Securities Law Summary

CHAPTER 1: FOUNDATIONAL CONCEPTS................................................................................................................................ 5

Securities and Exchange Commission v. WJ Howey Co. (pg 39) (old version of the test)..................................................................6State of Hawaii v. Hawaii Market Center (pg 43)..............................................................................................................................6Pacific Coast Coin Exchange v. Ontario (SC) (pg 48)..........................................................................................................................7In the Matter of Universal Settlements International Inc. (pg 58) (Test we now use in Canada)......................................................7Definitions........................................................................................................................................................................................ 8

CHAPTER 2: HISTORICAL AND CONSTITUTIONAL DEVELOPMENT OF SECURITIES REGULATION.............................................10

DIVISION OF POWERS.....................................................................................................................................................................10Mayland and Mercury Oils Ltd v. Lymburn and Frawley (pg 86).....................................................................................................10R v. Smith (pg 90)............................................................................................................................................................................10R v. W. McKenzie Securities Limited (pg 95)...................................................................................................................................11Multiple Access Ltd. v. McCutcheon (pg 100).................................................................................................................................11Quebec v. Ontario Securities Commission (pg 104)........................................................................................................................11Global Securities Corp. v. BC (Securities Commission) (pg 107)......................................................................................................12Torudag v. BC..................................................................................................................................................................................12

CHAPTER 3: REGULATORS AND TYPES OF MARKETS............................................................................................................. 12

THE ECONOMICS OF REGULATION....................................................................................................................................................12PROVINCIAL AND TERRITORIAL SECURITIES REGULATION IN CANADA.......................................................................................................12

Pearson v. Boliden (pg 165)............................................................................................................................................................12BC (Securities Commission) v. BDS (pg 169)...................................................................................................................................13Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission) (pg 171).................13Re Cartaway Resources Corp. (pg 173)...........................................................................................................................................13

CHAPTER 4: PROSPECTUS PROCESS...................................................................................................................................... 14

INTRODUCTION.............................................................................................................................................................................14THE PROSPECTUS PROCESS.............................................................................................................................................................14UNDERWRITING AN OFFERING.........................................................................................................................................................15

Kerr v. Danier Leather (pg 234) (Bought Deal – Implications for Purchaser Remedies)..................................................................15YBM Magnex International Inc. (pg 231) (Duty of Underwriters)...................................................................................................16

Market-Out and Disaster-Out Clauses in Underwriting Agreements....................................................................................16Retrieve Resources Ltd. v. Canaccord Capital Corp. (pg 235)..........................................................................................................16

Conflicts of Interest in Underwriting (pg 236)......................................................................................................................17THE PRELIMINARY PROSPECTUS.......................................................................................................................................................17

Preliminary Prospectus Filing Requirements (see Part 9, s.9.1 of NI41-101)..................................................................................17THE WAITING PERIOD AND REVIEW PROCESS (PG 242).......................................................................................................................17

Restrictions on Activities During the Waiting Period (pg 248)..............................................................................................18Notice Re Cambior Inc. (pg 249).....................................................................................................................................................18

FINAL PROSPECTUS (PG 252)..........................................................................................................................................................19Final Prospectus Filing Requirements (see Part 9, s.9.2 of NI41-101).............................................................................................19

REFUSAL TO ISSUE A RECEIPT FOR A PROSPECTUS (PG 296)..................................................................................................................19Tricor Holdings (pg 297)..................................................................................................................................................................19YBM Magnex International (pg 299)...............................................................................................................................................20

OTHER FORMS OF PROSPECTUSES (PG 253).......................................................................................................................................20Short Form Prospectus (NI 44-101)......................................................................................................................................20Shelf Prospectus (NI 44-102) (pg 261)..................................................................................................................................21Post Receipt Pricing Prospectus (PREP) (NI 44-103).............................................................................................................21The Multijurisdictional Disclosure System Prospectus (MJDS) (NI 77-101) (pg 266).............................................................22Capital Pool Companies (pg 268).........................................................................................................................................22

RIGHT TO WITHDRAW BEFORE DISTRIBUTION.....................................................................................................................................22FORWARD LOOKING INFORMATION (NI 51-102) (PG 288)..................................................................................................................23

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MATERIAL FACT AND MATERIAL CHANGE IN A PROSPECTUS PROCESS (PG 271).......................................................................................23Material Fact....................................................................................................................................................................... 23Material Change (pg 277)....................................................................................................................................................23

YBM Magnex International Inc. (pg 284)........................................................................................................................................23Sharbern SCC 2011 (slides).............................................................................................................................................................23Kerr v. Danier Leather Inc. (pg 287) SCC 2007................................................................................................................................24Pezim v. BC (Superintendent of Brokers) (pg 287) SCC 1994..........................................................................................................24

LAPSE DATE AND REFILING OF PROSPECTUS (PG 307)..........................................................................................................................24PROSPECTUS REQUIREMENTS IN A SECONDARY OFFERING (PG 294).......................................................................................................24

CHAPTER 5: MARKET TRANSACTIONS EXEMPT FROM PROSPECTUS REQUIREMENT..............................................................25

TYPES OF PROSPECTUS EXEMPTIONS (NI 45-106)..............................................................................................................................25Exemption for Small and Medium-Sized Enterprises or Startup Issuers...............................................................................25

Private Issuer Exemption (NI 45-106, s. 2.4) (pg 319)..........................................................................................................................26SEC v. Ralston Purina Co. (pg 321) (“Need to Know” TEST).............................................................................................................26R v. Piepgrass (pg 322) (“Common Bonds” TEST)............................................................................................................................26

Family, Friends, and Business Associates Exemption (NI 45-106, s. 2.5) (Not Available in ON) (pg 322)..............................................26Founder, Control Person, and Family Exemption (NI 45-106, s. 2.7) (Only in ON) (pg 324).................................................................27Government Incentive Security Exemption (OSC Rule 45-501) (pg 325)..............................................................................................27

Wealthy/Sophisticated Investor Exemptions........................................................................................................................28Accredited Investor Exemption (NI 45-106, s. 2.3) (pg 327).................................................................................................................28Minimum Amount Investment Exemption (NI 45-106, s. 2.10) (pg 329)..............................................................................................28

Exemptions Based on a Pre-Existing Relationship with the Issuer........................................................................................29Dividends and DRIP (NI 45-106, s. 2.31 and s. 2.2)...............................................................................................................................29Business Combinations and Reorganizations (NI 45-106, s. 2.11) (pg 331)..........................................................................................29Conversion or Exchange of Securities (NI 45-106, s. 2.42) (pg 332).....................................................................................................29Rights Offering (NI 45-106, s. 2.1) (pg 333)..........................................................................................................................................30Trades to Employees (NI 45-106, s. 2.24) (pg 334)...............................................................................................................................30Discretionary Exemption (OSA, s. 74)..................................................................................................................................................30

Reporting Requirements (NI45-106 PART 6)........................................................................................................................30Issues Related to Offering Memoranda (OM) (pg 335)........................................................................................................31Discretionary Exemption (OSA s. 7.4) (pg 337).....................................................................................................................31

POLICY OBJECTIVES OF RESALE RULES...............................................................................................................................................31SUBSTANTIVE REQUIREMENTS OF RESALE RULES.................................................................................................................................32

NI 45-102, Section 2.5 Restricted Period Rule (pg 340)........................................................................................................32NI 45-102 Section 2.6 Seasoning Period Rule.......................................................................................................................33

RESALE RULES FOR CONVERTIBLE OR EXCHANGEABLE SECURITIES...........................................................................................................34RESALE RULES FOR CONTROL PERSONS (S. 2.8) (PG 346)....................................................................................................................34IMPLICATIONS OF INCORRECT RELIANCE ON PROSPECTUS EXEMPTIONS....................................................................................................34

Jones v. Deacon Hodgson Inc. (pg 348)...........................................................................................................................................34

MINIMUM LISTING REQUIREMENTS: TSX & TSXV................................................................................................................. 35

CAPITAL POOL COMPANIES................................................................................................................................................. 36

Seed Financing Rules/Requirements....................................................................................................................................37CPCs: IPO..............................................................................................................................................................................37CPC s: Restrictions on Use of proceeds.................................................................................................................................38CPCs: Qualifying Transaction...............................................................................................................................................38CPCs: Shareholder Approval of Qualifying Transaction........................................................................................................38CPCs: Escrow........................................................................................................................................................................39

CHAPTER 7: PROXY SOLICITATION....................................................................................................................................... 39

Re Pacifica Papers Inc. (pg 434)......................................................................................................................................................39REGISTERED VS. BENEFICIAL OWNERS...............................................................................................................................................40

CHAPTER 6: CONTINUOUS DISCLOSURE............................................................................................................................... 41

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RATIONAL FOR CONTINUOUS DISCLOSURE..........................................................................................................................................41KEY DEFINITIONS NI 51-102..........................................................................................................................................................41MATERIALITY (PG 360)..................................................................................................................................................................41

TSX Company Manual (pg 360)............................................................................................................................................41TIMELY AND PERIODIC DISCLOSURE REQUIREMENTS............................................................................................................................42

Part 4 - Financial Statements (pg 367).................................................................................................................................42Forward Looking Information (FLI & FOFI) (Part 4A&B).......................................................................................................................44

Management Discussion and Analysis (NI 51-102) (pg 385)................................................................................................45Part 6 - Annual Information Form (AIF) (pg 387)..................................................................................................................45Part 7 – Material Change Reports (pg 399)..........................................................................................................................46

Pezim v. BC (Superintendent of Brokers) (pg 403)..........................................................................................................................46Kerr v. Danier Leather Inc. (pg 407)................................................................................................................................................47Re AiT Advanced Information Technologies Corp. (pg 410)............................................................................................................47YBM Magnex International Inc. (pg 414) (Probability/Magnitude Test).........................................................................................47

Part 8 – Business Acquisitions Report/Disclosure of Significant Acquisition (pg 417)...........................................................48Rumors (pg 418).................................................................................................................................................................................. 48

Part 9 – Information Circulars (pg 395)................................................................................................................................49Part 11 – Additional Disclosure Requirements.....................................................................................................................49Part 12 – Filing Material Documents....................................................................................................................................49

CHAPTER 8: INSIDER TRADING AND TIPPING........................................................................................................................ 49

LEGISLATIVE SCHEME (PG 481)........................................................................................................................................................49Legal Insider Trading (pg 482)..............................................................................................................................................50Illegal Insider Trading (pg 485)............................................................................................................................................50

Re Donnini (pg 487)........................................................................................................................................................................51What Counts as “General Disclosure”..................................................................................................................................................51

Pezim v. BC (Superintendent of Brokers) (pg 498)..........................................................................................................................52Tipping (pg 499)...................................................................................................................................................................52

DEFENCES TO LIABILITY FOR ILLEGAL INSIDER TRADING.........................................................................................................................52Reasonable Belief that Information Has Been Generally Disclosed......................................................................................52

Green v. Charterhouse Group Can. Ltd. (pg 501) (?? Don’t really understand this decision)..........................................................52Re Harold P. Conner (pg 502).........................................................................................................................................................53

Reasonable Mistake of Fact (pg 506)...................................................................................................................................53Lewis v. Fingold (pg 506)................................................................................................................................................................53R v. Harper (pg 508) (Useful in relation to the “reasonableness” standard in relation to defences)..............................................53

Necessary Course of Business Defence (pg 512)...................................................................................................................53Royal Trust Ltd. v. Ontario (Securities Commission) (pg 514).........................................................................................................54

CHAPTER 7: CORPORATE GOVERNANCE DISCLOSURE........................................................................................................... 54

NI 58-201 – CORPORATE GOVERNANCE GUIDELINES..........................................................................................................................54NI 52-109 CERTIFICATE OF DISCLOSURE IN ISSUERS’ ANNUAL INTERIM FILINGS (PG 456 & 461)...............................................................55

Fair Presentation..................................................................................................................................................................56Kripps v. Touche Ross and Co. (pg 464) (What constitutes fair presentation)................................................................................56

NI 52-110 – AUDIT COMMITTEES (PG 467).....................................................................................................................................56Rules under NI 52-110 (pg 468)...........................................................................................................................................................56Independence of the Audit Committee (pg 470)..................................................................................................................................56Financial Literacy of the Audit Committee (pg 473).............................................................................................................................56Pre-Approval of Non-Audit Services (pg 474).......................................................................................................................................57

IN-CLASS LECTURE SLIDES AND CASES (MAR 12, 2013)......................................................................................................................57Peoples Department Store v. Wise.................................................................................................................................................57BCE Inc. v. 1976 Debentureholders................................................................................................................................................58UPM-Kymmene (Repap) (Business Judgment Rule)........................................................................................................................58Maple Leaf Foods v. Schneider (Business judgment rule)...............................................................................................................58

CHAPTER 11: ENFORCEMENT............................................................................................................................................... 58

INVESTIGATION POWERS OF THE OSC...............................................................................................................................................593

Deloitte v. Ontario (Securities Commission) (pg 644) (discusses the OSC’s role in disclosing compelling testimony).....................59CRIMINAL CODE............................................................................................................................................................................60QUASI-CRIMINAL.......................................................................................................................................................................... 60CIVIL ENFORCEMENT POWERS.........................................................................................................................................................61ADMINISTRATIVE ENFORCEMENT POWERS (PUBLIC INTEREST POWERS: S. 127)........................................................................................62

Wilder v. Ontario (Securities Commission) (pg 691).......................................................................................................................62Re Canadian Tire Corp. (pg 695).....................................................................................................................................................62

Philosophy of Sanction under s. 127 Public Interest Orders (pg 704)...................................................................................63Asbestos Minority Shareholders v. OSC (pg 705)............................................................................................................................63Re Cartaway Resources Corp. (pg 712)...........................................................................................................................................63

JUDICIAL REVIEW OF REGULATORY DECISIONS (PG 721).......................................................................................................................63Donnini v. Ontario Securities Commission (pg 722)........................................................................................................................63

CHAPTER 10: CIVIL LIABILITY................................................................................................................................................ 64

PRIMARY MARKET LIABILITY (PART XXIII, OSA) (PG 598)....................................................................................................................64DEFENCES (PG 600)......................................................................................................................................................................66

Depreciation not caused by the misrepresentation.............................................................................................................................66Purchaser’s Knowledge of the Misrepresentation (OSA s. 130(2)).......................................................................................................66No Knowledge...................................................................................................................................................................................... 66Withdrawal of Consent........................................................................................................................................................................67Reliance on an Expert..........................................................................................................................................................................67Experts Defence................................................................................................................................................................................... 67Due Diligence Defence.........................................................................................................................................................................67

Escott et al. v. Bar Chris Construction (pg 605)...............................................................................................................................67Re YBM Magnex (pg 608) (Due Diligence Defence and what meets the Test of Reasonableness)..................................................68Kerr v. Danier Leather Inc. (pg 619) (Deals with statutory civil liability).........................................................................................68

SECONDARY MARKET LIABILITY (PART XXIII.1) (PG 634).....................................................................................................................68Secondary Market Liability - Common Law..........................................................................................................................73

REGISTRATION REQUIREMENTS........................................................................................................................................... 74

CATEGORIES OF LICENSING..............................................................................................................................................................74Dealers.................................................................................................................................................................................................74Advisors...............................................................................................................................................................................................74Investment Fund Managers.................................................................................................................................................................75

REGISTRATION REQUIREMENTS........................................................................................................................................................75Should a Person/Company be Registered?..........................................................................................................................................75

CHAPTER 9: TAKEOVER BIDS (PART XX, OSA)....................................................................................................................... 77

LEGISLATION (OSA SS. 93 TO 99.1) (PG 533)...................................................................................................................................77LAUNCHING A TAKEOVER BID: TWO METHODS (PG 535).....................................................................................................................77EQUALITY, DISCLOSURE, AND TIMING...............................................................................................................................................78

Equal Treatment (pg 536)....................................................................................................................................................78Disclosure.............................................................................................................................................................................79

Circulars (Directors and Hostile Bidders)........................................................................................................................................79Liability................................................................................................................................................................................................79

The “Early Warning” System...........................................................................................................................................................80Timing..................................................................................................................................................................................81Financing Issues...................................................................................................................................................................81Integration...........................................................................................................................................................................81

EXEMPTIONS FROM THE TAKEOVER BID REQUIREMENTS (PG 550).........................................................................................................83PLANS OF ARRANGEMENTS (PG 552)................................................................................................................................................84

BCE Inc. v. 1976 Debentureholders (pg 553)..................................................................................................................................84DEFENSIVE TACTICS.......................................................................................................................................................................85

Types of Defensive Tactics....................................................................................................................................................85White Knight........................................................................................................................................................................................ 85Poison Pill or Shareholder Rights Plan (SRP)........................................................................................................................................85

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Sale of Crown Jewel.............................................................................................................................................................................86Litigation..............................................................................................................................................................................................86Issuer Bid............................................................................................................................................................................................. 86Break Fee............................................................................................................................................................................................. 86Securities Issuance...............................................................................................................................................................................86

Guidelines for Target’s Use of Defensive Tactics..................................................................................................................86Re CW Shareholdings Inc. v. WIC Western International (pg 564)..................................................................................................86347883 Alberta Inc. v. Producers Pipelines Inc. (pg 566) (Improper Purpose of SRA).....................................................................87Re Royal Host Real Estate Investment Trust (pg 573).....................................................................................................................87

DUTIES OF THE TARGET BOARD........................................................................................................................................................88Re CW Shareholdings Inc. v. WIC (pg 579)......................................................................................................................................88Maple Leaf Foods Inc. v. Schneider Corporation (pg 584)..............................................................................................................88BCE Inc. v. 1976 Debentureholders (pg 589)..................................................................................................................................88

45-102, 45-106, 51-102 (Continuous Disclosure)

Chapter 1: Foundational Concepts Key Definitions

Purposes of the OSA1.1 The Purposes of this act are.

(a) To provide protection to investors from unfair, improper or fraudulent practices; and(b) To foster fair and efficient capital markets and confidence in capital markets

What is a Security? Principal Protected Notes: guarantee that you will not lose your principle investment Income Trusts Viatical Settlements: terminally ill policy holder (the viator) assigns the death benefit of his policy to a Viatical

settlement provide in exchange for an immediate payment of cash less than the expected benefit Derivatives: where the value depends on or derives its value from another security or financial asset

Legislative Definition of “Security” OSA s. 1(1) Any document, instrument, or writing that is commonly known as a security

o Commonly known: means to a sophisticated person who has skills in dealing with these things Courts will look at the policy behind the act to help determine if something should be considered a “security” Any kind of options (ie. stock), Futures, warrants, convertible debentures, trust units

OSA – S. 1(1): A “security” includes,a) Any document, instrument or writing commonly known as a security,

Refers to commonly known by members of the legal/investment community (not commonly known by average citizen)CM Joinder Leasing Corp

Note: open ended definition allows for the nature of things to change over time (i.e. viatical settlements)b) Any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person

or company, Broad because it could mean any commodity you buy courts engage in policy oriented analysis Distinction made by courts/regulators: when person bought this, did they think they were buying a commodity or did they think

that they were buying an investment Courts have had to narrow this definition, so only instruments intended as investments are securities and not instruments

bought and sold for other commercial purposes Look to see whether the person is expecting an increase in value if yes, security If you buy a bottle of scotch and get a receipt, the receipt is not a security. But if you buy a bottle, hoping it will increase in

value and asking someone to age it for you so you can later sell it for profit, it is a securityc) Any document constituting evidence of an interest in an association of legatees or heirs,

Historical interestfraudsters inviting investors to pay up front on notion that the person was eligible to get money from estate

d) Any document constituting evidence of option, subscription, other interest in security,

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e) Any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation certificate, certificate of share or interest, pre-organization certificate or subscription OTHER THAN a contract of insurance issued by an insurance company licensed under the Insurance Act and an evidence of deposit issued by a bank listed in Schedule I or II to the Bank Act (Canada), by a credit union or league to which the Credit Unions and Caisses Populaires Act, 1994 applies or by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act,

Exclusions refer to types of financial instruments otherwise regulated (insurance contracts, evidences of deposits in bank account, etc.)

f) Any agreement under which interest of purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets, except a contract issued by an insurance company licensed under the Insurance Act which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser,

Key example: mutual fundsg) Any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or interests at the

option of the recipient or of any person or company,h) Any certificate of share or interest in a trust, estate or association,i) Any profit-sharing agreement or certificate,j) Any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate,

Certificate that investors get from person called promoter (i.e. person responsible for organizing business.) Considered a security b/c investing money is being used to engage in profit making activity

k) Any oil or natural gas royalties or leases or fractional or other interest therein,l) Any collateral trust certificate,m) Any income or annuity contract not issued by an insurance company,n) Any investment contract,

MOST IMPORTANT BRANCH Dealt with in Pacific Coast Case Hotly litigated because it is ambiguous We determine if a particular instrument is a security by asking whether or not the person invested on the premise that the

other person’s expertise would create profit (in these situations, need full disclosure of relevant info)o) Any document constituting evidence of an interest in a scholarship or educational plan or trust,p) Any commodity futures contract or any commodity futures option that is not traded on a commodity futures exchange registered

with or recognized by the Commission under the Commodity Futures Act or the form of which is not accepted by the Director under that Act

Definition of “Investment Contract” Investment contract: a contract, transaction or scheme whereby a person invests his money in a common enterprise

and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise

Securities and Exchange Commission v. WJ Howey Co. (pg 39) (old version of the test) Facts: The WJ Howey Company sold orange groves to investors and the Howey-in-the-Hills Service Inc. provided cultivating, harvesting and marketing services for the crops if the investors so chose to use them.Issue: Whether the land sales contract, the warranty deed and the service contract together constitute an “investment contract” within the meaning of s. 2(1)?Decision: This was an investment contractRatio:

1. Whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others

State of Hawaii v. Hawaii Market Center (pg 43) Facts: The corporation express purpose was to open a retail store and sell only to people who possessed a retail card. To raise money they recruited founding members who paid money in and then hoped to recover through fees for bringing in new members and %’s of sale money from their members.Issue: Decision: This was an investment contract. Changes the test in Howey from “solely” to having some “managerial control”.Ratio: An investment contract is created whenever:

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1. An offeree furnishes initial value to an offeror, and2. A portion of this initial value is subjected to the risks of the enterprise, and3. The furnishing of the initial value is induced by the offeror’s promises or representations which give rise to a

reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and

4. The offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise

a. In this case the founder-members possess none of the incidents of managerial control which would preclude the finding of a security. The members have no power to influence the decision making of the company

Reason: It is irrelevant whether the inducement leading an investor to risk his initial investment are founded on a premise of

fixed returns rather than a share of profits

Pacific Coast Coin Exchange v. Ontario (SC) (pg 48) Facts: PCCE offered bags of silver coins for sale to members of the public which either bought them for cash or on margin. The promo literature described the coins as an investment. The purchaser would make a profit or loss depending on whether the value of silver increased or decreased while they had the silver.Issue: Decision: This was an investment account. The customers were dependant on Pacific namely for 1) the success of the venture and 2) for the existence of a true market to sell the silver coins onRatio: Where the profits are derived from the undeniably significant efforts of persons other than the investorsReason:

Common Enterprise: means “one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties”

Until the investor has paid the full purchase price, he has no title to any physical property but only a claim against Pacific

In the Matter of Universal Settlements International Inc. (pg 58) ( Test we now use in Canada ) Issue: Whether the Viatical products USI offers to investors in Ontario are investment contracts under the definition of securities under s. 1(1)?Decision: Yes, they are investment contractsRatio:

1. To determine if a contract, transaction or scheme is a security a FOUR part test must be satisfied:i. An investment of funds with a view to profit

ii. In a common enterpriseiii. Where the profits are derived from the undeniably significant efforts of persons other than the investors

Reason: Investors in the USI Viatical offering cannot exercise any such managerial control over their investment Significant pre-purchase managerial activities undertaken to insure the success of the investment may also satisfy the

third prong of the test

KEY QUESTIONS 53. (1) No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director.

- Process to Determine if the Ontario Securities Act Applies (FIRST STEP ON EXAM):1) Does the transaction involve a “security”?

If the transaction does NOT involve a security, the OSA does not apply2) If yes, does the transaction involve a “trade” in a security?

If the transaction (ie. security being bought or sold) does NOT involve a trade, then the OSA does not apply

3) If yes, then does the trade constitute a “distribution”?

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If the transaction does NOT involve a trade that constitutes a distribution, the prospectus requirement does not apply

4) If yes, then issuer must prepare a preliminary and final prospectus unless an exemption applies

CONCLUSION: There is a requirement to prepare a prospectus when there is a trade in a security that constitutes a distribution

Definitions Definition of a “Trade” OSA s. 1(1)

Clause (a) focuses on sales. Any sale or disposition for valuable consideration. Clause (d) Control Person: any person who has control of the company (has 20% ownership) anything he does is a

trade Clause (e) Advertising/sales pitches

o Saying “I have a security would you like to buy it?” is considered a “trade”o Simply advertising that you have a security for sale is also considered a “trade”

OSA – S. 1(1): “trade” or “trading” includes (NOT exhaustive),a) Any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, installment or otherwise,

but does not include a purchase of a security or, except as provided in clause (d), a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith,

Expressly excluded is a purchase of a security because they are trying to protect the purchaser, and force the seller to prepare a prospectus

SA cannot impose on a buyer the obligation to prepare a prospectus ‘Valuable consideration’ excludes gifts Using securities as collateral is excluded because the SA was never meant to restrict the ability of security holders to use their

equity as loan collateralb) Any participation as a trader in any transaction in a security through the facilities of any stock exchange or quotation and trade

reporting system, Focuses on traders/registrants regulation of persons involved in carrying out trades on behalf of others Consistent with the policy objective of controlling access to the activity of professional trading in the interests of protecting

investors in relation to their interactions with such professionalsc) Any receipt by a registrant of an order to buy or sell a security,

Focuses on traders/registrants regulation of persons involved in carrying out trades on behalf of others Consistent with the policy objective of controlling access to the activity of professional trading in the interests of protecting

investors in relation to their interactions with such professionalsd) Any transfer, pledge or encumbrancing of securities of an issuer from the holdings of any person or company or combination of

persons or companies described in clause (c) of the definition of “distribution” for the purpose of giving collateral for a debt made in good faith, and

Various transactions from the holdings of “control persons” for the purpose of giving collateral for a debt made in good faith are considered trades

Note: pledging by non-control holders is specifically excluded in clause (a) from the definition of tradee) Any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing

Anti-avoidance provision May include various presale activities or sales pitches, such as providing a list of names of prospective purchasers, or placing

advertisements in widely circulated publications before the incorporation of a company Regulatory concern is that any sales pitches might include pressure tactics or misreps, which would influence the buyer, but

not be caught by legislation because they take place prior to the actual trade Inclusion of presale activities is intended to maintain the integrity of the markets and to protect investors

Definition of a “Distribution” Definition of a distribution found at OSA s. 1(1) Clause (a): trade in securities of an issuer that have not been previously issued Clause (c) control persons: you will be deemed a control person if you hold 20% or more

OSA – S. 1(1): “distribution,” where used in relation to trading in securities, means (EXHAUSTIVE),a) A trade in securities of an issuer that have not been previously issued,

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An “issue” means to offer securities for sale an “issuer” means “a person or company who has outstanding, issues or proposes to issue, a security”

A prospectus is required where the security is issued for the first time by the companyb) A trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated

to that issuer, The point of this provisions is that on reissue, the issuer might have in its possession material info not otherwise available to

the public This covers “treasury shares” (share that are not outstanding; held onto by the board to be issued at a future time) that are

owned by the company but have not yet been issued to the publicc) A trade in previously issued securities of an issuer from the holdings of any control person,

Reasons:o Those in control have better knowledge of the issuer and the possibility of influence over internal board decisions.

