient capital markets



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Premature Disclosure:
            OSC said premature disclosure can be equally destabilizing as late disclosure
            Can’t disclose late and can’t disclose early. Have to disclose at just the right time.

Issues:
 What is required to be disclosed – what is a material change? Does a material Change include a material fact?
    Not all changes are material and there’s a distinction between internal and external changes.
 E.g. At what point are personal rights infringed by corporate law? Does Harold Ballard have to disclose the terms
    of his will? What about if he has chest pains and is admitted to the hospital.
 E.g. Toronto Sun buys National Post and turned it into daily paper. Sun knew that Post would lose money for a
    number of years. Changed Post from a corporation to a partnership  earnings of Sun became much higher.
    BUT, if Sun had to disclose this, they would have to disclose that National Post was losing millions of dollars –
    this would be bad for business as they would lose advertisers to the competition.

Distinction between Internal and External Changes:
     Internal changes (fire, lawsuit) require disclosure
     External changes (changes that affect other as well – e.g. bank of Canada raises interest rates) – does not
         require disclosure
          BUT NP51-201 says that if the external change will have a more significant impact on your company
             than other companies, then you ARE required to disclose.
                   e.g. if convenience stores could now sell beer, Mac’s Milk would have to disclose that change
                       and predict what the change will mean for them. – reverse onus on a company to use judgment
                       about whether this will affect them more than other companies

If there is a material change, issuer has to file three types of reports:

(i) Complete public disclosure:
    Two parts:
         1) Must immediately put out a press release disclosing the nature and substance of the change and
         2) must file a material change report describing in detail the nature and substance of the change

    What should press release include?
    National Policy 51-201 - press releases are to be factual and balanced with complete and prompt disclosure of
    favourable and unfavourable news and are not to contain unnecessary detail, exaggerated reports or promotional
    commentary

    Material Change Report
   Must describe in detail the nature and substance of the change. Must be filed as soon as practicable, but in any
    event within 10 days of the change.
   If there is information that is confidential that would be detrimental to the business to include, must explain to
    OSC why

(ii) Incomplete Disclosure:
 Issue a press release and a material change report but omit the confidential information and file a report with the
     OSC explaining confidential information and persuade them that the information ought not be disclosed
(iii) Confidential Report:
 No press report. No material change report. Letter to the OSC describing the nature and substance of the change,
      and new letter must be sent every 10 days explaining why it remains confidential.
 Can’t assume something is confidential just because you want it to be confidential.
 Note: If leaks to the press, then is no longer considered confidential.
 Also concerned about insider trading, so must include in letter to the OSC that to the best of your knowledge
      noone is trading on this information.



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Two circumstances where you can rely on confidential disclosure option:
1.        When it is unduly detrimental to the shareholders to disclose, in reasonable opinion of the company.
“Unduly detrimental”
    the courts have taken a very strict interpretation of the words ―Unduly Detrimental‖
    Niagara Wire Weaving - unduly detrimental= undue economic harm to the corporation that is not outweighed
       by the benefit realized to the market and its goals
    Note: What if it isn’t clear that something constitutes a material change? Why not write a letter to OSC
       seeking confidential disclosure? Once this is done, you are essentially admitting that it is a material change.
       If you get turned down then you can not argue later on that the info was not material so you will have no
       choice but to disclose it. This is too big a risk!

2.        As of Right
If a material change consists of a decision to implement a change made by management, but management believes
board of director approval is probable, you can seek confidential disclosure as of right. BUT senior mgmt must have
no reason to believe that persons have made use of the information in the buying or selling of securities. Once OSC is
watching stock, won’t be insider trading.

Rumours:
Even if issuer has made a case for a confidential report – if info begins to circulate and rumours begin to formulate
then the market will require disclosure.

You have confidential rights to keep things quite but as soon as rumours start, you must disclose

Note: You MUST comment on rumours.

         If you chose not to disclose you may want to impose an internal cease trade

                                                         S.75(3): Confidential Report
                S.75(3) Where,
                   (a) in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure required by
             subsections (1) and (2) would be unduly detrimental to the interests of the reporting issuer; or
                   (b) the material change consists of a decision to implement a change made by senior management of the issuer who believe that
             confirmation of the decision by the board of directors is probable and senior management of the issuer has no reason to believe that
             persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the issuer,
             the reporting issuer may, in lieu of compliance with subsection (1), forthwith file with the Commission the report required under
S.75(3)




             subsection (2) marked so as to indicate that it is confidential, together with written reasons for non-disclosure
                 (4) Where a report has been filed with the Commission under subsection (3), the reporting issuer shall advise the Commission in
             writing where it believes the report should continue to remain confidential within ten days of the date of filing of the initial report and
             every ten days thereafter until the material change is generally disclosed in the manner referred to in subsection (1) or, if the material
             change consists of a decision of the type referred to in clause (3) (b), until that decision has been rejected by the board of directors of the
             issuer.
                 (5) Although a report has been filed with the Commission under subsection (3), the reporting issuer shall promptly generally disclose
             the material change in the manner referred to in subsection (1) upon the reporting issuer becoming aware, or having reasonable grounds
             to believe, that persons or companies are purchasing or selling securities of the reporting issuer with knowledge of the material change
             that has not been generally disclosed.

c) Early Warning System
         NP 62-103 and s.101(1) of the OSA.
         Takeover bids are very expensive in Canada. Must be able to prove the ability to meet the financial obligation.
          To do so, usually need to hire a bank to approve financing, and pay a high fee to the bank to do so!
         Policy: The investing public should know when somebody is taking a run at acquiring a company. It might
          influence their decisions to buy, sell or hold shares as takeovers usually put stocks at a premium. Obligation on a
          shareholder if they own 10% of a public company or more of the outstanding voting securities of an issuer - they
          have to disclose their intentions going forward




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                                              S.101(1): Securities, Reports of Acquisitions

              S.101(1) – Securities, Reports of Acquisitions
                                                                                          When an OFFERROR acquires 10% or more of the
              Every offeror that acquires beneficial ownership of, or the power            outstanding voting or equity securities of a company,
              to exercise control or direction over, or securities convertible into,       that person must issue a press release immediately and
                                                                                           file a report within 2 days of the date of the
S.101(1)




              voting or equity securities of any class of a reporting issuer that,
              together with such offeror’s securities of that class, would                 transaction.
              constitute 10 per cent or more of the outstanding securities of that
              class,
                                                                                          Note: No obligation if you buy 9.99% of shares but as
                     (a) shall issue and file forthwith a news release containing          soon as you acquire 10% you have early warning
              the information prescribed by the regulations; and                           obligations.
                     (b) within two business days, shall file a report containing
              the same information as is contained in the news release issued
              under clause (a)


          S. 89 (1) defines OFFEROR as - you, or others acting jointly or in concert with you – can’t beat the system by
           joining with another party who has 9.99% later on.
          NOTE: You can’t do anything indirectly that you are not permitted to do directly – s.92
Contents of Press Release?
 NI 62-103, appendix e, clause 1(f):
   o Must disclose intention – tell why you are buying stock
   o In practice, they all say ―we have no present intention‖, but everyone knows intuitively that stock will go up
       and what their true intentions are.

          Why allow even 9.99%? Exception to insider trading about trading on your own information. Legislatures have
           decided that takeover bids are a good thing for society. Efficient and effective means of economic growth. If they
           didn’t allow up to 10%, then takeover bids would be too expensive in Canada.
          Note: Insider trading rules specifically exclude the offeror in a takeover bid.

                                                   S.101(3): Restrictions on Acquisitions
              S.101(3) - Restrictions on acquisitions
                                                                                          The OFFEROR cannot acquire any more securities of
                  (3) During the period commencing on the occurrence of an
              event in respect of which a report or further report is required to          the class in question from the occurrence of the
              be filed under this section and terminating on the expiry of one             event in respect of which the report is required until
S.101(3)




              business day from the date that the report or further report is filed,       the expiry of ONE business day after you have filed
              neither the offeror nor any person or company acting jointly or in           the report (―freeze period‖).
              concert with the offeror shall acquire or offer to acquire beneficial       This rule enables the market to digest the information
              ownership of any securities of the class in respect of which the
                                                                                           of a potential takeover bid and encourages acquirers to
              report or further report is required to be filed or any securities
              convertible into securities of that class.                                   file their reports quickly.
                                                                                          It is only the trade that puts you over 10% that has
                                                                                           to be disclosed.

Note: The strategy is to get to 9.9% and then save the largest transaction to the end. The goal is to get the largest
amount over 10% before the co. has to follow the early warning disclosure rules. You will want to buy the small
shareholders up first so that you can get to 9.9%. Once you are at 9.9% then you want to make the large buy to put
you the furthest over 10%. Should buy strategically to maximize the number of shares you can buy before early
warning rules come into effect.




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                                                       S.101(2): Change in Material Facts
              S.101(2) - Change in material facts
                  (2) Where an offeror is required to file a report under
              subsection (1) or a further report under this subsection and the
                                                                                           Once you hit the 10% mark, every additional 2% that
              offeror or any person or company acting jointly or in concert with            you buy gives rise to the early warning provision.
              the offeror acquires beneficial ownership of, or the power to                 Start process again – Press release, File report & One
                                                                                            Day freeze
S.101(2)




              exercise control or direction over, or securities convertible into, an
              additional 2 per cent or more of the outstanding securities of the           This happen every 2% until the co. reaches 20% (at
              class or there is a change in any other material fact in such a               which point different takeover bid rules apply - a press
              report, the offeror,
                    (a) shall issue and file forthwith a news release containing
                                                                                            release and report are still required but the freeze
              the information prescribed by the regulations; and                            period no longer exists – per S.101 (4)).
                    (b) within two business days, shall file a report containing
              the same information as is contained in the news release issued
              under clause (a).


                                                        S.102: Outstanding Takeover Bid
              102. (1) Where, after a formal bid has been made for voting or
              equity securities of an offeree issuer that is a reporting issuer and
                                                                                           There is a different set of rules dealing w/ early
              before the expiry of the bid, an offeror, other than the person or
              company making the bid, acquires beneficial ownership of, or the              warning during an outstanding takeover bid.
              power to exercise control or direction over, securities of the class         When someone has already announced a takeover.
              subject to the bid which, when added to such offeror’s securities             This will create an auction for the shares. At this time,
              of that class, constitute 5 per cent or more of the outstanding               there is a different early warning requirement to
              securities of that class, the offeror shall, not later than the opening       provide the market with information about any
              of trading on the next business day, issue a news release
                                                                                            possible competing bids. During the course of the
              containing the information prescribed by the regulations and,
              forthwith, the offeror shall file a copy of the news release                  takeover bid, the 5% early warning rule applies.
                                                                                           S. 102(1) - if there is an announced takeover bid
S.102




              Further news releases                                                         outstanding, anyone who acquires 5% of the shares
                  (2) Where an offeror that has filed a news release under                  that is subject to the bid, must issue & file a press
              subsection (1) or a further news release under this subsection or             release before the opening of trading on the next
              any person or company acting jointly or in concert with the                   business day. However, there is no report to be filed
              offeror acquires beneficial ownership of, or control or direction
                                                                                            and no freeze on the stock. (info prescribed by the
              over, securities of the class subject to the bid which, when added
              to the securities of that class acquired after the filing of the news         regulations)
              release by the offeror and any person or company acting jointly or           S. 102(2) - states that every subsequent 2% purchased
              in concert with the offeror, aggregates an additional 2 per cent or           requires another press release. This will happen until
              more of the class of outstanding securities, the offeror shall, not           you reach 10% and the regular early warning system
              later than the opening of trading on the next business day, issue a           kicks in.
              further news release containing the information prescribed by the
              regulations and, forthwith, the offeror shall file a copy of the news
              release.

Note: It is beneficial to buy stock before you announce a bid so you have less to buy, and if you lose to another
bidder, you can tender your shares to defray your costs.

d) Insider Reporting
          There is absolutely nothing wrong with insiders of a reporting issuer buying and selling shares of their company
           as long as they don’t have information that is not in the public domain. In fact, you can make an argument that
           this is a good thing – you want insiders to own shares, so therefore you must also allow them to sell. BUT, it is
           important for the marketplace to know what insiders are doing. You will draw your own conclusions about what
           they are doing and why, but you want to know.
          Insider reporting in theory is also a deterrent to insider trading.
          As soon as you become an insider you must file electronically an insider profile report within 10 days of
           becoming an insider.




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                                                  S.1(1): Insider – Statutory Definition
            ―insider‖ or ―insider of a reporting issuer‖ means,

            (a)   every director or senior officer of a reporting issuer,              Note: "subsidiary" is defined under s.1(1) as a
            (b)   every director or senior officer of a company that is itself          company which has 50% or more of its shares
                  an insider or subsidiary of a reporting issuer,                       owned by another company
            (c)   any person or company who beneficially owns, directly or
                  indirectly, voting securities of a reporting issuer or who
S.1(1)




                  exercises control or direction over voting securities of a
                  reporting issuer or a combination of both carrying more
                  than 10 per cent of the voting rights attached to all voting
                  securities of the reporting issuer for the time being
                  outstanding other than voting securities held by the person
                  or company as underwriter in the course of a distribution,
            (d)   a reporting issuer where it has purchased, redeemed or
                  otherwise acquired any of its securities, for so long as it
                  holds any of its securities;

                                                              S.107: Insider Report

            S.107. (1) A person or company who becomes an insider of a
                                                                                       a person who becomes an insider must file an initial
            reporting issuer, other than a mutual fund, shall, within 10 days
            from the day that he, she or it becomes an insider, or such shorter         report (Form 51-501F) within 10 days of becoming an
            period as may be prescribed by the regulations, file a report as of         insider.
            the day on which he, she or it became an insider disclosing any
            direct or indirect beneficial ownership of or control or direction
            over securities of the reporting issuer as may be required by the
            regulations.
                                                                                       any time there is a change in the insider’s direct or
                                                                                        indirect control or direction over the securities (i.e. buy
S.107




            S.107. (2) An insider who has filed or is required to file a report
            under this section or any predecessor section and whose direct or           or sell), must file a report of the change w/in 10 Days
            indirect beneficial ownership of or control or direction over               describing the change.
            securities of the reporting issuer changes from that shown or
            required to be shown in the report or in the latest report filed by
            the person or company under this section or any predecessor
            section shall, within 10 days from the day on which the change
            takes place, or such shorter period as may be prescribed by the
            regulations, file a report of direct or indirect beneficial ownership
            of or control or direction over securities of the reporting issuer as
            of the day on which the change took place and the change or
            changes that occurred, giving any details of each transaction as
            may be required by the regulations.

