Securities Regulation Summary

1.0 1.1 1.2 MAJOR THEMES IN THE COURSE ..........................................................................................1 Three Goals of Securities Regulation...................................................................................................... 1 Three Methods of Achieving these goals ................................................................................................ 2 Registration requirement ................................................................................................................. 2 Disclosure Requirement ................................................................................................................... 2 Remedies for Breach of Registration or Disclosure Requirements .............................................. 3 1.2.1 1.2.2 1.2.3 1.3 2.0 2.1 2.2 2.3

General Policy of the Course ................................................................................................................... 3 INTRODUCTORY CONCEPTS ...................................................................................................4 Purpose of Selling Securities.................................................................................................................... 4 Types of Securities .................................................................................................................................... 4 Securities Trading .................................................................................................................................... 4 Open Market in Capital ................................................................................................................... 4 Private Trades ................................................................................................................................... 5

2.3.1 2.3.2 2.4

Sources, History & Constitutional Division of Powers of Securities Regulation ................................ 6 Division of power .............................................................................................................................. 6 History of securities regulation ....................................................................................................... 6 Sources of Provincial Securities Regulation ................................................................................... 6

2.4.1 2.4.2 2.4.3 3.0 3.1

SEGMENT 1: GOING PUBLIC ....................................................................................................8 Introduction to Going Public ................................................................................................................... 8 General Rule– Securities Act, ss. 25 and 33 .................................................................................... 8 How Companies Go About Raising Capital ................................................................................... 8 Why Go Public? ................................................................................................................................ 8 Why do we regulate public offerings (3 objectives) ....................................................................... 9

3.1.1 3.1.2 3.1.3 3.1.4 3.2

The Prospectus Requirement: Does the Securities Act Apply?.......................................................... 10 What is a security? ......................................................................................................................... 10 What is a trade?  Statutory Definition...................................................................................... 16 What is a distribution? ................................................................................................................... 17

3.2.1 3.2.2 3.2.3 3.3

Prospectus Preparation .......................................................................................................................... 20 Prospectus General Rule ................................................................................................................ 21

3.3.1 3.4

Prospectus/ Distribution Process (After making decision to go public) ............................................ 25 Summary of Steps ........................................................................................................................... 25 Creating the Preliminary Prospectus: What must be included.................................................. 25 i
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

3.4.1 3.4.2

3.4.3 3.4.4 3.4.5 3.4.6 3.4.7 3.4.8 3.4.9 3.4.10 3.4.11 4.0 4.1 4.2

The Waiting Period, Vetting/ Comment Letter and Amendments ............................................ 28 Filing the Final and Obtaining a Receipt and Changes Post-Filing ........................................... 34 Closing & Any Post-Final Amendments ....................................................................................... 36 Consequences for Failure to Deliver/ File Prospectus (practically, none) ................................. 39 Failure to File (likely not needed) ................................................................................................. 40 Liability for Misrepresentation in a Prospectus .......................................................................... 40 Registration Requirement.............................................................................................................. 50 UW Agreement ............................................................................................................................... 50 Sample Prospectus .......................................................................................................................... 51

SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE ...........................53 Policy Behind Continuous Disclosure Regime – Merger Report (3 objectives) ................................ 53 PART I: Regular Disclosure .................................................................................................................. 53 Application to Reporting Issuers................................................................................................... 54 Obligation to File Financial Statements ....................................................................................... 54 Statutory Provision: OSA, Part XVIII – Continuous Disclosure ............................................... 56 Material Change vs Material Fact ................................................................................................ 56 What must be filed with a material change (3 Report Options) ................................................. 58

4.2.1 4.2.2 4.3

PART II: Timely Disclosure (of changes)............................................................................................. 54

4.3.1 4.3.2 4.3.3 4.4

PART III: Early Warning ..................................................................................................................... 60 STEPS: ............................................................................................................................................ 60 STATUTORY PROVISIONS ....................................................................................................... 60

4.4.1 4.4.2 4.5

PART IV: Insider Reporting ................................................................................................................. 61 Analysis: When do insider reporting rules apply? ...................................................................... 62 STATUTORY PROVISIONS ....................................................................................................... 62

4.5.1 4.5.2 4.6

PART V: Insider Trading ...................................................................................................................... 63 Policy Discussion about Insider Trading / Tipping Prohibition ................................................. 63 Steps ................................................................................................................................................. 64 Statutory Provisions (OSA) ........................................................................................................... 65 Meaning of Generally Disclosed (Defence) ................................................................................... 67 Defences to Insider Trading / Tipping .......................................................................................... 68 Actions, Sanctions & Penalties for Insider Trading .................................................................... 71