Regulating control transactions is justified as an issue of equality of access for all investorso Control persons have a superior ability to alter the value of the issuer. If the sale involves a substantial number of

securities, the market price of the security may be affected and the sale itself may be a “material” evento The control person herself may be an important factor in the success of the enterprise

What is a control person?o A holding of more than 20% of the voting rights attached to all outstanding voting securities is deemed to

represent a control block unless there is evidence to the contrary (such as evidence that the holder does not have the ability to control where another person or combination holds the majority of the voting securities or is in a position to control the election of the BOD)

o Also can be a combination of persons or companies acting in concert by virtue of an agreement, arrangement or understanding which holds sufficient number of voting rightsmust have some sort of relationship [family, inter-corporate ties, voting agreements, or previous actions in common]

o Note: less than 20% of the voting securities may still constitute a control block, depending on circumstances such as the existence of sufficiently large security holdings by others, the pattern of voting behavior by various holders, the way in which securities are distributed, analysis of the recent history of ownership of the securities in question must hold a sufficient number of the voting rights to affect materially the control of the issuer

d) A trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, prior to the 15th day of September, 1979 if those securities continued on that date to be owned by or for that underwriter, so acting,

e) A trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, within eighteen months after the 15th day of September, 1979, if the trade took place during that eighteen months, and

f) Any trade that is a distribution under the regulations, and on and after the 15th day of March, 1981, includes a distribution as referred to in subsections 72 (4), (5), (6) and (7), and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution

Definition of a “Reporting Issuer” Clause (b): that has filed a prospectus and for which the Director has issued a receipt under this Act

o Once you have a receipt it is very hard to lose reporting issuer status

OSA – S. 1(1): “Reporting issuer” means an issuer.a) That has issued voting securities on or after the 1st day of May, 1967 in respect of which a prospectus was filed and a receipt therefor

obtained under a predecessor of this Act or in respect of which a securities exchange takeover bid circular was filed under a predecessor of this act

Note: only applies to voting securities Transitional provision

b) That has filed a prospectus and for which the Director has issued a receipt under this act Doesn’t matter if the securities were distributed as long as a prospectus was filed and a receipt was obtained Most frequently encountered

b.1) That has filed a securities exchange take-over bid circular under this act before December 14, 1999 Only of historical interest in Ontario- former loophole in securities legislation Transitional provision

c) Any of those whose securities have been at any time since the 15th day of September 1979, listed and posted for trading on any stock exchange in Ontario recognized by the Commission regardless of when such listing and posting for trade commenced

For Ontario purposes only TSX and Canadian National Stock Exchange (CNSX) are recognized d) To which the Business Corporations Act applies and which for the purposes of that Act is offering its securities to the publice) That is the company whose existence continues following the exchange of securities of a company or by or for the account of such

company with another company or the holders of the securities of that other company in connection with

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i) A statutory amalgamation or arrangement ORii) A statutory procedure under which one company takes title to the assets of the other company that in turn loses its

existence by operation of law, or under which the existing companies merge into a new company, where one of the amalgamating or merged companies or the continuing company has been a reporting issuer for at least twelve months

f) That is designated as a reporting issuer in an order made in subsection 1(11) OSC acquired power to deem issuers to be reporting issuers- s. 1(11) of OSA Exercised on a public interest standard Intended to allow the Ontario regulator to deem reporting issuers in other Canadian jurisdictions to be reporting issuers in

Ontario where Ontario residents might access their securities

Definition of “Material” Material Fact & Material Change: A fact is material when it (i) significantly affects the market price or value of a

security; or (ii) would reasonably be expected to have a significant effect on the market price or value of a securityo Examples include:

Changes in the corporate structure: takeover bids, or insider bids Changes in capital structure: planned splitting of stocks Changes in financial results Changes in business and operations Acquisitions and Dispositions Changes in Credit Arrangements

Chapter 2: Historical and Constitutional Development of Securities Regulation Three objectives of securities regulation

1. To protect investors, 2. To foster fair and efficient capital markets, and3. Ensure integrity and stability of the financial system

Division of Powers

Mayland and Mercury Oils Ltd v. Lymburn and Frawley (pg 86) Facts: Under the Alberta Security Fraud Prevention Act registered persons must enter into a personal bond as condition of payment if the registered person is ever charged with or convicted of a criminal offence or found to have committed an offence under the act. Mayland argues that the legislation is ultra vires the province as it invades the federal field of criminal law.Issue: Decision: The Act is not an attempt to encroach upon the exclusive power of the Dominion as to Criminal Law. The province has the right to regulate this under property and civil rights and anybody operating in the province is subject to there laws.Ratio:

1. The imposition of such an ordinary condition in a bond taken to secure good conduct does not appear to invade in any degree the field of criminal law

2. There is no reason to suppose that any honest company would have any difficulty in finding registered persons in the Province through whom it could lawfully issue capital

Reason: If a Dominion company is formed to trade in securities there is no reason why it should not be subject to the

competent laws of the Province as to the business of all persons who trade in securities

R v. Smith (pg 90) Facts: The accused was charged wither offences under s. 63 of the Securities Act (Ontario). The Act requires people to submit a prospectus before selling securities in their company. The Act also says that anybody who provides false information may be penalized. S. 343 of the Criminal Code make it an offence to circulate or publish a prospectus known to be false. The trial judge held the pith and substance of the provision of the Act as falling under criminal law. The CoA reversed the judgment and the SCC dismissed the appeal.Issue: Whether s. 63 of the Act is in conflict with the provisions of s. 343 of the Criminal Code so as to make them inoperative?

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Decision: Court said the Pith and Substance of the act was to regulate property and civil rights and any overlap was minor and allowed as long as there was no conflict between the federal and provincial laws.Ratio:

1. The Securities Act affects anyone who is knowingly responsible for the furnishing of the information, whether he personally is interested in the marketing of the securities or not

Reason: Court found no conflict in the sense that compliance with one law involves the breach of the other. The court believes

they can operate concurrently.

R v. W. McKenzie Securities Limited (pg 95) Facts: Deals with the issue of what happens when a registered securities dealer in Ontario sells securities by mail and telephone to an investor living in Manitoba and those dealers are not registered in Manitoba. The dealers argue that the Manitoba Securities Act is ultra vires the province of Manitoba on the ground that it seeks to regulate interprovincial trading. Issue: Decision: The act is intra vires the province of Manitoba and the securities dealers are guilty.Ratio:

1. The securities legislation of one province governs trading initiated and pursued in another2. The true nature of the provincial statutes above considered, is to provide protection to the public through a system of

regulating and supervising the conduct of persons who engage in trading activities in securities within the provincea. It is not designed to reach out beyond provincial borders and to restrain conduct carried on in other parts of

Canada or elsewhere. Its operation is effective within Manitoba only.Reason:

Thus examined, the Act cannot justly be considered as designed in any way for the regulation of interprovincial trading. It accordingly does not invade the domain of trade and commerce reserved to the dominion by the provisions of sec. 91 (2) of the B.N.A. Act

Multiple Access Ltd. v. McCutcheon (pg 100) Facts: The conflict arose because federal corporate laws and provincial securities legislation with regards to insider trading overlapped with near-identical provisions.Issue: Decision: Held that the provincial legislation could stand alongside the federal legislation as the province had the right to regulate under its property and civil rights powerRatio:

1. Similar provincial regulation is permitted to overlap on the basis that federal and provincial legislation could operate concurrently where there is no conflict or contradiction between the two pieces of legislation but the legislation must fit under a provincial competence such as property and civil rights (this case)

a. There is no good reason to seek of paramountcy except where there is actual conflict in operation such as where one enactment says “yes” and the other says “no”

Reason: Court found that The Securities Act of Ontario constitute valid legislative provisions in relation to the subject matter of

property and civil rights in the provinceo These sections do not sterilize the functions and activities of a federal company nor do they impair its status

or essential powers

Quebec v. Ontario Securities Commission (pg 104) Facts: The legislation at issue was within the provincial competence as concerning property and civil rights in the province. The controversy was whether it was a valid exercise of power for the Ontario Securities Commission to enforce Ontario securities law on the actions of a Crown corporation in another province (Quebec).Issue: Decision: Held the a Crown corporation must follow the laws of another province when those transactions are more closely connected to Ontario or to some other province then they are to QuebecRatio:

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1. Court held that it could hardly be considered fair and reasonable to suggest that only residents of Ontario are subject to Ontario regulatory rules while operating in the province’s capital markets

Reason:

Global Securities Corp. v. BC (Securities Commission) (pg 107) Facts: A BC brokerage firm, Global, challanged the authority of the BC Securities Commission to order Global to produce documents that were to be handed over to the United States Securities Exchange Commission. The BC Securities Act at the time allowed the commission to require registered brokers in the province to produce records in their control “to assist in the administration of the securities laws of other jurisdictions.”Issue: Decision: Ratio:

1. The pith and substance of the provision in question was the enforcement of BC securities laws and that purpose clearly falls within the provincial domain under s. 92(12) “property and civil rights”

Reason: That where, as here, there is a clearly dominant intraprovincial purpose, the mere fact that the province is co-

operating with a foreign authority in the pursuit of that purpose will not change the law's pith and substance

Torudag v. BC Facts: Insider trading case where people knew there was a sale and knew it would raise the price of the stock when that info was released so they bought a bunch of stock before the info became public. They took the position that they don’t live in BC (they lived and worked in ON) and the trade happened in Toronto as well. BC did have power over the regulatory exchange in which the company traded on. Issue: Decision: Court held that there was enough of a connection for BC to have the power to bring charges against them as the company traded on the exchange they were responsible for and that gave them enough of a connection to go after people who physically made the trade in Ontario.

Chapter 3: Regulators and Types of Markets

The Economics of Regulation Primary Market Transaction or “Distribution: takes effect where the issuer sells its own securities or sells them

through the services of an underwritero Private Placement: is a sale of securities by the issuer directly to specific investors, frequently institutional

investors, using a specific exemption from securities regulatory requirements IPO: occurs when an issuer is first offering securities to the public generally

Secondary Markets: after an issuer has issued securities through a prospectus offering, it becomes a “reporting issuer” under the legislation and is required to comply with ongoing reporting obligations. Secondary markets are those in which shares and other securities are traded after being issued by the issuer for the first time.

Provincial and Territorial Securities Regulation in Canada Canadian system is largely recognized as a “closed system” as it is based on the idea that all distributions of securities

must be qualified by a prospectus and its attendant regulatory oversight o Some jurisdictions have “open” aspects in that they are not undertaking regulatory oversight for some types

of distributions

Pearson v. Boliden (pg 165) Facts: The dealer (plaintiff) was arguing that it is open to a plaintiff, or a court of law, to choose to apply the Act of one province that will provide a cause of action in misrepresentation for a plaintiff who has solicited in and purchased his or her shares pursuant to a distribution in another province.Issue:

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Decision: Once an Act of a province applies to regulate (by means of a prospectus requirement) the “distribution” of securities taking place within the province’s boundaries, the same Act must surely be looked to for any statutory cause of action for misrepresentation contained in the document.Ratio:

1. A court in making a choice of law is bound to follow the constitutional principle that it is the province in whose territory the securities are distributed which has the jurisdiction

2. The lex loci delicti choice of law rule does not applyReason:

BC (Securities Commission) v. BDS (pg 169) Facts: Appellant argued that the BC Securities Commission had not met the requirement of fundamental justice under the Charter in denying the appellant the right to cross-examine an investigator.Issue: Decision: Ratio:

1. Securities regulation is subject to much less stringent safe guards then the criminal law and there is no constitutionally protected right to cross-examine an investigator on an affidavit filed in support of a petition in the circumstances of this case

2. The compelling of personal attendance and document production for investigative purposes are generally not constitutionally objectionable

Reason:

Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission) (pg 171) Facts: Case discusses the scope and limits of securities regulators’ authority and the SCC examined the power to intervene in the market in the public interest.Issue: Decision: SCC endorses the broad scope of public interest jurisdiction for the Securities Commission while setting limits on the exercise of this power by the securities regulators. In this case the OSC was right to decide that this was not a case in which they should use their public interest powers.Ratio:

1. In exercising their public interest jurisdiction, securities regulators should consider:a. The protection of investors, andb. The efficiency of, and public confidence in, capital markets generally

2. Regulators can look at 4 legitimate factors when considering using its s. 127 powera. The seriousness and severity of the sanctions applied forb. The effect of imposing such a sanction on the efficiency of, and public confidence in Ontario marketsc. A reluctance to use the open-ended nature of the public interest jurisdiction to police out-of-province

activitiesd. A recognition that s. 127 powers are preventative in nature, not remedial

Reason: The OSC did not find that there was a significant enough transactional connection with Ontario to justify its

intervening in the public interest Also found that the minority shareholders were not materially misled by the statements of Quebec’s minister of

finance respecting the prospect of a follow-up offer

Re Cartaway Resources Corp. (pg 173) Facts: SCC considers the deterrent objectives of the sanctions provided in securities regulation.Issue: Whether it is reasonable to decide that general deterrence has a role to play in the policing of capital markets?Decision: Ratio:

1. General deterrence has a proper role to play in determining whether to make orders in the public interest and, if they choose to do so, the severity of those orders

Reason:

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In a word, a general deterrent is preventative. It is therefore reasonable to consider general deterrence as a factor, albeit not the only one, in imposing a sanction under s. 127

Chapter 4: Prospectus Process

Introduction A market participant seeking to issue securities MUST prepare both a preliminary and final prospectus

o Prospectus disclosure is also required where there is a sale of securities by persons having a controlling interest in the securities of an issuer

NI 41-101 recognizes a “passport system” creating a “passport prospectus” and a “dual prospectus” where an issuer is seeking to issue in Ontario and another province or a another province and Ontario

NP 11-202 sets out the rules for Passport Prospectus’ in Section 3.2 Passport Prospectus:o (1) If the principal regulator is a passport regulator and the prospectus is not filed in Ontario, only the

principal regulator will review the prospectuso (2) If the principal regulator is the OSC and the prospectus is also filed in a passport jurisdiction, only the OSC

will review the prospectus And in Section 3.3 Dual Prospectus:

o If the principal regulator is a passport regulator and the prospectus is also filed in Ontario, the principal regulator will review the prospectus, and the OSC, as a non-principal regulator, will coordinate its review with the principal regulator.

Securities law also allows a preliminary prospectus and a final prospectus to be filed to enable the issuer to become a reporting issuer, despite the fact that no distribution is contemplated at that time by the issuer

Advantages of Going Public: huge market capital, create base of interest for future capital needs, liquidity for investors, prestige and enhance visibility, established method of valuing share

Disadvantages of Going Public: lose confidentiality, reduced flexibility with respect to communications with shareholders, increased focus on short-term returns, changes in controlling voting share, process can be both time-consuming and expensive

The Prospectus Process A prospectus is required for an initial public offering (IPO) and a primary offering of new securities

o A prospectus can also be required in limited circumstances of a secondary offering (ex: resale of securities by a control block holder)

Four stages of a prospectus process:1) The development and filing of a preliminary prospectus and the issuing of a receipt by the regulator2) Comments and revisions during a waiting period3) The filing of a final prospectus and the issuing of a receipt4) The distribution of securities once the receipt is issued

NI 44-101 contains new definitions of an “IPO venture issuer” and a “junior issuer”o IPO Venture Issuer:o Junior Issuer:

OSA s. 56(1):The overriding principle of prospectus disclosure is that there be full, true, and plain disclosure of all material facts

o Full disclosure: is achieved when disclosure is made of facts sufficient to permit investors to make an informed investment decision

o True disclosure: is achieved if the disclosure is accurate and not misleading and does not omit a fact that is either material itself or is necessary to understand the facts that have been disclosed

o Plain disclosure must be understandable to investors and in plain language Only after a receipt has been obtained for the prelim prospectus can the issuer or underwriter test the market in

terms of determining the level of interest in the securities among potential investors

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In the US they have developed a more streamlined process for well-known secondary issuers which allows more flexibility and faster issuing

s. 53(1): No person or company can trade in a security if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them

o Remember a trade includes advertising

Underwriting an Offering Definition of Underwriter (OSA 1)

“underwriter” means a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution, but does not include,

(a) a person or company whose interest in the transaction is limited to receiving the usual and customary distributor’s or seller’s commission payable by an underwriter or issuer,

(b) a mutual fund that, under the laws of the jurisdiction to which it is subject, accepts its shares or units for surrender and resells them,

(c) a company that, under the laws of the jurisdiction to which it is subject, purchases its shares and resells them, or

(d) a bank listed in Schedule I, II or III to the Bank Act (Canada) with respect to securities described in paragraph 1 of subsection 35 (2) or to such banking transactions as are designated by the regulations

The underwriter is generally responsible for determining the terms and price of the offering based on demand Several Types of Underwriting Arrangements:

1) Agency Agreement (most common): where the underwriter agrees to use its “best efforts” to sell the securities as an agent of the issuer. No commitment to purchase.

Underwriter then takes a commission for the securities it is able to sell (normally up to 7%) Priced in context of the market (during waiting period) and disclosed in final prospectus

2) Firm Commitment/Underwritten Deals: where the underwriter makes an agreement to purchase the securities and resell them

Priced in the context of the market (during waiting period) and disclosed in final prospectus Commitment to purchase the securities, but subject to a “market out” clause

3) Bought Deal (type of “firm commitment”): where the underwriter makes a firm commitment to purchase a large block of securities, signed before the preliminary prospectus is filed and disclosed in prelim prospectus

Prelim short form prospectus must be filed within 4 business days of signing the agreement (NI 44-101)

Rarely used for IPO’s and there are often disaster Out’s and Regulatory Out’s but very hard to use Over Allotment Option: Issues can give the underwriter an option to sell up to 15% over the original

amount that they were looking to sell. Underwriters have 30 days to exercise the option post-closing

Kerr v. Danier Leather (pg 234) (Bought Deal – Implications for Purchaser Remedies) Facts: Plaintiff shares were purchased by Nesbitt Burns Inc., one of the underwriters of Danier’s IPO. The plaintiff purchased shares of Danier from Nesbitt. The plaintiff is attempting to sue Danier Leather for misrepresentation in the prospectus.Issue: Decision: Plaintiff cannot sue Danier because it was not them selling the shares but NesbittRatio:

1) Unlike agency agreements where the issuer is still the party selling the securities, under a bought deal, the underwriter is selling the securities

2) When the shares are purchased from an underwriter, the right of rescission under s. 130(1) is available only against that seller

The underwriter has a public obligation to ensure that the required assurances and covenants are obtained and that the integrity of the system is maintained

o OSA s. 59(1) (Prospectus Certificate): A prospectus must contain a certificate signed by the underwriters in a contractual relationship with the issuer with regards to the prospectus offering that to the best of their

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knowledge, information, and belief, the prospectus constitutes full, true, and plain disclosure of all material facts relating to the offering

The underwriters that sign the certificate are potentially liable for any misrepresentations in the prospectus

o S. 130(1) (Liability for Misrepresentation in Prospectus): Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against

(a) the issuer or a selling security holder on whose behalf the distribution is made;(b) each underwriter of the securities who is required to sign the certificate required by section 59 ;(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;(d) every person or company whose consent to disclosure of information in the prospectus has been filed

pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and

(e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),

YBM Magnex International Inc. (pg 231) ( Duty of Underwriters ) Facts: Illustrates how securities commissions view the role of the underwriter in terms of disclosure and certification. Deals with the phrase “to the best of our knowledge, information and belief” with respect to the certificate the underwriter must sign that goes along with the prospectus. Ratio:

1) The phrase “to the best of our knowledge, information and belief” carries with it a requirement to obtain information before an underwriter can make the affirmation

2) An underwriter must go beyond the statements of the issuer’s directors, officers and counsel and must avoid automatic reliance

a. They are expected to exercise a high degree of care in investigation and independent verification of the company’s representations…the underwriters must play devil’s advocate

3) Reliance on the issuers counsel cannot be an excuse for failing to make an adequate examination of the facts

Market-Out and Disaster-Out Clauses in Underwriting Agreements

Market-Out Clause: clause that allows the underwriter to terminate the agreement if it determines, acting reasonably, that the securities cannot be marketed profitably

Disaster-Out Clause: allows the underwriter to terminate the agreement if a significant event affects the issuer’s business or the capital markets

Retrieve Resources Ltd. v. Canaccord Capital Corp. (pg 235) Facts: The agency agreement provided a market-out clause to the effect that the obligations of the agent may be terminated by the agent at any time in the event that the state of the financial markets became such that the securities could not, in the agent’s opinion, be privately placed. Before the agreements could close, there has been a significant deterioration in the market for the plaintiff’s shares and CC Ltd. exercised its right to terminate the agreement under the market-out clause.Issue: Decision: Held that Canaccord was within its right under the clause to terminate the agreementRatio:

1) The phrase “state of the financial markets” must be interpreted to refer specifically to the market in the specific shares to be placed

2) Clause is intended to afford protection to the place in reference to the specific shares to be placedReason:

If the “state of the financial markets” referred to all markets, then presumably conditions adversely affecting all markets would have to exist before the market-out clause could be relied on (which would be ridiculous)

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Conflicts of Interest in Underwriting (pg 236)

Example: where the underwriter is a subsidiary of a bank and one purpose of the issuer’s offering of securities is to enable it to pay down indebtedness to the bank

CP 33-105 to NI 33-105: Imposes two basic requirements1) Full disclosure of the relationships giving rise to the potential conflict of interest is required to be given to

investors2) An independent underwriter is required in certain circumstances to participate in the transaction

Three types of Relationships of Concern (33-105CP – Section 2.1)1) The registrant as issuer or selling securityholder (this relationship has the highest degree of conflict)2) An issuer or selling securityholder that is a "related issuer" of the registrant (if one of them is an "influential

securityholder" of the other)3) An issuer or selling securityholder that is not a related issuer of the registrant, but that has some other

relationship with the registrant that would cause a reasonable prospective purchaser of the securities being offered to question if the registrant and the issuer or selling securityholder are independent of each other

The Preliminary Prospectus The preliminary prospectus must contain a caution that it is not final S. 54(1-2) Allowable Exclusions from Prelim Prospectus: the preliminary prospectus may exclude reports of the

auditor or accountant required by the regulations as well as information with respect to the price to the underwriter and offering price of any securities and other matters dependent upon or relating to such prices

S. 57: Amendment or Material Change to Prelim Prospectus: Where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable but regardless within ten days after change occurs

S. 55 & s. 61(1) Receipt: Once a prelim prospectus is filed, the director of the principle securities commission must forthwith issue a receipt for the preliminary prospectus unless the director considers it to be prejudicial to the public interest to do so

Preliminary Prospectus Filing Requirements (see Part 9, s.9.1 of NI41-101) signed copy of the Preliminary Prospectus; copy of the articles, by-laws and any other document affect security holder rights; material contracts; any reports or valuations; copy of a technical report in respect of material mineral property, if a mining issuer; consent and certificate of technical report author(s); copies of PIFs of officers and directors, together with completed Certificate and Consent to the form of PIF and

Authorization to Collect, Use and Disclose Personal Information; comfort letter of auditors (if auditor’s report is unsigned); letter of issuer in accordance with section 7.2(2) of NP 11-202

The Waiting Period and Review Process (pg 242) After filing the preliminary prospectus, there is a mandatory (minimum 10 day) waiting period after the receipt is

issued, in which the activities of the issuer are restricted in terms of communicating with potential investorso The waiting period allows the regulators the opportunity to consider the filed preliminary prospectus and to

determine whether it complies with all the statutory and regulatory requirements The OSC uses a risk based approach when determining the level of review a prospectus should get

o However prospectus pursuant to an IPO will always receive a full review

Three Types of Reviews1. Basic Review: staff complete a basic review of every long and short form prospectus submitted

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o The criteria are designed to identify 1) those issuers who disclosure is likely to be materially improved or brought into compliance with regulations as a result of staff review; and 2) prospectuses for which the Director may be obliged to refuse to issue a receipt

2. Full Review: If a sufficient combination of criteria are satisfied, the OSC will proceed to a full review3. Issue-Oriented Review: constitutes a review of a specific legal or accounting issue identified by the initial screeners,

and does not cover the balance of the prospectus

Prospectus Review Criteria1) Issuer’s Corporate Structure and Underlying Business2) Issuer’s Financial Condition or Results3) Nature of the offering4) Matters Related to Advisers or Corporate Governance

Once the review is complete the regulator sends a comment letter to the issuer advising of any requirements. The issuer then revises according and then submits the final prospectus and are then generally issued a receipt

o Securities regulations allows the regulator to refuse to give a receipt if it is not in the public interest to do so Issuer has an ongoing obligation to amend the prospectus if there is any material change in the business and affairs of

the issuer during the waiting period The preliminary prospectus may be distributed during the waiting period, however, no distribution of shares to the

public can occur until the final prospectus is filed and a receipt issued The waiting period can be shorter than 10 days for large well-known issuers but for smaller-issuers with no history in

the market the waiting period can take up to several months

Restrictions on Activities During the Waiting Period (pg 248)

Advertising is for the most part restricted during the waiting period Material to be distributed during waiting period: 65 (2) it is permissible during the waiting period,

o To distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued

o To distribute a preliminary prospectus; ando 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 S. 65: Test - Media communications are allowed to advise the public of the availability of the preliminary prospectus

including things like the price and from whom the securities may be purchased from but advertising campaigns with respect to how amazing the company is are strictly banned

o There is a fine line between testing the market for expressions of interest and advertising during the waiting period

NI 41-101 All you are permitted to do iso Identify the securityo State the priceo State where one can get a copy of the preliminary prospectus

s. 67 (Distribution list): Any dealer distributing a security to which section 65 applies shall maintain a record of the names and addresses of all persons and companies to whom the preliminary prospectus has been forwarded.

NI 41-101 Section 13.1-13.3: sets out the rules for advertising and what may or may not be included (pg 250-251) S. 71(1): There is a positive obligation for the issuer or underwriter to deliver a copy of both the preliminary + final

prospectuses to all investors who said they were interest or who have agreed to purchase Amendment to preliminary prospectus for material change S. 57(1)

Notice Re Cambior Inc. (pg 249) Facts: Cambior Inc. filed a preliminary prospectus. After they filed they ran advertisements in various publications extolling the prospects of Cambior. The OSC said those advertisements constituted a clear and serious contravention of the Securities Act. When contacted by the OSC Cambior immediately ceased all advertisements. Cambior said the contraventions of the Act were

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inadvertent and that their corporate counsel was aware of the advertisements and failed to tell them that they were prohibited by law. Issue: Decision: Held that Cambior was in contravention of the Securities ActRatio:

1) Advertising is confined to, alerting the public of the existence of the preliminary prospectus; advice as to where to find the prospectus information; and the ability to solicit expressions of interest

2) Any advertisement which can reasonably be considered to be in furtherance of an issue of securities is prohibited by subsection 52(1) of the Act until a receipt for a final prospectus has been issued

Reason: In determining whether a specific advertisement is prohibited, the OSC applies a factual test based on whether such

advertising can reasonably be considered to be in furtherance of a trade

Final Prospectus (pg 252) Must contain the final pricing information, audit reports, and audited financial statements NI 41-101 s. 2.3(1): An issuer must not file a final prospectus more than 90 days after the date of the receipt for the

preliminary prospectus that relates to the final prospectus NI 41-101 s. 8.2(1): the distribution must cease within 90 days after the date of the receipt for the final prospectus Sanctions for failure to comply with the prospectus requirements can include cease-trading orders or the cancellation

or restriction of the party’s registration

Final Prospectus Filing Requirements (see Part 9, s.9.2 of NI41-101) signed copy of the prospectus; blacklined (to prelim) copy of the prospectus; material contracts (or undertaking in lieu thereof); reports and valuations; consent of legal counsel; consent of auditors; undertakings (eg, BC and Alta (if applicable) w/r/t breakdown of sales and additional fees); submission to jurisdiction, if applicable; signed letter of the Corporation addressed to the Ontario Securities Commission in accordance with subsection 7.3(4)

of NP 11-202; copy of conditional approval letter of stock exchange; consent and certificate of technical report author(s), if applicable

Refusal to Issue a Receipt for a Prospectus (pg 296) s. 61 (Refusal to issue receipt): the Director shall issue a receipt for a prospectus filed under this Part unless it appears

to the Director that it is not in the public interest to do so (pg 296 of CB)o Public interest standardo Prospectus doesn’t comply in a substantial respect with the requirements of the acto Prospectus contains info that is misleading, false or deceptive or contains a misrepresentationo An unconscionable consideration has been paid for some services (promotional, accounting etc.)o If proceeds received from sale of securities together with the issuers other resources, will be insufficient to

accomplish the purposes stated in the prospectus Resources include both financial and people resources

o Receipt may be refused where the issuer cannot reasonably be expected to be financially responsible o May be refused where the past conduct of the issuer, its Ds &Os or its controlling security holder affords

reasonable grounds for the belief that the business will not be run with integrity The director won’t refuse anybody a receipt without giving the company an opportunity to be heard (s. 61(3))

Tricor Holdings (pg 297)

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Facts: The OSC upheld the director’s right to refuse a receipt where there was evidence that the issuer had previously been controlled by a convicted felon and only circumstantial evidence that the convicted individual continued to control the company.Ratio:

1. Where an issuer is unable to identify the beneficial owners or has difficulty identifying the owner then “generally a receipt should not be issued for a prospectus if the issuer is unable to identify the individual who is a principle security holder of that issuer”

Reason: Board found that based on the circumstantial evidence before the director her was within his right to believe the

silent security holder was the convicted felon Irving Kott and thus they had the right to withhold the receipt

YBM Magnex International (pg 299) Facts: YBM was using a small auditing firm to audit its statements for its prospectus. The OSC had some concerns with regards to the existence and identity of customers and end users as well as the tracing of cash receipts and revenue. The OSC required YBM to retain a “Big 6” auditor. All of this resulted in the OSC reviewing the prelim prospectus for 5 months before issuing a receipt which resulted in YBM having to pay a penalty of $8 million for being 3 days late. Ratio:

1. The denial of the receipt doesn’t invoke the same broad principles as the right to make full answer and defence in a section 127 case. While fairness is important it may sometimes to subject to limitation especially when it comes to the paramount objective of investor protection.