Note: If you are an insider and you have 9.9% and are going to buy an additional 2%, you have to comply with both
the ―early warning regime‖ and the ―insider reporting regime‖

        Deals with the obligation on the insiders of a co. to report when they buy or sell shares of the co. This is very
         important info. to shareholders (want to know what insiders think of the co.).
        Important to understand that there is nothing wrong with insiders buying or selling shares so long as they are not
         doing it based on insider info., i.e. information that is not in the public domain (in fact, trades should be
         encouraged).
        Reporting is used as a deterrent to insider trading (if OSC knows about trades, they can investigate it).
        it is a useful information tool for investors and it discourages insider trading

Therefore, when you own 10%,
        1. You become an insider
        2. You are subject to early warning

**Once you acquire 10% of shares in a public company bells should be going off because you now have to file initial
insider trading materials and early warning disclosure documents.



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e) Insider Trading
Note: There will likely be a question on insider trading on the exam. Go through the analysis and the policy.
Prepare an answer ahead of time.

(i) Insider Trading Regulation
 Policy: we need a level playing field so people are making informed decisions based on the same information
              o ensure that there isn’t an informational advantage with relation to the buying or selling of securities.
 Insider trading refers to the purchase or sale of securities with material information that has not been
    generally disclosed (and tipping). The essence of insider trading provisions is to stop people with knowledge that
    the market does not have from buying and selling securities based on that knowledge.
 If you have knowledge that the mkt. does not have, you cannot trade until that knowledge has been publicly
    disseminated in the market.
 There must be a positive action taken to invoke insider-trading regulations. This is to protect the integrity of
    capital markets and protect market confidence. If insider trading is alleged for all intents and purposes, your
    trading life is over. EXCEPT: Tipping – if you give an inside tip you are guilty of insider trading, whether or not
    the other party acts on the tip.

Arguments Against Insider Trading Regulation:
 Insider trading regulation creates false sense of confidence in the system.
 It is argued that, in reality however, there is insider-trading everyday and there is no level playing field. There
   have only been a few cases of insider trading to date in Ont.
 Critics of Insider Trading Rules: Insider trading legislation should be ripped up and companies should
   regulate themselves. Unsuccessful regulation will result in the inability of companies to successfully acquire
   capital because investors will not have confidence in that particular company.
        o These people argue that we should blow up s. 76 of the Act (there is no protection since it is too difficult
            to enforce – it is not a level playing field). They think that we should let the companies regulate
            themselves with respect to insider trading (they should monitor themselves and they should be more
            careful with the dissemination of this type of information). Companies have a stake, have interest, and
            have information to enforce it.

Supporters of Insider Trading Rules
 S.76 is not necessarily a false sense of security
 Legislation still serves as a preventative measure. Insider trading is not rampant in Canada.
 Just because we can’t stop speeding doesn’t mean we should make it legal to speed.

                           S.134(1): Liability where material fact or change undisclosed
          S.134. (1) Every person or company in a special relationship with a reporting issuer who purchases or sells
S.134




          securities of the reporting issuer with knowledge of a material fact or material change with respect to the
          reporting issuer that has not been generally disclosed is liable to compensate the seller or purchaser of the
          securities, as the case may be, for damages as a result of the trade

(ii) Insider Trading Offense – Special Relationship (S.76(1))

                                           S.76(1): Trading where undisclosed change

          S.76(1)
          No person or company in a special relationship with a reporting
                                                                                     It is an offence for a person in a "special relationship"
          issuer shall purchase or sell securities of the reporting issuer with       with the reporting issuer to purchase or sell securities
S.76(1)




          the knowledge of a material fact or material change with respect            of the reporting issuer with knowledge of a material
          to the reporting issuer that has not been generally disclosed               fact or a material change that has not been generally
                                                                                      disclosed.
                                                                                     You can never be guilty of insider trading unless
                                                                                      you are a person in a special relationship!!




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                                           S.76(5): Definition of “Special Relationship”
             ―person or company in a special relationship with a reporting issuer‖ means,

             (a) a person or company that is an insider, affiliate or associate of,
                (i) the reporting issuer,
               (ii) a person or company that is proposing to make a take-over bid, as defined in Part XX, for the securities of the
                    reporting issuer, or
              (iii) a person or company that is proposing to become a party to a reorganization, amalgamation, merger or
                    arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its
                    property,
             (b) a person or company that is engaging in or proposes to engage in any business or professional activity with or on
                 behalf of the reporting issuer or with or on behalf of a person or company described in subclause (a) (ii) or (iii),
                 [e.g: the reporting issuer’s lawyer]
S.76(5)




             (c) a person who is a director, officer or employee of the reporting issuer or of a person or company described in
                 subclause (a) (ii) or (iii)[i.e. company making a takeover bid] or clause (b),
             (d) a person or company that learned of the material fact or material change with respect to the reporting issuer while the
                 person or company was a person or company described in clause (a), (b) or (c), (a)
                         [i.e. if you were formerly in a special relationship and learned information, you are still in a special
                          relationship; (e.g. if you obtained information as a lawyer, but are no longer the lawyer)]
             Tippee
             (e)      a person or company that learns of a material fact or material change with respect to the issuer from any other
                      person or company described in this subsection, including a person or company described in this clause, and knows
                      or ought reasonably to have known that the other person or company is a person or company in such a
                      relationship
                         Note: The potential chain of tipees is infinite. This is unique to Canadian law – different in US.



         Note: Nothing wrong with the company buying shares of another reporting issuer… takeover bids are a good
          thing. However, there is a disclosure requirement if more than 10% of the shares are purchased. There is a policy
          in place to allow takeover bids, but no policy to allow directors of the company taking over to get rich!
         The company making the takeover bid is not in a special relationship because there is a policy consideration that
          allows the company to buy shares of the company, which it intends to takeover (however, if that company learns
          other confidential information, for example, through a friendly bid, it cannot trade those shares; lawyers make
          sure that nothing is disclosed that is not in the public domain or that it is immediately disclose or the takeover
          company would be prevented from trading). You can trade on your own information.

Tippee Examples:
1) What if you see the CEO of Dell and Compaq having dinner and one says that he is making a bid for other’s
company? This would put you in a special relationship b/c you learned information from someone in a special
relationship. Then if I go and tell Shira, and tell her where I got the info, Shira is in a special relationship because she
got the info from me, who was in a special relationship, etc… But if someone learns to buy stock but doesn’t know or
ought to have known about the special relationship, that person isn’t in a special relationship.

2) If a companies shares go up on anticipation of obtaining a patent, and you really know that you will receive the
patent, can you sell the stock short? Are you in a special relationship? This is likely okay, we are not sure.

Note: If you are planning a friendly takeover, send your lawyer, and agree to talk on the condition that they will not
give you any information that is not in the public domain, and if they do they will disclose it immediately. Otherwise
you get caught in a trap as a ―tipee‖ and are no longer allowed to buy or sell shares in the other company!




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(iii) Insider Trading Offense – Tipping (S.76(2))

                                                          S.76(2): Tipping
               S.76(2) No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform,
S.76(2)




             other than in the necessary course of business, another person or company of a material fact or material change with
             respect to the reporting issuer before the material fact or material change has been generally disclosed.


         S. 76(2) – Tipping - It is an offence for a company or persons in a special relationship with the company, [or
          certain others] to pass on information (or tip) with respect to undisclosed material facts or material changes except
          in the necessary course of business.
         It is an offence to convey insider information whether or not shares are purchased as a result of a tip. It is an
          offence whether or not anyone makes use of the information.
         Tipping, in the ordinary course of business, is not an offence. This is a pure question of fact. For example, if you
          disclose information to your lawyers when you are attempting a takeover.
         What is ―necessary course of business‖?

Borderline “Tipping” Examples:
   1. If Lastman knows something undisclosed about Stelco and comes into class and says "Stelco", is that tipping?
   2. What if Lastman mistakenly leaves a copy of the takeover bid on the table near a handout, is it tipping?
   3. What if you are golfing behind the Leaf's owner and you see him have a stroke, can you buy the stock?
   4. What if you work in the mailroom of a law office and see an unusual number of packages for Stelco, can you
        buy the stock?
   5. What if you are in a restaurant and you see the president of Stelco having a very interesting conversation with
        their competitor, can you buy the stock?
   6. You have registered a drug patent but your competitor publicly states that they are going to try to register the
        patent; their stock price soars. Can you sell short?

Takeover Bids and Insider Trading:
 Example: If Co. A is planning a takeover bid of Co. B and Co. A buys shares knowing that they will increase, this
   is not insider trading. Why?
   o In order to promote takeover activity, there is nothing offensive about Company A buying securities with
        information about what Company A is going to do. But, directors of Company A cannot trade because they
        should not be allowed to profit from the information that they know (there is no public benefit here).

Example 1:
 You are the president of a company that has a patent on a drug and a competitor comes out with a press release
   that they are getting a patent on that drug. The price of that company's stock increases dramatically and you short
   sell (knowing that price will eventually go down).
   o Intuitively, you should not be able to do the transaction but, technically, you cannot be caught by the
         definition of "special relationship". By definition, it is not "insider trading".
   o Question is whether or not you are in a ―special relationship‖ with the reporting issuer. You are not caught
         within the regime of insider trading.
   o Policy: How far do you want to cast the net of insider trading?

Example 2:
 President of Coca Cola is in a meeting with Pepsi. You are in the same restaurant and he gives you a wink. You
   buy Coca Cola stock. Are you a tipee?
   o No clear answer. He didn’t really give you any material information that hadn’t been disclosed. He might
       have just had something in his eye.




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Securities Regulation Summary – Lastman                                                                     14/10/2011


Example 3:
 Law firm is working secretly on a takeover bid. Partner trades, not knowing that law firm is working on the file.
   What happens?
   o Too bad, partner is caught by the Act.
   o Law firms often deal with this by circulating lists of companies that you cannot trade in. Sometimes, they put
       up Chinese walls to prevent the flow of info.

Example 4:
 If you are a lawyer acting for a company that is suing a public company can you be caught for short-selling your
   shares of the public company that your client is suing?
   o Technically, you are not caught by the Act – you have no special relationship with the public company whose
       shares you are short selling. Intuitively, you should be caught.
   o Different from the drug company example because lawyer is looking to profit from client info. Drug
       company may have just fallen onto the information.
   o Lastman confirmed that it would not be considered insider trading.

   Note: Usually you are still caught if you violate the spirit of the Act but not in the case of insider trading because
    dealing with a criminal situation.
   **The term "insider trading" is a misnomer because technically, you don’t need to be ―trading‖ and because it also
    applies to people that are not insiders (people in a "special relationship").

Royal Trustco v. Campeau (2004 – Ont CA)
Material fact vs. Material Change
Facts: Directors of Royal Trust Co knew that Campeau could not win his takeover bid and told a
shareholder that there was no risk, since 60% of shareholders were not tendering to Campeau‟s bid.
Issue: Are the directors guilty of tipping?
Held:
 The information was not given in the necessary course of business and therefore tipping occurred
    immediately when the information was passed to shareholders.
 Case turned on material fact vs. material change

     It is tipping! There is no circumstance in the world where you can give an informational
           advantage to a shareholder and claim it is in the necessary course of business.

Necessary Course of Business Exception (NP 51-201):
―Necessary course of business‖
   1) Mixed question of fact and law that must be determined in light of the policy reasons for the tipping
        provisions.
   2) Obligation on the tipper to make sure the tipee is aware that the information is confidential and should not be
        acted upon or disclosed
   3) Generally does not apply to analysts, institutional investors or analysts (ie. Don’t give an information
        advantage to someone who might use it )
   4) If the information starts to leak there is no safe harbour – must disclose immediately.

Barbara Danuke (???? – Ont ?)
What constitutes “necessary course of business”?
Facts:
 Employee of investment firm had conversation with employee of TD Bank. TD Bank was going to
    make a bid to buy TDRI (TD Realty); she disclosed it to other and bought shares
 She learned information from officer of investment firm (someone in a special relationship);
    information not generally known; traded on information
Held: The information remained undisclosed material fact and was clearly not in necessary course of
business



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(iv) Defences to Insider Trading – Reg 175(2)
 Once the case has been made against you for insider trading, i.e. offended ss. 76(1) or 76(2)…
     1. You (your firm) were in a special relationship with a reporting issuer
     2. You (your firm) had knowledge of an undisclosed material fact or change
     3. You (your firm) purchased or sold securities of that issuer or passed the info on to another person

   “Make Use Of” Defence: Prior to 1982, there was a defence if you can show that you did not make use of the
    information (difficult to prove defence) – now abolished from the Act.
          Was very difficult to prove – had to get inside the mind of the defendant to determine the basis of their
             decision.

1. Chinese Wall Defence
If you are found guilty of insider trading because you are deemed to have inside information, then you have a defence
if you can prove the following 4 things:
(under agency law, you are deemed to know what is going on in your firm unless you can prove the following
conditions):
          a) You didn’t really know, you are only deemed to have had the knowledge by reason of the fact that the
               information was known to your directors, officers, partners, employees, or agents; and
          b) The decision to buy or sell was made by someone who did not have actual knowledge of the information
               (if actual knowledge = you are dead); and
          c) No advice was given with respect to the trade by the person who had the actual knowledge to the person
               who made the decision to buy or sell; and
          d) An appropriate Chinese wall was in existence to prevent the flow of information from the people who
               had the actual knowledge to the people who did not. – Pursuant to Regulation 175 (3) in determining
               whether the person or company sustained the burden of proof under S.175(1) the commission will
               consider the extent co./person has procedures & policies to prevent contraventions of S. 76(1).
 If a law firm is sloppy in guarding the info. (does not satisfy requirement #4), the lawyer who purchases the shares
     will likely not go to jail but will have to repay the innocent vendor (civil suit). In such cases, with two innocent
     parties, the sloppy one must pay.