4.6.1 4.6.2 4.6.3 4.6.4 4.6.5 4.6.6 5.0 5.1

SEGMENT 3: THE CLOSED SYSTEM: ...................................................................................73 Private Placement & Exemptions ......................................................................................................... 73 General Rule ................................................................................................................................... 73 ii
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

5.1.1

5.1.2 5.1.3 5.1.4 5.1.5 5.2

Advantages & Objectives of Private Placement .......................................................................... 73 The Private Placement Exemptions .............................................................................................. 74 Offering Memorandum (and problems with it) ........................................................................... 77 Registration Requirement for Private Placement Exemptions .................................................. 79

Resale Rules ............................................................................................................................................ 79 General Rule: 2 Components of Resale Rules.............................................................................. 79 Resale Rules for Non-Control Persons ......................................................................................... 81 Resale Rules for Control Persons (Separate Regime) ................................................................. 83

5.2.1 5.2.2 5.2.3 6.0 6.1

SEGMENT 4: CONTROL TRANSACTIONS ...........................................................................87 Reasons for Takeover Bids .................................................................................................................... 87 Socially Useful Reasons for Takeover Bids .................................................................................. 87 Non-Socially Useful Reasons for Takeover Bids .......................................................................... 87 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them .... 87

6.1.1 6.1.2 6.1.3 6.2

Overview of How Takeover Bids Work................................................................................................ 88 What is a takeover bid? ................................................................................................................. 90 Deemed Ownership ........................................................................................................................ 92

6.2.1 6.2.2 6.3

Mechanics of a Vendor Takeover Bid................................................................................................... 94 Takeover Bid Circular (Information) ........................................................................................... 94 Minimum Period of Bid (Time) ..................................................................................................... 95 Pro Rata (Equality) ........................................................................................................................ 96 Withdrawal and Change of Info or Variation in Terms (time and info) ................................... 96 Conditions (just investor protection) ............................................................................................ 97 Payment for Securities (investor protection generally) ............................................................... 98 No collateral agreements ................................................................................................................ 98 Section 95: Offeree Issuer’s Obligations ...................................................................................... 99 Legislative Goal Met..................................................................................................................... 100

6.3.1 6.3.2 6.3.3 6.3.4 6.3.5 6.3.6 6.3.7 6.4

Post-Bid: Directors’ Circular (Response)............................................................................................. 99

6.4.1 6.4.2 6.5

Pre & Post-Bid Integration .................................................................................................................. 100 Lock-up Agreements/ Tendering Agreements (Allowed) ......................................................... 100 Pre-Bid Integration ...................................................................................................................... 101 Post-Bid Integration ..................................................................................................................... 102

6.5.1 6.5.2 6.5.3 6.6

Exemption from Pre-Bid and Post-Bid Restrictions – EXEMPT Takeover Bids! ......................... 102 Private Agreement Exemption (s.100.1(1) of OSA, most important) ...................................... 103 S.100 – Normal Course Exemption – Don’t Exceed 5% in 12 Months .................................... 103 iii
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

6.6.1 6.6.2

6...7 Voting & Non-Voting Shares .......................... Methods to attain them: Registration.................1 6........2 6...........................................................8.............. 105 Defensive Tactic Rules .. 104 Examples of Defensive Tactics...........................8 Director’s Duties and Responsibilities in a Takeover Bid Situation – Defensive Tactics to Buy Time 104 6............... Efficient Capital Market....... remedies .8........ 103 6........... Increase Confidence... 107 iv Three Policies: Protect Investing Public......................................................................8..................................................... disclosure......................NP 62-202...................................3 Fiduciary Duty in the Context of Takeover Bid ..........