2. What is essential is substantial fairness to the company which may be accomplished by providing as much information as possible without necessarily disclosing the precise information or sources

Other Forms of Prospectuses (pg 253)

Short Form Prospectus (NI 44-101)

Eligibility criteria set out on page 254 CB Only companies that are already reporting issuers can use this

o Principle is that reporting issuers have a continuous disclosure public record so prospectus does not have to duplicate such disclosure

Substantially the same disclosure as a long form, but takes advantage of documents previously filed by reporting issuer with regulators from which disclosure would be duplicated in a long form prospectus

Certain documents are required to be incorporated by reference (see ss. 11.1 and 11.2 of NI44-101F1), and are deemed to be incorporated by reference if not expressly so incorporated (see Part 3, s. 3.1 of NI44-101)

o Prospectus liability extends to all documents incorporated by reference

2.2 Basic Qualification Criteria (NI 44-101) (PAGE 254) for ANY of its securities in the local jurisdictiono The issuer is an electronic filer under NI 13-101;o The issuer is a reporting issuer in at least one jurisdiction of Canada;o The issuer has filed with the securities regulatory authority in each jurisdiction in which it is a reporting issuer all periodic and

timely disclosure documents that it is required to have filed in that jurisdictiono The issuer has, in at least one jurisdiction in which it is a reporting issuer, current annual financial statements, and a current

AIF; This means that a venture issuer must voluntarily file an AIF if it wants to file a short form prospectus….see BELOW

that AIFs are only mandatory for NON-venture issuerso The issuer’s equity securities are listed and posted for trading on a short form eligible exchange and the issuer is not an issuer

whose operations have ceased, or whose principal asset is cash, cash equivalents, or its exchange listing.- NI 44-101F1, NI 44-101CP What should be included:

The distribution plan The intended market What the proceeds will be used for Rights attaching to the securities Recent and Proposed Acquisitions (if a reasonable person believes that the likelihood of the acquisition being

completed is high)

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For asset backed securities, the nature, performance and servicing of the underlying financial assets Risk factors

Fling Process Underwriter and issuer enter into binding letter of intent for the purchase and sale of the issuer’s securities to the UW

(or to substituted purchasers) (Bought Deal)o See Part 7, sections 7.1 and 7.2, of NI 44-101 , permitting solicitations of expressions of interest (“pre-

marketing”) for securities and over-allotment securities under conditions set out therein (is an Exception to s. 53 that stops you from doing “anything in furtherance of a trade”)

Enforceable agreement; Agreement requires filing and obtaining of receipt for prelim within 4 business days of agreement; News release; Prelim must be sent to everyone who expresses interest; and No sale of securities until final has been filed and receipted

o File preliminary prospectus within 4 business days.o Regulators provide comments within 3 business days (long form they have 10 business days)o Clear comments from regulators.o File final prospectus.o Close offering, usually about 7 days after filing of final

- NI 44-101 Short Form Prospectus Distribution 7.1 Solicitations of Expressions of Interest

The prospectus requirement DOES NOT APPLY to solicitations of expressions of interest before filing of a preliminary short form prospectus for securities to be qualified for distribution under a short form prospectus in accordance with this Instrument IF:

a) The issuer has entered into an enforceable agreement with an underwriter who has, or underwriters who have, agreed to purchase securities

b) The agreement referred to in paragraph (a) has fixed the terms of the distribution and requires that the issuer file a preliminary short form prospectus for the securities and obtain from the regulator a receipt dated as of the date that is not more than FOUR business days after the date that the agreement is entered into for the preliminary short form prospectus

c) The issuer has issued and filed a news release announcing the agreement immediately upon entering into the agreement

d) Upon issuance of a receipt for the preliminary short form prospectus, a copy of the preliminary short form prospectus is sent to each person or company who has expressed an interest in acquiring the securities and

e) Except as provided in paragraph (a), no agreement of purchase and sale for the securities is entered into until the short form prospectus has been filed and a receipt obtained

Shelf Prospectus (NI 44-102) (pg 261)

Must meet the requirements for a short form prospectus. If a issuer does then they can file a prospectus and then leave it “on the shelf” for up to 25 months before actually seeking to set a price a distribute

Two components: 1) Base; and 2) Supplemento Most disclosure is in base. Supplement contains disclosure specific to the security to be qualified (thus under

this system you can choose the type of security you want to issue eg. shares, units, convertible debentures, when you file the supplement component)

Supplement does not need to be approved by the regulators

Post Receipt Pricing Prospectus (PREP) (NI 44-103)

Available to all issuers but is used for a specific transaction and a single type of security Cannot be used for a rights offering

o Also has Two components: 1) Base; and 2) Supplement However, unlike in the Shelf Prospectus you need to list the type of security you are issuing in the

Base component but the supplement does not need to be reviews by the regulator A PREP prospectus is reviewed by regulators and then can be “on the shelf” for up to 90 days

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o When the issuer actually makes the actual distribution the supplement that it must give to prospective purchasers does not need to be approved by the regulators

The Multijurisdictional Disclosure System Prospectus (MJDS) (NI 77-101) (pg 266)

Permits issuers in Canada and the United States to use the same disclosure forms when selling securities in each other’s markets

Under the eligibility criteria, the issuer must have a significant reporting history or be of a size that has attracted considerable review by regulators, self-regulatory organizations, and investors. The criteria will also vary depending on the type of securities being offered (ie. for a rights offering, issuers must have a 36-month reporting history and must have a class of securities listed on the NYSE or the ASE, or be quoted on the NASDAQ National Market for a period of 12 months prior to filing; or the issuer’s equity shares must have public float of US$75 million

Capital Pool Companies (pg 268)

Are companies that have no assets other than cash and have not commenced business activity This is an initiative by the TSXVE and the prospectus is reviewed by the TSXVE rather than the securities commissions

o Requires the CPC to identify and complete a Qualifying Transaction within a specified period of time after listing

Provided the resulting issuer after the transaction meets Venture minimum listing requirements they are taken onto the TSXVE and are no longer considered to be a CPC

Right to Withdraw Before Distribution s. 71(2): purchasers have a “cooling down” period of 2 business days after receiving the final prospectus to make a

final determination if they want to buy or withdraw from the distributiono The final prospectus must advise purchasers of their right to withdraw or rescind

Material Change and Cooling Off Periodo The issuer of the security has a continuous duty of disclosure to the investoro Once a FP is delivered to the purchaser, the 48 hour cooling period begins to run, HOWEVER where a material

change occurs within the 48 hour cooling period, the material change essentially stops the clock. When a material change occurs, the issuer has 10 days to deliver an amendment in accordance with s. 57(1). Once the purchaser receives the amendment, the cooling off period begins to run again.

o Purchaser must have 48 consecutive hours will all the information

- Examples: KEY QUESTION DID I HAVE 48 CONSECUTIVE HOURS WITH ALL OF THE INFORMATION AT ANY TIME?

Day 1 Day 2 Day 4 Day 9 Day 11“I want to buy” Prospectus received Fire Amendment Cooling off period

Ends- Cooling off period ends on day 11 (2 days after I receive the amendment) because the purpose of the 2-day period is to properly allow

you to evaluate the company and whether you want to be involved The regulators want you to have 48 hours with all of the info before you are obliged to buy…On day 5, for example, I didn't have all of the info because I had not yet been informed of the fire

Day 1 Day 2 Day 4 Day 9 Day 11“I want to buy” Prospectus received Nothing Fire Amendment

- My 2-day cooling period ended on day 5 because I had 48 consecutive hours with all the information On day 5, I became subject to the company’s continuous disclosure regime

Day -4 Day 1 Day 3 Day 4I get sent a

prospectus without asking

“I want to buy” Fire

- This one’s tricky If you read the prospectus on Day 4, you technically had all of the info for 48 consecutive hours most updated FP was sent to you on Day -4…CONFUSING!!

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Forward Looking Information (NI 51-102) (pg 288) See Kerr case below for a bit on FIFO Reporting issuer must not disclose forward looking info unless the issuer has a reasonable basis for the forward looking info

A reporting issuer that discloses material forward-looking information must include disclosure that:(a) identifies forward-looking information as such;(b) cautions users of forward-looking information that actual results may vary from the forward-looking information and

identifies material risk factors that could cause actual results to differ materially from the forward-looking information(c) states the material factors or assumptions used to develop forward looking information; and(d) describes the reporting issuer’s policy for updating forward-looking information if it includes procedures in addition to those

described in subsection 5.8(2).

If a reporting issuer discloses FOFI or a financial outlook, the issuer must include disclosure that:(a) states the date management approved the FOFI, if the document containing the FOFI is undated, and(b) explains the purpose of the FOFI and cautions readers that the info may not be appropriate for other purposes

Material Fact and Material Change in a Prospectus Process (pg 271)

Material Fact

OSA s. 1(1) “Material Fact”: when used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities

Form 41-101F1: An item of information is considered material if it is probable that its omission or misstatement would influence or change an investment decision with respect to an issuer’s securities

o The potential significance of an item must be considered individually rather than on a net basis, if the items have an offsetting effect

Material Change (pg 277)

“ Material Change”: is limited to 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 a security

OSA s. 57(1): If there is a material change between the filing of the preliminary prospectus and the completion of the distribution, the issuer must file an amendment to the prospectus as soon as practicable and within 10 business days after the change occurs

YBM Magnex International Inc. (pg 284) Facts: YBM failed to disclose in its prospectus some material facts, including that it was being investigated in the United States for money-laundering operations. TYBM made their auditor the Special Committee Chair charged with looking into the charges of money-laundering. The commission said the independence of his mandate was questionable as the auditor had a financial stake in the success of the public offering. The commission then describes how materiality is determined.Issue: Decision: Board said that some disclosure regarding what YBM knew about the US investigation would have better informed investors about the risks facing YBM.Ratio:

1. The test for materiality in the act is objective and one of market impact. An investor wants to know the facts that would reasonably be expected to significantly affect the market price or value of the securities.

Reason:

Sharbern SCC 2011 (slides) Ratio:

Test for Materiality: Substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important.

o Omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available

The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality

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Kerr v. Danier Leather Inc. (pg 287) SCC 2007 Facts: Danier created a forecast of projected revenue on April 2 which was put into their preliminary prospectus with a receipt date of April 6. They issued a final prospectus and got the receipt for it on May 6 and then they closed the offering on May 20. On May 16th however, they ran an updated projection which showed they would not hit the expected short term forecast, due to warmer than expected weather, but would hit the long term forecast. On June 4th they filed a material change report stating this expectation.Issue: Should Danier have filed an updated final prospectus with this information before the closing date?Decision: Danier did not need to file an updated final prospectus because it was not a material changeRatio:

An issuer has no similar express obligation to amend a prospectus or to publicize and file a report for the modification of “material facts” occurring after a receipt for a prospectus is obtained

o The term “material change” is limited to a change in the business, operations or capital of the issuerAnalysis:

When a prospectus is accurate at the time of filing, s. 57(1) of the Act limits the obligation of post-filing disclosure to notice of a "material change", which the Act defines in s. 1 as "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"

Pezim v. BC (Superintendent of Brokers) (pg 287) SCC 1994 Facts: Looks at the relationship between “material fact” and “material change”Ratio:

The definition of "material fact" is broader than that of "material change"; it encompasses any fact that can "reasonably be expected to significantly affect" the market price or value of the securities of an issuer, and not only changes "in the business, operations, assets or ownership of the issuer" that would reasonably be expected to have such an effect.

o Their use reflects the difference in their scope. For example, a prospectus relating to a public distribution of securities must disclose all material facts relating to the issuer…However, the prospectus need be amended only when a material change occurs

Lapse Date and Refiling of Prospectus (pg 307) In order to ensure that info remains current, securities legislation sets a “lapse date” S. 62

o 62(1) “lapse date” means with reference to a security that is being distributed under subsection 53(1) or this section, the date that is 12 months after the date of the most recent prospectus relating to the security

o 62(1.1) No distribution of a security to which subsection 53(1) applies shall continue after the lapse date, unless a new prospectus that complies with this Part is filed and a receipt for the new prospectus is obtained from the Director

o 62(2) A distribution may be continued for a further twelve months after a lapse date if,(a) A pro forma prospectus prepared in accordance with the regulations is filed not less than thirty days prior

to the lapse date of the previous prospectus;(b) A prospectus is filed not later than ten days following the lapse date of the previous prospectus; and(c) A receipt for the prospectus is obtained from the Director within the twenty days following the lapse date

of the previous prospectuso 62(4) Subject to any extension granted under subsection (5), all trades completed in reliance upon subsection

(2) after the lapse date may be cancelled at the option of the purchaser within ninety days of the purchaser’s first knowledge of the failure to comply with such conditions where any of the conditions to the continuation of a distribution under subsection (2) are not complied with

Prospectus Requirements in a Secondary Offering (pg 294) A prospectus is required where there is a sale of previously issued securities by a person distributing, where the

person has not received an exemption (see chapter 5). This requirement includes control persons:

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o “Control Person” means a person or company who holds a sufficient number of voting rights to affect materially the control of the issuer, and, if a person or company holds 20% or more of voting rights

o “Distribution”: a trade in previously issued securities of an issuer from the holdings of any control person See pg 294 for more detail

TSX Minimum Listing Requirements Net tangible assets of at least $2 million and adequate working capital to carry on the business Earnings of at least $200,000 Pre-tax cash flow of at least $500,000 Must have at least 1 million freely tradable shares having an aggregate market value of at least $4 million held by 300

public holders holding one board lot each

TSXVE Minimum Listing Requirements $750,000 of net tangible assets or $500,000 in revenue or $2,000,000 in arm’s length financing History of operations or validation of business Adequate working capital or financial resources to execute business plan for 12 months following listing and $100,000

in unallocated funds Public float of at least 500,000 shares held by 200 shareholders each holding a board lot

Chapter 5: Market Transactions Exempt from Prospectus Requirement Exempt Market consists of two level of transactions

1. Transactions that take place directly between the issuers of securities and the investors who buy from them2. Regulators are also concern with regulating the process of reselling those exempted securities to other

investors, where the initial rational for the exemption might no longer apply (ex: subsequent investors may not be sufficiently “investment savvy”)

Closed System: where all possible legal ways of distributing securities are contemplated by the legislation (Ex: Ontario)

Open System: places such as Manitoba and the Yukon which do not regulate the downstream sale of securities issued under an exemption

Policy Objectives of Prospectus Exemptions1. The perceived regulatory need to address the specific problems of startup, small, or medium-sized issuers, by allowing

them more flexibility than the prospectus system provides to generate initial amounts of working capital2. The acknowledgement that some wealthy and/or sophisticated investors are capable of making investment decisions

without the information that a prospectus provides3. Where issuers are issuing securities to those with whom they have a pre-existing relationship, it is considered that the

prospectus requirements may be relaxed.a. Assumption in these cases is that the investor either also has or has access to adequate financial information

on the issuer4. Some types of securities are so safe that a prospectus is considered to be redundant (ex: bonds or debentures

guaranteed by the province or federal government)

Types of Prospectus Exemptions (NI 45-106)

Exemption for Small and Medium-Sized Enterprises or Startup Issuers

Corporate Law Requirementso Always make sure that the companies Articles allow you to issue shares and that there aren’t any limit issues

on the number of shares that can be issuedo Also, consider any Shareholder Agreements that might be in place and any restrictions that create

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Private Issuer Exemption (NI 45-106, s. 2.4) (pg 319)

There are no disclosure obligations that accompany the use of this exemption2.4 (1) In this section,“private issuer” means an issuer

(a) that is not a reporting issuer or an investment fund,(b) the securities of which, other than non-convertible debt securities,

(i) are subject to restrictions on transfer that are contained in the issuer’s constating documents or security holders’ agreements (i.e. prohibits transfer of shares without the permission of the board ), and(ii) are beneficially owned by not more than 50 persons, not including employees and former employees of the issuer or its affiliates, provided that each person is counted as one beneficial owner unless the person is created or used solely to purchase or hold securities of the issuer in which case each beneficial owner or each beneficiary of the person, as the case may be, must be counted as a separate beneficial owner, and

s. 2.4(2) lists a variety of classes of purchases that an issuer is allowed to sell to which can be summed up in 4 groups:1. Close personal friends and business associates of management or control persons of the issuer2. Family members of management or control persons or other selling security holders3. Accredited investors4. Persons that are “not the public”

Whether or not the person is a member of the public must be determined on the facts of each individual case but the courts have interpreted “the public” very broadly (see 2 cases below)

2 Restrictions under this Exemption First, the intention is to limited the exemption to issuers with a numerically small number of security holders (50) who

might otherwise be deemed to be in need of investor protection, but will not receive a prospectus because of the more pressing goal of supporting entrepreneurial activity

Second, the requirement for restriction on share transfer is intended to enable the issuer to control, or at least be aware of, any changes or increases in the number of shareholders of the entity

SEC v. Ralston Purina Co. (pg 321) (“Need to Know” TEST) Facts: Purina instituted an employee share ownership plan. Shares were offered to any employee who expressed an interest in the shares. Shares were sold to employees in several different states and included such employees as a chuck loading foreman, a clerical assistant, a stock clerk and a production trainee.Issue: Decision: USSC held that the sales constituted a distribution to the publicRatio:

1. Key question is whether the persons who are offered the security need to know the kind of information that the prospectus would provide

Reason: Court noted that the security need not be made available to the whole world and that “to the public” applies whether

the offer is made to many persons or to only a few persons

R v. Piepgrass (pg 322) (“Common Bonds” TEST) Facts: $50,000 worth of capital was sought by soliciting farmers, most of whom were known by the promoter from previous business dealings. Issue: Decision: Held that sales to the persons solicited constituted a distribution to the publicRatio:

1. Court noted that the persons sold to “were not in any sense friends or associates of the accused, or persons having common bonds of interest or association

Family, Friends, and Business Associates Exemption (NI 45-106, s. 2.5) ( Not Available in ON ) (pg 322)

2.5 (1) Except in Ontario and subject to section 2.6 [Family, friends and business associates -- Saskatchewan], the prospectusrequirement does not apply to a distribution of a security to a person who purchases the security as principal and is

(a) a director, executive officer or control person of the issuer, or of an affiliate of the issuer,

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(b) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer or control person of the issuer, or of an affiliate of the issuer,(c) a parent, grandparent, brother, sister, child or grandchild of the spouse of …(d) a close personal friend …(e) a close business associate … (f) a founder of the issuer or a spouse, parent, grandparent, brother, sister, child, grandchild, close personal friend or close business associate of a founder of the issuer,(g) a parent, grandparent, brother, sister, child or grandchild of a spouse of a founder of the issuer,(h) a person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in paragraphs (a) to (g), or(i) a trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described in paragraphs (a) to (g).

Analysis of Exemption This exemption does not carry a restriction on the number of investors that the securities can be sold to An issuer cannot advertise or pay a commission or finder’s fee to a third party to find purchasers under this exemption

because that suggests that the precondition of a close relationship between the purchaser and the issuer may not exist and therefore the issuer cannot rely on the exemption

NI 45-106CP, s. 2.7: notes that a “close personal friend” is an individual who knows the director, executive officer, founder, or control person well enough and has known them for a sufficient period of time to be in a position to assess their capabilities and trustworthiness

o An individual is not a close personal friend “solely because the individual is: (a) a relative, (b) a member of the same organization, association or religious group, or (c) a client, customer, former client or former customer

Disclosure Requirement (NI 45-106, s 6.1): issuing under this exemption requires the issuer to file a report in the jurisdiction where the distribution takes place no later than 10 days after the distribution

Founder, Control Person, and Family Exemption (NI 45-106, s. 2.7) ( Only in ON ) (pg 324)

2.7 In Ontario, the prospectus requirement does not apply to a distribution to a person who purchases the security as principaland is

(a) a founder of the issuer,(b) an affiliate of a founder of the issuer,(c) a spouse, parent, brother, sister, grandparent, grandchild or child of an executive officer, director or founder of the issuer, or(d) a person that is a control person of the issuer

Analysis of Exemption For all of these sales you would get the purchaser to sign a certificate to say that they fall within one of these exempt

categories of investors S. 2.7 unlike s. 2.6 does not allow prospectus exempt securities to be distribution to close personal friends or close

business associates Founder is defined is NI 45-106 as:

1. A person or people who directly or indirectly, take the initiative in founding, organizing, or substantially reorganizing the business of the issuer, and

2. At the time of the trade is actively involved in the business of the issuer

Government Incentive Security Exemption (OSC Rule 45-501) (pg 325)

Basically an exemption to help the mining and oil and gas industries raise money. Creates a tax shelter for investors. As long as the company uses the raised money from the shares for certain things like exploration an investor can take the

money they spent on the shares and deduct it from their income in the year they investedo However, when you sell the shares the gov says you bought them at $0 and then if they are sold for anything

higher that profit is considered a capital gain for tax purposes. Even if you bought at $10 and sold at $5.

“government incentive security” means

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(a) A security, or unit or interest in a partnership that invests in a security, that is issued by a company and for which the company has agreed to renounce in favour of the holder of the security, unit or interest, amounts that will constitute Canadian exploration expense, or Canadian development expense, or Canadian oil and gas property expense, or

(b) A unit or interest in a partnership or joint venture that is issued in order to fund Canadian exploration expense, Canadian development expense or Canadian oil and gas property expense

Substantive Requirement of s. 2(1) includes (disclosure obligations):1. A maximum of 75 investors may be solicited2. A maximum of 50 investors may purchase the GIS (Anti avoidance language is included to stop people from grouping

together)3. Each investor must have access to substantially the same information as a prospectus (in Ontario an OM is

mandatory)4. Investors must be supplied with an offering memorandum giving specific info, including info as to their civil remedies5. No publicity or advertising is allowed6. Promoters limited to using GIS exemption once every calendar year7. A report is required within 10 days of a trade (s. 6.1)

Wealthy/Sophisticated Investor Exemptions

Accredited Investor Exemption (NI 45-106, s. 2.3) (pg 327)

Definition of “accredited investor” see pages 326-327 and includes:o Financial institutions such as banks, loan or trust companies, insurance companies, and credit unionso Appropriately regulated pension funds and mutual fundso There are also several ways for individuals to qualify for accredited investor status:

Three tests available under this 1) two assets tests, or 2) an income test Income Test (subpara (k): individual with net income of $200,000 in each of the 2 most

recent calendar years or $300,000 combined with spouse and expects to exceed that level in current year

An individual who, either alone or with a spouse, has net assets of at least $5,000,000 Net Assets Test

Finacial Asset Test (subpara (j): An individual who, either alone or with spouse, beneficially owns financial assets have an aggregate realizable value before taxes of more than $1,000,000

o Financial Assets: are defined to mean cash, securities, or a contract of insurance, a deposit or an evidence of a deposit that is not a security for the purposes of securities legislation

Factors Indicative of “beneficial ownership” (CP s. 3.5):(a) physical or constructive possession of evidence of ownership of the financial asset;(b) entitlement to receipt of any income generated by the financial asset;(c) risk of loss of the value of the financial asset; and(d) the ability to dispose of the financial asset or otherwise deal with it as the individual sees fit.

All that is required is for the purchaser to be an accredited investor purchasing as principalo This allows securities to continue to be circulated among accredited investors without triggering a prospectus

or resale requirement (no minimum purchase amount required) Anti-Avoidance Rule: group of investors can’t come together to meet the minimum requirements as a group Disclosure Requirements: s. 6.1 requires a report to be made to the regulators within 10 days of a trade

Minimum Amount Investment Exemption (NI 45-106, s. 2.10) (pg 329)

Exemption is available for a distribution where the purchasers were paying a specific amount of money to acquire the securities (currently $150,000)

o Ontario removed the minimum investment exemption, in favour of a version of the accredited investor exemption (see pg 329)

Disclosure Requirement: s. 6.1 requires a report to be made to the regulators within 10 days of a trade

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Anti-avoidance component to ensure that an entity is not created to amalgamate the contributions of a number of small investors so as to defeat the policy underpinnings of the exemption

2.10 (1) The prospectus requirement does not apply to a distribution of a security to a person if(a) that person purchases as principal,(b) the security has an acquisition cost to the purchaser of not less than $150 000 paid in cash at the time of the distribution, and(c) the distribution is of a security of a single issuer

Exemptions Based on a Pre-Existing Relationship with the Issuer

Dividends and DRIP (NI 45-106, s. 2.31 and s. 2.2)

Deals with securities issued to existing security holders as a dividend payment (s. 2.31)o Ex: Where a company issues its own securities in payment of a dividend to its security holders, in principle

this would be a distribution, so the exemption allows this to occur without filing a prospectus DRIP: Dividend Re-Investment Program (s. 2.2) where dividend is applied to acquire additional securities

Business Combinations and Reorganizations (NI 45-106, s. 2.11) (pg 331)

See the section of the act on pg 331 It deals with various types of reorganizations of a business entity that involve the issuing of securities

o They include amalgamations or arrangements under statutory procedures such as those in corporate statutes or under the Companies Creditors’ Arrangements Act that regulates the reorganization of businesses in financial difficulty

In the last scenario debt obligations are often exchanged for equity as the business entity tries to rehabilitate itself financially

The rational is that the regulators do not want to add to the corporations difficulties Reverse Takeover (Example)

o Public Company: 50,000 shares outstandingo Private Company (looking to go Public without a prospectus): 1,000 shares in company outstanding

Public companies gives private company 5,000,000 shares to buy the 1,000 shares in the private company (Private company now effectively controls the Public company)

2.11 (1) The dealer registration requirement does not apply in respect of a trade in a security in connection witha) An amalgamation, merger, reorganization or arrangement that is under a statutory procedureb) An amalgamation, merger, reorganization or arrangement that

i) Is described in an information circular, which is delivered to each security holder whose approval of the amalgamation, merger, reorganization or arrangement is required before it can proceed, and

ii) Is approved by the security holders referred to in subparagraph (i)c) A dissolution or winding-up of the issuer

(2) The prospectus requirement does not apply to a distribution of a security in the circumstances referred to in subsection (1).

Conversion or Exchange of Securities (NI 45-106, s. 2.42) (pg 332)

Securities that carry with them a conversion or exchange feature whereby the securities initially issued can be converted into or exchanged for other securities, or can carry an option to acquire additional securities

o Ex: convertible preferred shares that can be converted into common shareso Ex: Warrant/Option: Basically gives people the right to buy shares. Say you buy a common share at $1 and

can also get a warrant to buy another common share at the price of $1.25 at anytime in the next 2 years Section 2.42 provides an exemption from prospectus requirements as long as that issuance is in accordance with

the terms and conditions of the previously issued securities 2. 42(1) The dealer registration requirement does not apply in respect of a trade by an issuer if

a) The issuer trades in a security of its own issue to a security holder of the issuer in accordance with the terms and conditions of a security preciously issued by that issuer, or

b) The issuer trades a security of a reporting issuer held by it to a security holder of the issuer in accordance with the

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terms and conditions of a security previously issued by that issuer.

Rights Offering (NI 45-106, s. 2.1) (pg 333)

This exemption is designed to allow issuers the opportunity to offer their existing security holders the right to buy additional securities based on the number of securities they already hold (ex: 1 additional share for each 10 shares held) without a prospectus being required

Disclosure Requirement: issuer is required to give written notice to the regulators giving information about the proposed trade. The regulators have 10 days to object to the trade.

o However, the CSA’s view is that the rights offering cannot be relied upon by an issuer to effect a “major financing and it will be rejected by the regulator if:

(a) It would result in an increase of more than 25% in the number of the outstanding securities of the class to be issued upon exercise of those rights

(b) Where the issuer has been dormant or inactive, to financing the reactivation of the Issuer(c) Where the offering is for the purpose of financing a major new undertaking(d) Where the securities issuable are exercisable into a class of securities which are not already in

existence SlimEx Inc.: despite the restriction in (d) in this case an exemption was granted where the

rights offered were in a new class of share. The security-holders were required to consent to the terms of the financing in writing.

Trades to Employees (NI 45-106, s. 2.24) (pg 334)

Enables an issuer or a control person of an issuer to distribute securities to its employees or employees of its affiliates without providing a prospectus as long as participation is voluntary (voluntariness is key to exemption)

o This exemption forms the basis for employee incentive plans such as stock purchases and stock option plans No disclosure requirement are prescribed

Discretionary Exemption (OSA, s. 74)

The OSC may, upon application of an interested 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 and may impose such terms and conditions as are necessary

Would have to be really unique circumstances in order to get this

Reporting Requirements (NI45-106 PART 6)

- Engagement letter- Agency Agreement- Subscription Agreement

Purchasers sign it, filling out how much they want to buy and what the price is Purchasers also indicate which exemption they qualify for Company also signs the agreement

- Certificate indicating which exemption you relied on- Share certificate needs a legend…legend says restrictions on transfer- DON'T need any disclosure documents (ie. Offering Memoranda) as long as the investors are prepared to buy based on

the subscription agreement, youre okay In Ontario, the only exemption where the provision of an offering memorandum is mandatory is the GIS exemption

Any document you create to help you sell securities is called an offering memoranda (so, could be a powerpoint that summarizes the company, a three page summary, etc.)

If you have an offering memoranda, you don't sign a certificate that says there is full, true and plain disclosure…DO have to sign a certificate that the info in the memorandum is true, however then there is a provision that says if there is a misrep in the memorandum, the investor has the right to rescind or sue for damages (similar to prospectus)

Must filing offering memorandum within ten days AFTER the private placement closes

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- Must file form 45-106F1 if you rely on accredited investor or minimum subscription exemption indicates how many securities you issued, who you issued them to and what exemption you relied on (not necessary for private issuer exemption)

Issues Related to Offering Memoranda (OM) (pg 335)

OM (OSA s. 1): a document that has been prepared primarily for delivery to a prospective purchaser so as to assist the prospective purchaser to make an investment decision for a security being sold in a distribution to which section 53 of the Act would apply but for the availability of one or more of the exemptions

In Ontario the only exemption where an offering memorandum is mandatory is the GIS Exemption o Also in Ontario if you are using an OM you still need another exemption to rely on (see OSC 45-501)

Must Include a Statutory Right of Action (OSA s. 130.1): Must write on the cover of the OM saying if there is anything untrue in the OM then the investor can either back out and get their money back or gives them a statutory right to sue (must write this on front of the OM)

o Grounds for Liability are in: Misrepresentation Deemed Reliance

o Defences Purchaser knowledge Depreciation not due to misrepresentation Not receiving proceeds

o Remedies Either have a right of rescission, or Damages for misrepresentation

Filing Requirements: Copies of OM to be filed with OSC within 10 days o But the OSC will not review the OM and the OM is not made public

S. 1.1(2) of NI 14-501 “offering memorandum”o A document purporting to describe the business and affairs of an issuer that has been prepared primarily for delivery to

and review by a prospective purchaser so as to assist the prospective purchaser to make an investment decision for a security being sold in a distribution to which section 53 of the Act would apply but for the availability of one or more of the exemptions contained in Ontario securities law but does not include a document setting out current information about an issuer for the benefit of a prospective purchaser familiar with the issuer through prior investment or business contacts

It doesn’t have a certificate attached to it which says it is complete and plain disclosure and there is no prior review by regulators

Discretionary Exemption (OSA s. 7.4) (pg 337)

It is possible to apply to the securities regulators to obtain a transaction-specific exemption from the prospectus requirement (very unlikely to happen)

o The exercise of this legislative power requires the regulator to determine that it is not prejudicial to the public interest to allow the exemption

Policy Objectives of Resale Rules Policy objectives of resale rules: to prevent backdoor underwriting (stop people from finding an exemption to avoid

prospectus requirements and then being able to have those securities freely traded on an exchange), promoting disclosure of information, pricing, and control distributions

o One mechanism used is to impose a hold or restricted period on some exempt purchasers Persons who acquires securities pursuant to prospectus exemption can sell by:

1. Filing prospectus for secondary offering2. Relying on another Exemption3. Get an exemption order from the OSC4. Satisfy the following resale rules

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Substantive Requirements of Resale Rules Two rules created for non-control block resales in NI 45-102

o Found in s. 2.5 and s. 2.6 S. 2.5 imposes conditions on both the issuer and the reseller of the securities S. 2.6 imposes no “restricted period” on the initial purchaser who wants to resell under NI 45-102

Prospectus Exemptions and Their Accompanying Resale RulesExemption Applicable NI 45-102 Resale Rule

Private Issuer Exemption (NI 45-106, s. 2.4) Section 2.6 (Seasoning)

Family, friends, and business associates (NI 45-106, s. 2.5) Section 2.5 (Restricted)

Founder, control person, and family (NI 45-106, s. 2.7) Section 2.5

Government incentive security exemption (OSC Rule 45-501, s. 2.1) Section 2.5

Accredited investor exemption (NI 45-106, s. 2.3) Section 2.5

Minimal amount investment exemption (NI 45-106, s. 2.10) Section 2.5

Stock Dividend exemption (NI 45-106, s. 2.31) Section 2.6

Business combinations and reorganization (NI 45-106, s. 2.11) Section 2.6

Convertible or exchangeable securities exemption (NI 45-106, s. 2.42)

Section 2.5 applies to the converted or underlying security if the original security was acquired under an exemption to which the resale rule in NI 45-102, s. 2.5 would apply

Section 2.6 applies to the converted or underlying security if the original security was acquired under an exemption to which the resale rule in NI 45-102, s. s.6 would apply

Section 2.10 applies to the converted or underlying security if the original security was acquired under a prospectus

Rights offering exemption (NI 45-106, s. 2.1) Section 2.6

Distribution to employees, etc. (NI 45-106, s. 2.24) Section 2.6

Offering memorandum exemption (NI 45-106, s. 2.9) Section 2.5

NI 45-102, Section 2.5 Restricted Period Rule (pg 340)

S. 2.5 Rules found pg 340Major Conditions

1. The Seasoning Period: The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately preceding the trade

o S. 2.7: this requirement does not apply if the issuer became a reporting issuer after the distribution date by filing a prospectus

o A four month "seasoning” period which ensure that subsequent purchasers of securities distributed without a prospectus have access to adequate information about the issuer

o If the issuer never becomes a reporting issuer, the seasoning period requirement remains unfulfilled, thus preventing the securities from being resold unless a further exemption is available

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2. The Restricted Period: At least 4 months have elapsed from the distribution dateo Distribution Date: refers to the “date the security that is subject to the trade was distributed in reliance on

an exemption from the prospectus requirement by the issuer”

3. Legending Requirements: that securities certificates or ownership statements carry a legend indicating the date when securities may be validly resold

o This is an attempt to provide more transparency to downstream purchasers of securities issued under prospectus exemptions

4. Preparing the Market and Paying Extraordinary Commissions: No unusual effort is made to prepare the market or to create a demand for the security that is the subject of the trade and No extraordinary commission or consideration is paid to a person or company in respect of the trade.

o See pg 343 and 344 for detailed examples of disallowed behavior

5. No Reasonable Ground to Believe Issuer is in Default: If the selling security holder is an insider or officer of the issuer, the selling security holder has no reasonable grounds to believe that the issuer is in default of securities legislation

o Imposes a good faith requirement on insiders or officers of issuers that they are not selling securities acquired in an exempt transaction because of a default in securities regulatory requirements on the part of the issuer

NI 45-102 Section 2.6 Seasoning Period Rule

Known as the “seasoning rule” because a seasoning requirement for the issuer is the main regulatory obligation imposed on the resale process

For the purposes of subsections (1) and (2), the conditions are:1. The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately preceding the trade

o The issuer must satisfy a seasoning period obligation of 4 months, in order for the purchaser to be able to validly resell the securities to non-exempt purchasers

S. 2.7: this requirement does not apply if the issuer became a reporting issuer after the distribution date by filing a prospectus

2. The trade is not a control distribution.3. No unusual effort is made to prepare the market or to create a demand for the security that is the subject of the trade.4. No extraordinary commission or consideration is paid to a person or company in respect of the trade.5. If the selling security holder is an insider or officer of the issuer, the selling security holder has no reasonable grounds to

believe that the issuer is in default of securities legislation

Example ScenariosScenario 1

Jan 1: Private placement exemption as an accredited investor (s. 2.5) March 1: Company files a prospectus When can you re-sell the securities? 4 months after initial distribution. i.e. May 1.