2. Unsolicited Order Defence – Reg. 175 (2)(a)
   The purchase or sale was entered into as an agent of another person or company pursuant to a specific unsolicited
    order – i.e. a broker can execute the trade and it will not be insider trading. This happens in the case that your
    broker knows that Stelco is being taken over, you call and ask him to buy shares (broker has two options: execute
    trade or tell you he cannot do it. If he says something to you this would make you curious).

3. Automatic Dividend Investment Plan Defence - Reg. 175(2)(b)
   deals w/ automatic dividend plans, if entered into prior to the acquisition of the knowledge of the material fact or
    change.

4. Legally Binding Obligation - Reg. 175(2)(c)
 If purchase or sale was made to fulfill a legally binding obligation prior to the acquisition of the knowledge of the
    material fact or change.
         o This happens in the case when you enter into an agreement to purchase the shares of Co. A in two weeks.
             Two days later, you find out that a takeover is happening.
         o This defence does not apply if you have an option to buy, and you exercise the option.

5. Both Parties Have the Same Info.
 If both parties to the trade have access to the same material information, it is not insider trading (they can
    exchange shares on a level playing field – no disadvantage to either party).




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Securities Regulation Summary – Lastman                                                                   14/10/2011



6. Reasonable Belief in Disclosure Defence
 If you can show that you reasonably believed that the material facts had been generally disclosed. But, what does
    ―generally disclosed‖ mean? When has information been generally disclosed?(Ministry does not give guidance)?
 NP 51-201: By press release in a responsible manner.

Texas Gulf Case (???? – ON)
What constitutes “reasonable belief in disclosure”?
Facts:
Company had lots of information and put out a press release. The next minute, called to buy the stock.
Ratio:
OSC commenting on U.S. holding said that a two-part test exists:
          1. The Information must be disseminated to the trading public; and
          2. The trading public must have it in its possession long enough to digest it
Rule of Thumb:
Safe rule is to wait one full trading day. An exact timeline does not exist b/c the dissemination of info.
will differ in each case depending on the industry and the size of the co. (for less significant issuers, the
intervention of a calendar week would suffice).

National Sea Case (???? – ON)
No firm rule on timing
Timing Requirement Depends on:
    1. The nature of the information - An insider must let the market digest the information (safe
        working rule = 1 full trading day) after the release of the information before insider trading issues
        are removed.
    2. The amount of time must reflect the purpose of the Act, that is, to protect investors

(v) Why is the term “insider trading” a misnomer?
 It doesn’t apply to insiders – applies to ―people within a special relationship to reporting issuer‖
 It doesn’t necessarily involve a trade. Under the Securities Act a ―trade‖ is defined as a sale of securities. You
    are guilty of insider trading whether you buy or sell. Additionally, you don’t have to buy or sell in order to be
    guilty of the offense.




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Securities Regulation Summary – Lastman                                                                  14/10/2011



                                III.     Private Placement Exemptions
1. Policy Reasons for PPE’s

OSC recognizes three ways to sell securities to the public and, therefore, 3 ways to raise money:
   1) Prospectus
   2) Private Placement Exemption: allow you to sell securities without a prospectus
   3) Discretionary Ruling from the OSC: allows you to sell securities without a prospectus and without a private
       placement exemption, but it’s really more of an idea than a reality because there’ll never be a case where this
       is granted.

   General Rule: Securities Law requires registration and the filing of a prospectus with the OSC, unless an
    exemption can be found.

Why is there a need for Private Placements? Two principle advantages over a prospectus:
1. Speed: since there is no prior regulatory review PP’s can be done quickly
2. Confidentiality: the transaction is not subject to Full, Fair and Plain disclosure or subject to the Continuous
   Disclosure regime
        o However, PP exemptions are subject to supervisory review, since they have to meet the conditions. More
             than superficially regulated! Failure to meet the conditions set out in the Act carries significant
             consequences (e.g. transaction can be void).

Policy for Allowing PP exemptions:
 Reflects the trade-off between 2 fundamental tenants of securities law: investor protection and efficient capital
    markets (allowing small companies to gain access to financing without significant expense)
          We cannot survive as a country if the only way for companies to access the market is through a
             prospectus – many companies can’t afford a prospectus or don’t want to be public.
          An efficient capital market needs another way to access the market
 Problem is that regulators are schizo!
     The rules are supposed to be in place to allow small companies access to markets, but the conditions that a
         company now has to meet are so restrictive that small companies can’t qualify for the exemptions anymore
 All exemptions are premised on one of three policy objectives:
         a) The purchaser is sufficiently sophisticated (deemed to be a function of wealth) and therefore doesn’t
             need protection of a prospectus – will go through time and trouble of protecting themselves; or
         b) The information is otherwise readily available from some other source; or
         c) The securities are considered inherently safe that to require a prospectus would be ridiculous (e.g.
             Canada Savings Bonds)

REFLECT BACK ON THE POLICY AND ASK EVERY TIME: WHY DOES RULE EXIST? WHAT ARE THEY
TRYING TO ACCOMPLISH? HOW ARE THEY TRYING TO ACCOMPLISH IT? AND WHY IS THAT OK?

2. Types of Exemptions

Four Categories:
 A) Exemptions based on wealth or sophistication of the purchaser
 B) Limited offering exemptions – limited in their scope (Government Incentive Securities ??)
 C) Trades in securities of private issuers
 D) Isolated Trades

All exemptions found in one of two places: NI 45-106 or Rule 45-501




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a) Exemptions Based on Wealth and/or Sophistication

   Policy behind these exemptions: A sophisticated and/or wealthy person will seek all the advice they
    need to protect themselves. We can sacrifice investor protection in the interests of allowing companies
    to raise money that are sophisticated (or wealthy) enough to protect themselves.

(i) Accredited Investor

NI 45-106
 This exemption provides prospectus and registration exemption for trades (any number of trades to any number of
    investors) to classes of investors who meet the definition of an Accredited Investor (essentially wealthy people
    and therefore sophisticated)
             o Theory is that if you are an accredited investor you will go through the time, trouble and expense to
                  protect yourself and you’ll do whatever is necessary to protect yourself and therefore you don’t need
                  the protection of the OSC
             o There is no limit to the money that can be raised or the number of investors approached
             o The money raised under this exemption does not affect the limit of the Closely-Held Issuer
                  exemption, as such an issuer may qualify under both exemptions

Who Qualifies: 45-501 (1) Definitions:
 Banks, insurance companies, government agencies, pension funds, certain charities.
           o Most Accredited Investors are institutional investors (banks, pension funds), however there are a
                number of significant classes of investors who meet the definition, most notably are:
                     A Spouse, parent, grandparent or child of a promoter, officer or director;
                     A promoter of an issuer or affiliate of the company
                     An Individual who beneficially owns (defined by 45-501CP s.2.2) or who together w/ a
                        spouse owns, financial assets having an aggregate realizable value (b4 taxes, but net of
                        liabilities) exceeding $1,000,000.
                     A Company, limited partnership, trust, estate, or individual w/ net assets of at least
                        $5,000,000

   There is no obligation for the company to prepare an offering memorandum (a document) for use in connection
    with a trade made in reliance on Rule 45-501 but if they voluntarily give a document that meets the definition of
    an offering memorandum, it is deemed to be an offering memorandum, and must include certain elements (see
    below).
   Copy of Offering Memorandum must be delivered to OSC within 10 days of the date of trade.

4.1 of 45-501CP
 “However, business practice may dictate the preparation of offering material that is delivered voluntarily to the
     purchasers in connection w/ an exempt trade. This offering material may constitute an “offering memorandum”
     as defined in Ontario Securities Law”

If an Offering Memorandum is provided:
 S. 4.2 requires that any OM must include the statutory right of action referred to in S. 130
 S. 4.3 requires seller to deliver a copy to the commission w/in 10 Days of the date of the trade

(ii) $150,000 Exemption

   Aggregate acquisition cost of the securities purchased must be at least $150,000 in cash on closing.
   Lastman thinks this is a modest benefit – hard to find people who are going to have $150,000 in cash to invest at
    one time
   No need to deliver any information to investors, but as a matter of business practice, you may have to. If deemed
    to be an offering memorandum, must deliver a copy to the OSC within 10 days of the date of trade




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                                              NI 45-106 S.10: Minimum Amount Invested
                 S.10 – Minimum Amount Invested
                      (1) The dealer registration requirement does not apply in respect of a trade in a security to a person if
                           (a) that person purchases as principal,
NI 45-106 S.10




                           (b) the security has an acquisition cost to the purchaser of not less than $150 000 paid in cash at the time of the
                           trade, and
                           (c) the trade is in a security of a single issuer.
                      (2) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in
                      subsection (1).
                      (3) This section does not apply to a trade in a security to a person if that person is created or used solely to purchase
                      or hold securities in reliance on this exemption from the dealer registration requirement or the prospectus
                      requirement.


b) Limited Offering Exemptions

Policy Objective:
 To create an opportunity for establishment of a new enterprise, or rehabilitation of an old enterprise, or to promote
    some kind of activity that the government thinks is important for the country.

(i) Government Incentive Securities Exemption

Policy Objective:
 There are certain industries that the government wants to promote investment, as such these securities are exempt
    from the prospectus and registration requirements.
 Whatever the government is trying to promote will be made accessible and opportunities will be created for these
    businesses to raise money.

What qualifies as a GIS?
 Whatever industry the government of Canada wants to promote at the moment (e.g. mining, energy).




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                               OSC Rule 45.501 – S.2.1 – Government Incentive Security

        S.2.1 – Government Incentive Security

        (1)   The dealer registration requirement does not apply to a trade            The registration and prospectus requirements do not
              by an issuer or a promoter of an issuer in a security of the              apply to a trade in a security of an issuer that is a
              issuer that is a government incentive security, if                        government incentive security provided you meet all
              (a) in the aggregate in all jurisdictions in Canada, not                  of the preconditions:
                    more than 75 prospective purchasers are solicited                   (a) Cannot solicit more than 75 prospective
                    resulting in sales to not more than 50 purchasers,                        purchasers and cannot sell to more than 50
              (b) before entering into an agreement of purchase and sale,
                                                                                              purchasers, each of whom must purchase as a
                    the prospective purchaser has been supplied with an
                    offering memorandum that includes information                             principle;
                       (i) identifying every officer and director of the                (b) Before entering into the agreement of purchase
                             issuer,                                                          and sale, the prospective purchaser has been
                      (ii) identifying every promoter of the issuer,                          supplied with an Offering Memorandum that
                     (iii) giving the particulars of the professional                         includes specific information;
                             qualifications and associations during the five            (c) The prospective purchaser has access to
                             years before the date of the offering                            substantially the same information concerning the
                             memorandum of each officer, director and
                                                                                              issuer that a prospectus filed under the Act would
                             promoter of the issuer that are relevant to the
                             offering,                                                        provide (there is no clear indication what
                     (iv) indicating each of the directors that will be                       substantially similar to a prospectus means) and
                             devoting his or her full time to the affairs of the              (i) each purchaser who by net worth or
                             issuer, and                                                           investment experience is able to evaluate the
                      (v) (v) describing the right of action referred to in                        investment and protect themselves (note:
                             section 130.1 of the Act that is applicable in                        does not refer to any specific criteria vs.
                             respect of the offering memorandum,                                   accredited investor)
              (c) the prospective purchaser has access to substantially
                                                                                             (ii) is a senior officer or director of the issuer or
                    the same information concerning the issuer that a
                    prospectus filed under the Act would provide and,                              affiliated entity or spouse or child of either
                       (i) because of net worth and investment experience               (d) Cannot be any advertising or selling expenses in
S.2.1




                             or because of consultation with or advice from                   connection with this investment (Why?
                             a person that is not a promoter of the issuer and                Otherwise would be soliciting more than 75
                             that is an adviser or dealer registered under the                persons)
                             Act, is able to evaluate the prospective                   (e) No promoter can use this exemption more than
                             investment on the basis of information about                     once in any one calendar year (this is the person
                             the investment presented to the prospective
                                                                                              responsible for putting together the deal)
                             purchaser by the issuer or selling security
                             holder, or
                      (ii) is an executive officer or director of the issuer       Note: a corporation or partnership shall be counted as one
                             or of an affiliate of the issuer or a spouse or       purchaser or prospective purchaser, unless the entity has
                             child of a director or executive officer of the       been created or primarily use for the purpose of purchasing
                             issuer or of an affiliate of the issuer,              securities of the issuer.
              (d) the offer and sale of the security is not accompanied by
                    an advertisement and no selling or promotional                 Note: If you are going to an accredited investor don’t offer
                    expenses have been paid or incurred for the offer and
                                                                                   them securities under this exemption, otherwise they will
                    sale except for professional services or for services
                    performed by a dealer registered under the Act, and            count towards the 75 solicitations, not the 50 purchasers
              (e) the promoter, if any, has not acted as a promoter of any
                    other issue of securities under this exemption within          Note: there is nothing wrong with combining exemptions
                    the calendar year.
        (2)   For the purpose of determining the number of purchasers or
              prospective purchasers under paragraph (1)(a), a
              corporation, partnership, trust or other entity is counted as
              one purchaser or prospective purchaser unless the entity has
              been created, or is being used, primarily for the purpose of
              purchasing a security of the issuer, in which event each
              beneficial owner of an equity security of the entity or each
              beneficiary of the entity, as the case may be, is counted as a
              separate purchaser or prospective purchaser.
        (3)   The prospectus requirement does not apply to a distribution
              of a security in the circumstances referred to in subsection
              (1).




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(ii) Founder and Family Exemption

                               OSC Rule NI 45-106 – S.2.7 – Founder, Control Person and Family

                  S.2.7 – Government Incentive Security

                  (1) In Ontario, the dealer registration requirement does not apply in respect of a trade in a security to a person who
                      purchases the security as principal and is
45-106 S.2.7




                           (a) a founder of the issuer,
                           (b) an affiliate of a founder of the issuer,
                           (c) a spouse, parent, brother, sister, grandparent or child of an executive officer, director or founder of the
                                issuer, or
                           (d) a person that is a control person of the issuer.
                  (2) In Ontario, the prospectus requirement does not apply to a distribution of a security in the circumstances referred to
                      in subsection (1).


              No disclosure obligation, but if you do provide an offering memorandum, OM rules apply.

c) Private Issuers – OSC Rule NI 45-106, S.2.4

              Purpose: to allow close business associates of the issuer to buy securities in a private company
              Policy: Allow small companies to get a start at an early stage

              Must be a private issuer, and purchasers must be a type of purchaser that satisfies certain requirements.

Private Issuer: is defined as an entity that has 3 qualifications:
               i. Articles of Incorporation must include restrictions on the transfer of shares
              ii. Cannot have more than 50 security holders, exclusive of current and former employees
             iii. Can only distribute securities to persons who qualify for this exemption

Note: No restriction on the number of purchasers or number of solicitations (subject to the 50 security holder limit)

Who qualifies as a purchaser, such that they are not a “member of the public”?
   1)      Directors, officers, employees, founders, or control persons of the company (or spouse, parent,
           grandparent, sibling of that group); or
   2)      Close personal friend; or
   3)      Close business associate, or an accredited investor

              ―close personal friend‖ – knows well enough and for a long enough period of time to assess trustworthiness. Not
               solely because they are a relative, member of same religious group, client or customer.
              ―Close business associate‖ – must be direct relationship.

R. v. Piepgrass (1959 - Alta.CA)
Common Bonds Test
Facts:
Without first being registered, Piepgrass sold shares to 5 individuals, 4 of whom he had had previous
dealings, the other individual being a complete stranger. The offer of shares was openly advertised to
the general public, and Piepgrass put on a vigorous selling campaign to these specific individuals, with
whom he had no common bonds of interest or association.

Issue:
Did these sales constitute „sales to the public‟?




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Held: These were „sales to the public‟ and therefore, P was required to be registered.

Common Bonds Test:
If an individual has “common bonds” of interest or association with an insider, then that individual will not
be construed as a “member of the public.” An insider includes a director, officer, or shareholder of the
issuing entity.

The court found that because the 5 individuals did not have “common bonds” of interest or association
with Piepgrass that they were members of the public. The 4 purchasers had had previous dealings with
Piepgrass, but they “were not in any sense friends or associates of the defendant, or persons having
common bonds of interest or association.” The fifth individual “was an absolute stranger to the accused.”


SEC v. Ralston Purina (1953 - US)
“Need to Know” Test
Facts:
RP issued shares to some of its employees without filing a prospectus.

Issue:
Did this stock offering to a limited group of employees constitute an offering „to the public‟?

Held:
This offering was an offering “to the public.” The court held that “employees are just as much members
of the investing “public” as any of their neighbours in the community. Some employee offerings could be
exempt, such as those made to executive personnel who because of their position have access to the
same kind of information that the Act would make available. But, absent such special circumstances,
employees are in need of protection through full disclosure of pertinent information.

   Offers to employees will be exempt from the prospectus requirement only when it can be proven that those
    employees would already have access to the pertinent information that the prospectus would contain—i.e. they
    would not ―need to know‖ the information b/c they would already have access to it.

d) Isolated Trade
NI 45-106 – S.2.30: You don’t need a prospectus for an isolated trade.
 Lastman: ―I haven’t got the foggiest clue what an isolated trade is‖

e) Discretionary Rulings
S.74(1): The OSC can exempt you from disclosure rule, unless contrary to public interest to do so.
         “The OSC may, upon application of an interest person or company, rule that a prospectus is not required,
         where it is satisfied that to do so would not be prejudicial to the public interest & may impose such terms &
         conditions as are necessary”
 Lastman: No one knows why/how you would ever get one; would have to be truly unique circumstances (forget
    it!)




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3. Offering Memorandum

s. 1.1(2) of RULE 14-501:
   An Offering Memorandum is a document prepared by a seller of securities, which describes the business affairs of
    the company and allows investors to make informed investment decisions.

CATCH:
s.4.1 & s. 4.2 of 45-501:
 if you deliver a document that meets the definition of an OM within 10 days of the date of the trade, then that
     document must contain a statutory right of action that you can sue the company if there is a misrepresentation

THEREFORE
 Since a misrepresentation includes omissions of a material fact – if an Offering Memorandum is incomplete
   (missing material information) then the seller can be sued for misrepresentation.
 As such, an offering memorandum carries the same implications as a prospectus, but is not subject to prior
   regulatory review.

Two Kinds of Offering Memoranda:
   1) Obligatory: like in GISE
   2) Voluntary: for business practices, even though you are not required to provide – it doesn’t matter what you
       call it, it the document meets the definition of an OM, then the statutory right of action attaches

How do you know if a document is an OM?
   Doesn’t matter what you call it. If you have included in it a contractual right to sue on a
    misrepresentation it’s an OM. Misrepresentation includes omission.
        You are not in an OM position if you provide any information that is statutorily required information (i.e.
         annual report of financial statements)
        A term sheet, which simply sets out the terms of the deal, is NOT an OM
        If you deliver a document that goes beyond a term sheet and beyond financial statements, it might
         be defined as an OM and you better make sure you can satisfy the statutory right of action

Jones v. Deacon Hodgeson (1986 - ON)
No statute of limitations applies to liability wrt failure to properly prepare a prospectus!
Facts:
Deacon Hodgeson (investment banker) sold securities to Jones (“a crook. In prison in Australia”)
without a prospectus or an exemption

Held:
 The requirement to file a prospectus is so fundamental to Securities Law that it can never be barred
   by statute. Even though the statute of limitations had expired.
    Anyone who at any time received securities without a prospectus or inadequately used an
       exemption, can void the transaction at any time at the purchasers instance. The transaction is
       FOREVER void; there is no statute of limitations!
    Although three-year limitation period applies for an action for rescission or damages under s.
       130, the person who should have received a prospectus under s. 53 and didn‟t has a cause of
       action under common law that does not expire

a) Registration Requirement Exemption

S. 25:
        You can’t trade in securities unless you are registered.



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S.35:
        Exemptions from Registration Requirements mirror the disclosure exemptions. These exemptions effectively
         apply to all trades that are exempt from prospectus requirements. (only available to the company itself NOW
         – this was initially being abused by market intermediaries)

Universal Registration System - June 30, 1987:
            o anyone who is a market intermediary can only act as such if they are registered under one of the
                categories under the OSA (so now similar to an underwriter – just called an agency agreement vs. an
                underwriting agreement)

    If company wants to sell the securities itself, that is okay, it has a private placement exemption and a registration
     exemption. However, for everyone else (market Intermediaries), they must be registered to sell securities in 1 of
     30-40 categories.
    Market Intermediary: anyone who engages or holds themselves out as being in the business of trading securities

OSC Guidelines to Offering Memorandum
1.   Can be as long or short as company wants
2.   Can’t contain untrue information
3.   Can’t be ambiguous
4.   Document must describe contractual right of action
5.   Document must in some way deal with the business and affairs of the company


4. Resale Rules

    How does one re-sell securities they acquired pursuant to a private placement exemption?
     o If bought through a prospectus – freely tradable and fully liquid.
    Rationale: Once a company files a prospectus it becomes a reporting issuer and subject to continuous disclosure
     obligations in the Act. Information will remain current, therefore no reason to prevent people from buying or
     selling the securities.
    However, sale of securities to the public also permitted without a prospectus for various other reasons (see:
     Private placement exemptions)
    What happens when an accredited investor wants to sell his securities to someone else? May not be any
     information on the company in the public domain. Allowing him to sell freely would circumvent the entire policy
     around the prospectus/disclosure requirement.

National Instrument 45-102: Resale of Securities

    Recall the definition of a ―distribution‖ from S.1(1):
     o A sale of securities that had not been previously issued.
    Second branch of the definition of ―distribution‖:
     o It is a distribution to resell securities acquired pursuant to a private placement exemption unless you satisfy
         the resale rules.

a) Resale Rules for Non-Control Persons

(i) Securities acquired pursuant to a prospectus are freely tradable unless the seller is a “control
    person”.

Rationale: Information is available in the marketplace to allow investors to make an informed investment decision
           and ongoing continuous disclosure obligations ensure that the information remains current. Other policy
           considerations prevent control persons from selling securities even if acquired pursuant to a prospectus.


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(ii) If securities are acquired pursuant to a private placement exemption, the seller cannot resell
     them unless one of four conditions are satisfied:

          1) a prospectus is filed with respect to the trade of the subject securities;
              This would happen only if there was a contract when securities were first sold that the company
                  would file the prospectus with respect to my securities
                        As such, the selling security holder (the owner of the specific shares, who acquired those
                            shares pursuant to a PP exemption) will be subject to strict liability with respect to a
                            misrepresentation – only defence is that the Purchaser knew of the misrepresentation when
                            they purchased
          2) the seller relies on another private placement exemption or, in the case of the government incentive
             securities exemption, the sale is to a member of the original 50 purchasers;
          3) an exemption order is obtained from the OSC; or
          4) the resale rules referred to below are satisfied.


Rationale:      The private placement exemptions permit the issuance of securities without the concomitant obligation to
                provide complete disclosure to investors and without the continuous disclosure obligations. The Act
                permits these transactions because either:

                     i. the sophistication of the purchaser or his or her knowledge of the business and affairs of the
                        issuer reduces the need for prospectus-like disclosure; or
                    ii. the legislators are trying to address some more important policy objective.

               However, in order to ensure that there are not subsequent sales of securities to persons who need the
                protection offered by a prospectus, the Act has to regulate the second trade in such securities until such
                time as the protections afforded by a prospectus are available.

Resale Rules for All Exemptions Except the “Private Issuer” Exemption

    (a)       The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately
              preceding the trade (i.e., the date of the resale of the security) (the “Seasoning Period”) unless the issuer
              became a reporting issuer after the distribution date (i.e., the date of the original private placement) by
              filing a prospectus in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan
              and is a reporting issuer in a jurisdiction of Canada at the time of the trade, in which case the 4 month
              seasoning period does NOT apply; AND
                 o Policy: don’t want to have the resale take place in a private company context.
    (b)       At least 4 months have elapsed from the distribution date (the “Restricted Period”); AND
                o Policy: Want time for the market to digest the information before they can redump securities into
                     the market
    (c)       The share certificate of the resale securities must include the prescribed legend setting out the restriction on
              transfer; AND
    (d)       The trade is not a control distribution; AND
    (e)       No market manipulation; (i.e. nobody prepared the market for this event); AND
    (f)       No extraordinary commission or consideration is paid in respect of the trade; AND
    (g)       No grounds to believe issuer is in default.

   Note: If the company never files a prospectus you can never resell the securities!


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Resale Rules for the “Private Issuer” Exemption
    (a)   The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta, British
          Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a
          jurisdiction of Canada at the time of the trade; AND
    (b)   The trade is not a control distribution; AND
    (c)   No market manipulation; AND
    (d)   No extraordinary commission or consideration is paid in respect of the trade; AND
    (e)   No grounds to believe issuer is in default.

(iii) Four Resale Rules Scenarios
        Note: Resale rules used to be much more complicated - DO NOT LOOK AT RESALE RULES
          QUESTIONS FROM OLD EXAMS!!

Scenario 1
        Day 1: Private placement exemption as an accredited investor
        Two months later: Company files a prospectus
        When can you re-sell the securities? Two months later.

Scenario 2
        Day 1: company files a prospectus
        Two months later: Purchase securities pursuant to private placement exemption (as an Accredited Investor)
        When can you re-sell the securities? Four months later.

Scenario 3:
        Day 1: Private Issuer Exemption
        Two months later: Company files a prospectus
        When can you re-sell the securities? The next day – no 4 month hold period for Private Issuer Exemptions

Scenario 4 (Tacking):
     Day 1: Private placement exemption as an accredited investor
     Two months later: Company files a prospectus
     One month later: I sell to another accredited investor (remember, can always resell to another accredited
         investor)
     When can the second accredited investor resell their securities? One month later – tacking is permitted –
         they will let you tack on the time that the security was held by the original accredited investor and count it
         towards the time the other accredited investor’s hold period

b) Resale Rules for Control Persons

   Third branch of the definition of distribution says that if you are a control person you cannot resell securities
    unless you satisfy the resale rules.
   S.1(1): ―control person‖ Person who alone or in combination with others holds sufficient shares to effectively
    control the company.
    o In absence of evidence to the contrary, there is a rebuttable presumption that you are a control person if you
        hold more than 20% of the shares.
    o Pure question of fact, but there is a rebuttable presumption at 20%.




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Rule: No matter how a control person acquires securities, they cannot be resold unless:
     (a)   The control person qualifies a prospectus for the sale of the subject securities (as a selling security holer)
     (b)   An exemption order is obtained from the OSC (fat chance!);
     (c)   The control person sells pursuant to another private placement exemption (which gives rise to the resale
           rules);
     (d)   The control person sells to another control person (which gives rise to the resale rules); or
     (e)   The control person sells pursuant to the ―advance notice route‖ discussed below.

Rationale:   The policy behind regulating trading by control persons is to prevent abuses by such persons of their
             access to material information concerning the affairs of an issuer where that information has not been
             generally disclosed.

(i) Advance Notice Route

 Advantage: Control persons can sell securities in any denominations to any persons without subjecting the
            purchaser to resale rules (i.e., the purchaser receives freely tradable shares).

Conditions for the Advance Notice Route

         (a) The issuer is and has been a reporting issuer in Alberta, British Columbia, Manitoba, Nova Scotia,
             Ontario, Quebec or Saskatchewan for the 4 months immediately preceding the trade (i.e., the date of the
             resale of the security) unless the issuer became a reporting issuer after the distribution date (i.e., the date
             of the original private placement) by filing a prospectus in Alberta, British Columbia, Manitoba, Nova
             Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time
             of the trade, in which case the 4 month seasoning period does NOT apply;
         (b) The control person has held the securities for at least 4 months;
         (c) No market manipulation;
         (d) No extraordinary commission or consideration is paid in respect of the trade; and
         (e) No grounds to believe issuer is in default.