Scenario 2 Jan 1: buy as an accredited investor (s. 2.5) May 1: 4 months has passed but still not a reporting issuer, can’t resell Sept 1: Become a reporting issuer Can sell sept 2. It’s the later date of either 4 months from when you bought or the date

they become a reporting issuer.

Scenario 3: Jan 1: Private Issuer Exemption (s. 2.6) March 1: Company files a prospectus When can you re-sell the securities? March 2 Yes company has filed a prospectus so s. 2.7 applies

Scenario 4:

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Jan 1: PIE Never become a reporting issuercan’t resell.

Scenario 5 (Tacking): Jan 1: Private placement exemption as an accredited investor March 1: Company files a prospectus April 1: I sell to another accredited investor (remember, can always resell to another accredited investor) When can the second accredited investor resell their securities? May 1 i.e. 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

Resale Rules for Convertible or Exchangeable Securities Section 2.5 applies to the converted or underlying security if the original security was acquired under an exemption

to which the resale rule in NI 45-102, s. 2.5 would apply Section 2.6 applies to the converted or underlying security if the original security was acquired under an exemption

to which the resale rule in NI 45-102, s. s.6 would apply Section 2.10 applies to the converted or underlying security if the original security was acquired under a prospectus

Resale Rules for Control Persons (s. 2.8) (pg 346) Rules can be found on pg 347 It will be a question of fact whether the control person holds a sufficient number of securities to “materially affect

control of the issuer”, but there will be deemed control if he holds more than 20% of the voting rights attached to all outstanding voting securities of an issuer

Options available to a control person on resale are:1. The control person could include his shares as a secondary offering with a distribution by an issuer pursuant

to a prospectus2. He could seek a discretionary exemption from the regulator3. A control person could sell to another person who qualifies for an exemption4. Control persons could follow the strictures of the resale rule in NI 45-102, s. 2.8 (has two advantages)

i. Not necessary to find selected purchasers who meet prospectus exemption requirementsii. The buyer is not subject to further resale rules

(2) For the purposes of subsection (1), the conditions are:1. Seasoning Period: the issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately

preceding the tradeo S. 2.7: this requirement does not apply if the issuer became a reporting issuer after the distribution date by

filing a prospectus2. Restricted Period: the selling security holder, or the lender, pledgee, mortgagee or other encumbrancer if the distribution is

for the purpose of liquidating a debt, has held the securities for at least 4 months.3. No unusual effort is made to prepare the market or to create a demand for the security that is the subject of the trade.4. No extraordinary commission or consideration is paid to a person or company in respect of the trade.5. The selling security holder has no reasonable grounds to believe that the issuer is in default of securities legislation

Subsection (3) imposes two types of filing requirements on control personsi. Form 45-102FI must be filed on SEDAR at least 7 days before the first trade and signed no earlier than 1 business

day before filing The form expires 30 days from the date it is filed

ii. Insider reporting requirements must be filed within 3 days after the completion of any trade

Implications of Incorrect Reliance on Prospectus Exemptions Jones v. Deacon Hodgson Inc. (pg 348) Facts: Deacon caused a private company (Bacova Investments) to be incorporated for the purpose of investing in Lumax Oil and Gas Limited. Deacon offered shares in Bacova and solicited subscribers. This constituted a distribution and Deacon did not

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file a prospectus. The plaintiff purchased shared in January of 1982. Plaintiff commences an action in Feb 1986 for a declaration that the contract of purchase and sale of the shares is void. Defendant argues that the motion is statute barred by s. 138 which provides a maximum three-year limitation period on recovery.Issue: Decision: Court finds that Deacon did sell securities without a prospectus or in proper compliance with a PPE, and compliance is so fundamental to the integrity of our capital markets, the transaction is never statute barred, and is always voidable at the instance of the purchaser (this is unbelievable).Ratio:

1. There is a distinction between the absolute failure to file a prospectus and the failure to deliver a prospectus to an investor that had been filed with the regulator.

o The failure to file a prospectus with the regulator at all renders the contract of purchase and sale void and there is no time-limit in which one must seek a remedy in

Reason: The provision of a prospectus is so fundamental to the scheme of securities regulation that a remedy for failure to file

it should not be statute-barred

SUMMARY

Every time you look at an issue with regard to the RESALE of securities, ask two questions: (1) WHO are you?

a. If you are a non-control person, go straight to question #2b. If you are a control person, you will have to satisfy the resale rules regardless of how you acquired the

securities (skip question #2)(2) HOW where the securities acquired?

a. By prospectus? Tradable.b. Through PPE? Must satisfy resale rules or go through another PPE.

Minimum Listing Requirements: TSX & TSXV TSX Listing Requirements

3 categories of companieso Industrialo Mining o Oil and Gas

Profitable Companieso net tangible assets of at least $2 milliono earnings of at least $200,000o pre-tax cash flow of at least $500,000o adequate working capital to carry on the business and appropriate capital structure

different criteria for different companies Public Distribution Requirements

o TSX wants to ensure liquidity in the shareso must have at least 1 million freely tradable shares having an aggregate market value of at least $4 million

held by 300 public holders holding one board lot each (see definition of board lot)

TSXV Listing Requirements TSX Venture Exchange Corporate Finance Manual sets out initial listing requirements Tier 1 and Tier 2 Tier 2 (Industrial, Tech or Life Sciences):

o $750,000 of net tangible assets or $500,000 in revenue or $2,000,000 in arm’s length financing

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o significant interest in business or primary asset to carry on businesso history of operations or validation of businesso adequate working capital or financial resources to execute business plan for 12 months following listing and

$100,000 in unallocated fundso public float of at least 500,000 shares held by 200 shareholders each holding a board lot with 20% of shares

held by public shareholders Tier 1 (Industrial, Tech or Life Sciences):

o net tangible assets of $5,000,000 or 5,000,000 in revenueo significant interest in business or primary asset to carry on businesso history of operations or validation of businesso adequate working capital or financial resources to execute business plan for 18 months following listing and

$200,000 in unallocated fundso public float of at least 1,000,000 shares held by 250 shareholders each holding a board lot with 20% of

shares held by public shareholders

Combined RequirementsManagement

Must have solid board of directorso Must have at least 3 directorso Must have at least 2 independent directors. See NI 52-110.

Directors and officers must submit PIFso Exchange conducts security and background checko must have independent directors (see definition – not management, holds less than 10% of the shares and no

material business relationship) CPC directors must be Canadian or US citizens

Capital Pool Companies TSXV Manual: “The Exchange’s program was designed as a corporate finance vehicle to provide businesses with an

opportunity to obtain financing earlier in their development than might be possible with an IPO. The CPC program permits an IPO to be conducted and an Exchange listing to be achieved by a newly created company that has no assets, other than cash, and has not commenced commercial operations. The CPC then uses this pool of funds to identify and evaluate assets or businesses which, when acquired, qualify the CPC for listing as a regular Tier 1 or Tier 2 Issuer on the Exchange.”

o Is a company that has shareholders, is listed on the TSXV but has no business operations People create these CPC’s (public companies) and then go find a private company to buy and thus

bring public

Stage 1 Organization and seed financing of the CPC Filing of a prospectus in respect of the CPC’s IPO Completion of the IPO and the listing of the CPC’s common shares on the Exchange

Stage 2 Entering into of an Agreement in Principle in respect of a proposed “Qualifying Transaction” Preparation and filing with the Exchange of a comprehensive CPC Information Circular or CPC Filing Statement (each

of which provides “prospectus level” disclosure concerning the CPC, the target company and the Resulting Issuer)

Ultimate Goal: Acquire a business (shares or assets) through a Qualifying Transaction and Resulting Issuer begins trading as a normal TSXV listed company

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Seed Financing Rules/Requirements

Founders’ contribution:o Minimum of 3 founders (directors and officers).o Each director must invest a minimum of $5000 investedo Together they must invest the greater of $100,000 or 5% of the aggregate from the sale of all securities by

the CPC at the date of filing the prospectus in relation to the IPOo The founders must each submit to the exchange (and to the OSC) a personal information form.

Price of Seed Shares:o Minimum: greater of $0.05 and 50% of the price at which the common shares of the CPC are sold pursuant to

its IPOo Value of seed shares sold at a price less than the IPO price cannot exceed $500,000

After the minimum $100,000 is invested by founders, other investors (private placement) may also invest

CPCs: IPO

Following the completion of the seed financing, the CPC prepares a prospectus for its IPO to raise between $200,000 and $4,750,000 by the sale of common shares of the CPC.

o Prospectus is very bare and standard since there is no real business activity to discuss o Prospectus is reviewed by the TSXV, not the securities commissions

Only a single class of common shares may be issued as seed shares and IPO Shares. The minimum price at which the IPO Shares may be issued is $0.10 (if seed shares are issued at $.05) Typically, the IPO Shares are priced at twice the issue price of the seed shares. The maximum aggregate gross

proceeds to the CPC from the issuance of all seed shares and IPO Shares (and any shares issued pursuant to subsequent private placements) must not exceed $5,000,000. Minimum amount raised is $300,000

Following the IPO, the CPC must:o Have at least 1,000,000 issued and outstanding common shares in the public float upon completion of the IPOo Have a minimum of 200 shareholders with each shareholder beneficially owning at least one board lot of listed

common shares free of resale restrictions (exclusive of any common shares held by non-arm’s length parties to the CPC).

o No person can subscribe for more than 2% of the IPO shares o Must have an IIROC dealer as an agent. Typically pay Agent 10% commission and options to purchase 10% of

IPO shares If final listing documentation is satisfactory, the Exchange issues a bulletin

o Two days after bulletin, the shares begin trading on the TSXV

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CPC s: Restrictions on Use of proceeds

Generally, proceeds only to be used to identify and evaluate businesses or assets and obtain shareholder approval for a proposed Qualifying Transaction

CPC cannot pay officers and directorsExceptions:

Up to $225,000 may be advanced as a refundable deposit or secured loan to a target company or vendor for a proposed arm’s length Qualifying Transaction, if

o it has been publicly announced at least 15 days prior to the date of such advance, o due diligence with respect to the Qualifying Transaction is well underway and o either a sponsor has been engaged or sponsorship has been waived.

Up to $25,000 may be advanced as a non-refundable deposit, unsecured deposit or advance to a target company or vendor to preserve assets without the prior acceptance of the Exchange (basically a deposit)

Up to the lesser of 30% of the gross proceeds from the sale of all securities by the CPC or $210,000 can be used for purposes other than the permitted expenditures described above, which expenses include:

o listing and filing fees; legal, accounting and audit expenses relating to issuance of securities and preparation and filing of the CPC prospectus; administrative and general expenses of the Corporation

CPCs: Qualifying Transaction

Within 24 months of the issuance of the IPO Bulletin, the CPC must complete the acquisition of a company or business as its Qualifying Transaction.

Upon entering an Agreement in Principal, the company issues a news release and trading of shares is halted until all of the following occur:

o where the transaction is subject to sponsorship (if no significant concurrent financing, need a sponsor), the Exchange has received a Sponsorship Acknowledgement Form

o Exchange receives a Personal Information Form for each person who will be a director, senior officer, promoter and other insider of the Resulting Issuer together with resumes for each director and senior officer of the Resulting Issuer

o the Exchange has completed preliminary background searches and other due diligenceo comprehensive news release in respect of the Qualifying Transaction has been issued

Agreement in Principal must not exist before the IPO CPC then prepares either a draft CPC Information Circular or CPC Filing Statement

o prospectus level disclosure on the CPC and the business that is to be acquired, as well as the Resulting Issuer (pro forma)

o Include 3 years of audited financial statementso reviewed by the TSXV

Resulting Issuer must meet the TSXV minimum listing requirements (Tier 1 or Tier 2) CPC has 75 days after Agreement in Principle announced to file draft information circular or filing statement with TSXV

CPCs: Shareholder Approval of Qualifying Transaction

Non-Arms Length Transaction: where the person who set up the CPC is also an officer or director of the company that the CPC is buying A CPC must hold a shareholders’ meeting for approval of proposed Qualifying Transaction if non-arm’s length:

o “Majority of the Minority Approval” required approval by a majority of the votes cast by shareholders other than non-arm’s length parties to the

CPC, the target company and the vendors of the assets being acquired, as the case may be)o CPC must file a CPC Information Circular with the Exchange and send that document to its shareholders prior

to holding its shareholders’ meeting Arms Length Transaction: where people who don’t know each other come together and the CPC buys the company

If arm’s length:o the CPC will not be required to obtain shareholder approval provided it files a CPC Filing Statement with the

Exchange. CPC Filing Statement becomes the disclosure documento CPC can close Qualifying Transaction 7 business days after filing its CPC Filing Statement on SEDAR

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However, in either case, shareholder approval may also be required under applicable corporate or securities law (e.g. where there will be a change of auditor, election of new directors, name change, amalgamation, etc.)

CPCs: Escrow

Purpose: o To ensure founders and purchasers of shares at a discount are committed to and stay with the company and

cannot cash-out (and run). Different conditions depending on:

o whether resulting issuer is Tier 1 or Tier 2 Issuer of TSXV and o when shares were purchased and for what price

E.g. Resulting Issuer is Tier 2 more stringent escrow conditions

Group 1: CPC shares that must go in escrow:

o All shares issued prior to the CPC’s IPO at a discount to the price of the IPO Shares o all shares acquired by non-arm’s length parties to the CPC prior to completion of the Qualifying Transaction

Group 2: CPC shares that must go in escrow:

o securities held by directors, officers and 10% shareholders of the Resulting Issuer (“Principals”) following the completion of the Qualifying Transaction will also be subject to escrow restrictions

Further distinction: Value Securities v. Surplus Securitieso Basically, Value Securities’ value is backed by assets in the company while Surplus Securities’ value is not.

If at least 75% of securities issued pursuant to the QT are Value Securities Value Security Escrow Agreemento If not Surplus Security Escrow Agreement

Chapter 7: Proxy Solicitation Corporate Statutes

Most reporting issuers are corporations.Part XIII of the CBCA

Section 149: management of a CBCA corporation must send a form of proxy to all shareholders unless the corporation is not a distributing corporation and has less than 50 shareholders

o Management Solicitation must occur for every general meeting and special meeting that the issuer calls, and the proxy must be very explicit regarding the scope of authority

Section 150: a person shall not solicit proxies unless, in the case of management, the notice of meeting is accompanied by a management proxy circular in prescribed form and, in the case of any other solicitation, a dissident proxy circular in the prescribed form is sent to each shareholder

Section 151: allows a corporation to apply for an exemption from mandatory proxy solicitation rules Exemption to the proxy solicitation requirements for dissidents who solicit proxies from fifteen or fewer shareholders

o Solicitation has be redefined in the CBCA to allow broader communication without triggering dissident proxy requirements

s. 147: allows a public announcement by a shareholder of how the shareholder intends to vote and he reasons for that decision, or a communication for the purposes of obtaining the number of shares required for a shareholder proposal

Solicitation does not include a public announcement that is made by a speech in a public forum; or a press release, an opinion, a statement or advertisement generally available to the public

S. 67 Regulations: a person may now solicit proxies without sending a dissident’s proxy circular, if the total number of shareholders who’s proxies are solicited is 15 or fewer

a person may solicit proxies without sending a dissident’s proxy circular if the solicitation is conveyed by public broadcast, speech or publication (s. 150(1.1),(1.2)

Re Pacifica Papers Inc. (pg 434)

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Facts: Two shareholders contend that support agreements obtained by management of the company before an information circular was sent out are in contravention of the CBCA by rendering the vote a foregone conclusion.Decision: While management was in contravention of s. 150(1) it is not fatal to the vote as the shareholders still all had the right to vote and look over the information circular before votingRatio:

1. As a condition precedent to management being lawfully able to solicit proxies an information circular must be sent, either as an appendix to or as a separate document accompanying the notice of the meeting

Registered vs. Beneficial Owners By definition, corporate statutes refer to registered security holders. Difference between registered and beneficial holders.

o Holding shares directly vs. through a nominee. Policy considerations behind the proxy rules

o Companies must reach out to their beneficial holders who are now the vast majority of “shareholders”

Overview of Beneficial Shareholder System Players:

o Reporting Issuero Transfer Agento Registered Shareholderso Beneficial Shareholders

NOBOs (Non-objecting beneficial owners) OBOs (objecting beneficial owners)

o Intermediaries and proximate intermediarieso Broadridge o CDS – Canadian Depository for Securities o DTC – Depository Trust Company (USA)

Use of Proxies and Voting Instruction Forms (VIFs) Facilitate voting at annual and special meetings of registered and beneficial shareholders of a reporting issuer

o What is the difference between the two? Registered shareholders can use proxies to appoint someone to vote for them if they do not plan to

attend the meeting. Beneficial owners can use VIFs to instruct the registered holder (or its proxyholder) how to vote the

securities beneficially held by the beneficial owner.

NI 54-101 (pg 442) Fundamental principles of NI 54-101

o all security holders of a reporting issuer, whether registered or beneficial, should be treated as identically as possible; and

o market efficiency should be encouraged.o following developments in the USA, “notice-and-access” now permitted in Canada

Essentially permits reporting issuers to send a notice and either proxy or VIF in lieu of sending an information circular; the notice sets out the website on which the information circular and other documents can be found

NI 51-102 9.1(1) If mgmt. of a reporting issuer gives notice of a meeting to its registered holders of voting securities, mgmt. must, at the

same time as or before giving that notice, send to each registered holder of voting securities who is entitled to notice of the meeting a form of proxy for use at the meeting

9.1(2) If reporting issuer solicits proxies from registered holders, reporting issuer must also send an information circular with the notice of meeting to each registered security holder whose proxy is solicited

9.2 EXEMPTIONS from Information Circular

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(1) Does not apply if person is beneficial owner(2) Does not apply if total number of security holders is 15 or less(3) If solicitation is made to public by broadcast, speech or publication

9.3.1 CONTENT OF INFO CIRCULAR, NI-102F5o Disclose compensation paid to each directoro Included detail and discussion of the compensation

9.4 CONTENT OF PROXY FORMo Indicate that the security holder has the right to appoint a person or company to represent the security holder at the

meeting as well as the instructions on how to do soo Must provide an option for the security holder to specify that the securities held by the security holder will be voted for

or against each matter identified in the form of proxyo Must indicate that security holder doe NOT have the authority to vote for the election of any person as director unless a

bona fide proposed nominee for that election is named in the info circular

Chapter 6: Continuous Disclosure

Rational for Continuous Disclosure Two fundamental components of the continuous disclosure regime in Canada:

1. Periodic disclosure of interim and annual financial statements and accompanying reports2. Timely and accurate disclosure of material changes experienced by the issuer

Continuous disclosure is an integral part of an issuer ability to effectively and cost efficiently raise capital, because without the disclosure system, there would be a disincentive for investors to provide capital

o Any failure to disclose can lead to seriously impaired confidence resulting in a higher cost of capital

Key Definitions NI 51-102 Venture Issuer: means a reporting issuer that, as at the applicable time, did not have any of its securities listed or quoted on any of the Toronto Stock Exchange, a U.S. marketplace, or a marketplace outside of Canada and the United States of America other than the Alternative Investment Market of theLondon Stock Exchange or the PLUS markets operated by PLUS Markets Group plc; where the “applicable time” in respect of

(a) Parts 4 and 5 of this Instrument and Form 51-102F1, is the end of the applicable financial period;(b) Parts 6 and 9 of this Instrument and Form 51-102F6, is the end of the most recently completed financial year;(c) Part 8 of this Instrument and Form 51-102F4, is the acquisition date; and(d) section 11.3 of this Instrument, is the date of the meeting of the securityholders.

Materiality (pg 360) Material Change (NI 51-102 Definition): a change in the business, operations, or capital of the reporting issuer that

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

o Includes a decision to implement a change, made by the board of directors or by senior management of the reporting issuer

Issuer listed on the TSX of TSXVE must comply with a disclosure standard of “material information” which eliminates the distinction between material fact and material change

TSX Company Manual (pg 360)

Definition – Section 407 Material Information: is any information relating to the business and affairs of a company that results in or would

reasonably be expected to result in a significant change in the market price or value of any of the company’s listed securities

o “Material information” is a broader term than “material change” since it encompasses material facts that may not entail a “material change” as defined in the act

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Rule: Immediate Disclosure – Section 408 Requirement to disclose material information forthwith upon the information becoming known to management, or in

the case of information previously known, forthwith upon it becoming apparent that the information is materialo Required to reduce the chances of insider trading based on undisclosed info

Developments to be Disclosed – Section 409 Companies are not required to interpret the impact of external political, economic and social developments on their

affairs, but if the external development will have or has had a direct effect on their business or affairs then companies are urged, where practical, to explain the particular impact on them

Section 410 ( List on pg 362 ) List of business developments that are likely to give rise to material information and thus to require disclosure

Section 411 Forecasts of earnings and other financial forecasts need not be disclosed, but where a significant increase or decrease

in earnings is expected in the near future, that must be disclosed

Timely and Periodic Disclosure Requirements Timely Disclosure: can mean forthwith, as soon as practicable, or in some instances no later than ten days Periodic disclosure: includes quarterly and annual financial statements, MD&A, the annual information form (AIF),

and information circulars

Part 4 - Financial Statements (pg 367)

NI 51-102: Continuous Disclosure Obligations S. 4.1(1)(a) (Financial Statements): Annual and quarterly financial statements include— incomes statement, balance

sheet, statement of retained earnings, and a cash flow statement S. 4.1(1)(a)(ii) (Financial Statements): reporting issuer must file annual financial statements that include comparative

information for the immediately preceding financial year that are auditedo S. 4.1(2) (Audit Requirement): requires the financial statements to be audited

S. 4.2(a) (Filing Deadline): specifies that the audited financial statements must be filed within 90 days after the end of its most recently completed financial year (if you are a reporting issuer other than a venture issuer)

o (b): if you are a venture issuer than it is on or before the earlier of the 120th day after the end of its most recently completed financial year and the date of filing, in a foreign jurisdiction, annual financial statements for its most recently completed financial year

S. 4.4 (Filing Deadline for Interim Financial Reports): An interim financial report required to be filed under subsection 4.3(1) must be filed

o (a) in the case of a reporting issuer other than a venture issuer, on or before the earlier of the 45th day after the end of the interim period

o (b) in the case of a venture issuer, on or before the earlier of the 60th day after the end of the interim period S. 4.5 (Approval by Board): Board of Directors of the issuer must review the financial statements and sign off before

they are publicly disclosed, but the board may delegate that responsibility to the audit committee as per s. 4.5(3) S. 4.6(1) (Delivery of Financial Statements): Reporting issuer must send a request form annually to registered holders

which they may use to request a copy of the annual financial statements and s. 4.6(3) upon receipt of that form must send the statements within 10 days

o Unless issuer mails financial statements to all shareholders within the prescribed time limits (within 140 days of issuers year end) (s. 4.6(5))

S. 4.3(4) (Filing in Compliance with US Rules): Requires reporting issuer that file in compliance with US SEC requirements under US GAAP to reconcile the reporting and file a restated financial statement (pg 373)

S. 4.8 (Change in Year End Date): If a reporting issuer decides to change its financial yearend by more than 14 days, it must file a notice containing the information set out in subsection (3) as soon as practicable

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S. 4.10 (Reverse Takeovers): if there is a reverse takeover the company must comply with s. 4.8 unless they have the same year-end date or the reporting issuer changes its year-end to the same date as the reverse takeover acquirer

S. 4.11 (Change of Auditor): Reporting requirements if you change your auditor and disclosure as to why the auditor is being changed. Especially important if there was a disagreement between management and the auditor

Interim Financial Statements- NI 51-102, 4.4 Filing Deadline for Interim Financial Statements

The interim financial statements required to be filed under subsection 4.3(1) must be filed (a) in the case of a reporting issuer other than a venture issuer, on or before the earlier of

(i) the 45th day after the end of the interim period; and (ii) the date of filing, in a foreign jurisdiction, interim financial statements for a period ending on the

last day of the interim period; or (b) in the case of a venture issuer, on or before the earlier of

(i) the 60th day after the end of the interim period; and (ii) the date of filing, in a foreign jurisdiction, interim financial statements for a period ending on the last day of the interim period.

- NI 51-102, s. 4.5 (2) Approval of Financial Statements The financial statements a reporting issuer is required to file under section 4.3 must be approved by the board of

directors before the statements are filed (3) In fulfilling the requirement in subsection (2), the board of directors may delegate the approval of the

financial statements to the audit committee of the board of director

- NI 52-109 Certification of Annual and Interim Filings Certify that filings don't contain any untrue statements of a material fact or do not omit a material fact Certify that filings present the financial condition, results of operations and cash flow of issuer Say that they have designed disclosure controls and procedures to provide reasonable assurance that material info is make

known to Say that they have designed internal control over financial reporting to provide reasonable assurance regarding the reliability

of financial reporting and the preparation of the statements in accordance with GAAP NOTE: certification less onerous for venture issuers no need to say they have designed disclosure controls or internal

controls over financial reporting re: third and fourth bullet points

- NI 51-102, s. 4.10 Reverse Takeovers (1) Change in Year End – if a reporting issuer must comply with section 4.9 because it was a party to a reverse takeover, the

reporting issuer must comply with section 4.8 UNLESS (a) the reporting issuer had the same year-end as the reverse takeover acquirer before the transaction; or (b) the reporting issuer changes its year-end to be the same as that of the reverse takeover acquirer.

(2) If a reporting issuer completes a reverse takeover, it must file financial statements for the reverse takeover acquirer for all annual and interim periods ending (i) after the date of the financial statements included in an information circular filed in connection with the transaction; and (ii) before the date of the reverse takeover unless the financial statements have already been filed;

o Annual statements must be filed on or before the later of 20 days after date of reverse takeover 90 days after end of financial year (or 120 days after financial year if venture issuer)

o Interim statements must be filed on or before the later of 10 days after date of reverse takeover 45 days after end of interim period (60 days after interim period if venture issuer)

- NI 51-102, s. 4.11 Change of Auditor Reporting issuer must disclose any change in auditor, including info on whether there was a difference of opinion between

personnel of a reporting issuer responsible for the financial statements and the former auditor responsible for authorizing the issuance of audit reports or communication of the results of the auditor’s review of the interim financial statements. This disclosure is MANDATORY IF:

o The difference of opinion resulted in a reservation or would have resulted in a reservation in the former auditor’s audit report on the financial statements OR

o The difference of opinion resulted in a qualified or adverse communication or denial of assurance in respect of the former auditor’s review of the reporting issuer’s interim financial statements

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Issuer must disclose any decision by the board of directors to propose to securities holders that its auditor be removed before expiry of its term of appointment or that a diff person or company be appointed as its auditor on expiry

o Must disclose any matter that in the former auditor’s opinion has, or could have, a material impact on the financial statements or reports provided by the auditor relating to the financial statements

11.6Executive Compensation Disclosure for Certain Reporting Issuers (full section on pg 374-375) (a) Must disclose all compensation, paid, payable, awarded, granted, given, or otherwise provided, directly or

indirectly, by the issuer, or a subsidiary of the issuer, to each NEO and director (b) include detail and discussion of the compensation, and the decision-making process relating to compensation

Form 51-102F6 , Statement of Executive Compensation ( pg 375 ) NEO: “named executive officer” means each of the following individuals

o (a) a CEO, (b) a CFO, (c) each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and CFO, whose total compensation was, individually, more than $150,000

Performance Graph (s. 2.2): Provide a line graph showing the company’s cumulative total shareholder return over the five most recently completed financial years. Assume that $100 was invested on the first day of the five-year period

o Must compare to the cumulative return of at least one broad equity market index (eg. S&P Composite Index) Option-Based Rewards (s. 2.3): Describe the process the company uses to grant share-based or option-based awards

to executive officers

In the Matter of Research in Motion Limited et al. (pg 381) (Options-based rewards Issue)Facts: According to the terms of RIMs plan with respect to pricing, Options were to be priced “at the money”, where the exercised price per share is equal to the closing market price of the shares on the last trading day immediately preceding the date of the grant. Four executives engaged in the grant Options, in which option backdating or option repricing occurred. The grant dates selected resulted in more favourable pricing of the Options (“Incorrect Dating Practices”). OSC says that RIM repeatedly made statements in many of its filings that contained the misleading or untrue statement that Options were priced at the fair market value of RIM’s common shares at the date of the grant in accordance with the terms of its plan. OSC claim that the CEO and CFO failed to make sure the statements in their disclosures were accurate and that they acted contrary to the Act and the public interest.Issue: Decision: Resulted in harsh penalties for several executives including having to pay millions of dollars in fines and limitation of when certain executives could act as a director or officer of any reporting issuer, and they were all required to take courses regarding the duties of directors and officers of public companies.Ratio:

Forward Looking Information (FLI & FOFI) (Part 4A&B)

4A.2 Reasonable Basis A reporting issuer must not disclose forward-looking information unless the issuer has a reasonable basis for the

forward-looking information4A.3 Disclosure

A reporting issuer that discloses material forward-looking information must include disclosure that(a) identifies forward-looking information as such;(b) cautions users of forward-looking information that actual results may vary from the forward-looking

information and identifies material risk factors that could cause actual results to differ materially from the forward-looking information;

(c) states the material factors or assumptions used to develop forward-looking information; and(d) describes the reporting issuer’s policy for updating forward-looking information if it includes procedures in

addition to those described in subsection 5.8(2).4B.2 Assumptions

1) A reporting issuer must not disclose FOFI or a financial outlook unless the FOFI or financial outlook is based on assumptions that are reasonable in the circumstances.

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2) FOFI or a financial outlook that is based on assumptions that are reasonable in the circumstances must, without limitation,

(a) be limited to a period for which the information in the FOFI or financial outlook can be reasonably estimated; and

(b) use the accounting policies the reporting issuer expects to use to prepare its historical financial statements for the period covered by the FOFI or the financial outlook.

4B.3 Disclosure In addition to the disclosure required by section 4A.3, if a reporting issuer discloses FOFI or a financial outlook, the

issuer must include disclosure that(a) states the date management approved the FOFI or financial outlook, if the document containing the FOFI or

financial outlook is undated; and(b) explains the purpose of the FOFI or financial outlook and cautions readers that the information may not be

appropriate for other purposes.

Management Discussion and Analysis (NI 51-102) (pg 385)

Financial statements record what occurred during the reporting periodo The MD&A discusses why it happened and provides management’s insights into how the issuer is likely to

perform on a going-forward basis The requirements for MD&A are set out in NI 51-102, Part 5 and require:

Management must analyze the financial statements and discuss the dynamics of the business Must disclose the nature of changes in the issuer’s performance during the reporting period and

management’s opinion as to the reason for the change Should discuss both the positive and negative developments and any material changes from the last

reporting period Form 51-102F1: What is Material? – Slightly different from statutory definition of material change

Would a reasonable investor’s decision whether or not to buy, sell or hold securities in your company likely be influenced or changed if the information in question was omitted or misstated? If so, the information is likely material.

Should provide a reconciliation with any offering document issued during the reporting period Should discuss future financial and operating plans and very importantly, any risks to solvency Must disclose the capital structure of the issuer, which includes the designation and number of each class

and series of voting or equity securities which are outstanding. As well as any conversion of exercisable rights options that are attached to any of the securities.

MD&A must be approved by the board of directors of the issuer before being filed or if an interim MD&A, by the board’s audit committee

Update of Previous FOFI (s. 5.8) – sets out that any previously disclosed FOFI must be updated in the next MD&A. Can’t just talk about something in one MD&A and then never discuss it again going forward

S. 5.5 (Approval of MD&A): The annual and interim MD&A’s that a reporting issuer is required to file under this Part must be approved by the board of directors before being filed

S. 5.1(2) (Filing Requirements): tied to 4.2 and 4.4 (above) S. 5.6 (Delivery Requirements): tied to s. 4.6 (above)

- NI 52-102, s. 5.2 Additional Disclosure for Venture Issuers Without Significant Revenue A venture issuer that hasn't had significant revenue from operations in either of its last two financial years must disclose

in its MD&A a breakdown ofo Capitalized or expensed exploration and development costso Expensed research and development costso Deferred development costso General and admin expenseso Any additional material costs

- NI 52-102, s. 5.4 Disclosure of Outstanding Share data Reporting issuer must disclose its capital structure this includes the designation and number or principal amount of

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o Each class and series of voting or equity securities of the reporting issuer for which there are securities outstanding

o Each class and series of securities of the reporting issuer for which there are securities outstanding that are convertible into, or exercisable or exchangeable for voting or equity securities of the reporting issuer

o Each class and series of voting or equity securities of the reporting issuer that are issuable on the conversion, exercise, or exchange of outstanding securities of the reporting issuer

Part 6 - Annual Information Form (AIF) (pg 387)

AIF was originally made and still is used as a means to communicate extensive information in order to qualify for the short form prospectus

S. 6.1 (Filing Requirements): A reporting issuer that is not a venture issuer must file an AIFo S. 6.2 (Filing Deadline): Must be filed within 90 days after the end of the issuer’s most recently completed

financial yearo There is no requirement to send an AIF directly to securityholders

NI 52-110 Audit Committees: sets out disclosure (content) requirements that must be included in the AIFo Three Year History how company’s business has developed over last three financial yearso Significant Acquisitions Must disclose the text of the audit committee’s charter, the name of each audit committee member, and

whether or not each is independent and financially literate Must disclose, by category, all external auditor service fees under the captions: “Audit Fees”, “Audit-Related

Fees”, and “Tax Fees” Must disclose all social and environmental policies, as well as risk factors such as environmental and health

risks and political considerations The required standard of disclosure of social and environmental policies is that the policies are

fundamental to operations OSC: “To meet these requirements, the issuer should quantify the accounting estimate

where quantitative information is reasonably available and would provide material information to investors”

OSC: “any risks relating to environmental laws are material to an issuer’s operations, whether national or international, the issuer should include a detailed discussion of these laws”

o OSC says: “Boilerplate disclosure is insufficient”

Part 7 – Material Change Reports (pg 399)

Material Change (OSA definition) (pg 399):o (a) when used in relation to an issuer other than an investment fund, means,

(i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or

(ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, and

o Basically asking “would the information affect the market price or value of the company if made public S. 7.1 (Timing of Filing): Subject to subsection (2), if a material change occurs in the affairs of a reporting issuer, the

reporting issuer musto (a) immediately issue and file a news release authorized by an executive officer disclosing the nature and

substance of the change; ando (b) as soon as practicable, and in any event within 10 days of the date of which the change occurs, file a Form

51-102F3 Material Change Report with respect to the material change S. 7.1(2)(a) (Exception from Filing): if in the opinion of the issuer, arrived at in a reasonable manner,

it would be detrimental to disclose the information to the public the issuer can file a confidential material change report with the OSC and then needs to reprove their case every 10 days

Pezim v. BC (Superintendent of Brokers) (pg 403)

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Facts: BCSC’s Superintendent of Brokers instituted proceedings against the respondents in connection with various transactions that occurred in 1989, alleging that the respondents had violated timely disclosure provisions and insider-trading prohibitions in three categories of impugned transactions: the drilling results, the private placement, and the ALC withdrawal.Issue: Decision: Court of appeal erred in overturning the regulators decision that Pezim was guilty of not filing a material change report when they should haveRatio:

1. Must disclose material changes as soon as practicable, and the notion “as soon as practicable” takes on a different meaning when the issuer is about to engage in a securities transaction

o The directors of the issuer have a positive duty to inquire about material changes and to ensure that any such changes are disclosed prior to the transaction

2. The courts should give substantial deference to the securities regulators when they make a ruling3. Three Elements of a “Material Change”: the change must be

(a) In relation to the affairs of an issuer(b) In the business, operations, assets or ownership of the issuer, and(c) Material, i.e., would reasonably be expected to have a significant effect on the market price or value of the

securities of the issuerAnalysis:

ALC’s withdrawal meant a loss of $4.25 million dollars and that was a material change to the business of Pezim

Kerr v. Danier Leather Inc. (pg 407) Facts: SCC clarifies the difference between “material fact” and “material change”Ratio:

1. When a prospectus or amendment to a prospectus contains no misrepresentation on the date the document is filed (or amended), information amounting to material facts, but not material changes that arise subsequently cannot support an action under s. 130(1)

a. If a material change arises during the period distribution, failure to disclose this change as required by s. 57(1) could support an action under s. 130(1)

Reason: Example: Poor intra-quarterly results may motivate a company to implement a change in its business or operations

but the disclosure obligation would be motivated by the change in the business, operations or capital, and not by the financial results themselves

Re AiT Advanced Information Technologies Corp. (pg 410) Facts: OSC considered whether directors authorized, permitted, or acquiesced in a breach of the Ontario Securities Act and acted contrary to the public interest by authorizing, permitting, or acquiescing in AiT’s failure to disclose forthwith the merger transaction between AiT and 3M Company as a material change. Issue: Decision: Ratio:

1. Step 1: Determine if the information is Material to the company2. Step 2: Determine if there has been a Change in the business, operations or capital of the company

a. A change will occur when a decision has been made indicating a substantial likelihood that implementation will be forthcoming

b. A decision by a board of directors of an issuer to pursue a potential transaction that is not yet within its control to put into effect would not ordinarily be a material change in the business, operations or capital of an issuer at that point in time unless the board has reason to believe that the other party is also committed to completing the transaction

i. It is necessary to establish whether there is sufficient commitment from both parties of the transaction to determine whether a "decision to implement" the transaction has taken place

Reason: Where transactions are involved, it is not enough to consider only the materiality of the transaction itself, but also the

materiality of the information that negotiations are underway that could lead to a possible transaction. In some cases,

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the existence of negotiations would or could reasonably be expected to affect the stock price, and is therefore material

Probability/Magnitude Test

YBM Magnex International Inc. (pg 414) (Probability/Magnitude Test) Facts: In August of 1996, US regulators suspected company was laundering money. By April 1997 a special committee determines no wrongdoing. YBM files (final) prospectus later in 1997 (about 5 months after filing prelim) but does not disclose information about regulatory investigations, rumors or special committee mandate. D&T tells YBM it cannot issue audit report on 1997 financial statements.Decision: There was a material change and YBM failed to announce the change in a reasonable timeRatio:

1. Probability/Magnitude Test: encompasses an assessment of the current value of the information as it affects the price of securities, discounted by the chances of it occurring.

a. Requires an assessment of the probability that an event will occur, having regard to all the known or ascertainable facts. It also requires some assessment of the magnitude or significance of the change, in terms of whether the information would be viewed by a reasonable investor as important information for making a decision to buy, sell, or continue to hold their securities.

2. Test only helps with respect to materiality, it is not useful in determining whether a change has occurredReason:

Magnitude: Board said “we believe the potential magnitude of a publicly traded company missing its filing deadline and having its securities cease-traded is self-evident”

Remaining question is then “what is the probability of YBM not obtaining an audit opinion by its filing date?”o Probability: it was probable as of April 20 that YBM would be unable to obtain an audit opinion and make its

May 20 filing deadline The emergence by April 20 of the risk regarding the filing deadline and likely cease trade order

constituted a material change There press release was released 18 days after the notice by D&T. Board found this was not "forthwith", particularly in

light of the ten-day period set out in subsection 75(2) of the Act.

Part 8 – Business Acquisitions Report/Disclosure of Significant Acquisition (pg 417)

Definition: required when a reporting issuer completes an acquisition of a business that is a significant acquisition Requires audited financial reports which can be onerous to get financial reporting out of the acquire company8.2 Obligation to File a Business Acquisition Report and Filing Deadline(1) If a reporting issuer completes a significant acquisition, as determined under section 8.3, it must file a business

acquisition report within 75 days after the acquisition date.(2) Despite subsection (1), if the most recently completed financial year of the acquired business ended 45 days or less

before the acquisition date, a reporting issuer must file a business acquisition report(a) within 90 days after the acquisition date, in the case of an issuer other than a venture issuer, or(b) within 120 days after the acquisition date, in the case of a venture issuer.

8.3(2) Required Significance Tests(a) The Asset Test. The reporting issuer’s proportionate share of the consolidated assets of the business or related businesses exceeds 20 percent of the consolidated assets of the reporting issuer calculated using the audited annual financial statements of each of the reporting issuer and the business or the related businesses for the most recently completed financial year of each that ended before the acquisition date.

(b) The Investment Test. The reporting issuer’s consolidated investments in and advances to the business or related businesses as at the acquisition date exceeds 20 percent of the consolidated assets of the reporting issuer as at the last day of the most recently completed financial year of the reporting issuer ended before the acquisition date, excluding any investments in or advances to the business or related businesses as at that date.

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(c) The Profit or Loss Test. The reporting issuer’s proportionate share of the consolidated specified profit or loss of the business or related businesses exceeds 20 percent of the consolidated specified profit or loss of the reporting issuer calculated using the audited annual financial statements of each of the reporting issuer and the business or related businesses for the most recently completed financial year of each ended before the acquisition date.

Test for venture issuer is slightly different, specifically, 20% under the asset test and investment test are read as 40% Once you meet the requirements under one of the 3 tests then you are required to disclose the business interests

Rumors (pg 418)

Regulators have tried to find the appropriate balance between confidentiality and requiring issuers to disclose as a result of rumours circulating in the market. They have done this through NP 51-201

s. 2.2 (Confidentiality): Securities legislation permits a company to delay disclosure of a material change and to keep it confidential temporarily where immediate release of the information would be unduly detrimental to the company’s interests.

o If the harm to a company’s business from disclosing outweighs the general benefit to the market of immediate disclosure, withholding disclosure is justified

Must file a confidentiality filing with the regulator and renew it with a new filing every 10 days should the company want to continue to keep the information confidential

Part 9 – Information Circulars (pg 395)

S. 9.1 (Proxy Solicitation): If management of a reporting issuer gives notice of a meeting to its registered holders of voting securities, management must, at the same time as or before giving that notice, send to each registered holder of voting securities who is entitled to notice of the meeting a form of proxy for use at the meeting

S. 9.4 lists the content required in the proxy on pg 396

Part 11 – Additional Disclosure Requirements

Additional Material – s. 11.1 Change of status report – s. 11.2 Voting results – s. 11.3: a non-venture issuer has to file the voting results of any meeting that takes place News release containing financial information – s. 11.4 Re-filling documents – s. 11.5 Executive compensation – s. 11.6

Part 12 – Filing Material Documents

Material documents – s. 12.1: A reporting issuer must file articles of incorporation, by-laws, any securityholder or voting trust agreement, any securityholders’ rights plans or other similar plans

Material Contracts – s. 12.2: a reporting issuer is not required to file a material contract entered into in the ordinary course of business unless the material contract is

(a) a contract to which directors, officers, or promoters are parties other than a contract of employment;(b) a continuing contract to sell the majority of the reporting issuer’s products or services or to purchase the

majority of the reporting issuer’s requirements of goods, services, or raw materials;(c) a franchise or licence or other agreement to use a patent, formula, trade secret, process or trade name;(d) a financing or credit agreement with terms that have a direct correlation with anticipated cash distributions;(e) an external management or external administration agreement; or(f) a contract on which the reporting issuer’s business is substantially dependent

Chapter 8: Insider Trading and Tipping For a recent case on Insider Trading and Tipping see R v. Landen on pg 671

Legislative Scheme (pg 481) Two pronged

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1. Legislation states that under prescribed circumstances, insider trading is legal (ie. At the proper times and not based on any undisclosed information)

2. Legislation identifies certain illegal insider trading. No, insider, or any other person in a “special relationship” with the issuer, can trade on material undisclosed information.

OSA s. 1(1) definition of “insider” (pg 481)“insider” means,

(a) a director or officer of a reporting issuer,(b) a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer,(c) a person or company that has,

(i) beneficial ownership of, or control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuer’s outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, or (ii) a combination of beneficial ownership of, and control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuer’s outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution,

(d) a reporting issuer that has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security,

Legal Insider Trading (pg 482)

Insider Trading Reports (ITRs): issuers’ insiders are required to file ITRs with the Commission and the information required is set out in NI 55-102F2

o Must also file a Insider Profile: issuers’ insiders must fill out NI 51-102F1 which just gives general information about the insider and his/her holdings in the company

o Insiders must file an ITR within 10 calendar days of becoming an insider (OSA s. 107(1))o When an insider trades – 107(2): an insider who has direct or indirect beneficial ownership of or control or

direction over securities of the reporting issuer must within 10 days file a report detailing each transactiono An insider of one issuer who becomes an insider of a second issuer must file a report regarding securities of

the second issuer for the previous six months (OSA s. 107(3))o A person who becomes an insider but has no ownership, direction or control over any of the issuer’s

securities need not file an ITR Exemptions from Filing ITRs:

o Under NI 62-103 “eligible institutional investors” as defined in the instrument are exempt from insider reporting requirements if they have filed an early warning report and do not have knowledge of any material fact or change

o NI 55-101: Exemption for directors and senior officers of some subsidiaries of a reporting issuer. These individuals are exempt if they do not ordinarily have inside information

Exemption for some directors and senior officers of the reporting issuer itself, so long as those individuals do not normally receive undisclosed material information

Illegal Insider Trading (pg 485)

Illegal Tradings. 76(1): No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed

Elements of Illegal Trading1. the accused was in a “special relationship” with the reporting issuer 2. the accused purchased or sold securities of reporting issuer

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3. the accused made the purchase or sale with knowledge of a material fact or material change concerning the affairs of the reporting issuer

4. the material facts or changes had not been generally disclosed (see below for details on “general disclosure”)

OSA s. 76(5): Definition of “Special Relationship” (broader than definition of “insider”)“person or company in a special relationship with a reporting issuer” means,

(a) a person or company that is an insider, affiliate or associate of,(i) the reporting issuer,(ii) a person or company that is proposing to make a take-over bid, as defined in Part XX, for the securities of the reporting issuer, or(iii) a person or company that is proposing to become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its property,

(b) a person or company that is engaging in or proposes to engage in any business or professional activity with or on behalf of the reporting issuer or with or on behalf of a person or company described in subclause (a) (ii) or (iii),(c) a person who is a director, officer or employee of the reporting issuer or of a person or company described in subclause (a) (ii) or (iii) or clause (b),(d) a person or company that learned of the material fact or material change with respect to the reporting issuer while the person or company was a person or company described in clause (a), (b) or (c),(e) a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship; (Broad)

Anyone who learns of a material fact or change from anyone described in the definition as a whole and who should have known that the person was in a special relationship with the issuer can come within the definition

Material Information Material Fact: requires disclosure of facts that would reasonably be expected to have a significant effect on the

market price or value of securities o Material facts do not need to be disclose but you can’t disclose them selectively (to certain people and not

others) and anybody who know about the material fact can’t trade shares in the company until the fact is disclosed publicly

Material Change: is “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 vale of any of the securities of the issuer”

o Material changes must be disclosed as soon as possible or otherwise within 10 days but you can apply to the OSC to keep the change confidential

Re Donnini (pg 487) Facts: Donnini, who was the head trader at Yorkton Securities. Donnini had a discussion with Yorkton’s chair concerning the initiation of a second financing for a company called Kasten Chase (KC). That day and the day after, Donnini traded an unusually high volume of KC stock, while also acting to conceal the identity of his firm. Issue: Decision: OSC concluded that Donnini insider traded and that his actions could not be excused on the basis of reasonable mistakeRatio:

1. Probability/Magnitude Test: at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity

a. Since the potential magnitude of the second special warrants financing was highly significant for the value of KCA shares, a lower probability of occurrence than we determined was actually present would still have led us to conclude that each of the financing, the negotiations and the potential price and size of the financing was a material fact.

2. Facts may be a material fact without being a material change but a material change will always be a material factReason: Was Donnini in a special relationship with KCA?

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Board found that Yorkton’s Chair was in a special relation with KCA. He clearly tipped Donnini about the upcoming offering and that Donnini should have known that the Chair was in a special relationship with KCA thus he falls within the definition of being in a special relationship himself with KCA under s. 76(5)(e).

Was the information a material fact? The negotiations for the second special warrants financing were sufficiently advanced at 2:45 p.m. on February 29,

2000 that the information about the proposed transaction at that time was a fact for purposes of the definition of "material fact" in the Act

o See probability/magnitude test above for more details

What Counts as “General Disclosure”

NP 51-201 s. 3.5(2): two factors for determining whether information has been “Generally Disclosed”1. The information must be “disseminated to the trading public”, and2. The public must be given a sufficient amount of time to digest and analyze the information

OSC suggests that one full trading day following the release of the information should pass before insiders trade

Pezim v. BC (Superintendent of Brokers) (pg 498) Issue: Whether there is a duty on the Directors under s. 67 to inquire as to the existence of material changes before causing a reporting issuer to engage in securities transactions? Ratio:

1. If an issuer wishes to engage in a securities transaction, s. 67 requires that its directors must inquire about all material changes in the issuer’s affairs

2. Compliance with the rule does indeed put a duty of inquiry on those who sign the prospectusReason:

Tipping (pg 499)

TippingOSA s. 76(2) No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed.

Tipping is in and of itself illegal. Nobody actually has to trade on the tipped info for there to be a crime committed.

Elements of Tipping1. The tipper must be in a special relationship with the reporting issuer;2. The tipper informs the tippee of a material fact or material change other than in the necessary course of business; and3. The information has not been generally disclosed As the definition of “special relationship” suggest: A tippee can also be a tipper if he or she, like the original tipper, is

also in a special relationship with the issuer and passes material undisclosed information along to another person (OSA s. 76(5)(e))

Defences to Liability for Illegal Insider Trading

Reasonable Belief that Information Has Been Generally Disclosed

s. 175(1) OSA: a person or company may avoid quasi-criminal and civil liability under the OSA if the firm or employee can prove that no individual with actual knowledge of an undisclosed material fact or material change made, or participated in the making of, the decision to buy or sell a security to which the material fact or material change relates

OSA s. 76(4): No person or company shall be found to have contravened subsection (1), (2) or (3) if the person or company proves that the person or company reasonably believed that the material fact or material change had been generally disclosed

The onus is on the accused to prove that he or she had a reasonable belief that the information had been “generally disclosed”

Green v. Charterhouse Group Can. Ltd. (pg 501) (?? Don’t really understand this decision) 52

Facts: The plaintiff (Green) had an agreement with the defendants that he would offer to sell his shares to them before attempting to sell them to others. He offered his shares to the defendant shareholders under the agreement, which was accepted. Prior to the sale the defendants gained knowledge of a possible takeover of the company under which an offer might be made for the shares at a much higher price. The takeover was not a certainty. The plaintiff was notified by the defendants in general terms in a letter of the possibility of an offer. Issue: Decision: Court held that a limited discussion of the relevant information in a letter was inadequate disclosureRatio:

1. It is not discharged by disclosing it exists, without saying what it isReason:

Re Harold P. Conner (pg 502) Facts: One of the defendants in the case, Morrow, believed that certain information had been disclosed before he traded because a press release had been issued. He was a board member and the board meeting ended late at 5pm. The evidence showed that it was usual practice by the company’s secretary to send the press release out right after the meeting ended. Since the meeting ended at 5pm she didn’t send it out until the next morning. At 10:33 Halifax time Morrow made a trade of the company’s stock assuming that the information was public. Issue: Decision: Held that he was guilty of insider trading.Ratio:

1. An insider may not trade with the release of the news as was the case here. An insider should wait a minimum of one full day after the release of the information before trading.

Reasonable Mistake of Fact (pg 506)

Test: Must establish on a balance of probabilities that he reasonably believed in a mistaken set of facts which, if true, would render the act or omission innocent

o Onus is also on the accused to establish on a balance of probabilities that he took all reasonable steps to avoid committing the offence

Lewis v. Fingold (pg 506) Facts: The accused, a director of a movie company, became aware of certain information at a board meeting. He then sold shares in the company before the disclosure of this information to the public. Issue: Whether the accused believed that the information would not have a substantial effect on the company’s share price?Decision: Held that he reasonable believed that the poor quarterly results would not have a significant effect on the market price and therefore was under a reasonable mistake of fact.Ratio:

1. In a strict liability offence such as this, a defendant can avoid liability by establishing on a balance of probabilities that he reasonably believed in a mistaken set of facts which, if true, would render the prohibited act an innocent one

Reason:

R v. Harper (pg 508) (Useful in relation to the “reasonableness” standard in relation to defences) Facts: OSC alleged that Harper was in a special relationship with the company that he sold shares contrary to s. 76(1). OSC alleged that Harper knew about negative reports on the amount of gold that was in the ground which the public was unaware of. Despite his knowledge of those material facts, he continued to send out positive press releases and indicated that there were no other reports. The information was made public and the stock price dropped but Harper had already sold most of his shares. He argued that the information was not material and even if it was, he had a genuine and reasonable belief that it was not.Issue: Decision: Harper did not demonstrate an honest and reasonable belief on the accepted evidence to refute his knowledge of the found material fact and was thus guilty of insider trading.Ratio: Analysis:

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the evidentiary test becomes has Harper demonstrated on a balance of probabilities an honest and reasonable mistaken belief to refute his knowledge of facts which the Court finds to be material and which Harper admits to being in possession

o It is not reasonable that good news results are material and bad news results are not materialo Given Harper's decades of experience with Golden Rule, its related mining companies, prior employment and

his industrial/financial involvement in general leads his reliance on a company rep telling him that the results in no way undermine the previous results to be completely unreasonable

Necessary Course of Business Defence (pg 512)

NP 51-201s. 3.3(2): The "necessary course of business" exception exists so as not to unduly interfere with a company's ordinary business activities and would generally cover communications with:

(a) vendors, suppliers, or strategic partners on issues such as research and development, sales and marketing, and supply contracts;

(b) employees, officers, and board members;(c) lenders, legal counsel, auditors, underwriters, and financial and other professional advisors to the company;(d) parties to negotiations;(e) labour unions and industry associations;(f) government agencies and non-governmental regulators; and(g) credit rating agencies (provided that the information is disclosed for the purpose of assisting the agency to formulate a

credit rating and the agency's ratings generally are or will be publicly available)

s. 3.3(3) (Takeover Bid): Securities legislation prohibits any person or company that is proposing to make a take-over bid, become a party to a reorganization, amalgamation, merger, arrangement or similar business combination or acquire a substantial portion of a company's property from informing anyone of material information that has not been generally disclosed. An exception to this prohibition is provided where the material information is given in the "necessary course of business" to effect the take-over bid, business combination or acquisition.

s. 3.3(4) (Private Placement): We recognize that select communications between the parties to a private placement of material information may be necessary to effect the private placement

s. 3.3(5&6) (Analyst): “Necessary course of business” exception would not generally permit a company to make a selective disclosure of material corporate information to an analyst (s. 3.3(5))

But there may be situations where an analyst will be "brought over the wall" to act as an advisor in a specific transaction involving a reporting issuer they would normally issue research about and the analyst them becomes a “person in a special relationship” with the reporting issuer (s. 3.3(6))

Royal Trust Ltd. v. Ontario (Securities Commission) (pg 514) Facts: There was a hostile takeover bid for Royal Trust and the allegation was that Royal Trust met with personnel from TD Bank and revealed to them that management was considering recommending to the board to increase the dividend and that 60% of the shares in Royal Trust were owned by people or companies that Royal Trust management knew personally.Issue: Decision: Held that the information disclosed was a material fact and that it could not be disclosed in the necessary course of businessRatio:

1. Disclosing information to a shareholder as part of an attempt to defend against a takeover bid is not in the “necessary course of business

Chapter 7: Corporate Governance Disclosure

NI 58-201 – Corporate Governance Guidelines Canadian regulators implemented voluntary compliance with a mandatory disclosure requirements

o Hence corporate governance standards are voluntary in Canada, but securities regulation requires disclosure of governance practices

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Non-compliance then means the issuer’s failure to disclose its non-adherence to the guidelines (compared to the US where it means failure to adhere to the guidelines)

o Thus in Canada the non-adhering issuer remains listed as long as it is disclosing its non-adherence, and the only sanction is the potential for shareholder exit

Form 58-101F1 Requirements (pg 449) All reporting issuers are to disclose the identity of independent and non-independent directors, and describe the basis

for that determination; however, the requirements for non-venture issuers are considerably more detailed Disclosure requirements include: board of directors, Board mandate, position descriptions, orientation and

continuing education, ethical business conduct, nomination of directors, compensation, and assessmento Non-Venture Issuer: must also disclose board attendance records, the identity, role, and responsibilities of

any independent chair or lead director, or if the board does not have one, a description of what the board does to provide leadership for its independent directors (Form 58-101F1, s. 1)

Venture issuers do not face such requirements nor are there required to disclose the board’s written mandate or delineation of board roles and responsibilities; nor required to disclose written position descriptions or delineated roles for the board chair and chair of each board committee

o Orientation and continuing education: Both types of issuers must disclose orientation and continuing education initiatives for directors, but only non-venture issuers must describe how the board ensures that its directors maintain the skill and knowledge necessary to meet their obligations and directors

o Ethical Business Conduct: non-venture issuers must provide more detailed disclosure then venture issuers including whether or not the board has adopted a written code for the directors, officers, and employees; describe how the board monitors compliance with its code etc.