   Note: If the control person bought stock pursuant to a PPE, still must follow the same rules as everyone else,
    so have to satisfy the seasoning and restricted periods discussed above.

   Note: Any reference in old summaries to ―tainting‖ rules do not apply.
   Note: Important for the company to become a reporting issuer or none of these rules apply.

c) Shelf Prospectus:
   Normally, you file a prospectus to raise money but sometimes a prospectus can be filed so that the hold period
    starts running so that people who purchased securities by way of PP can start to sell them. If someone sells you
    securities of a private company and the company never files a prospectus and you cannot find an exemption then
    you will be stuck with the securities

S. 53 (2) Filing w/o Distribution
         ―a preliminary prospectus and a prospectus may be filed in accordance w/ this Part to enable the issuer to
         become a reporting issuer, despite the fact that no distribution is contemplated.‖
         o As such, allows for the restricted periods to start running




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NI 44-102: shelf prospectus
 Filed for up to 25 months – At the time of sale the issuer prepares a ―shelf prospectus supplement,‖ which is
    incorporated by reference and includes the statutory right of action (only issuers eligible to use the short-form
    prospectus system are eligible to use the shelf system).

Always have to ask:
       1) How did you acquire securities?
       2) Who are you? Are you a control person? If so, will have resale rules regardless of how you acquired the
           securities.

Don’t forget you can be subject to resale rules based on both HOW you acquired the securities, and WHO you are.




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                                            IV.      Takeover Bids

1. Fundamental Concepts – What is a Takeover Bid?
   If A owns 51% of the shares of a public company and B owns 49%, A has full control over the company and has
    the final say in every decision.
   Even though A owns only 2% more than B, A’s shares are obviously worth more than B’s shares.
   It is the ―control‖ associated with A’s shares that is worth a lot of money – people are prepared to pay a premuim
    for control
   The Securities Act says that as long as someone owns control, they can do what they want. BUT if you are a
    public company, when you want to sell control, that premium that you get for control doesn’t belong to you alone,
    but it belongs to all shareholders of the company. You don’t have to share control while you own it, but the
    premium you are going to get to sell the control belongs to all shareholders equally.
   Control only belongs to you when you own it. It doesn’t belong to you when you sell it.
   All shareholders helped create the value, therefore the premium paid to control the company must be distributed
    amongst all the shareholders. Premium attached to sale of control belongs to all shareholders
   Under the Takeover Bid rules, ―control‖ is defined as 20%. Bright Line Test.

Social Reasons Takeover Bids are GOOD:
1) moves assets to their most desired use - someone buys an asset and puts it to a better use than its previous owner
2) creates synergies – takes 2 assets and put them together and because they can use similar services there are
    synergies that make them more effective and productive. e.g. Torstar taking over Sunmedia – Toronto Star and
    Toronto Sun together are more efficient
3) the threat of a takeover bid forces management to be efficient because if they aren’t then the stock prices will
    remain low and then they will be vulnerable to a takeover bid

Social Reasons Takeover Bids are BAD
1) all someone is doing is taking an undervalued asset and taking the value for themselves
2) seen as empire building – people just want bigger toys - it becomes how many you own and not what you do with
    them
3) It creates monopolies and these are bad
     SunMedia went to competition bureau and said that TorStar will have a monopoly because they will be able
        to dictate advertising rates so the competition bureau stopped this

OVERALL: after weighing the bad against the good, the legislature came to the conclusion that overall
takeover bids are a GOOD thing

2. Objectives Of Takeover Bid Legislation
   Protection of the interests of the target shareholders – so that they may make an informed decision as to whether
    they want to tender their shares to the takeover bidder
   create a level playing field where bidders and targets can operate relatively free from oppression

Three objectives of Takeover Bid legislation:
1) INFORMATION: must give the target shareholders sufficient information to make an informed decision to
   decide whether to sell shares to offeror
2) TIME:
        a. must give the shareholder adequate time to assess information
        b. must give the management adequate time to assess the bid and respond to shareholders with their views
        c. Time to create an auction for the shares – best thing for the shareholders to find another buyer (a ―white
             knight‖)
3) EQUALITY : all shareholder of target are to be treated equally – have to be given identical consideration – no
   collateral agreements allowed.(ex. If bidder wants 2/3 of share and 100% tender, then has to take 2/3 of every
   shareholder’s holdings – pro-rata)


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3. Mechanics Of Takeover Bid Legislation
         Securities Act doesn’t care how you obtain shares up to 19.9%.
         As soon as you buy one share that together with what you already own (or anyone acting jointly in concert with
          you) puts you over 20%, or as soon as you propose to, you cannot do that transaction without doing a takeover bid
          circular offering to buy the same percentage of shares from all shareholders on the same basis, UNLESS it is an
          exempt takeover bid.
         Note: Relevant regulations: 182-203 Relevant Sections: 89-105.
         Note: If 3 people each own 7%, if they get together it is NOT a takeover bid if they are not offering to acquire
          any shares.

                                                     S.89(1): Definition of Takeover Bid
             “take-over bid”                                                        “Offer to Acquire”

             means an offer to acquire outstanding voting or equity                 offer to purchase or a solicitation of an offer to sell or an
             securities of a class made to any person or company who is in          acceptance of an offer to sell
             Ontario or to any security holder of the offeree issuer whose last
             address as shown on the books of the offeree issuer is in Ontario,          the passage of time is NOT an offer to acquire!
S.89(1)




             where the securities subject to the offer to acquire, together with         if what you are going to buy together with what you
             the offeror’s securities, constitute in the aggregate 20 per cent
                                                                                          already own is 20% or more of the outstanding voting
             or more of the outstanding securities of that class of securities at
             the date of the offer to acquire.                                            or equity securities of that class, you can not buy those
                                                                                          shares without complying with takeover rules (think of
                                                                                          the 20% as 50%)
                                                                                         Must be outstanding shares- so reaching above 20%
                                                                                          because of exercising stock options is NOT a TOB.


                                                 S.90(1): Deemed Beneficial Ownership
             S.90(1)
                                                                                         You are deemed to own securities you have a ―right to
             For the purposes of this Part, in determining the beneficial                 acquire‖ w/in 60 Days of the date of the transaction
             ownership of securities of an offeror or of any person or company
             acting jointly or in concert with the offeror, at any given date,
                                                                                          (i.e the transaction that puts you over 20%)
             the offeror, person or company shall be deemed to have acquired             Note: Only applies to outstanding shares, not treasury
             and be the beneficial owner of a security, including an unissued             shares.
             security, if the offeror, person or company is the beneficial owner                o If money is being paid to company, there’s
             of any security convertible within sixty days following such date                        no premium for control going to any
             into such a security or has the right or obligation, whether or not                      individual because all shareholders are
S.90(1)




             on conditions, to acquire within such sixty days beneficial                              sharing equally anyway. Therefore, treasury
             ownership of the security whether through the exercise of an
                                                                                                      shares don’t count as a takeover bid.
             option, warrant, right or subscription privilege or otherwise
                                                                                         Policy: What legislation is trying to do is say you can
                                                                                          not buy shares that put you over 20% without
                                                                                          complying with the takeover bid rules, so if you have
                                                                                          shares that are convertible into shares of a class within
                                                                                          60 days, then when calculating how many shares you
                                                                                          own, you will be deemed to have those shares and
                                                                                          when you go to buy your next shares you will be
                                                                                          caught - it is 20% on a class by class

             S.90(3) – Unissued securities deemed outstanding                            when deemed to be the beneficial owner of unissued
             Where an offeror or any person or company acting jointly or in               securities, the securities shall be deemed to be
S.90(3)




             concert with the offeror is deemed by reason of subsection (1) to            outstanding for the purpose of calculating the number
             be the beneficial owner of unissued securities, the securities shall
             be deemed to be outstanding for the purpose of calculating the
                                                                                          of outstanding securities of that class in respect of that
             number of outstanding securities of that class in respect of that            offeror’s offer to acquire
             offeror’s offer to acquire




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                                                             S.92: Indirect Offers
          S.92
                                                                                    cannot make any indirect offers in order to circumvent
          For the purposes of this Part, a reference to an offer to acquire or       the Take-Over Bid regime
          to the acquisition or ownership of securities or to control or
                                                                                    i.e. ―Treats‖: owned 49% by public and 51% by a
S.92




          direction over securities shall be construed to include a direct or
          indirect offer to acquire or the direct or indirect acquisition or         holding company and someone wants to takeover
          ownership of securities, or the direct or indirect control or              Treats, so he offers to purchase the holding company
          direction over securities, as the case may be                              and get control of Treats indirectly. [OSC said no
                                                                                     way, even though s.92 didn’t exist at the time – ruled
                                                                                     under s.127]

Overview of Takeover Bid Rules:

      A takeover bid is the acquisition of shares of a company (the "target") which, together with the shares already
       owned by the purchaser, will put the purchaser's shareholdings in the target over a certain threshold, generally
       20%. For instance, a person owning 19.99% of the common shares of a company will (subject to certain
       exemptions) be making a takeover bid if he/she buys .01 % more shares. The object of takeover bid legislation is
       to ensure, to the extent possible, that shareholders and the investing public receive sufficient information about the
       terms of the bid and that all shareholders are treated alike.

      Details are communicated to shareholders by way of a takeover bid circular. The circular will describe the offer
       (the price, the number of shares and any conditions) and is sent to all shareholders. To ensure that shareholders
       have an opportunity to receive the circular, review it and decide whether they want to sell, a bid must be open for
       acceptance for at least 35 days. The offeror can't take-up the tendered shares for 35 days and the shareholder can
       withdraw the shares at any time before the securities are taken up. This allows shares which have been tendered
       to be withdrawn if the shareholder changes his/her mind (which generally occurs when a higher offer is made). If
       a term of the offer is changed (i.e., the offer price increased), this must be communicated to all shareholders who
       are given an extra 10 days to tender their shares. Most changes (other than an increase in price or the waiver of a
       condition) allow a shareholder to withdraw tendered shares for 10 days. To prevent an offeror from holding on to
       shares for too long after taking them up, a shareholder can withdraw their shares if not paid for within 3 business
       days after having been taken up.

      If the offeror wants to buy a maximum number of shares and more than this number is tendered, the shares are
       taken-up pro rata and not first come, first serve. This ensures shareholders are not pressured to tender early (and
       can therefore review all pertinent information) and are treated equally.

      All shareholders must be offered the same consideration and no collateral agreements may be entered into. This
       ensures that a higher price per share is not paid for larger blocks or for shares tendered early. If, after shares have
       been taken up, the offer price is increased, all shareholders, including those whose shares have already been taken
       up, are entitled to the higher price.

      Shares purchased before the offer is made but within the previous 90 days from the date of the offer can affect the
       price of and number of shares the offeror must buy. This is pre-bid integration. An offeror must offer to buy from
       the public the highest percentage of shares at the highest price acquired in the period. For instance, if the offeror
       buys 50% of a shareholder's shares 30 days before the offer at $5.00 per share, any bid must be for at least 50% of
       the outstanding shares of all shareholders for a price of at least $5.00 per share. An offeror can’t purchase shares
       of the target for 20 business days after the termination of a bid except pursuant to another circular bid.

      Shareholders in deciding whether to tender would generally consider the advice of directors of the target. For this
       reason, a Directors Circular recommending acceptance or rejection of bid or making no recommendation and the
       reasons therefor must be sent by the target to all shareholders.




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a) Takeover Bid Circular

               S.98(1)
               The offeror who is attempting to acquire a total of 20% or more of the securities of a reporting issuer must
                prepare a Takeover Bid Circular containing the information mandated in form 32, which includes sufficient
                information to make an informed decision.
               Must tell shareholders all the rules (what they can do, how they go about it…)
               POLICY: giving the shareholders sufficient information to make an informed investment decision whether
                or not they should make an offer to tender their shares to your bid.


                                                               S.95: Takeover Bid Rules
S.95




               S.95: Subject to the regulations, the following rules apply to every take-over bid and issuer bid:

               S.95 (1) Delivery of bid
                                                                                            a bid may be commenced by: delivery of a takeover
               The bid shall be made to all holders of securities of the class that
S.95(1)




                                                                                             bid circular to shareholders (the bid is dated the date of
               is subject to the bid who are in Ontario, and delivered by the
               offeror to all holders, whose last address as shown on the books of
                                                                                             delivery) OR advertisement of a summary of the bid
               the offeree issuer is in Ontario, of securities of that class and of          (the bid is dated the date of 1st publication)
               securities that, before the expiry of the bid, are convertible into
               securities of that class
               S.95(2) – Minimum Period of Bid                                              it has to be open for at least 35 days, although it may
               The offeror shall allow at least 35 days from the date of the bid             be open longer
               during which securities may be deposited pursuant to the bid.
                                                                                            at least 35 days from the date of the bid for SHs to
                                                                                             tender their shares
                                                                                            to tender your shares, you deposit your shares at a
S.95(2)




                                                                                             trust company and the bidder picks up the shares and
                                                                                             pays for them
                                                                                            POLICY: don’t want to rush people into their decision
                                                                                             – have to give time for the company to find other
                                                                                             bidders, time for the management to make their
                                                                                             opinion and get advice and time for the Shareholders
                                                                                             to think and assess the merits and time for other
                                                                                             potential bidders to make their bid (auction)
               S.95(3) – When Taking Up Prohibited                                          even if you tender your shares before 35 days, the
               No securities deposited pursuant to the bid shall be taken up by              offeror can’t take them for 35 days (from the time they
S.95(3)




               the offeror until the expiration of 35 days from the date of the bid          gave the bid)
                                                                                            Policy: Shareholders should have the option to tender
                                                                                             to a higher
               S.95(4) – Withdrawal Rights                                                  What if I have tendered my shares and I want to
               Securities deposited pursuant to the bid may be withdrawn by or               withdraw them? Either changed mind or is a
               on behalf of a depositing security holder,
                                                                                             higher bid?
S.95(4)




                    (i) at any time where the securities have not been taken up
                          by the offeror,                                                   Shareholder may not be sure at that point in time and
                   (ii) at any time before the expiration of 10 days from the date           there may be a higher bidder…so a depositing security
                          of a notice of change or variation under section 98, and           holder can withdraw shares that he has tendered at any
                  (iii) if the securities have not been paid for by the offeror              time if one of three conditions are met.
                          within three business days after having been taken up
               S.95(5) – Exceptions to Withdrawal Rights
               The right of withdrawal conferred by subparagraph ii of paragraph
               4 does not apply,
                (i) where the securities have been taken up by the offeror at the
S.95(5)




                       date of the notice,
               (ii) where a variation in the terms of a bid consists solely of an
                       increase in the consideration offered for the securities
                       subject to the bid and the time for deposit is not extended for
                       a period greater than that required by subsection 98 (5), or
              (iii) iii. in the circumstances described in subsection 98 (6).