o Assessment: While both types must describe how the board satisfies itself that its members and committees are performing effectively, non-venture issuers must disclose whether its directors are regularly assessed with respect to their effectiveness and contribution, and describe the process of assessment

o Compensation: Both types need to disclose with respect to nomination and compensation but non-venture issuers must disclose whether a compensation advisor has been retained at anytime in the past year

NI 52-109 Certificate of Disclosure in Issuers’ Annual Interim Filings (pg 456 & 461) NI 52-109 requires an issuer’s CEO and CFO or persons in similar functions, to personally certify that

1. the issuer’s annual and interim fillings do not contain an misrepresentations2. The financial statements and other financial information in the annual and interim filings fairly present all

material respects the financial condition, results of operations, and sash flows of the issuer3. They have designed or supervised design of disclosure controls and procedures (DC&P) and internal control

over financial reporting (ICFR)4. They have caused the issuer to disclose in its MD&A any changes in the issuer’s ICFR that has materially

affected the issuer’s ICFR; and5. On an annual basis, they have evaluated the effectiveness of the issuer’s DC&P and caused the issuer to

disclose their conclusions about the effectiveness of DC&P in the issuer’s MD&A Disclosure controls and Procedures (s. 1): means controls and other procedures of an issuer that are designed to

provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings is reported within the time periods specified in the securities legislation and ensure that information required to be disclosed is accumulated and communicated to the issuer’s management

Internal Control over Financial Reporting (s. 1): means a process designed by, or under the supervision of, an issuer’s certifying officers, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP

S. 6(b) (52-109F1): if the certifying officer becomes aware of a material weakness relating to the design of ICFR that existed at the end of a financial period, the issuers MD&A must describe each material weakness related to design and the issuer’s current plans to remediate each material weakness

S. 4.1: A venture issuer is not required to file an AIF; however,, if it voluntarily files and AIF for a financial year after it has filed its annual financial statements, annual MD&A, and annual certificates for the financial year, the venture issuer must file on the same date that it files its AIF a separate annual certificate signed by a certifying officer

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Summary of Rules: the certifying officers are now required to certify that the financial statements fairly present the financial condition of the issuer, that there are internal controls to ensure that material information is conveyed to decision makers, and that they have disclosed to the auditor and audit committee any significant deficiencies in internal control and any fraud, material or not, that involved managers or other employees who have a significant role in the company’s internal controls

The certification is NOT qualified by the phrase “in accordance with GAAP” and thus it is important to realize that the issuer’s GAAP financial statements might not fairly reflect the financial condition of the issuer thus requiring further disclosure

18.1 Liability for certificates containing misrepresentations A certifying officer that certified a misrep could be subject to quasi-criminal, administrative or civil proceedings under

securities lawo Could also potentially be subject to private actions for damages at common law

Fair Presentation

Certifying that the financial information fairly present’s the issuer’s financial condition is broader than affirming that documents comply with GAAP (or IFRS)

o Where an issuer is of the view that there are limitations to the issuer’s GAAP-based financial statements as an indicator of its financial condition, the issuer should provide additional disclosure in its MD&A necessary to provide a fair and complete picture of the issuer’s financial condition (NI 52-109CP, s. 4.1)

Kripps v. Touche Ross and Co. (pg 464) (What constitutes fair presentation) Ratio:

1. Auditors cannot hid behind the qualifications to their reports (According to GAAP) where the financial statements nevertheless misrepresent the financial position of the company

NI 52-110 – Audit Committees (pg 467) NI 52-110 ensures that external audits are conducted independently of the issuer’s management by assigning

oversight duties to an independent audit committeeo Applies to both corporate and non-corporate entities such as incomes trusts and LPs

External Auditors are to be retained by, and are ultimately accountable to, the shareholderso Hence auditors have a right and duty to provide their views directly to the shareholders if they disagree with

an approach being taken by the audit committee

Rules under NI 52-110 (pg 468)

S. 3.1(1): An audit committee of a reporting issuer must be made up of a minimum of three directors of the issuer S. 2.2: audit committee must be responsible for managing the relationship between the issuer and the external

auditors by requiring the external auditor to report directly to the audit committee S. 2.3: provides that an audit committee recommend to the board the nomination and compensation of the external

auditors S. 2.3(3): specifies that an audit committee must be directly responsible for overseeing the work of the external

auditor engaged for the purpose of preparing or issuing an auditor’s report or performing other audit, review, or attest services for the issuer

Independence of the Audit Committee (pg 470)

Every member of an audit committee is to be independent o Independence: means the absence of any direct or indirect material relationship between the director and

the issuer that, in the view of the issuer’s board of directors, could be reasonably expected to interfere with the exercise of a member’s independent judgement

Subsection 1.4(3) sets out a list of relationships with an issuer that would reasonably interfere with the exercise of the person’s independent judgment

The meaning of independence is further defined in s. 1.4 on pg 470

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S. 3.6: Temporary exceptions to the independence requirements are available if the member is able to exercise the impartial judgment necessary for the member to fulfill their responsibilities as an audit committee member

o The person granted the exemption cannot be the chair of the committee (s. 3.6) and the exemption is not available unless the majority of the audit committee members are still independent (s. 3.7)

o S. 3.9: the board must first determine that reliance on the exemption will not materially adversely affect the ability of the audit committee to act independently

Financial Literacy of the Audit Committee (pg 473)

Sets out financial literacy requirementso S. 1.6: An individual is financially literate if he or she has the ability to read and understand a set of financial

statements that present a breadth and level of complexity of accounting issues that can reasonably be expected to be raised by the issuer’s financial statements

S. 3.8 & s.9: A director that is not financially literate can be appointed provided that the member becomes financially literate within a reasonable period of time and the board has determined that it will not affect the committees ability to act independently

Pre-Approval of Non-Audit Services (pg 474)

S. 2.3(4): requires the pre-approval of non-audit services by the financial committee S. 2.6: the audit committee must adopt policies and procedures for the engagement of non-audit services, including

that the audit committee is informed of non-audit services

In-Class Lecture Slides and Cases (Mar 12, 2013) Legislation (CBCA)122. (1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall,

(a) act honestly and in good faith with a view to the best interests of the corporation; and (fiduciary duty)(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances (duty of care)

106. (3) (Election of directors): shareholders of a corporation shall, by ordinary resolution at the first meeting of shareholders and at each succeeding annual meeting at which an election of directors is required, elect directors to hold office for a term expiring not later than the close of the third annual meeting of shareholders following the election.

108. (1) (Ceasing to hold office): A director of a corporation ceases to hold office when the director (a) dies or resigns; (b) is removed in accordance with section 109; or (c) becomes disqualified under subsection 105(1)

109. (1): Directors can be removed by a special meeting of the shareholders of the corporation

S. 121.3 (OSA): A reporting issuer shall comply with such requirements as may be prescribed with respect to the governance of reporting issuers, including requirements relating to (a) board composition; (b) board committees; and (c) codes of business conduct and ethics

TSX Company Manual New rules with respect to the election of directors

1. Directors can no longer be elected by slate. They need to be elected individually, which greatly assists people bringing a proxy fight.

2. Must appoint/elect directors annually

Peoples Department Store v. Wise Ratio:

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1. The SCC definitively established that the statutory fiduciary duty is owed to the corporation as such, rather than to its shareholders

2. Directors and officers will not be held in breach of the duty of care if they act prudently and on a reasonably informed basis (Business Judgment Rule)

Reason: The standard is an objective one, and the factual aspects of the circumstances surrounding the actions of directors

and officers are important. The establishment of good corporate governance practices should be a shield that protects directors and officers

BCE Inc. v. 1976 Debentureholders Facts: Bondholders said the transaction violated their expectations with respect to the bonds they have given them and they filed an oppression claim. The bonds were going to becomes much riskier because of the debt that BCE would be taking on.Issue: Decision: Ratio:

1. Officers and directors owe the fiduciary duty of care to the corporation and are to act in the “Best Interests of the Corporation” and in deciding what is in the BIOC they may consider shareholders, employees, creditors, consumers, governments, and the environment

2. The fiduciary duty to the corporation is a “broad, contextual concept”. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation.

a. This theoretically means the directors could take a “just say no” approach and keep a poison pill in place for an extended period of time by just saying the deal is not in the long term interest of the corporation

Reason: Teacher: This case looked to see if the directors ever considered the bondholders interests when making their

decision. Had they considered them and come to the decision that the deal was still in the “best interests of the corporation” then it is unlikely that the court will overrule that decision

UPM-Kymmene (Repap) (Business Judgment Rule) Facts: Board hired a new CEO without having met him or interviewed him and then proceeded to give huge salary and benefits package.Ratio:

1. The business judgment rule protects directors from those that might second-guess their decisions. However, directors are only protected to the extent that their actions actually evidence their business judgment. Although board decisions are not subject to “microscopic” examination with the benefit of hindsight, they are subject to examination.

Maple Leaf Foods v. Schneider (Business judgment rule) Ratio:

1. The court looks to see that the directors made a reasonable decision, not a perfect decision. Provided that the directors have acted honestly and the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may cast doubts on the board’s determination.

Chapter 11: Enforcement OSA, s. 1.1 The purposes of this Act are,

a) To provide protection to investors from unfair, improper or fraudulent practices; and b) To foster fair and efficient capital markets and confidence in capital markets.

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Investigation Powers of the OSC S. 11(1)(Investigation Order): provides that the commission may order such investigation as it considers expedient for

the administration of Ontario securities law or to “assist in the due administration of the securities or derivatives laws or the regulation of the capital markets in another jurisdiction

o The commission and its investigator basically has complete indiscretion to access any information they want without a court ordered warrant (see pg 643 for exact OSA rules)

Section 11(3) (Scope of Order): A person appointed to make the investigation may investigate and inquire into…(broad scope to look at securities transactions, assets, and relationships of the person/company being investigated)

Section 11(4) (Right to Examine): Can examine documents or other things whether they are in the possession or control of the person or company in respect of which the investigation is ordered or of any other person or company.”

S. 12: allows the commission to order an examination of the financial affairs of a market participant Neither of these provisions require evidence of any threshold level of suspicion on the part of enforcement staff in

order to ground the request for the order S. 13: provides that investigators have the same powers to summon attendance or compel testimony or the

production of documents as do the courts for the trial of civil actions S. 16: provides that testimony, documents, or reports provided under an investigation or examination order are for

the exclusive use of the OSC or “such other regulator as the Commissioner may specify in the order” and should not be disclosed or produced in any other proceeding “except as permitted under section 17.”

o S. 17: provides that the commission may authorize disclosure of these materials to any person or company if it considers it would be in the public interest to do so

Deloitte v. Ontario (Securities Commission) (pg 644) (discusses the OSC’s role in disclosing compelling testimony) Facts: Philips made a public offering of common shares in 1997. Shortly thereafter, Philip announced serious financial problems that had not been reflected in the material filed with the OSC (prospectus and financial statements). All the financial statements were prepared by Deloitte. The OSC started an investigation as the OSC was concerned that the Philips staff were aware of the negative financial information before the public offering and chose not to disclose it. Staff brought an action under s. 127 and compelled material from Deloitte. Staff decided that all of the compelled material obtained from Deloitte was relevant and should be disclosed to Philip. Staff seek an order under s. 17 to disclose the information.Issue: Whether the OSC acted unlawfully in finding it in the public interest to order disclosure of the compelled material to Philip?Decision: Court held that the decision to disclose the information was reasonableRatio:

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1. The decision of the OSC to order disclosure in the public interest attracts a standard of review of reasonableness2. In making a disclosure order in the public interest under s. 17, the OSC has a duty to parties like Deloitte to protect its

privacy interests and confidencesReason:

The OSC considered: the nature of the allegations against Philip and the officers; that the files in issue had been produced by Deloitte in response to a summons arising out of an investigation into the adequacy of the financial disclosure in the prospectus and related financial statements; the indices provided by Deloitte describing the files

The OSC observed, documents which might appear irrelevant to the OSC Staff might have considerable relevance to the defence of Philip and the officers

o Court uses a relevance standard

Criminal Code S. 380(2): creates the offence of affecting the public market price of “stocks, shares, merchandise of anything that is

offered for sale to the public” with intent to defraud S. 382: makes it an offence to fraudulently manipulate stock exchange transactions by engaging in various strategies,

such as matched orders and wash trading to “create a false or misleading appearance of active public trading S. 400: anyone who “makes, circulates or publishes a prospectus…that he knows is false in a material particular, with

intent” to induce someone to become a shareholder or partner, or to deceive or defraud members, shareholders, or creditors of a company is guilty of an indictable offence

S. 383 (gaming in stocks and merchandise): S. 384 (broker reducing stock by selling for his own account): S. 382.1 (insider trading & tipping offence (see CB 664)): offence to directly or indirectly, buy or sell a security,

knowingly using inside information that theyo (a) possess by virtue of being a shareholder of the issuer of that security;o (b) possess by virtue of, or obtained in the course of, their business or professional relationship with that

issuer;o (c) possess by virtue of, or obtained in the course of, a proposed takeover or reorganization of, or

amalgamation, merger or similar business combination with, that issuer;o (d) possess by virtue of, or obtained in the course of, their employment, office, duties or occupation with that

issuer or with a person referred to in paragraphs (a) to (c)o (e) Obtained from a person who possesses or obtained the information in a manner referred to in paragraphs

(a) to (d)

Quasi-Criminal Two key aspects of quasi-criminal offences:

o They still require proof beyond a reasonable doubt but they don’t require a mens rea (just an actus reus) Once the crown proves the actus reus the onus then shifts to the defendant to prove his defence

such as due diligence (in true criminal offences the onus never shifts to the defendant) Joe thinks that the rule should be when you are bringing a case against a person you should

prove the mens rea as wellS. 122(1) (OSA): Every person or company that

(a) makes a statement in any material, evidence or information submitted to the Commission in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading;

(b) makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information circular etc. that is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading;

(c) contravenes Ontario securities lawIs guilty of an offence and is liable to a fine of not more than $5 million or to prison for not more than 5 years, or both

S. 122(2): provides a due diligence defence with respect to offences in s. 121(1)(a) and (b) only S. 122(3): Directors and officers can be prosecuted for acquiescing in an offence, even where the company is not even

being prosecuted

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Offence Provision for Insider Trading S. 122(4): it provides for the possibility of additional penalties on conviction for insider trading under s. 76. The

accused is “liable to a minimum fine equal to the profit made or the loss avoided by the person or company by reason of the contravention” on conviction.

o R v. Harper (pg 668): the contravention is the trading with knowledge of undisclosed material facts while an insider in relation to the shares being traded

“by reason of the contravention” means “by virtue of the insider having engaged in the impugned trade”

s. 126.1 (New offences for fraud and market manipulation)o A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of

conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,

a) Results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative; or

b) Perpetrates a fraud on any person or company

Civil Enforcement Powers S. 128: allows the OSC to apply to the Ontario Superior Court for a “declaration that a person or company has not

complied with or is not complying with Ontario securities law

Trading:134(1) Every person or company in a special relationship with a reporting issuer who purchases or sells securities of the reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is liable to compensate the seller or purchaser of the securities, as the case may be, for damages as a result of the trade unless,

a) The person or company in the special relationship with the reporting issuer proves that the person or company reasonably believed that the material fact or material change had been generally disclosed; or

b) The material fact or material change was known or ought reasonably to have been known to the seller or purchaser, as the case may be

Tipping:134(2) Every,

a) Reporting issuer;b) Person or company in a special relationship with a reporting issuer; andc) Person or company that proposes,

i) To make a take-over bid, as defined in Part XX, for the securities of a reporting issuer,ii) To become a party to a reorganization, amalgamation, merger, arrangement or similar business

combination with a reporting issuer, oriii) To acquire a substantial portion of the property of a reporting issuer,

and who informs another person or company of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is liable to compensate for damages any person or company that thereafter sells securities of the reporting issuer to or purchases securities of the reporting issuer from the person or company that received the information unless,

d) The person or company who informed the other person or company proves that the informing person or company reasonably believed the material fact or material change had been generally disclosed;

e) The material fact or material change was known or ought reasonably to have been known to the seller or purchaser, as the case may be

f) In the case of an action against a reporting issuer or a person in a special relationship with the reporting issuer, the information was given in the necessary course of business; or

g) In the case of an action against a person or company described in subclause (c) (i), (ii) or (iii), the information was given in the necessary course of business to effect the take-over bid, business combination or acquisition.

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Accountability to Reporting Issuer:134(4) Every person or company who is an insider, affiliate or associate of a reporting issuer that,

a) Sells or purchases the securities of the reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed; or

b) Communicates to another person, other than in the necessary course of business, knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed,

is accountable to the reporting issuer for any benefit or advantage received or receivable by the person or company as a result of the purchase, sale or communication, as the case may be, unless the person or company proves that the person or company reasonably believed that the material fact or material change had been generally disclosed

Action by Commission on behalf of Issuer:135(1) Upon application by the Commission or by any person or company who was at the time of a transaction referred to in subsection 134 (1) or (2) or is at the time of the application a security holder of the reporting issuer, a judge of the Superior Court of Justice may, if satisfied that,

a) The Commission or the person or company has reasonable grounds for believing that the reporting issuer has a cause of action under subsection 134 (4); and

b) Either,i) The reporting issuer has refused or failed to commence an action under section 134 within sixty days

after receipt of a written request from the Commission or such person or company so to do, orii) The reporting issuer has failed to prosecute diligently an action commenced by it under section 134,

make an order, upon such terms as to security for costs and otherwise as to the judge seems fit, requiring the Commission or authorizing such person or company or the Commission to commence or continue an action in the name of and on behalf of the reporting issuer to enforce the liability created by subsection 134 (4)

Administrative Enforcement Powers (Public Interest Powers: s. 127) S. 127: The Commission may make one or more of the following orders if in its opinion it is in the public interest to

make the order or orders (CB 717-719 for full OSA legislation)o Making such an order does not require a breach of securities lawo OSC has the power to reprimand market participants. Thus one of the orders the OSC can make is to

reprimand “a person or company” (see Wilder below)

Wilder v. Ontario (Securities Commission) (pg 691) Facts: A notice of hearing under s. 127(1) was issued. Notice said that Wilder sent a letter to the OSC that contained a misleading statement of material facts, in that Wilder knew that YBM had not been the subject of a “series of favourable due diligence results”. Issue: OSC seeks to reprimand a lawyer who represented YBM because of his actions in connection with representing that issuer. Wilder brought an application for judicial review on the grounds that such an order was beyond the OSC’s jurisdiction.Decision: Held that the OSC had the jurisdiction to make such a finding and order against a lawyerRatio:

1. S. 127(1) can apply to a lawyer acting in a professional capacityReason:

There is nothing in the wording of the act to indicate that it should not apply to lawyers Such proceedings do not constitute state interference in the independence of the bar

Re Canadian Tire Corp. (pg 695) Facts: The Dealers made an offer to purchase 49% of outstanding common shares. The Billes’ owned a controlling share of the outstanding voting shares. They agreed to a lockup provision where they would sell their shares to Dealers. The makeup of the deal was designed to avoid the coattail provision that was given to the Class A non-voting shares where if another party made a bid to obtain a controlling block of shares then the Class A shares would be converted into common shares. There was nothing illegal about how the deal was designed. It just found a loophole in the coattail provision and exploited it. The OSC brought an s. 127 claim to cease trade the deal on the grounds that it was not in the public interest.Issue: Can the OSC use its s. 127 powers to block a transaction that has not broken any laws?Decision: Yes the OSC can use its s. 127 powers even when there have been no laws broken

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Ratio: 1. TEST: To invoke the public interest test of section 127, particularly in the absence of a demonstrated breach of the

Act, the regulations or a policy statement, the conduct or transaction must clearly be demonstrated to be abusive of shareholders in particular, and of the capital markets in general.

o A showing of abuse is something different from, and goes beyond, a complaint of unfairness.o Moreover, the abuse must be such that it can be shown to the Commission's satisfaction that a question of

the public interest is involved.Reason:

The severe skew between the percentage of equity that controlled the Company -- 4% -- and the 92% of the equity that had no say in management was well known. Accordingly, the takeover bid protection accorded to the A's at the time of the reorganization in 1983 was well known and an important factor in marketing the Class A shares. A transaction that is so patently designed to avoid the rights granted to holders of the Class A shares is, in the circumstances and for the reasons noted, so abusive of the Class A shareholders in particular, and of the capital markets in general, that the public interest test of section 123 is properly invoked.

Philosophy of Sanction under s. 127 Public Interest Orders (pg 704)

The OSC is required to act in accordance with the philosophy underlying regulatory legislation in generalo Which is that it should protect societal interests rather than punish individual faults – that is, it should be

protective and preventative rather than punitive

Asbestos Minority Shareholders v. OSC (pg 705) Facts: Certain minority shareholders of Asbestos Corp. wanted the OSC to use its OSA s. 127 power to intervene in a transaction whereby the Quebec government would obtain control over Asbestos Corp. by dealing only with the majority shareholder of the company.Issue: Decision: OSC concluded that the use of its public interest power under s. 127 was not warrantedRatio:

1. The discretion to act in the public interest is not unlimited. In exercising its discretion, the OSC should consider the protection of investors and the efficiency of, and public confidence in, capital markets generally (s. 1.1).

2. The sanctions under the section are preventive in nature and prospective in orientation.Reason:

The OSC’s relative expertise in the regulation of the capital markets, the purpose of the Act as a whole and s. 127(1) in particular, and the nature of the problem before the OSC, those factors all militate in favour of a high degree of curial deference

Re Cartaway Resources Corp. (pg 712) Facts: Hearing held by the BCSC into the activities of a number of brokers who became involved as controlling shareholders in the Cartaway Company. In the process, they arranged a fundamental change in the nature of Cartaway’s business without disclosing this to regulators or investors, and also made inappropriate use of prospectus exemptions to raise money.Issue: Decision: Can consider future deterrence in making orders under s. 127Ratio:

1. Court acknowledged that general deterrence as a basis for making an order under s. 127 is in accordance with the “protective and preventive” orientation of securities enforcement (thus deterrence is not considered punitive)

Reason:

Judicial Review of Regulatory Decisions (pg 721)

Donnini v. Ontario Securities Commission (pg 722) Facts: OSC imposed a year penalty on Donnini by suspending his registration for a period of 15 years and directed that he cease trading securities. They also ordered that he pay costs totaling $186,052. Donnini appeals both of these decisions. The suspension as being wholly unfair considering the person in charge of the operation was only given a 2 year suspension. The

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only difference being that he agreed to a plea deal and voluntarily paid $1,000,000 penalty. With regards to costs he appealed on the basis that the OSC only gave him a 6 line statement and refused to give any back up proving their costs. Ratio:

1. Court allowed the appeal on costs saying that a claim for costs in that amount justifies a more intense and searching examination than the OSC was prepared to allow

a. “orders to cost are simply a fine by another name, unless they can prove it is a true reflection of the actual and reasonable costs they incurred”

2. With respect to the 15 year ban the divisional court said it was wholly uncalled for compared to past cases and the OSC should generally adhere to some recognizable pattern of punishment

a. This was overturned by the court of appeals who said the OSC wrote “a careful and extensive reasons on the sanction issue”

Chapter 10: Civil Liability Starting point is the expectation of “full, true, and plain” disclosure in the prospectus, OM, and takeover bid circulars

(primary market)o Failure to meet this standard will support a claim that the prospectus contains a misrepresentation in its

disclosure Legislation has been enacted invoking liability for misreps in continuous disclosure markets (secondary market) s. 1(1) - Misrepresentations: are defined in the legislation to include omissions as well as misrepresentation The plaintiff must prove a breach of the of the relevant securities act provision but the defendant can rely on

available defences and usually must prove the defence

Primary market Liability (Part XXIII, OSA) (pg 598) s. 130(1) : Liability for Misrepresentation in a Prospectus Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;(b) each underwriter of the securities who is required to sign the certificate required by section 59;(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;(d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and (usually includes professionals like accountants or lawyers)(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. (Rescission clause)

Two Remedies in s. 130(1)o Damageso Rescission

According to Kerr v. Danier, misrepresentations can include future-oriented financial information in some situations Where damages are claimed, they are limited by statute to the price at which they were offered to the public (s.

130(9))o Kerr v. Danier: the measure of damages is the depreciation in the price of the security, which is equal to the

price paid less the post-misrepresentation price S. 130(7): then says that that amount can be reduced if the defendant proves that the damages

given “do not represent the depreciation in value of the security as a result of the misrepresentation relied upon”

Have to do an “event study” to determine what was solely lost because of the misrepo S. 130(6): the underwriter can be liable for no more than the total public offering price represented by the

portion of the distribution underwritten by the underwritero S. 130(8): The liability of persons under the statutory civil action is joint and severable

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Deemed Reliance : s. 130 specifically provides that everyone who purchases securities is deemed to have relied on everything that is said in the prospectus (even if a person didn’t read the prospectus, they are deemed to have relied on it)

S. 138 Limitation Periodsa) In the case of an action for rescission, 180 days after the date of the transaction that gave rise to the cause of

action; orb) In the case of any action, other than an action for rescission, the earlier of,

i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, orii) three years after the date of the transaction that gave rise to the cause of action

Liability for misrepresentation in offering memorandum

130.1 (1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights:

1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made.

2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company. 2004, c. 31, Sched. 34, s. 7.

Defence

(2) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 1999, c. 9, s. 218.

Limitation in action for damages

(3) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 1999, c. 9, s. 218.

Joint and several liability

(4) Subject to subsection (5), all or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment, unless the court rules that, in all the circumstances of the case, to permit recovery of the contribution would not be just and equitable. 1999, c. 9, s. 218.

Same

(5) Despite subsection (4), an issuer shall not be liable where it is not receiving any proceeds from the distribution of the securities being distributed and the misrepresentation was not based on information provided by the issuer, unless the misrepresentation,

(a) was based on information that was previously publicly disclosed by the issuer;

(b) was a misrepresentation at the time of its previous public disclosure; and

(c) was not subsequently publicly corrected or superseded by the issuer prior to the completion of the distribution of the securities being distributed. 1999, c. 9, s. 218.

Liability for misrepresentation in take-over bid circular

131. (1) Where a take-over bid circular sent to the security holders of an offeree issuer as required by Part XX, or any notice of change or variation in respect of the circular, contains a misrepresentation, a security holder may, without regard to whether the security holder relied on the misrepresentation, elect to exercise a right of action for rescission or damages against the offeror or a right of action for damages against,

(a) every person who at the time the circular or notice, as the case may be, was signed was a director of the offeror;

(b) every person or company whose consent in respect of the circular or notice, as the case may be, has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by the person or company; and

(c) each person who signed a certificate in the circular or notice, as the case may be, other than the persons included in clause (a). R.S.O. 1990, c. S.5, s. 131 (1); 2004, c. 31, Sched. 34, s. 8 (1).

Same

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(2) Where a directors’ circular or a director’s or officer’s circular delivered to the security holders of an offeree issuer as required by Part XX, or any notice of change or variation in respect of the circular, contains a misrepresentation, a security holder has, without regard to whether the security holder relied on the misrepresentation, a right of action for damages against every director or officer who signed the circular or notice that contained the misrepresentation. 2004, c. 31, Sched. 34, s. 8 (2); 2007, c. 7, Sched. 38, s. 9 (1).

Idem

(3) Subsection (1) applies with necessary modifications where an issuer bid circular or any notice of change or variation in respect thereof contains a misrepresentation. R.S.O. 1990, c. S.5, s. 131 (3).

Defence

(4) No person or company is liable under subsection (1), (2) or (3) if the person or company proves that the security holder had knowledge of the misrepresentation. R.S.O. 1990, c. S.5, s. 131 (4).

Idem

(5) No person or company, other than the offeror, is liable under subsection (1), (2) or (3) if he, she or it proves,

(a) that the take-over bid circular, issuer bid circular, directors’ circular or director’s or officer’s circular, as the case may be, was sent without his, her or its knowledge or consent and that, on becoming aware of it, he, she or it forthwith gave reasonable general notice that it was so sent;

(b) that, after the sending of the take-over bid circular, issuer bid circular, directors’ circular or director’s or officer’s circular, as the case may be, on becoming aware of any misrepresentation in the take-over bid circular, issuer bid circular, directors’ circular or director’s or officer’s circular, he, she or it withdrew the consent thereto and gave reasonable general notice of the withdrawal and the reason therefor;

(c) that, with respect to any part of the circular purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the circular did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

(d) that, with respect to any part of the circular 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 circular fairly represented his, her or its report, opinion or statement as an expert, or

(ii) on becoming aware that such part of the circular 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 circular; or

(e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document and he, she or it had reasonable grounds to believe and did believe that the statement was true. R.S.O. 1990, c. S.5, s. 131 (5); 2007, c. 7, Sched. 38, s. 9 (2, 3).

Defences (pg 600)

Depreciation not caused by the misrepresentation

From Joe’s slides

Purchaser’s Knowledge of the Misrepresentation (OSA s. 130(2))

s. 130(2): No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation

This is a complete defence available for a misrepresentation in a prospectus and is also available for misrepresentations in an OM or takeover bid circular (OSA 130.1(2) and 131(4))

No Knowledge

s. 130(3)(a): that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed

Defendant must prove this defence The defence is also available in a takeover bid (s. 131(5)(a))

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Withdrawal of Consent

s. 130(3)(b): that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor

Likely that this reasonable notice must be provided to investors or those individuals who purchased on the basis of the misrepresentation

The defence is also available in the takeover bid circular context (s. 131(5)(b))

Reliance on an Expert

s. 130(3)(c): that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert

Defendant must prove that he or she had no reasonable grounds to believe and did not believe that there had been a misrepresentation or an inaccurate representation of the expert’s report

Also available for misrepresentations in takeover bid circulars (s. 131(5)(c))

Experts Defence

s. 130(3)(d)(i): the onus of proof rests with the expert to prove that he or she had reasonable grounds to believe and did believe that the impugned part of the prospectus was a fair representation of the opinion or report

s. 130(3)(d)(ii): if the expert became aware of the misrepresentation and then advised the securities 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”

o Defences also available for takeover bid circulars (s. 131(5)(d))

Due Diligence Defence

s. 130(4),(5): a defendant is not liable unless he, she, or it failed to conduct “such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation. The defendant also must not have believed that there had been a misrepresentation

This defence is available for experts in respect of their opinions and reports as well as for other individuals, such as directors, in respect of other portions of the prospectus

The onus of proof is unclear as the legislation does not specifically provide that the onus rests with the defendanto Danier case suggests that the onus is on the plaintiff to prove that the defendant did not act diligently

Escott et al. v. Bar Chris Construction (pg 605) Facts: The case involved incorporators of a construction company who founders did not speak English. The company went public and the founders signed the prospectus and were held liable regardless of the fact that they could not even read the document containing the misrepresentations and omissions. Company built bowling alleys and by the time they signed the prospectus the company was experiencing financial difficulties in collecting amounts due to them from customers. They filed for bankruptcy within 7 months of filing the prospectus.Issue: Decision: Founders held liable for a misrepresentation Ratio:

1. Court uses an objective standard of reasonablenessa. Court said: whether or not they could read the document is irrelevant. The liability of a director who signs a

registration statement does not depend upon whether or not he read it or, if he did, whether or not he understood what he was reading

Reason: There is nothing to show that they made any investigation of anything which they may not have known about or

understoodo They have not proven their due diligence defence

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Re YBM Magnex (pg 608) (Due Diligence Defence and what meets the Test of Reasonableness) Facts: YBM made a public offering. The company had investigated and learned that the US Attorney’s office was investigating them for illegal activity linking the company to organized crime in Europe. Board of Directors set up a special committee which concluded that no disclosure was required. YBM filed its AIF on SEDAR, which contained some general disclosure regarding the special committee. The preliminary prospectus was filed witch incorporated the AIF and it the prospectus contained no further disclosure. US government executed search warrants and a cease trade order was issued on the stock. Issue: Decision: Some failed to meet the due diligence defence and thus held liable while other did meet the testRatio:

1. Best to consider the reasonableness of the respondent’s diligence and their belief from the perspective of a prudent person in the circumstances. This entails both objective and subjective considerations including their degree of participation, access to information and skill.

Analysis: The decision seems to suggest that individuals in positions of responsibility, such as a member of a special committee

or the board, may not always need to make inquiries about potential omissions or misrepresentations. Rather, in certain cases, members may be permitted to rest on information that was “given to them”.

YBM illustrates a mix of objective and subjective testso The Mitchell and Davies decision, contained an objective element in that the Commission held that they

“ought to have known better”o However, for the other members of the board, such as Antes, Greenwald, and Gatti, the standard seems to

have been subjective in that the commission analyzed the knowledge and actions of each individual so as to determine whether he qualified under the defence at issue

Kerr v. Danier Leather Inc. (pg 619) (Deals with statutory civil liability) Facts: Company went public and had forward looking financial information in their prospectus. Before the deal closed they ran actual numbers and because of the warm weather they were well behind their budgeted numbers in the prospectus. They did not release an updated prospectus with the new numbers before the deal closed and then two weeks after the closing; Danier issued a press release which included a revised forecast downgrading the predictions.Issue: Decision: Was not a misrepresentationRatio:

1. Prospectuses need not be updated where new material facts come to light after the prospectus has been filed. These subsequent material facts cannot support an action pursuant to s. 130(1) misrepresentation claim.

Secondary Market Liability (Part XXIII.1) (pg 634) Shareholders given the right to sue: issuers, officers, directors, and experts such as accountants, lawyers, geologists,

and engineers for making public material representations, written or oral, about the company or for failing to comply with continuous disclosure requirements.

s. 138.3 (Liability for Secondary Market Disclosure): Creates a right of action for damages for any person or company acquiring or disposing of an issuer's securities during which time the misrepresentation or material non-disclosure went uncorrected;

o Deemed Reliance: Reliance of the misrepresentation as a reason for purchase need not be proven The touchstone of liability if whether the misrepresentations are made knowingly or not, rather than whether or not

investors “relied” on the misrepresentationo For misrepresentations made unknowingly: liability is capped and is proportionateo For misrepresentations made knowingly: liability is not capped and is joint and severable

Documents released by responsible issuer

138.3 (1) Where a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,

(a) the responsible issuer;

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(b) each director of the responsible issuer at the time the document was released;

(c) each officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document;

(d) each influential person, and each director and officer of an influential person, who knowingly influenced,

(i) the responsible issuer or any person or company acting on behalf of the responsible issuer to release the document, or

(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the release of the document; and

(e) each expert where,

(i) the misrepresentation is also contained in a report, statement or opinion made by the expert,

(ii) the document includes, summarizes or quotes from the report, statement or opinion of the expert, and

(iii) if the document was released by a person or company other than the expert, the expert consented in writing to the use of the report, statement or opinion in the document.

Public oral statements by responsible issuer

(2) Where a person with actual, implied or apparent authority to speak on behalf of a responsible issuer makes a public oral statement that relates to the business or affairs of the responsible issuer and that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the public oral statement was made and the time when the misrepresentation contained in the public oral statement was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,

(a) the responsible issuer;

(b) the person who made the public oral statement;

(c) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the making of the public oral statement;

(d) each influential person, and each director and officer of the influential person, who knowingly influenced,

(i) the person who made the public oral statement to make the public oral statement, or

(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the making of the public oral statement; and

(e) each expert where,

(i) the misrepresentation is also contained in a report, statement or opinion made by the expert,

(ii) the person making the public oral statement includes, summarizes or quotes from the report, statement or opinion of the expert, and

(iii) if the public oral statement was made by a person other than the expert, the expert consented in writing to the use of the report, statement or opinion in the public oral statement.

Influential persons

(3) Where an influential person or a person or company with actual, implied or apparent authority to act or speak on behalf of the influential person releases a document or makes a public oral statement that relates to a responsible issuer and that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released or the public oral statement was made and the time when the misrepresentation contained in the document or public oral statement was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,

(a) the responsible issuer, if a director or officer of the responsible issuer, or where the responsible issuer is an investment fund, the investment fund manager, authorized, permitted or acquiesced in the release of the document or the making of the public oral statement;

(b) the person who made the public oral statement;

(c) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document or the making of the public oral statement;

(d) the influential person;

(e) each director and officer of the influential person who authorized, permitted or acquiesced in the release of the document or the making of the public oral statement; and

(f) each expert where,

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(i) the misrepresentation is also contained in a report, statement or opinion made by the expert,

(ii) the document or public oral statement includes, summarizes or quotes from the report, statement or opinion of the expert, and

(iii) if the document was released or the public oral statement was made by a person other than the expert, the expert consented in writing to the use of the report, statement or opinion in the document or public oral statement.

Failure to make timely disclosure

(4) Where a responsible issuer fails to make a timely disclosure, a person or company who acquires or disposes of the issuer’s security between the time when the material change was required to be disclosed in the manner required under this Act or the regulations and the subsequent disclosure of the material change has, without regard to whether the person or company relied on the responsible issuer having complied with its disclosure requirements, a right of action for damages against,

(a) the responsible issuer;

(b) each director and officer of the responsible issuer who authorized, permitted or acquiesced in the failure to make timely disclosure; and

(c) each influential person, and each director and officer of an influential person, who knowingly influenced,

(i) the responsible issuer or any person or company acting on behalf of the responsible issuer in the failure to make timely disclosure, or

(ii) a director or officer of the responsible issuer to authorize, permit or acquiesce in the failure to make timely disclosure.

Burden of proof and defences

Non-core documents and public oral statements

138.4 (1) In an action under section 138.3 in relation to a misrepresentation in a document that is not a core document, or a misrepresentation in a public oral statement, a person or company is not liable, subject to subsection (2), unless the plaintiff proves that the person or company,

(a) knew, at the time that the document was released or public oral statement was made, that the document or public oral statement contained the misrepresentation;

(b) at or before the time that the document was released or public oral statement was made, deliberately avoided acquiring knowledge that the document or public oral statement contained the misrepresentation; or

(c) was, through action or failure to act, guilty of gross misconduct in connection with the release of the document or the making of the public oral statement that contained the misrepresentation.

Same

(2) A plaintiff is not required to prove any of the matters set out in subsection (1) in an action under section 138.3 in relation to an expert.

Failure to make timely disclosure

(3) In an action under section 138.3 in relation to a failure to make timely disclosure, a person or company is not liable, subject to subsection (4), unless the plaintiff proves that the person or company,

(a) knew, at the time that the failure to make timely disclosure first occurred, of the change and that the change was a material change;

(b) at the time or before the failure to make timely disclosure first occurred, deliberately avoided acquiring knowledge of the change or that the change was a material change; or

(c) was, through action or failure to act, guilty of gross misconduct in connection with the failure to make timely disclosure.

Same

(4) A plaintiff is not required to prove any of the matters set out in subsection (3) in an action under section 138.3 in relation to,

(a) a responsible issuer;

(b) an officer of a responsible issuer;

(c) an investment fund manager; or

(d) an officer of an investment fund manager. 2002, c. 22, s. 185; 2004, c. 31, Sched. 34, s. 13 (4).

Knowledge of the misrepresentation or material change

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(5) A person or company is not liable in an action under section 138.3 in relation to a misrepresentation or a failure to make timely disclosure if that person or company proves that the plaintiff acquired or disposed of the issuer’s security,

(a) with knowledge that the document or public oral statement contained a misrepresentation; or

(b) with knowledge of the material change. 2002, c. 22, s. 185; 2004, c. 31, Sched. 34, s. 13 (5).

Reasonable investigation

(6) A person or company is not liable in an action under section 138.3 in relation to,

(a) a misrepresentation if that person or company proves that,

(i) before the release of the document or the making of the public oral statement containing the misrepresentation, the person or company conducted or caused to be conducted a reasonable investigation, and

(ii) at the time of the release of the document or the making of the public oral statement, the person or company had no reasonable grounds to believe that the document or public oral statement contained the misrepresentation; or

(b) a failure to make timely disclosure if that person or company proves that,

(i) before the failure to make timely disclosure first occurred, the person or company conducted or caused to be conducted a reasonable investigation, and

(ii) the person or company had no reasonable grounds to believe that the failure to make timely disclosure would occur.

Defences – s.138.4 Plaintiff's Knowledge; Due Diligence Defence; Confidential Disclosure; Forward-looking Information Safe-Harbour; Liability of Experts for Misrepresentations; Lack of Knowledge of Release of a Document; Reliance on Derivative Information; and Corrective Action

Damages – s. 138.5 – 138.7

Assessment of damages

138.5 (1) Damages shall be assessed in favour of a person or company that acquired an issuer’s securities after the release of a document or the making of a public oral statement containing a misrepresentation or after a failure to make timely disclosure as follows:

1. In respect of any of the securities of the responsible issuer that the person or company subsequently disposed of on or before the 10th trading day after the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, assessed damages shall equal the difference between the average price paid for those securities (including any commissions paid in respect thereof) and the price received upon the disposition of those securities (without deducting any commissions paid in respect of the disposition), calculated taking into account the result of hedging or other risk limitation transactions.

2. In respect of any of the securities of the responsible issuer that the person or company subsequently disposed of after the 10th trading day after the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, assessed damages shall equal the lesser of,

i. an amount equal to the difference between the average price paid for those securities (including any commissions paid in respect thereof) and the price received upon the disposition of those securities (without deducting any commissions paid in respect of the disposition), calculated taking into account the result of hedging or other risk limitation transactions, and

ii. an amount equal to the number of securities that the person disposed of, multiplied by the difference between the average price per security paid for those securities (including any commissions paid in respect thereof determined on a per security basis) and,

A. if the issuer’s securities trade on a published market, the trading price of the issuer’s securities on the principal market (as those terms are defined in the regulations) for the 10 trading days following the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, or

B. if there is no published market, the amount that the court considers just.

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3. In respect of any of the securities of the responsible issuer that the person or company has not disposed of, assessed damages shall equal the number of securities acquired, multiplied by the difference between the average price per security paid for those securities (including any commissions paid in respect thereof determined on a per security basis) and,

i. if the issuer’s securities trade on a published market, the trading price of the issuer’ securities on the principal market (as those terms are defined in the regulations) for the 10 trading days following the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, or

ii. if there is no published market, the amount that the court considers just.

Same

(2) Damages shall be assessed in favour of a person or company that disposed of securities after a document was released or a public oral statement made containing a misrepresentation or after a failure to make timely disclosure as follows:

1. In respect of any of the securities of the responsible issuer that the person or company subsequently acquired on or before the 10th trading day after the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, assessed damages shall equal the difference between the average price received upon the disposition of those securities (deducting any commissions paid in respect of the disposition) and the price paid for those securities (without including any commissions paid in respect thereof), calculated taking into account the result of hedging or other risk limitation transactions.

2. In respect of any of the securities of the responsible issuer that the person or company subsequently acquired after the 10th trading day after the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, assessed damages shall equal the lesser of,

i. an amount equal to the difference between the average price received upon the disposition of those securities (deducting any commissions paid in respect of the disposition) and the price paid for those securities (without including any commissions paid in respect thereof), calculated taking into account the result of hedging or other risk limitation transactions, and

ii. an amount equal to the number of securities that the person disposed of, multiplied by the difference between the average price per security received upon the disposition of those securities (deducting any commissions paid in respect of the disposition determined on a per security basis) and,

A. if the issuer’s securities trade on a published market, the trading price of the issuer’s securities on the principal market (as those terms are defined in the regulations) for the 10 trading days following the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, or

B. if there is no published market, the amount that the court considers just.

3. In respect of any of the securities of the responsible issuer that the person or company has not acquired, assessed damages shall equal the number of securities that the person or company disposed of, multiplied by the difference between the average price per security received upon the disposition of those securities (deducting any commissions paid in respect of the disposition determined on a per security basis) and,

i. if the issuer’s securities trade on a published market, the trading price of the issuer’s securities on the principal market (as such terms are defined in the regulations) for the 10 trading days following the public correction of the misrepresentation or the disclosure of the material change in the manner required under this Act or the regulations, or

ii. if there is no published market, then the amount that the court considers just.

Same

(3) Despite subsections (1) and (2), assessed damages shall not include any amount that the defendant proves is attributable to a change in the market price of securities that is unrelated to the misrepresentation or the failure to make timely disclosure.

Proportionate liability

138.6 (1) In an action under section 138.3, the court shall determine, in respect of each defendant found liable in the action, the defendant’s responsibility for the damages assessed in favour of all plaintiffs in the action, and each such defendant shall be liable, subject to the limits set out in subsection 138.7 (1), to the plaintiffs for only that portion of the aggregate amount of damages assessed in favour of the plaintiffs that corresponds to that defendant’s responsibility for the damages.

Same

(2) Despite subsection (1), where, in an action under section 138.3 in respect of a misrepresentation or a failure to make timely disclosure, a court determines that a particular defendant, other than the responsible issuer, authorized, permitted or acquiesced in the making of the

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misrepresentation or the failure to make timely disclosure while knowing it to be a misrepresentation or a failure to make timely disclosure, the whole amount of the damages assessed in the action may be recovered from that defendant.

Same

(3) Each defendant in respect of whom the court has made a determination under subsection (2) is jointly and severally liable with each other defendant in respect of whom the court has made a determination under subsection (2). 2002, c. 22, s. 185.

Same

(4) Any defendant against whom recovery is obtained under subsection (2) is entitled to claim contribution from any other defendant who is found liable in the action. 2002, c. 22, s. 185.

Limits on damages

138.7 (1) Despite section 138.5, the damages payable by a person or company in an action under section 138.3 is the lesser of,

(a) the aggregate damages assessed against the person or company in the action; and

(b) the liability limit for the person or company less the aggregate of all damages assessed after appeals, if any, against the person or company in all other actions brought under section 138.3, and under comparable legislation in other provinces or territories in Canada in respect of that misrepresentation or failure to make timely disclosure, and less any amount paid in settlement of any such actions. 2002, c. 22, s. 185; 2004, c. 31, Sched. 34, s. 16.

Same

(2) Subsection (1) does not apply to a person or company, other than the responsible issuer, if the plaintiff proves that the person or company authorized, permitted or acquiesced in the making of the misrepresentation or the failure to make timely disclosure while knowing that it was a misrepresentation or a failure to make timely disclosure, or influenced the making of the misrepresentation or the failure to make timely disclosure while knowing that it was a misrepresentation or a failure to make timely disclosure

Procedural Matters – s. 138.8 Must get judicial leave to proceed

Test - P has to prove: 1. the action is being brought in good faith; and2. there is a reasonable possibility that the action will be resolved at trial in favour of P

Notice requirement – s. 138.9; Restrictions on discontinuation and court approval of settlements – s. 138.10; Costs to the successful party– s. 138.11; Commission’s intervention - s. 138.12; Common law rights are preserved – s. 138.13; Limitation period – s. 138.14: 3 year limitation period

Secondary Market Liability - Common Law

Causes of action: Negligence and negligent misrepresentation; Fraud; Fraudulent misrepresentation or deceit; Conspiracy; and Breach of contract

Defences The business judgment rule; Due diligence and reliance on advisors

Remedies: Damages Injunctions

Registration Requirements Regulatory Agencies

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Canadian Securities Administrators (“CSA”) and Ontario Securities Commission (“OSA”) IIROC: Investment Industry Regulatory Agency of Canada

o Preliminary registration and enforcement of anything that involves investment dealers MFDA: Mutual Fund Dealers Association

o The last two are self-regulatory organizations (SROs)

Categories of Licensing

Dealers

Deal in securitieso Less fiduciary duties because he is just managing the money as directed by the client

So they buy and sell the securities for their clients Dealers need to:

1. Know your client: what their financial requirements are2. Suitability: determine whether the financial instrument is appropriate for the client based on their

requirements

Categories of Dealers Investment Dealer: Can deal in any type of financial instrument in the Canadian marketplace (IIROC)

o Highest level of requirements Mutual Fund Dealer: can only deal in the trade of mutual funds (MFDA) Scholarship Plan Dealer (unimportant) Exempt Market Dealer: can deal in private placements and other exempt market transactions Restricted Dealer (unimportant)

Dealer Exemptions• If another regulatory regime exists, e.g. PPSA• Existing investor relationship, e.g. DRIPs• Low risk securities

• Ex: government of Canada Bonds and T-bills are all exempt from registration requirements because of how safe they are considered

• Trades through or to a registered dealer• Ex: e-trades where the client makes the trades through a website

• Trades by portfolio manager of in-house units to managed accounts• Non-resident dealers – but with limitations

Advisors

Advises with respect to securitieso Full on fiduciary duties because they are actually managing and investing the clients money for them

Thus advisors could be liable to the client for any losses if they do a negligent job

Categories of Advisors Portfolio Manager: allows you to do anything for the client. Manage their money as you see fit. Restricted Portfolio Manager: Someone that has a specialized knowledge in one particular instrument they invest in

(ex: mortgages)o They don’t get a full on license because their experience doesn’t lead the OSC to believe they can advise in

other asset classes

Advisor Exemptions IIROC discretionary advisors: where designated IIROC members provide discretionary advice in accordance with

bylawso Just means they need to register with IIROC and not the OSC

Non-discretionary advice (new): where such advice is necessary to support trading activities74

Generic advice (new): newsletters, etc. International advisors (new): (replaces international advisor category in Ontario) but with limitations – permitted

clients only, and cannot advise in Canada on Canadian securities o Only if securities being advised in are not in Canada

Permitted clients: subset of accredited investors – registrants do not have to comply with certain conduct requirements if clients waive same

Mobility: registrants can continue to deal with up to five (individual registrants) or ten (firm registrants) clients that move to jurisdictions in which registrant is not registered

Investment Fund Managers

New category that permits people to direct the business, affairs and operations of an investment fundo Thus they neither deal nor advise in securities

No business trigger analysis - any person or company performing investment fund manager services must registero Key test: If you can affect the operations of a company then you are an investment fund manager but if you

are just a “passive” holder of stock in a company then you are not an investment fund manager This therefore covers all Hedge Funds and so if a US company comes up to Canada they need to find

someone with the IFM license to route their advice through.

Registration Requirements 31-103: attempts to streamline the ability for an advisor or dealer to register himself to operate in all jurisdictions in

Canadao Thus reducing regulatory burden

Requirement to register: any person or company that “trades” in a security or acts as an “underwriter” or “advisor” (ss.25(1)(a) and (c) of Securities Act (Ontario)) - all words in parentheses are defined terms in the OSA

o New requirement to register subject to “business trigger” rule – trading, underwriting or advising conducted as a business triggers requirement to register. Companion Policy contains some assistance with respect to the business trigger.

o Definition of “trade” has been given a broad meaning by the OSCo Definition of “advisor” means you need to be “in the business of advising”

Should a Person/Company be Registered?

- BUSINESS TRIGGER TEST in NI 31-103: (1) Assess whether the particular activity involves dealing in securities or advising in securities and (2) Assess the extent to which the activity is being conducted as a business purpose. Factors in determining business purpose (not a complete list)

Engaging in activities similar to a registrant: We usually consider an individual or firm engaging in activities similar to those of a registrant to be trading or advising for a business purposes

o Ex. promoting securities or stating in any way that the individual or firm will buy or sell securities. If an individual or firm sets up a business to carry out any of these activities, we may consider them to be trading or advising for a business purpose.

Intermediating trades or acting as a market maker In general, we consider intermediating a trade between a seller and a buyer of securities to be trading for a business purpose. This typically takes the form of the business commonly referred to as a broker. Making a market in securities is also generally considered to be trading for a business purpose.

Directly or indirectly carrying on the activity with repetition, regularity or continuity Frequent or regular transactions are a common indicator that an individual or firm may be engaged in trading or advising for a business purpose. The activity does not have to be their sole or even primary endeavour for them to be in the business. We consider regularly trading or advising in any way that produces, or is intended to produce, profits to be for a business purpose. We also consider any other sources of income and how much time an individual or firm spends on all activities associated with the trading or advising.

Being, or expecting to be, remunerated or compensatedReceiving, or expecting to receive, any form of compensation for carrying on the activity, including whether the compensation is transaction or value based,

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indicates a business purpose. It does not matter if the individual or firm actually receives compensation or in what form. Having the capacity or the ability to carry on the activity to produce profit is also a relevant factor.

Directly or indirectly solicitingContacting anyone to solicit securities transactions or to offer advice may reflect a business purpose. Solicitation includes contacting someone by any means, including advertising that proposes buying or selling securities or participating in a securities transaction, or that offers services or advice for these purposes.

- OSC will look at what person does, and if they buy/sell/advise people about securities, they’ve triggered the test, and must be registered

Required Filings1. Form 31-103F62. Form 31-103F4: have to file this for every person working in the organization3. Audited Financial Statements: Need to have at least $125,000 of working capital (investment dealers need more

capital)4. Confirmation of Insurance5. Business Plan: Say to OSC here is what we plan to do over the next 3-5 years6. Policies & Procedures Manual7. Formation Documents

General Observations Firms may register in more than one category (aka. advisor, dealer, and portfolio manager) Capitalization and insurance requirements are not cumulative Most stringent proficiency requirements apply Register in jurisdictions where advice is given and where advisor is resident

Individual Categories of Registration Dealers Must Appoint: an ultimate designated person and a chief compliance officer Advisors Must Appoint: an ultimate designated person, a chief compliance officer, and an advising representative

Ultimate Designated Person Promotes compliance and oversees effectiveness of compliance system CEO, sole proprietor or equivalent (is the highest person in the organization) No proficiency requirements Must be registered and goes through background checks

Chief Compliance Officer Operating officer, monitors and oversees compliance system Establishes policies and procedures Reporting function Must meet proficiency requirements

o Must meet both experiential and educational requirements as per 31-103

Dealing and Advising Representative Broadest category of advisor, may advise in respect of any security on which the individual's firm is permitted to

advise Requires education and experience:

o CFA charter and 12 months relevant investment management experience in the 36 month period before registration, or

o CIM designation and 48 months of relevant investment management experience, 12 of which was in the 36 month period before registration

Associate Advising Representative Essentially, “apprentice” advisor or one who does not wish to become advisor representative

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o They have the course work but don’t have the experience to be a full advising representative May advise in respect of a security that the individual’s firm is permitted to advise on, if the advice has been approved

by an advising representative

Ongoing Requirements Annual Renewal (December 1st) Annual Audited Financial Statements (within 90 days of financial year end) Calculation of Excess Working Capital (within 90 days of financial year end)

Chapter 9: Takeover Bids ( Part XX, OSA )

Legislation (OSA ss. 93 to 99.1) (pg 533) s. 89(1) (“takeover bid”): is an offer to acquire outstanding voting securities or equity securities of a class made to one

or more persons or companies, any of whom is in Ontario or whose last address as shown on the books of the offeree issuer is in Ontario, where the securities subject to the offer to acquire, together with the offeror’s securities, constitute in the aggregate 20 per cent or more of the outstanding securities of that class of securities at the date of the offer to acquire but does not include an offer to acquire if the offer to acquire is a step in an amalgamation, merger, reorganization or arrangement that requires approval in a vote of security holders.

o s. 89(1) (“offer to acquire”): means (a) an offer to purchase, or a solicitation of an offer to sell, securities, (b) an acceptance of an offer to sell securities, whether or not the offer has been solicited, or (c) any combination of the above

o s. 89(1) (“equity security”): means a security of an issuer that carries a residual right to participate in the earnings of the issuer and, on liquidation or winding up of the issuer, in its assets

o s. 89(1) (“formal takeover bid”): means a take-over bid that is not exempt from the formal bid requirements by sections 100 to 100.6

“Offeror” is the bidder and “offeree” is the target Takeover bids occurs with the making of an offer, not with the completion of a transaction itself s. 91(1)(2) (Jointly and in Concert): any agreement, commitment, or understanding, whether informal or formal, with

a bidder under which a person or company offers to acquire the sae securities as those the bidder is seeking to acquire will constitute joint and in concert actions

o s. 90(3) (Calculation of holdings, joint offerors): a bidder may be acting “jointly and in concert” with another person or company. In that case, the law requires both the bidder and the other joint party to count their shares together for the purposes of analyzing whether the 20% threshold has been reached

s. 89(5): if the bidder or any person acting jointly and in concert with the bidder has a right to acquire the securities of the target company through conversion privileges, those securities must be included in the calculation

s. 90(1) (Deemed beneficial ownership): are securities convertible into relevant class within 60 days or securities that offeror may or must acquire (within 60 days), by exercise of option, right etc.

s. 92 (Anti-avoidance rule): a reference to an offer to acquire or to the acquisition or ownership of securities or to control or direction over securities includes a direct or indirect offer to acquire or the direct or indirect acquisition or ownership of securities, or the direct or indirect control or direction over securities

Launching a Takeover Bid: Two Methods (pg 535) 1. Delivering a Takeover Bid Circular to all shareholder of the target (s. 94.1(1)(b))

2. By publishing an advertisement containing a brief summary of the bid in at least one major daily newspaper of general and regular paid circulation in Ontario (s. 94.1(1)(a))

o Must also file and deliver a copy of the bid to the target companies office (s. 94.2(2)) and must be accompanied by a takeover bid circular (s. 94.2(1))

o In addition within two days of receiving a list of the target’s shareholders, the bidder must deliver the circular to all the shareholders of the target and the OSC

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The advantage to a bidder in commencing a bid this way is that it speeds up the process of completing the transaction as the 35 day minimum period begins the day the public advertisement is placed, which can be as much as 10 days earlier than a bid document can be mailed to shareholders

s. 99(1) (Certificate Requirement): A bid circular, or a notice of change or notice of variation in respect of the bid circular shall contain a certificate of the offeror and the certificate must be signed by:

o The CEO, CFO, and two directors other than the CEO and CFO

Duty to prepare and send offeror’s circular94.2 (1) An offeror making a formal bid shall prepare a take-over bid circular or an issuer bid circular, as the case may be, containing the information required by the regulations and in the form required by the regulations and shall send the bid circular either as part of the bid or together with the bid. 2007, c. 7, Sched. 38, s. 8.Formal take-over bid commenced by advertising(2) An offeror commencing a formal take-over bid by means of an advertisement under clause 94.1 (1) (a) shall,

(a) on or before the date of first publication of the advertisement, deliver the bid and the bid circular to the offeree issuer’s principal office and file the bid, the bid circular and the advertisement;

(b) on or before the date of first publication of the advertisement, request from the offeree issuer a list of security holders described in section 94; and

(c) not later than two business days after receipt of the list of security holders referred to in clause (b), send the bid and the bid circular to those security holders

Equality, Disclosure, and Timing Are a series of obligations that govern the bidder’s behaviour in the making of a takeover bid

Equal Treatment (pg 536)

Pro Rata Takeup In a partial bid (seeking less than 100% of shares outstanding) the question arises as to how the bidder takes up shares

if more than the desired number of shares are tendered?o s. 97.2(1): the bidder must take up shares on a pro rata basis so that the bidder purchases the same

proportion of shares from all tendering shareholders according to the number of shares each shareholder tendered

Pro rata takeup therefore replaces the “first come, first served” system Slocan: Allegation that there was no take-up or payment

1. OSC: “takeup” means you have agreed to purchase them which was met here and payment was met through the use of deposit receipts which would trade freely on the exchange

Identical Consideration s. 97(1): all holders of the target’s securities shall receive identical consideration

o Therefore, if the bidder increases its offer price after the initial bid is made any shareholders that tendered to the original bid prior to the increase in price will not be deprived of the higher offer price. Rather all shareholders must receive the same offer price (s. 97(3))

The legislation also prevents the bidder from making side deals with certain securities holders, such as controlling shareholders who may be seeking a premium for their holdings over and above what the “masses” receive

s. 97.1(1) (Prohibition on Collateral Agreements): No bidder either acting on their own or jointly or in concert with another party can enter into any collateral agreement or commitment that has the effect, directly or indirectly, of providing a security holder of the offeree issuer with consideration of greater value than that offered to the other security holders of the same class of securities.

s. 97.1(1) (Prohibition on Lockup Agreements): An offeror shall not offer to acquire, or make or enter into an agreement, commitment or understanding to acquire beneficial ownership of any securities of the class that are subject to a formal take-over bid or securities convertible into securities of that class otherwise than under the bid on and from the day of the announcement of the offeror’s intention to make the bid until the expiry of the bid.