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           S.95(7) – Pro Rata                                                        the offeror must take up and pay for the shares on a
           Where the bid is made for less than all of the class of securities         pro rata basis
           subject to the bid and where a greater number of securities is
                                                                                     sometimes you only want to own 60% instead of 100%
           deposited pursuant thereto than the offeror is bound or willing to
           acquire under the bid, the securities shall be taken up and paid for       of the company so if you put in your takeover bid
S.95(7)




           by the offeror proportionately, disregarding fractions, according to       circular that you only want 60% and more
           the number of securities deposited by each depositing security             shareholders have tendered than you want
           holder                                                                     (oversubscribed), you have to take 60% from
                                                                                      everyone’s shares – can’t choose who (eg. not 1st
                                                                                      come 1st serve)
                                                                                     POLICY: equality – shareholders treated the same
                                                                                      whether they tendered first or last
           S.95(9,10,11) – Takeup and Payment
           (9) Subject to paragraphs 10 and 11, the offeror shall take up and        If all terms and conditions of bid are satisfied,
           pay for securities deposited under the bid, where all the terms and        securities must be taken up within 10 days after
           conditions of the bid have been complied with or waived, not later
           than ten days after the expiry of the bid.
                                                                                      expiry of bid and must be paid for as soon as possible
                                                                                      and in any event within 3 business days after the
S.95(9)




           (10) Any securities that are taken up by the offeror under the bid
           shall be paid for by the offeror as soon as possible, and in any           securities have been taken up.
           event not more than three business days, after the taking up of the
           securities.
           (11) Any securities deposited pursuant to the bid subsequent to
           the date on which the offeror first takes up securities deposited
           under the bid shall be taken up and paid for by the offeror within
           ten days of the deposit of the securities.

                                              S.97(1,2); S.104(2): No Collateral Benefit
           S.97 (1) Identical Consideration
S.97(1)




           Subject to the regulations, where a take-over bid or issuer bid is        all holders of the same class of securities must be
           made, all holders of the same class of securities shall be offered         offered identical consideration
           identical consideration.
           S.97 (2) Collateral Benefit                                               TEST: if your arrangement is designed to induce a
           If an offeror makes or intends to make a take-over bid or issuer           shareholder to tender to the bid, it is a collateral
           bid, neither the offeror nor any person or company acting jointly          agreement BUT if your incentive is designed to be the
           or in concert with the offeror shall enter into any collateral
           agreement, commitment or understanding with any holder or
                                                                                      responsible thing to do in the company then it is not a
           beneficial owner of securities of the offeree issuer that has the          collateral agreement
           effect of providing to the holder or owner a consideration of             LOOK TO INTENTION
S.97(2)




           greater value than that offered to the other holders of the same          if you are treating a shareholder different from every
           class                                                                      other shareholder, you must be doing it for some
                                                                                      legitimate/valid business purpose and not to induce
                                                                                      them to tender, then it is ok – but if just to induce them
                                                                                      to tender, then it is not ok
                                                                                     it is a question of fact – if it is good sense to keep the
                                                                                      dealers on side when you buy the company then it is
                                                                                      not illegal (Canadian Tire)
           S.104(2) – Application to the Commission                                  if you are not sure whether what you are offering is a
           On application by an interested person and subject to such terms           collateral agreement, you can apply to the OSC to find
           and conditions as the Commission may impose, if the                        out
           Commission is satisfied that it would not be prejudicial to the
                                                                                     note: any agreements you have must be in the takeover
S.104(2)




           public interest, the Commission may,
                                                                                      bid circular
           (a) decide for the purposes of subsection 97 (2) that an agreement,       note: technically you can not have a collateral
           commitment or understanding with a selling security holder is              agreement if TOB never happens – Canadian Tire
           made for reasons other than to increase the value of the
           consideration paid to the selling security holder for the securities
           of the selling security holder and that the agreement, commitment
           or understanding may be entered into despite that subsection;




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                                                      S.96: Conditions in a Bid
       S.96 - Financing
       Where a take-over bid or issuer bid provides that the consideration             An offeror may attach any conditions to a bid which it
       for the securities deposited pursuant to the bid is to be paid in cash           believes to be appropriate except for a condition on
       or partly in cash, the offeror shall make adequate arrangements
       prior to the bid to ensure that the required funds are available to
                                                                                        financing to pay for the securities tendered pursuant to
       effect payment in full for all securities that the offeror has offered           the bid. You need to have financing in place to satisfy
       to acquire                                                                       the maximum price you will pay under your bid. This
                                                                                        is the biggest reason why there are so few takeover
S.96




                                                                                        bids in Canada.
                                                                                       Note: In Canada, the first one in usually loses, so
                                                                                        takeover bids are VERY expensive. This is why
                                                                                        companies buy toeholds, and can tender the shares
                                                                                        they bought at a higher price to recover some of the
                                                                                        costs. (This financing exception does not exist in US)
                                                                                       In Practice: The more conditions you attach to your
                                                                                        bid, the less credibility the bid will have in the
                                                                                        marketplace
                                                       S.98: Variations in a Bid
       S.98 (2,3) – Notice of Change in Information
            (2) Where, before the expiry of a take-over bid or issuer bid       (i)         If a change occurs in the information contained in a
       or after the expiry of the bid but before the expiry of all rights to                circular that would reasonably be expected to affect
       withdraw the relevant securities, a change has occurred in the                       the decision of the security holders of the target
       information contained in a take-over bid circular or issuer bid                      company to accept or reject the bid, the offeror
       circular or in any notice of change or notice of variation that                      must send a notice of change to every person to
       would reasonably be expected to affect the decision of the holders                   whom the circular was required to be delivered and
       of the securities of the offeree issuer to accept or reject the bid, a               whose securities have not yet been taken up.
       notice of the change shall be delivered to every person or
       company to whom the circular was required to be delivered and
       whose securities were not taken up at the date of the occurrence of      (ii)        10 day withdrawal right. (S.95(4))
       the change.
            (3) Subsection (2) does not apply to a change that is not
       within the control of the offeror or of an affiliate of the offeror
       unless it is a change in a material fact relating to the securities
       being offered in exchange for securities of the offeree issuer
       S.98 (4,5) – Variation in Terms of Bid                                   Where there is a variation in the terms of a bid:
           (4) Where there is a variation in the terms of a take-over bid or
S.98




       issuer bid, including any extension of the period during which           (i)         the offeror must deliver a notice of variation to
       securities may be deposited thereunder and whether or not the                        every person to whom the circular is required to be
       variation results from the exercise of any right contained in the                    delivered and whose securities have not yet been
       bid, a notice of the variation shall be delivered to every person or                 taken up.
       company to whom the take-over bid circular or issuer bid circular
       was required to be delivered and whose securities were not taken
       up at the date of the variation.                                         (ii)        10 day withdrawal right. (S.95(4))
            (5) Subject to subsection (6), where there is a variation in the
       terms of a take-over bid or issuer bid, the period during which          (iii)       10 day extension of deposit period unless the
       securities may be deposited pursuant to the bid shall not expire                     change is the waiver of a condition in an all cash
       before ten days after the notice of variation has been delivered.
                                                                                            bid.
            (6) Subsection (5) does not apply to a variation in the terms of
       a bid consisting solely of the waiver of a condition in the bid
       where the consideration offered for the securities that are subject      (iv)        Where a variation in the terms of a bid increases
       to the bid consists solely of cash.                                                  the value of the consideration offered, the offeror
                                                                                            shall pay such increased consideration to each
                                                                                            person whose securities were taken up whether or
                                                                                            not such securities were taken up before the
                                                                                            variation.




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                                                           S.99: Directors Circular
          (1) Where a take-over bid has been made, a directors’ circular
          shall be prepared and delivered by the board of directors of an           the directors of the target company have an obligation
          offeree issuer to every person and company to whom a take-over             to deliver a director’s circular to all their shareholders
          bid must be delivered under paragraph 1 of section 95 not later
          than 15 days after the date of the bid.                                    within 15 days from the date of the bid

          Recommendation by board
          (2) The board of directors shall include in a directors’ circular         must recommend to shareholders that they recommend
          either a recommendation to accept or to reject a take-over bid and         that the shareholders accept the bid, reject the bid, or
          the reasons for their recommendation, or a statement that they are         make no recommendation at all and they give their
          unable to make or are not making a recommendation and if no                reasons
          recommendation is made, the reasons for not making a
          recommendation.
S.98




                                                                                    Policy: the reason we gave shareholder time was
          (4) Where a board of directors is considering recommending                 because we thought it was important that the company
          acceptance or rejection of a take-over bid, it shall, at the time of       tells the shareholders what they think
          sending or delivering a directors’ circular, advise the security
          holders of this fact and may advise them not to tender their
          securities until further communication is received from the
          directors.

          Advising of decision of directors
          (5) Where subsection (4) applies, the board of directors shall            if within the 15 day period you aren’t ready to give
          deliver the recommendation or the decision not to make a                   your reasons, you can do it later in a 2nd document as
          recommendation at least seven days before the scheduled expiry             long as it is 7 days before the expiry of the bid
          of the period during which securities may be deposited under the
          bid.

                                                         S.94(5): Pre-bid Integration
          S.94(5)
          Where a take-over bid that is a formal bid is made by an offeror          Note: This only applies to private agreements. It’s
          and, within the period of ninety days immediately preceding the
                                                                                     ok on the open market, which is purely random.
          bid, the offeror acquired beneficial ownership of securities of the
          class subject to the bid pursuant to a transaction not generally
          available on identical terms to holders of that class of securities,

                (a) the offeror shall offer consideration for securities
S.94(5)




          deposited under the bid at least equal to the highest consideration
          that was paid on a per security basis under any of such prior
          transactions or the offeror shall offer at least the cash equivalent
          of such consideration; and

                (b) the offeror shall offer to acquire under the bid that
          percentage of securities of the class subject to the bid that is at
          least equal to the highest percentage that the number of securities
          acquired from a seller in such a prior transaction was of the total
          number of securities of that class beneficially owned by such
          seller at the time of the prior transaction.


Pre-Bid Integration Example:
Day 1: Buy 100% of A’s shares at $14/share.
Day 4: Buy 5% of B’s shares at $20/share.
Day 6 – TOB: TOB must be for $20 for 100% of shares. Note: Shareholder A is out of luck. No protection for ―big
shareholders‖ in the Securities Act.




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                                                                      S.94(6): Post-bid Integration
                         S.94(6)
                         An offeror shall not acquire beneficial ownership of securities of         offeror can not buy shares for a period of 20
                         the class that was subject to the bid by way of a transaction that is
   S.94(6)




                                                                                                     business days after his bid EXCEPT pursuant to a
                         not generally available on identical terms to holders of that
                         class of securities during the period beginning with the expiry
                                                                                                     transaction available to all Shareholders (eg. pursuant
                         of the bid and ending at the end of the twentieth business day              to another circular bid or on open market)
                         thereafter, and whether or not any securities are taken up under
                         the bid.

                        S.94(2): Restrictions on acquisitions during take-over bid; S.185(1): Lockup Agreements
                         S.94(2)                                                                    Although a PRIVATE agreement CANNOT be entered
                         An offeror shall not offer to acquire or make, or enter into, any           into during the period of the bid, a LOCK-UP agreement
   S.94(2)




                         agreement, commitment or understanding to acquire beneficial                is permitted, whereby a security holder and an offeror
                         ownership of any securities of the class that are subject to a take-
                         over bid otherwise than pursuant to the bid on and from the day of
                                                                                                     will contract to the effect that the security holder will
                         the announcement of the offeror’s intention to make the bid until           tender his shares to a formal TOB made by the offeror in
                         its expiry                                                                  accordance with the terms and conditions of his bid.
                         Regulation 1015 s.185(1) – Lockup Agreements Allowed                       Lock-Up agreement is really a contract that is subject to
                                                                                                     negotiations between the offeror and the SH. For
                         Subsection 94 (2) of the Act is not applicable to an agreement
                         between a security holder and an offeror to the effect that the             instance, in the clause it may state that the SH is not
Reg 1015 – S.185(1)




                         security holder will tender the security holder’s securities to a           obligated to tender to the original bidder at a certain price
                         formal take-over bid made by the offeror in accordance with the             if a higher bidder comes along BUT then the SH must
                         terms and conditions of the bid                                             give the original bidder a % of the profits. If there is NO
                                                                                                     such clause in the LU agreement, then the SH is stuck.
                                                                                                    POLICY: This is NOT a collateral agreement b/c all
                                                                                                     shareholders are still treated equally however, lock-ups
                                                                                                     help to allay the expense of TOBs to offerors b/c it lowers
                                                                                                     the risk of the bid failing and are thus in accordance with
                                                                                                     the intention of the Act to promote TOBs.



b) Exemptions to the Takeover Bid Rules
                     Note: IF an exemption applies, it is still a TOB, but it is an Exempt TOB.

                                                                  S.93(1): Exempted Takeover Bids
                         S.93(1)(b) – De Minimus Exemption
                         Subject to the regulations, a take-over bid is exempt from sections        You can buy up to 5% of the share in the open market
                         95 to 100 if,                                                               in any 12 month period without triggering the takeover
                         (b) the bid is for not more than 5 per cent of the outstanding
                                                                                                     bid rules.
                         securities of a class of securities of the issuer and,
                                     (i) the aggregate number of securities acquired by the         You can buy 5% of a company’s shares every 12
                                     offeror and any person or company acting jointly or in          months without having to worry about TOB
                                     concert with the offeror within any period of twelve            requirements as long as you pay market price. As long
                                     months in reliance upon the exemption provided by               as the purchasing is gradual and well communicated, it
   S.93(1)(b)




                                     this clause does not, when aggregated with acquisitions         is acceptable. If you bought 19% 3 years ago, you can
                                     otherwise made by the offeror and any person or
                                                                                                     buy 5% more in the market without it being a formal
                                     company acting jointly or in concert with the offeror
                                     within the same twelve month period, constitute in              TOB
                                     excess of 5 per cent of the outstanding securities of
                                     that class of the issuer at the commencement of the            POLICY: public knows because early warning and
                                     twelve month period, and                                        insider reporting and no premium so who cares
                                     (ii) if there is a published market for the securities
                                     acquired, the value of the consideration paid for any of
                                     the securities acquired is not in excess of the market
                                     price at the date of acquisition determined in
                                     accordance with the regulations plus reasonable
                                     brokerage fees or commissions actually paid;




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             S.93(1)(c) – Private Agreement Exemption                                    market price is defined as the 20 trading day closing
             Subject to the regulations, a take-over bid is exempt from sections          average
             95 to 100 if,
                                                                                         POLICY: if you are within a range of 115%, you
             (c) all of the following conditions apply,                                   haven’t paid a sufficient premium so there is not
                        (i) purchases are made from not more than five                    reason for it to be a takeover bid because there is
                        persons or companies in the aggregate, including                  nothing to share and so it is exempt we don’t care if
                        persons or companies outside of Ontario,                          someone owns the company. If there is a premium
S.93(1)(c)




                        (ii) the bid is not made generally to security holders of         then we care and 15% is not a control premium. So
                        the class of securities that is the subject of the bid, and       you could buy the whole company this way. If no
                        (iii) the value of the consideration paid for any of              premium for control, no harm no foul.
                        the securities, including brokerage fees or
                        commissions, does not exceed 115 per cent of the
                                                                                         Note: s. 93(2) – you can not prepare your seller -
                        market price of securities of that class at the date of           Offeror cannot use this exemption if he should have
                        the bid determined in accordance with the regulations;            known that the person he bought the securities from
                                                                                          bought them from a number of other people so that he
                                                                                          could use the exemption
                                                                                          o you can not go up to 4 people and say get
                                                                                               together and become 1 big seller and I’ll buy
                                                                                               from you
             S.93(1)(d) – Private Company Exemption                                      TOB is exempt from the rules if:
             Subject to the regulations, a take-over bid is exempt from sections          a) the target of the bidder is a private company (s.
             95 to 100 if,                                                                     1(1))
             (d) the offeree issuer is not a reporting issuer, there is not a
                                                                                          b) there is no published market for the security
             published market in respect of the securities that are the subject                subject to the bid
S.93(1)(d)




             of the bid, and the number of holders of securities of that class            c) the number of security holders of that class is less
             is not more than fifty, exclusive of holders who are in the                       than 50, exclusive of employees
             employment of the offeree issuer or an affiliate of the offeree             TOB rules do not apply to private companies – but
             issuer, and exclusive of holders who were formerly in the                    problems arise when you buy a private company that
             employment of the offeree issuer or an affiliate of the offeree              owns other public companies! (This is what happened
             issuer and who while in that employment were, and have
                                                                                          in Treats).
             continued after that employment to be, security holders of the
             offeree issuer;



Canadian Tire Example:
35% in hands of dealers.
Make offer to dealer that if your takeover bid is successful you will reduce the royalties from 7% to 5%. S.97(1) says
all shareholders must be given identical consideration. 97(2) – no collateral agreements.
Is this a business decision or is the premium you are giving to the dealers compensation for their shares? If you are
entering into an agreement to induce someone to tender their shares it is a collateral agreement and not allowed. If it is
a genuine business decision, then that is ok.

Sample Takeover Bid Problems (Look at Sunlore question from old exam):

Are the following examples takeover bids?

1)
Day 1: Buy 10% of Common Shares
Day 4: Option from company to purchase 9% of common shares excercisable at any time.
Day 6: Consider buying 2% of common shares in open market.

Yes - I am deemed to own 19 because of my option and so if I buy the 2% it is a takeover

POLICY: the 2% I would be getting would be from an individual shareholder in the open market and so he would be
getting the benefit of the premium and not sharing it with the other shareholders

It is a takeover bid because that 2% I am going to buy in the open market is worth a lot to me because it will give me
control over every decision so I’ll pay a lot for it so there is a premium attached to it and since that premium is going
to a person, it has to be a takeover bid so that the same offer goes to all shareholders so everyone is equal.




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2)
Day 1: Buy 10% of Common Shares
Day 4: Option from individual to purchase 9% of common shares excercisable at any time.
Day 6: Consider buying 2% of common shares in open market.

Yes because I have 10 and am deemed to own the 9 and the 2 I buy would be a takeover.
This is exactly the same as 1 – it doesn’t matter how you get to 20, it is only what puts you over 20 that matters – it
doesn’t matter whether the option is from the individual or the company, it is what puts you over 20 because until you
have the 20, you are not considered to have control.

3)
Day 1: Buy 10% of Common Shares
Day 4: Option from individual to purchase 9% of common shares excercisable in six months
Day 6: Consider buying 2% of common shares in open market.

a) Acquisition of 2% is not a takeover bid because I only own 10 and I am not deemed to own the 9 because it is not
    exercisable for 6 months so the 2 more I buy would be 12 – not a takeover.

b) When exercise the option for 9% it is a takeover bid because I own 12 and if have the 9 it would be more than 20,
so I couldn’t do it unless follow the takeover rules. Also, I would be getting the 9% from an individual who would be
getting the benefit of my paying a premium for control. I would then be able to make every single decision so I would
pay more than I would for just any other share and if there was not a takeover bid, the individual would get the
premium so have to have the offer to every shareholder in the company, not just that person selling you the 9%
NOTE: if I own 12 and I have an option in 6 months to buy 9 more, why is it not automatically a takeover bid when
that option is 60 days away? Because the option is not being excercised, it is only an option so I would have to
actually buy the shares, just having the option doesn’t make it a takeover and until I exercises the option - but in the
above examples, you are deemed to have the options because you are buying the 2% - but the passage of time does not
constitute an offer to acquire.
NOTE: there is an exemption that if the purchaser was buying the shares from an individual at the market price and
not at a premium, then it does not have to be shared with all shareholders (S.93(1)(c))

4)
Day 1: Buy 10% of Common Shares
Day 4: Option from company to purchase 9% of common shares exercisable in six months
Day 6: Consider buying 2% of common shares in open market.

a) Acquisition of 2% is not a takeover bid because I only own 10 and I am not deemed to own the 9 because it is not
exercisable for 6 months so the 2 more I buy would be 12 – not a takeover.

b) Buying shares directly from company treasury. Not a takeover bid – money goes back to the company directly, so
premium will be shared by all shareholders. This is precisely what TOB legislation is designed to do, so this is not a
takeover bid. Note: If he then purchases another 1% on the open market, this would be a takeover bid. ―Outstanding‖
means must be shares that have previously been issued (eg. not from treasury). TOB rules do NOT apply to the
purchase of treasury shares (have not yet been issued by the company but are approved in the articles of
incorporation). POLICY: because shareholders of company will share in the premium generated from the purchase
of shares this is the most important thing to know in takeover bids!
can’t offer to buy someone’s shares at a premium – have to go through all the takeover obligations (above and below)
but if go to the company, can offer to buy at a premium, then you can because it will be evenly distributed to the
shareholders




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Example – Private Agreement Exemption

A                B                 C                 D                 E                F                 Public
5%               3%                2%                4%                6%               8%                72%


I want to buy as many shares as I can buy at the cheapest price and as fast as possible without triggering takeover bid
rules. What do I do?

         1)   Buy 9.9% from the public.
         2)   Buy F (up to 17.9%) – Early warning, Insider Reporting.
         3)   Buy 1.9% from the public
         4)   Five private agreements with A-E: Takes you to 39.9%.

What if five private agreements first? You won’t get close. Timing matters.
Never use your private agreements until you need them! Don’t waste them before you are at 19.99%.

c) Maintaining Control: Voting & Non-Voting Shares
    Sometimes owners want to sell shares to raise funds but they don’t want to give up control
    So they developed the concept of restricted voting shares or multiple voting shares
    Normally, a company sets up two classes of shares:
          1. Voting ( I keep them all);
          2. Non-voting no control
    Restricted voting shares: Allow companies to raise money without giving up control. I will issue tons of shares
     to everyone and they will be exactly the same as the CEO’s or founder but the only difference is that all of your
     shares will have 1 vote and the CEO’s will have 10 votes per share so the CEO/founder can control the votes and
     when the CEO leaves the business, his shares will sell and automatically convert into another class
                    This was OK as in the interest of the public and in the interest of the company
    BUT then there was the Canadian Tire case
    As a result of Canadian Tire, there are very few restricted voting share companies, and there are many
     rules dealing with this abuse. from now on, if you want to create shares with different voting structures,
     you can’t do it UNLESS you get the approval of the minority shareholders and the shares have to be
     described as non-voting shares

Example: Four Seasons is controlled by Izzy Sharpe, who wants to go to the public for money to expand the
business. If he issues too many shares, he’ll lose control of the business. He wants to sell a lot of equity but maintain
control. People want to buy shares, not to vote, but because Izzy can run the business the price will go up. Therefore,
they can issue “voting and non-voting shares” or “regular voting and multiple-voting shares.‖


    Issue: Co. may want to raise equity but if they raise too much, they may lose control over their co. How do you
     raise enough equity while allowing the founders to maintain control?

    Solution: Voting and non-voting shares. The co. grants the founder voting shares and grants all other
     shareholders non-voting shares. This way the founder can still maintain control. If the founder can keep control,
     then he can raise more equity for the benefit of all shareholders.

    This concept never took off in the U.S. and has fallen out of favour in Canada because of Canadian Tire.




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Canadian Tire (1986)
Cannot violate the spirit of Coat Tail agreements
Facts:
In December 1986, Canadian Tire (CT) dealers offered to buy 49% of outstanding voting shares of CT at
$160.24 per share while the stock was trading at $16-$18. The offer revealed that CT had voting and
non-voting shares as their 2 classes. The dealers already owned 17.4% of the voting shares. Billlis
family owned 60.9% of the voting shares. The offer further revealed that the Billis family entered into a
“lock up agreement” w/ the dealers to irrevocably tender their shares to the bid. The dealers were
guaranteed to be successful and gain control over the co. w/ majority control. As protection and as part
of an enticement, the dealers gave the family a $30M non-refundable deposit.

Note: This is not a collateral agreement because if there is no takeover bid, the takeover bid rules do not
apply and if there is a takeover bid, the $30M is just applied to the proceeds and spread evenly. This bid
is legitimate because there is no obligation to offer the same bid price to the non-voting shares of a
different class.

In 1983, Billis family introduced two classes of shares: voting and non-voting. The family retained the
voting shares while everyone else got non-voting. As a protection to the shareholders, the Billis family
introduced “Coat Tail” protection (a provision is added to the Articles whereby in the event of a takeover
bid the non-voting shareholders will become voting shareholders so that the takeover bid will have to be
offered to all of the shareholders of the co.). The triggering event that turns non-voting to voting is
where an offer is made for a majority of voting shares and a majority of the shares are taken up
(premium will be shared amongst voting and non-voting shareholders). The dealers read this and felt
that they could not pay $160 for all shares so, they were careful not to trigger the coat tail (they only bid
for 49% of the shares). Non-voting shareholders were furious.

Issue:            Should the bid be stopped b/c it violates any securities provisions?
Holding           OSC declined the bid and did not let it happen.

Nothing in the Articles of the co., the case law, the Act, precedent transactions, the importance of
certainty in commercial transactions stops the dealers from making this deal – OSC still did not allow it.

**OSC said that when the shareholders agreed to do this in 1983, there was reliance that they were to
be treated equally in the event of a takeover bid. Commissioners seemed to be saying that the
shareholders were misled and this was outrageous.

Note: If an action violates the spirit of the coat tail or the statute, then the Commission will find a way to
stop you. The dealers came back to the Commission and complained about the decision and requested
their $30M back. The Commission did not help them get the money back because if the bid went
through, then all of the shareholders would benefit from the deposit as a premium. However, if the bid
does not go through then there is no reason to treat all shareholders equally.

   Coat tails are now mandatory and companies will get punished in the marketplace when they have non-voting
    shares. The TSE has a rule that requires coat tails for companies that have non-voting and voting shares before
    they can be listed (but, companies before 1986 have been listed without coat tails).
   Because of Canadian Tire, companies with non-voting shares have depressed stock values because in the event of
    a takeover bid, as a result of coat tails, non-voting shares will come into play which will cost the bidder more
    money.

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

This raises issues over certainty. The marketplace works because of certainty by allowing people to be creative and
allows flexibility and integrity in the capital markets.




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d) Defensive Tactics in the Face of a Hostile Bid

   Although directors have a fiduciary duty to the shareholders of a corporation, directors of companies may attempt
    to block a hostile takeover bid in order to save their jobs/perks. Obviously there’s the opportunity for a disconnect
    between shareholders and management.

(i) Examples:

Unicorp v. Union Enterprise Utility Co.
F: Union Enterprises is a gigantic utility company. In response to a hostile takeover bid by Unicorp, Union
management bought a pig farm by issuing 20% of treasury shares to the farm owner. The agreement stated that the
farm      owner was not permitted to tender to a Unicorp bid, thus ensuring that a significant number of shares were
held in friendly hands to block Unicorp. Unicorp buys Union Enterprise anyway – it costs them a lot more to buy and
they were stuck with a pig farm.
I: Is this type of action permissible to block a takeover bid?
H: At the time, this action was permissible

Note: OSC since has come out w/ a policy on defensive tactics as a result of the Unicorp and Union Enterprise
takeover bid.