Restrictions on acquisitions before formal take-over bid93.2 (1) If, within the period of 90 days immediately preceding a formal take-over bid, an offeror acquired beneficial ownership of securities of the class subject to the bid in a transaction not generally available on identical terms to holders of that class of securities,

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(a) the offeror shall offer,(i) consideration for securities deposited under the bid at least equal to and in the same form as the highest consideration that was

paid on a per security basis under any such prior transaction, or(ii) at least the cash equivalent of that consideration; and

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

Disclosure

Ensures that shareholders have full disclosure about the bid and the bidder s. 94: all shareholders in a particular jurisdiction are entitled to receive the bid documents

Circulars (Directors and Hostile Bidders) Once the bid has commenced by either of the two means the target’s board of directors has an obligation to prepare

a directors’ circular and deliver it to target shareholders not more than 15 days after the date of the bid (s. 95(1))o s. 95(2): within the circular the directors must either 1) make a recommendation to the target shareholders

to accept or reject the bid, 2) advise that the board is unable, or will not be making a recommendation and why, or 3) advise that the board is still considering what recommendation to wait and that the target shareholders should not deposit their securities under the bid until they receive further communication from the board

o Form 62-504F3: lists the mandated information required in the directors’ circular which includes information such as the relationship between target management/board and the bidder, trading by managers and directors, material change in the target etc.

s. 94.3(1) (Change in Information): If the bidder makes a change to the information contained in the bid circular or any notice of change or notice of variation that would reasonably be expected to affect the decision of the security holders then the bidder must deliver a notice of variation to every person or company to whom the takeover bid circular or issuer bid circular was required to be delivered to and issue a news release

s. 94.4(1) (Variation of Terms): If the bidder amends the terms of the deal after the offer has been made then the bidder must deliver a notice of variation to every person or company to whom the takeover bid circular or issuer bid circular was required to be delivered to and issue a news release

o S. 94.4(3) If there is a VARIATION in the terms of a formal bid, the period during which securities may be deposited under the bid shall not expire before 10 days after the date of the notice of variation

Change or variation in advertised take-over bid94.6 (1) If a change or variation occurs to a formal take-over bid that was commenced by means of an advertisement and if the offeror has complied with clauses 94.2 (2) (a) and (b) but has not yet sent the bid and the bid circular as required by clause 94.2 (2) (c), the offeror shall,(a) publish an advertisement that contains a brief summary of the change or variation in at least one major daily newspaper of general and regular paid circulation in Ontario;(b) concurrently with the date of first publication of the advertisement,

(i) file the advertisement, and(ii) file and deliver a notice of change or notice of variation to the offeree issuer’s principal office; and

(c) subsequently send the bid, the bid circular and the notice of change or notice of variation to the security holders of the offeree issuer before the expiration of the period set out in clause 94.2 (2) (c)

Liability

Failure to deliver a takeover bid circular contravenes provincial securities law and is therefore punishable as a quasi-criminal offence (s. 122(1))

o Liability can also occur if the takeover bid circular contains a misleading or untrue statement or contains a material omission (s. 131(1))

o Possibility of administrative action if the contravention violates the public interest (s. 127)o Civil right of action arises against the bidders in favour of all those entitled to receive a takeover bid circular

but who did not in fact receive one (s. 133)

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- S. 131(1) Where a take-over bid circular sent to the security holders of an offeree issuer as required by Part XX, or any notice of change or variation in respect of the circular, contains a misrepresentation, a security holder may, without regard to whether the security holder relied on the misrepresentation, elect to exercise a right of action for rescission or damages against the offeror or a right of action for damages against,

a) Every person who at the time the circular or notice, as the case may be, was signed was a director of the offeror;

b) Every person or company whose consent in respect of the circular or notice, as the case may be, has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by the person or company; and

c) Each person who signed a certificate in the circular or notice, as the case may be, other than the persons included in clause

The “Early Warning” System s. 102.1(1) (Percentage Rule): requires any person or company acting jointly or in concert who acquires control over

10% of voting or equity securities of an issuer to issue and file a press release (disclosing your intentions- investment purposes or takeover?) and file a report with the OSC within 2 days

o s. 102.1(2) (Further 2% Rule): Once the 10% threshold has been reached, every subsequent increase of 2% or change in any material fact requires the person to issue a press release

So every time you acquire an additional 2%, you have to file a press release and file a report 102.1(3) (Period When Acquisition are Prohibited): During the period beginning on the occurrence of an event in

respect of which disclosure is required to be made under this section and ending on the expiry of one business day after the date that the disclosure is made, the acquiror required to make the disclosure or any person or company acting jointly or in concert with the acquiror shall not acquire or offer to acquire beneficial ownership of any securities of the class in respect of which the disclosure is made or any securities convertible into securities of that class

The effect of these provisions is to provide targets with an “early warning” of potential takeovers Exemptions from the early warning requirements include:

o Mutual funds or “eligible institutional investors” as defined under the instrument;o Entities that have an increase in a class of securities of a reporting issuer that arose solely due to certain

actions of the issuer; ando Underwriters, if they own securities only as underwriters and have made certain disclosures by news release

Different Rules if Takeover Bid is in Existence RULE if there is a takeover bid outstanding, any other person who acquires 5% or more of the securities that are the subject of

the bid must put out a press release with their intentions the NEXT business day (no freeze) 5 per cent rule 102.2(1): If, after a formal bid has been made for voting or equity securities of a reporting issuer and before

the expiry of the bid, an acquiror acquires beneficial ownership of, or the power to exercise control or direction over, securities of the class subject to the bid which, when added to the acquiror’s securities of that class, constitute 5 per cent or more of the outstanding securities of that class, the acquiror shall disclose the acquisition in the manner and form required by regulation.

o They just want to give you advance notice that someone else may be trying to make a competing bid (relevant to the marketplace)

o No obligation to file a report (just the press release) and no 1 day freeze Further 2 per cent rule 102.2(2): An acquiror who is required to make disclosure under subsection (1) shall make further

disclosure in the manner and form required by regulation each time the acquiror or any person or company acting jointly or in concert with the acquiror acquires beneficial ownership of, or the power to exercise control or direction over, an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates

Overview (if there is an outstanding takeover bid):1) When, after a formal bid has been made for securities of an issuer, and a new offeror acquires 5% or more of the

outstanding shares, the new offeror musta. Issue a press release not later than opening of trading on the next business dayb. File a press release with the OSC

2) For every additional 2% of shares acquired, offeror must issue press release and file report3) Once the purchases amount to 10% or more, the early warning system applies and there will be a one business day

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Timing

s. 98(1) (Minimum Deposit Period): a takeover bid must remain open for at least 35 days in order to provide target shareholders with ample time to consider the offer

s. 98(2) (Prohibition on takeup): the bidder is not permitted to take up, or accept for purchase, any shares deposited by tendering shareholders during the 35-day period

s. 98.1(1) (Withdrawal of securities): A security holder may withdraw securities deposited under a formal bid(a) at any time before the securities have been taken up by the offeror;(b) at any time before the expiration of 10 days from the date of a notice of change under section 94.3 or a

notice of variation under section 94.4; or(c) if the securities have not been paid for by the offeror within three business days after the securities have

been taken up s. 98.3(1) (Obligation to takeup): if all the terms and conditions of a formal bid have been complied with or waived,

the offeror shall take up and pay for securities deposited under the bid not later than 10 days after the expiry of the bid or at the time required by subsection (2) or (3), whichever is earliest

o s. 98.3(2) (Obligation to pay): An offeror shall pay for any securities taken up under a formal bid as soon as possible, and in any event not later than three business days after the securities deposited under the bid are taken up

s. 98.3(4) (Extending the Bid): Bidders are permitted to extend the date on which the offer will expire. However, the bidders are only permitted to extend the bid if the securities previously deposited are first taken up.

o s. 98.3(6): If the bid is extended while tendering shareholders continue to enjoy a withdrawal right, it is not necessary, or possible, to require a bidder to take up the shares before extending its bid

Financing Issues

Key Point: Need to be sure that financing is in place before you make a bid. In the US you don’t. s. 97.3(1): If a formal bid provides that the consideration for the securities deposited under the bid is to be paid in cash or

partly in cash, the offeror shall make adequate arrangements before the bid to ensure that the required funds are available to make full payment for the securities that the offeror has offered to acquire

s. 97.3(1) (Conditional Financing arrangements): The financing arrangements required to be made under subsection (1) may be subject to conditions if, at the time the bid is commenced, the offeror reasonably believes the possibility to be remote that, if the conditions of the bid are satisfied or waived, the offeror will be unable to pay for the securities deposited under the bid due to a financing condition not being satisfied.

Integration

i) During Transaction- Can’t buy shares while bid is in progress 93.1(1) An offeror shall not offer to acquire, or make or enter into an

agreement, commitment or understanding to acquire beneficial ownership of any securities of the class that are subject to a formal take-over bid or securities convertible into securities of that class otherwise than under the bid on and from the day of the announcement of the offeror’s intention to make the bid until the expiry of the bid

- S. 2.1(2) of 62-504 allows tendering agreements• Takeover bids are expensive, bidders need financing in place, so they will go to big shareholder and negotiate

for them to tender their shares increases likelihood of success lockup agreement• Must be disclosed in the takeover bid circular• Bidder won’t bid unless it knows that the big shareholder is going to agree, and if the big shareholder wants this

to happen (will get more money than he can on the open market), he will negotiate with bidder often includes contingency for the bidder to get money back if they lose

• Why isn’t this a collateral agreement? Because the bidder is still going to make the same bid to everyone, so no advantage, just trying to tie up the big shareholder

ii) Pre-Bid Integration- 93.2 (1) If, within the period of 90 days immediately preceding a formal take-over bid, an offeror acquired beneficial

ownership of securities of the class subject to the bid in a transaction not generally available on identical terms to holders of that class of securities,

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a) The offeror shall offer,i) Consideration for securities deposited under the bid at least equal to and in the same form as the

highest consideration that was paid on a per security basis under any such prior transaction, orii) At least the cash equivalent of that consideration; and

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

- SC will look back 90 days from the date of a takeover bid and if within that 90 day period you have entered into a private agreement to buy shares that are the subject of the bid your TOB, the bid has to be for the highest price/percentage you bought in that 90 days.

• Highest consideration: highest price bidder paid per share within the period• Highest percentage: if bidder bought 5% of A’s shares at $14/share, and then bought 100% of B’s shares

for $20/share (both within 90 day period), the bidder’s formal takeover offer must be for 100% of the shareholder’s shares at $20/share

• This ONLY applies to private agreements, not shares purchased on the open market (TSX) You cant control what you pay on the opnt market

- Possible that purchaser purchased a SMALL percentage at a HIGH price, and takeover bid has to be at that price or higher. Catastrophic consequences from a financial prospective.

- NOTE – if you buy from the same person twice you need to add the % of shares purchased from that person to determine your %

iii) Post-Bid Integration

- 93.3(1) During the period beginning with the expiry of a formal bid and ending at the end of the 20th business day after that, whether or not any securities are taken up under the bid, an offeror shall not acquire or offer to acquire beneficial ownership of securities of the class that was subject to the bid except by way of a transaction that is generally available to holders of that class of securities on identical terms.

- Exception 93.3 (2) Subsection (1) does not apply to trades effected in the normal course on a published market if the trades satisfy such conditions as may be specified by regulation.

You can’t enter into an agreement for at least 20 business days following the expiry of the bid. Any suggestion you make that you will do it violates the rule. So if a shareholder doesn’t tender their shares to the bid, they might be trapped in the company.

You can’t acquire beneficial ownership of securities of the class that was subject to the bid by way of a transaction that wasn’t available in identical terms to all of the SHs

iv) Exemptions from Pre-Bid and Post-Bid Restrictions- The integration restrictions do not apply to trades:

Effected in the normal course on a published market so long as any broker acting for the offeror:o Does not perform services beyond customary broker functionso Does not receive an unreasonable commission

The offeror or his/her agent does not solicit or arrange or the solicitation of offers to sell securities The seller or any person or company acting for the seller does not solicit or arrange for the solicitation of offers to

buy securities of the class subject to the bid

v) Examples

Examples: Integration / Tender AgreementsExample:I don’t own any shares in a public company. I go to a 19% shareholder and offer to buy the 19% for $50. The next day, I make a bid for the company at $11. I haven’t crossed 20%, but this wasn’t really a nice move to offer the big shareholder $50 and the rest $11. Was this wrong?Pre-Bid Integration says: if within the 90 day period before the takeover bid was made you’ve entered into a private

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agreement (i.e. to purchase someone’s shares to a certain price), your takeover bid must be for the highest price and percentage you bought in that 90-day period.

Example:30 days before the takeover bid – private agreement to buy 50% of A’s shares for $5/ share15 days before the takeover bid – private agreement to buy 100% of B’s shares for $3 / sharePre-bid integration says my takeover bid must be for at least the highest price ($5/share) and the highest percentage (100%) made during the previous 90-day period.

Example: I’ve offered $15 / share, and Mr. Big isn’t going to sell them, in which case I won’t win. So I tell Big to wait until the takeover bid is over. That way Big will be the only shareholder left besides me, and I’ll buy his shares for $25 / share.This is not allowed because it will violate all of the rulesPost-bid integration says you can’t enter into an agreement to buy the shares that are subject to a bid for at least 20 business days following the expiry of the bid

Exemptions from the Takeover Bid Requirements (pg 550) Normal Course Purchase Exemptions. 100: A take-over bid is exempt from the formal bid requirements if all of the following conditions are satisfied:

1. The bid is for not more than 5 per cent of the outstanding securities of a class of securities of the offeree issuer2. An offeror who intends to rely on the exemption must at the time of the purchase count, as part of the 5% maximum ,

the target securities purchased by the offeror and any joint actor in any manner, other than by formal bid, “within any period of 12 months”

3. The target securities must be listed or quoted for trading on a published market4. 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 as determined in accordance with the regulations, plus reasonable brokerage fees or commissions actually paid

o (Thus this could be used when the bidder already owns/beneficially own 15%)

Private Agreement Exemptions. 100.1: A take-over bid is exempt from the formal bid requirements if all of the following conditions are satisfied:

1. Purchases are made from not more than five persons or companies in the aggregate, including persons or companies located outside of Ontario.

2. The bid is not made generally to security holders of the class of securities that is the subject of the bid, so long as there are more than five security holders of the class.

3. If there is a published market for the securities acquired, the value of the consideration paid for any of the securities, including brokerage fees or commissions, is not greater than 115 per cent of the market price of the securities at the date of the bid as determined in accordance with the regulations.

4. If there is no published market for the securities acquired, there is a reasonable basis for determining that the value of the consideration paid for any of the securities is not greater than 115 per cent of the value of the securities.

o Anti-Avoidance Rule: that says if the party the buyer is buying from bought the securities for the purpose that the buyer would buy the shares from then than this exemption will not work

Non-Reporting Issuer Exemptions. 100.2: A take-over bid for an issuer that is not a reporting issuer is exempt from the formal take-over bid requirements in ss. 93 to 99.1 of the OSA provided that:

(a) There is no published market for the securities that are the subject of the take-over bid, and(b) There are no more than 50 holders of securities that are the subject of the take-over bid at the commencement of the

bid (s. 6.1 of OSC Rule 62-504)

Foreign Take-over Bid Exemption

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s. 100.3: Subject to section 100.5, a take-over bid is exempt from the formal bid requirements if all of the following conditions are satisfied:

1. Security holders whose last address as shown on the books of the offeree issuer is in Canada hold less than 10 per cent of the outstanding securities of the class subject to the bid at the commencement of the bid.

2. The offeror reasonably believes that security holders in Canada beneficially own less than 10 per cent of the outstanding securities of the class subject to the bid at the commencement of the bid.

3. The published market on which the greatest dollar volume of trading in securities of that class occurred during the 12 months immediately preceding the commencement of the bid was not in Canada.

4. Security holders in Ontario are entitled to participate in the bid on terms at least as favourable as the terms that apply to the general body of security holders of the same class.

De Minimis Take-Over Bid Exemptions. 100.4: Is available for take-over bids made to a de minimis number of securityholders in the local jurisdiction subject to the following conditions:

1. There are a maximum of 49 beneficial holders of target securities in the local jurisdiction2. Such holders hold, in aggregate, less than 2% of the outstanding securities of the class3. Securityholders in the local jurisdiction are entitled to participate in the takeover bid on terms at least as favorable as

the terms that apply to the general body of securityholders of the same class4. At the same time as the material relating to the take-over bid is sent by or on behalf of the offeror to holders of target

securities, the material is filed on SEDAR and sent to securityholders on the jurisdiction

Plans of Arrangements (pg 552) There are separate regulations for takeover bids and plans of arrangements

BCE Inc. v. 1976 Debentureholders (pg 553) Facts: The Ontario Teachers’ Pension Plan board announced that it intended to acquire BCE through a plan of arrangement in the form of a leveraged buyout. A group of debentureholders opposed the plan; however, they were not accorded a vote in the transaction. They brought an oppression claim under s. 241 of the CBCA. Issue: The only question is whether the arrangement is fair and reasonable but how do you determine what is fair and reasonable?Decision: Ratio:

1. To determine if a plan is fair and reasonable, courts must be satisfied that:(a) The arrangement has a valid business purpose, and

There must be a positive value to the corporation to offset the fact that rights are being altered An important factor in determining this is the necessity of the arrangement to the continued

operations of the corporation (if necessary for continued operation then court more likely to approve)

(b) The objections of those whose legal rights are being arranged are being resolved in a fair and balanced way Judge must be satisfied that the arrangement strikes a fair balance, having regard to the ongoing

interests of the corporation and the circumstances of the case An important but not determinative factor is if a majority of shareholders have voted to approve the

arrangement May also consider the repute of the directors and advisors who endorsed the arrangement and its

terms including if approved by a special committee made up of independent directors

Defensive Tactics When a hostile bid is made, the target board finds itself in a conflict of interest situation as the directors are obliged to

act in the best interests of the company but on the other hand, in a takeover bid situation, target directors and management stand to lose their positions if the bid is successful

In Canada, unlike the US, the rule appears to the that the board cannot “just say no” to a takeover bido However, they can employ defensive tactics to delay the bid in order to give the board more time to consider

it and so seek alternative offers84

When a takeover bid is made the target company should create a special committee comprised of independent directors although their independence is not a legal requirement

Regulators have said that you are trying to maximize value for shareholders. SO you need to use defensive tactics with that in mind. If you put a defensive tactic in place that serves to refuse the offer outright without giving shareholders an option to vote on it and is not designed to help drive better offers, then the defensive tactic will be cease traded by the regulator.

Types of Defensive Tactics

White Knight

The law requires the special committee to canvass the market (Schneider)o If a bid emerges that is “friendly”, in the sense that it is invited, accepted, and favoured by management in

the face of a hostile bid, the bidder is known as a “white knight”

Poison Pill or Shareholder Rights Plan (SRP)

A SRP can be adopted by a corporation prior to or during a takeover bido If the SRP is adopted during a bid without shareholder approval, the pill is referred to as “tactical”

Once activated, the typical pill provides shareholders of the target company with the right to purchase additional shares of the class that is subject to the bid at a very low price.

o The shares are issued to all shareholders except the bidder The effect of the SRP is therefore to dilute the bidder’s holdings and make it much more difficult to

complete the takeover bid Canadian regulators have held that unlike in the US where you can use a “just say no” defence, here it is not a

question of “if” but “when” they will cease trade it

Sale of Crown Jewel

A target may attempt to discourage an initial bidder by entering into an agreement with a third party to sell a significant asset

o The significant asset is known as the “crown jewel” and may constitute the initial bidder’s reason for making a takeover bid in the first place

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When will regulators strike down Poison Pills? Pulse Data (ASC)

no reasonable prospect of alternative bid. majority of shareholders had approved the poison pill. ASC satisfied recent and fully informed decision of shareholders was response to the offer - not in public interest to

cease trade poison pill. NEO (OSC)

shareholders had ratified poison pill after the take-over bid had been announced. SCC n BCE Inc. - may not be appropriate to intervene if target board considers option of pursuing business plan as

being in best interests of the corporation - provided the decision within “range of reasonableness”. Also, unfavourable market conditions - board not looking for other offers

Lions Gate (BCSC) Relied on public interest policy principles in NP 62-202 and related jurisprudence, and affirmed that, in the absence

of any attempts by the target board to take steps to increase shareholder value through an improvement of the bid or the presentation of an alternative transaction, there can be no basis for allowing a rights plan to stay in place for any additional period of time.

Even if ratified, poison pill can no longer serve only purpose for which it is justified – buy additional time for target board to solicit a competing bid.

deprive Lions Gate shareholders of ability to tender their shares to the offer. Baffinland (OSC)

Clarified that NEO did not establish a new basis for upholding a rights plan, but that shareholder approval of a rights plan in the face of a hostile bid was an important element.

Petaquilla (BCSC) Traditional analysis – cease traded plan to allow bid to go to the shareholders.

Litigation

The target company may initiate litigation that has an ancillary purpose to delay and possibly thwart the bid process

Issuer Bid

The target may make a bid for its own shares, competing with the outstanding hostile bid

Break Fee

The merger or acquisition agreement that is negotiated between the target and a white knight may contain a clause indicating that if a merger between the target and the white knight does not occur, the target will pay a certain fee to the white knight (works as an inducement for the white knight to enter the agreement)

o Break fees range from 3 to 5 percent of the value of the target company This amount thus adds to the cost of the acquisition by a bidder other than the white knight

Anita Anand: “where a break fee is within the generally accepted range (i.e. the amount of the fee does not preclude a competing bid), the commission need not and should not take a position on it

Securities Issuance

Target board authorizes sale of securities in the face of a bid to increase the number of securities subject to the bid, and to reduce the percentage of shares committed to tendering to the bid as you would sell to a friendly buyer who would not tender their shares to the hostile bidder

Guidelines for Target’s Use of Defensive Tactics

NP 62-202: sets forth guidelines that govern the board’s conduct with regards to defensive tacticso It states that companies are permitted to adopt defensive tactics, but they must not deny shareholders the

ability to make their own decisions and they must not frustrate an open bidding process The policy is not mandatory and therefore contains only recommendations, not prescriptive law

Re CW Shareholdings Inc. v. WIC Western International (pg 564) Facts: CW made a hostile bid for WIC. In response WIC went out and found a white knight in Shaw and they entered into an agreement with Shaw that contained a break fee and they granted Shaw an option to purchase WIC’s radio assets as a further inducement to enter the bidding.Issue: Whether the uses of certain defensive mechanisms (break-fee and the sale of a crown jewel) are permissible?Decision: Held that the defensive tactics used by the target company were not per se illegal, but they could become illegal depending on the circumstances of the caseRatio:

1. Break fees are appropriate where:a. as the Commissions have noted, they are "necessary . . . in order to induce a competing bid to come forward"b. that bid represents a better value for the shareholders; and wherec. the break fee represents a reasonable commercial balance between its potential negative effect as an

auction inhibitor and its potential positive effect as an auction stimulator2. Granting an asset purchase option to a potential bidder may be an acceptable measure for a target corporation to

adopt as a competitive-bid stimulating inducement where - it strikes a reasonable commercial balance between its potential negative effect as an auction inhibitor depressing shareholder value and its potential positive effect as an auction stimulator enhancing shareholder value. Factors to be considered will include:

a. Whether the process by which the directors of the target company exercised their obligation to maximize shareholder value complied with their duties as target-corporation directors

b. Whether the price for the optioned asset is within the range of reasonable value attributed to that assetc. Whether the competing bid induced by the asset lock-up agreement provides enough additional value to the

shareholders to justify the granting of the option

347883 Alberta Inc. v. Producers Pipelines Inc. (pg 566) (Improper Purpose of SRA) Facts: Producers Pipelines Inc. was the target of a takeover bid. The board of the target company employed a number of defensive tactics one of which was a shareholder rights plan (SRP). The SRP was implemented without shareholder approval and was originally set to be valid only until December 27, 1990. However, it was extended by resolution of the board of

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directors to Feb 26, 1991. Although an annual meeting and a special meeting were held during that time period the Agreement was never presented to the shareholders for their approval. The bidder was fully aware of the SRP but had anticipated that it would expire, by its own terms. The directors said the purpose of the SRA was to give themselves time to assess any take-over offer and to consider alternatives. Later, after the amendment of the SRA, the purpose was stated to be “to protect shareholders from an unfair, abusive, or coercive take-over bid.”Issue: Decision: The SRA was used improperly and the court set aside the SRA and extended the closing date of the hostile offerRatio: Analysis:

The purpose of the extended and amended SRA, in conjunction with the issuer bid was, at this point, unequivocal. The terms of a permitted take-over bid were, all cash, for all shares, and only with the unanimous approval of the Board of Directors. There was agreement among the directors that approval would not be given at a price less than $25.00 a share, a price 25% above the appraised value. These terms were so onerous that any take-over bid was effectively prohibited.

o At the same time as the shareholders were deprived of the right to consider any take-over bid, they were forced to consider authorization of the issuer bid

The fact that the SRA was not put to the shareholders for ratification either prior to, or simultaneous with, the issuer bid confirms the view that the purpose of the directors was to force the issuer bid on the shareholders without the choice of any possible alternative such as the appellant's proposed takeover bid or any other take-over bid.

Re Royal Host Real Estate Investment Trust (pg 573) Facts: Royal Host publicly announced that it would make a bid for CHIP. Two days later the trustees of CHIP adopted a unitholders rights plan, without the approval of the holders. Royal Host sought orders terminating the operation of the CHIP rights plan against its bid, specifically.Issue: Decision: There is no holy grail for determining when it is time for a SRP to goRatio:

1. In determining where the public interest lies the OSC will consider two questions:a. If the Plan is permitted to remain in effect for a reasonable further period, is there, on the evidence, a reasonable

possibility that a better offer will come along during the period so that, whether or not this results in MDC raising its bid, the shareholders of Regal will be advantaged?

b. If the Plan is not terminated prior to the end of the current period for the acceptance of the bid, is it likely that [the bidder] will not extend the period for acceptance for such "reasonable further period", and thus deprive the Regal shareholders of the opportunity to decide whether they wish to accept the [the bidders] bid?

2. If a rights plan is put into place in the face of a bid and without a vote of shareholders, it is, at the very least, necessary for the target company to demonstrate that it was necessary to do so because of the coercive nature of the bid or some other very substantial unfairness or impropriety.

Reason: List of factors to be considered when determining if it is time for a SRP to go include:

o whether shareholder approval of the rights plan was obtained;o when the plan was adopted; o whether there is broad shareholder support for the continued operation of the plan;o the size and complexity of the target company;o the other defensive tactics, if any, implemented by the target company;o the number of potential, viable offerors;o the steps taken by the target company to find an alternative bid or transaction that would be better for the

shareholders;o the likelihood that, if given further time, the target company will be able to find a better bid or transaction;o the nature of the bid, including whether it is coercive or unfair to the shareholders of the target company;o the length of time since the bid was announced and made;o the likelihood that the bid will not be extended if the rights plan is not terminated

Duties of the Target Board CBCA s. 122(a) (Fiduciary Duty): The directors must exercise the common law fiduciary and statutory obligation to act

honestly and in good faith with a view to the best interests of the corporation

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Re CW Shareholdings Inc. v. WIC (pg 579) Issue: Decision: WIC and WIC directors complied with their fiduciary duties and statutory obligations and acted independently to the benefit of WIC and its shareholders as a whole.Ratio:

1. Business Judgment Rule: where business decisions have been made honestly, prudently, in good faith and on reasonable and rational grounds, the court will be reluctant to interfere and to usurp the board of director's function in managing the corporation. In such cases, the board's decisions will not be subject to microscopic examination.

2. Held that boards must seek to maximize shareholder value by conducting an auction (OLD LAW overturned in Schneider)

Reason: WIC set up a special committee of independent directors and they obtained their own independent legal and

accounting council.o The special committee also took steps to attempt to generate competitive bids

Maple Leaf Foods Inc. v. Schneider Corporation (pg 584) Facts: The target board (Schneider) rejected numerous increasing bids from the original bidder (Maple Leaf) in favor of a bid from another bidder (Smithfield Foods), preferred by the target’s controlling shareholder. The board established a special committee of independent directors. The majority shareholder told the special committee that the only offer it would accept was an offer made by Smithfield Foods.Issue: Decision: Court held that the target board had acted properly in rejecting the Maple Leaf offers and accepting Smithfield’sRatio:

1. An auction need not be held in each change of control situation and that a “market canvass” may be acceptable if a board is unable to judge the adequacy of a bid.

o When the board has received a single offer and has no reliable grounds upon which to judge its adequacy, a canvass of the market to determine if higher bids may be elicited is appropriate, and may be necessary

Reason: Concluded that the special committee and the directors "exercised their powers and discharged their duties honestly,

and in good faith, with a view to the best interests of Schneider and that they exercised the care, diligence and skill that a reasonable and prudent person would exercise in comparable circumstances in relation to dealing with the take over bid situation."

He also found that because Schneider was known to be controlled by the Family which could decide whether or not to sell its shares, the company was never truly in play and no public expectation was created that an auction would be held.

o Thus no oppression remedy because there was no reasonable expectation that an auction would be held

BCE Inc. v. 1976 Debentureholders (pg 589) Decision: The directors met their fiduciary duties and the transaction was not oppressive to the debentureholdersRatio:

1. Often the interests of shareholders and stakeholders are co-extensive with the interests of the corporation. But if they conflict, the directors' duty is clear -- it is to the best interest of the corporation

2. The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation.

a. And in considering those interests the directors may look to the interest of shareholders, employees, creditors, consumers, government, and the environment to inform their decision

i. Directors may find themselves in a situation where it is impossible to please all stakeholders. The "fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction"

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3. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule.

o The "business judgment rule" accords deference to a business decision, so long as it lies within a range of reasonable alternatives

Reason: Given the potential impact on the debentureholders of the transactions under consideration, one would expect the

directors, acting in the best interests of the corporation, to consider their short and long-term interests in the course of making their ultimate decision.

o Indeed, the evidence shows that the directors did consider the interests of the debentureholders.i. The directors' response to these overtures was that the contractual terms of the debentures would

be met, but no additional assurances were given.

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