Onex bid for Labatts
   Onex was rumoured to be making a takeover bid for Labatts for a long time. Labatts had a long time to prepare.
    Labatts at the time had 2 assetts: beer and the TSN and Blue Jays. TSN was regulated and had to be owned by a
    Canadian company.
   Labatts created a $300MM tax liability (by changing TSN corporation into a partnership) that could only be
    triggered due to a change in control. It was a tax liability that could only be fixed pre-takeover – thus
    guaranteeing a friendly takeover.
   Onex makes a bid, and in the directors circular Labatts discloses that TSN was changed from a corporation into a
    partnership and discloses that this will trigger a $300MM tax liability upon change in control.
   Onex went to the OSC to complain, and asked OSC to force Labatts to reverse the change to the structure of TSN.
   Basically, this bought Labatts more time to find a higher bidder.


Mac’s Milk and Beckers.
Couche Tarde in Quebec wants to make a bid for Silkcorp (Mac’s Milk). The day Couche Tarde makes its bid for
Mac’s Milk, Mac’s merges with Beckers on the condition that they don’t tender shares to Couche Tarde.


TorStar bids for Sun Media.
Sun Media goes to competition bureau and says that the advertising rates in Toronto are cheaper than in Saskatchewan
because of competition. They said that no local competition would result in skyrocketing ad rates and this would be
anti-competitive. Sun Media shareholders are furious – they want the deal, but if you go to a regulator, you can’t
change your mind later. Before it got resolved, Sun Media found Quebecor who paid a lot more, and TorStar went
away.
Bottom Line:
If you are a target company you need to create an opportunity for negotiation and leverage. Need time to do this!

(ii) Defensive Tactics

1) Golden Parachutes
   If a company is taken over, then the bidder will have to pay the officers a huge sum of money to leave the
    company before the takeover




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    o   OSC says that golden parachutes are acceptable because if an officer has a golden parachute, then they will
        act in the best interest of the shareholders because they will not be concerned about saving their own jobs and
        thus ruin a good deal.
    o   As long as they are deemed to be reasonable, they are not challenged.

2) Poison Pill and Rights Plan
   If someone makes a hostile bid (acquires 20% or more of the outstanding shares), then board of directors has the
    right to push a button that will give every shareholder in the company an extra share for 1 penny except for the
    hostile bidder (the acquirer) – thus raising the acquisition cost – not bad – once a company is in play, it is always
    bought!!
     Can make a poison pill even after the HTOB is made.
     This will blow up the company (you cannot fix it once it is triggered). This is a deterrent effect to make the
         hostile bidder negotiate (makes it impossible for anyone to take control of the company).
     There has never been a poison pill triggered. No hostile bidder has ever tried to drive through one either.
     Rationale: This gives a balance of power between the bidder and the target in order to necessitate negotiation
         in a takeover bid and possibly encourage an auction
     A hostile bidder may apply to the OSC to have the poison pill removed.

3) Sell the Crown Jewels
   Sell interest in the most attractive assets of the co. This is not permitted by the OSC (cannot sell your assets
    merely to protect yourself).
    o i.e. When Onyx bid for Labatts, Labatts believed the intention was for the Blue Jays or TSN. Therefore,
         Labatts considered selling the Blue Jays as a defensive tactic.

4) Find a White Knight
   Target co. seeks out a ―friendly‖ acquirer who will pay more and/or keep the directors in        place.

5) Enlist the Aid of the Law
   The co. may enlist the law as a defensive tactic by claiming that the takeover is anti- competitive (Competition
    Bureau). The attempt is to get an injunction and draft protection legislation. (This was done by Sun Media when
    TorStar issued a HTOB. The claim was that a monopoly would be bad for business etc.)

6) Advise Shareholders Not to Tender
   Management in its circular can tell shareholder not to tender

7) Pac-Man Defence
   The target company turns around and starts trying to take over the bidder

8) Issue Shares into Friendly Hands
   This is what Union Enterprises did.


9) Institute Break-up Fees
   This is what Labbat’s did to Onex before Interbrew came along with a sweeter bid. They           split up the
    company in such a way that the tax liability was enormous.




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e) Dealing with Defensive Tactics of Hostile Takeover Bids – NP 62-202
   There is a danger of lawlessness in all of this. Often, it deprives shareholders from the opportunity to make a
    choice as to whether they want to tender to the bid.
   If you take actions that are designed to entrench yourself and deny shareholders the right to make a choice, this is
    against the law.
   BUT, if you do nothing to protect your shareholders you are useless! Job of directors is to protect the
    shareholders interests. Always have to draw this fine balance.
   There is a huge opportunity for abuse and lawlessness and the commission cannot do much about it. – THUS:
    o Realize that without responsible resistance of bids, price won’t go up.

Primary objective of Takeover Bid legislation is to protect the bona fide interests of the target shareholders.
Secondary objective is to create a level playing field where the rules do not favour bidders or the targets; to create a
framework where takeover bids can occur in an even-handed manner.

    Recognize that take over bids are good things but for the first time, the interests of management and shareholders
    are not aligned – shareholders want highest price but management might just want to protect their jobs.

Third objective: No fixed ―code of conduct‖ - it may be insufficient in some cases and excessive in others, but
behaviour of directors of a target company will be reviewed in hindsight.

   Canadian securities regulators believe that takeover bids are a good thing.
   Takeover bids impose a discipline on corporate management and reallocate resources to their best uses and create
    synergies.
   In the context of a hostile takeover bid, the interests of management and shareholders may differ (management
    may want to stay entrenched while shareholders may want the cash).
   The rules should allow bids to occur in a fair and even-handed fashion. The rules should allow the shareholder to
    make a favourable informed decision. The regulators are worried that certain defensive tactics may deny the
    shareholder the ability to make the best decision.
   Regulators will thus review any possible defensive mechanism in hindsight.
    o If what you did was to thwart shareholders’ ability to make a choice  NOT OK
    o If what you did was to create an auction OK
   Like the idea that ―Defensive Tactics‖ create an auction – Don’t like that they deny s/h the right to make a choice

OSC Advice:       If the board of directors is worried, then it should get shareholder approval in advance.
                 This Advice is Useless: takeover bids last 35 days but calling a shareholder meeting takes 60 days
                  (there simply is no time).
Policy:
Most important point:
Best result from the OSC’s perspective is to have an auction that will get the price as high as possible.
The OSC likes auctions b/c they ensure that shareholders receive maximum value for their shares (to ensure that
shareholders get the best results).
 If the companies' defensive tactic is done to create an auction, then it will be alright.
 If the defensive action is intended to deny shareholders the right to make a choice, then it will be
    unacceptable. The penalty is up to the discretion of the OSC. It is the intention that matters, not the result.
 This all discourages TOB – therefore it’s a balancing act between protecting shareholder rights while still
    encouraging take over bids.

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

Note. Everything you do will be scrutinized because this is the equivalent of war where corporate and legal reputations
are on the line.



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Note: If the steps taken are legitimately designed to create an auction, then no matter what the result is, you will likely
be fine. But, if they are designed or perceived to be designed to entrench yourself or deny shareholders the right to
make a choice, you are dead.

   Lastman: It’s not good enough for directors to take the easy route to protect themselves as opposed to engaging in
    the battle. The shareholders do not need the directors on a day-to-day basis, they need them when they are in
    trouble. If you are not there when they are in trouble, you are worth nothing. Sometimes, you need to take a risk
    in good intentions, but there is no need to buy a ―pig farm‖.


4. ISSUER BIDS – NOT EXAMINABLE THIS YEAR

   Same as a takeover bid, only it is the company offering to buy back its own shares
   Provisions effectively preclude green mail – illegal in Ontario b/c there is no equivalent of the private agreement
    exemption – US prohibits by way of exorbitant taxes. Companies can only buy back their own shares on a pro-
    rata basis (same as takeover bid).
   So if company wants to buy back shares, basically goes through TOB

S. 89(1): an offer to acquire or redeem securities made by the company
 Designed to ensure that all shareholders of the company are treated equally and prevents green mail
 Company has a perceived informational advantage, so the OSA tries to create a level playing field

S. 97 (1): must give all s/h the same consideration – S. 97(2) no collateral agreements

S. 98(1) company must prepare an issuer bid circular (similar to TOB circular w/ some
         exception)
     Issuer bid must include information found in Form 33

Rule 61-501 – Two differences:

1)        Requires the company to prepare an independent valuation of the shares by an independent valuator and
include it in the issuer bid circular.
 You must also include any valuation done in the prior two years.
 Policy: important b/c the company is in an adverse position w/ shareholders b/c they want to buy back shares –
     therefore, need protection to ensure that the price being offered is fair

2)      Recommended that the co. set up a special independent committee of the board to               oversee the process
– comprised of independent directors (non-mgmt) make sure it is fair)


a) EXEMPTIONS from ISSUER BID REQUIREMENTS:
   No exemption for purchasing <5% of o/s for not more than 115% of market price
   Might not need valuation if market is liquid and stock has market value. If stock is thinly traded, easier to
    manipulate value.

S.93(3)(a) if your share has a repurchase provision attached to the share, at the time of issue, then the company can
redeem that share w/o making the same offer to all shareholders (which goes against the issuer bid requirements)

S.93(3)(d): the company can buy back shares from current or former employees, as long as they do not buy back more
than 5% of the o/s shares (on a class basis) in any 12 months and do not pay more than market price. (market price =
20 day average closing price)

S.93(3)(f): if you give advance notice to the world that you intend to buy back shares in the open market, you can buy
back 5% of the shares in 12 months (known as normal course issuer exemption)



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S.93(3)(g) provisions do not apply to private companies

S. 93(3)(h) if there is a minimal Ontario connection (less than 50 shareholders holding less than 2%), you do not
have to comply w/ the laws of Ontario, as long as you comply w/ provisions of another jurisdiction

Note: If you buy 5% in open market, you can still buy 5% from employees. But, if you buy from employees first, that
applies to the open market.


5. INSIDER BIDS – NOT EXAMINABLE THIS YEAR

   In between issuer and takeover bids

e.g. Second Cup is owned 38% by Cara Foods, who has 2 representatives on the board of Second Cup. Cara offers to
buy another 32%.

In this situation, that same informational advantage exists.

61-501: If a TOB is made by an insider, you must:

    1) The company, at the inside bidder’s expense, must hire an independent valuator to valuate the company
       and then the inside bidder must use this in their takeover bid circular (to explain the value of the shares) – no
       requirement that the bid must be w/n the range of the evaluation, it must merely be included (allows
       shareholders to make a choice)
    2) It is recommended that a special committee of independent directors be set up to oversee the fairness of the
       transaction

Note:    Takeover bid circular can discuss the independent valuation and the directors’ circular
         can refute allegations that the valuation is wrong.

Problem: Normally takeover bids occur after 19.99% and you don’t know anything about the company.

61-501 Exemption from the valuation requirement if you lack knowledge and access to information. Second
exemption is arm’s length transaction within 12 months – that’s a third party valuation of price and therefore people
are protected. Finally, if insider comes in with a bid at an auction, that means that the price was set at the auction and
again, valuation isn’t necessary because it’s been valued by the market.

   Therefore, you tell the Securities Commission that you know nothing about the company, and that you only
    became an insider two weeks ago, and you can get an exemption from the Commission.

Both Insider Bids and Issuer Bids are part of the bigger category of ―related party transactions‖




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Securities Regulation Summary – Lastman                                                                     14/10/2011



                              V. Video - Corporate Ethics in America
   Sir Goldsmith - best reason to be in business is for $ b/c it keeps you competitive and keeps your interests
    involved
    o make a bid b/c if someone counter bids you can sell your shares and make the money he put into the bid
   No problem of buying shares with intention to eventually make a takeover bid and this is not insider trading – at
    10% you have early warning and insider obligations, but until then, it is ok
   Nbidder would call up the CEO of company and ask to meet and the lawyers would advise them as to what could
    and could not be said – don’t want to trap yourself as the insider by getting info you don’t want to hear - should do
    research on who the caller was before meeting and get a standstill agreement before meeting

   example of a meeting between 2 CEOs with 1 wanting to take over the other:
    o 1st says he understands the other is his largest SH is there something you have in mind and the other (Boone)
        says he wants to make an offer and the other says what are his intentions when he takes over the company and
        the other says he wants to run the company and will give the SHs 30/share when the stock is at 20 and pay a
        big premium (50% premium) and the other asks what is the plan that will benefit the corp
    o Goldsmith says he’d explain what the plan was and another would go to the board of directors

   example of board of director’s meeting:
         o the lawyer explains to the board their duties and responsibilities – to consider the offer in good faith,
              consider the interests of the shareholders and that there are all sorts of shareholders and listen to the
              investment banker as to whether the offer is fair, more than fair or unfair – the primacy of their duty is to
              the shareholders, even if have outside interests too – the shareholder should have a say, not the board of
              directors because the board is there to manage, not to sell
         o 1 guy says if he were on the board and was a substantial SH, he would look at all the options and do the
              best thing for the SHs – put it to the shareholders but let them know that the offer may close the plant
         o but another says he is on the board because he is there to represent not only the shareholders, but also
              other constituencies like the outside university…
         o another says he doesn’t see how a board elected by shareholders can be expected to protect the
              community or the economy…boards must represent shareholders
   Mercer says need a plan for corp to survive and become more competitive and increase value – not just 1 shot deal
   arbitrage firm – goes in to profit bw the difference bw the anticipated final selling price and what the current price
    is but the present market price usually goes up

Dfensive options – if the board thinks the 30 is inadequate:
             o can buy some of own shares by going to the shareholders directly and competing with the bidder
             o can consider whether want to run an auction and decide to sell to highest bidder
             o can have a 3rd party agree to buy your stock
             o can try to deal with the company and try to buy the bidders shares at a premium from them so they
                 would go away – green mail – BUT this is illegal in Canada
             o Sir Goldsmith says when company is in trouble, it gets its lawyers to go to the legislature to block
                 the deal

   Goldsmith says marry management and capitalism - if a factory is not efficient, close it




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