............................2 INTRODUCTORY CONCEPTS ................... contracts etc............. risks.................................................. 2) Disclosure Requirement............................... 1 1....3 General Policy of the Course ......................................................... 2 1. 3 For the exam: 1) Know what the rules are............................................ 4 Types of Securities ........0 2............................... 2 1..... 3 When securities are acquired pursuant to one of the private placement exemptions and not pursuant to a prospectus.............. 3) Remedies for Breach of 1 and 2 ..........) via a prospectus and continuous disclosure .......3 Remedies for Breach of Registration or Disclosure Requirements ........................................................................................... true and plain disclosure of all material facts related to the company (adv/disadv.................................. improper or fraudulent practices..2..................... Increase Confidence.....1 Registration requirement .............. the resale by the initial investors of these securities to other investors on the secondary market is restricted and certain conditions must be satisfied prior to their resale.2 Disclosure Requirement ............. OSA is consumer protection legislation and in order to do that................................2 Closed System & Resale Restrictions .............. 3) Increasing and Maintaining Public Confidence in Capital Markets / In the Persons and Institutions Operating Them ................ remedies ...........................2.............................................. we need to give you the information that you need to make an informed investment decision .................................................0 1.............................................................. Efficient Capital Market.................. and the exceptions are to provide efficient markets for securities that are considered to be very low-risk to the public................................................................................................................... 1 3 purposes: 1) Protection of investing public...................................2....2............................. 2 POLICY: Need to balance the objectives of the efficiency of capital markets (would be inefficient to file a prospectus every time a company needs money) with the need to protect the public............. Methods to attain them: Registration............................................ 3 1............................................ 4 v Three Policies: Protect Investing Public...........................................1 Three Goals of Securities Regulation................. 3 Policy: Transparency is key to the process .............1 of the OSA under the purposes of the act! The purposes of the Act are (a) to provide protection to investors from unfair.... 2 1.........2........................ 1 Another theme: NO SMART GUYS and NO CERTAINTY ....................................................................................2 Three Methods of Achieving these goals ...................................................... 3 2.. ............................................... 2 To protect investing public................... 3 1.............................................. disclosure.4 Purpose of Selling Securities............. 2 POLICY: need to protect investors....................... 2 1) Registration Requirement..1 MAJOR THEMES IN THE COURSE ............. makes sure you are educated and policed  fosters confidence in the market.....................1 2...........1... must make sure they have full............ ......................................................2.............................................................................. 1 Found in s....................... 2 1............................. and (b) to foster fair and efficient capital markets and confidence in capital markets ................................. 2) Ensuring the Efficient Operation of Canadian Capital Markets.... 2) Look at why they exist (why does the law regulate these activities? What objectives is the rule trying to establish?).. 2 POLICY: This helps ensure accountability................................... People will lose confidence if some whackos are selling you securities....... 3 Policy: investor protection and confidence in the market (fix something when it goes wrong) .................................................... ......................................................................................1 Exceptions to the Disclosure Rule ................................1.............. 3) THEN Challenge the rules .........2.......................

......................................................2 2............4.............1....................1........... 4 Open Market in Capital ........................ Ontario Securities Act)..................... 8 3......................... ........................................................................53 deals with not being able to issue securities without a prospectus..................... 8 3 Ways: 1) Borrow....0 3......... 2) Go Public (IPO – segment 1)....... 6) Shareholder Liquidity . 10 Analysis for Whether You Need to Issue Prospectus: ................................8 Introduction to Going Public .............................. 25......... 10 Recall General Rule: ss...............3 3..................................... 4 Primary market (sale of securities to investors) and secondary market (investors exchange sec in return for payment from another invested) together permits continued marketability / liquidity of shares ......................................... 5) Acquisitions................ 9 1) Protection of Investing Public................. Methods to attain them: Registration............... 9 Disadv: 1) Loss of confidentiality... 8 s............ 9 3.................. 3) Private Placement of Securities (segment 3)...... disclosure...........3.................... 6 Sources of Provincial Securities Regulation ...................................... 53 of the SA: No person shall engage in or hold themselves out as engaging in the business of trading in a security without being registered and if a trade is a distribution...................................... 2) Reduced flexibility.........1 2..................................................................................... 8 s............................................................................................. History & Constitutional Division of Powers of Securities Regulation .................. 3) Employee Incentives....2 2.1..4............ 9 3.............. 6) High costs of going public (initial costs of IPO and ongoing cont disclosure requirements) ...........3.................................. 3) Managing share prices..................................................... 8 3.................. 5) Loss of tax advantages.................................................... 4) Enhanced corporate image........................................................................................................................ 6 2............4 Private Trades ........4 Why do we regulate public offerings (3 objectives) ...............1 Why Go Public? ... 4) Reduced control...................................... ss......4.................................................. 6 History of securities regulation ...............1. 8 3.......... and if a trade constitutes a distribution......................2 How Companies Go About Raising Capital ............................... 8 RULE: No person shall engage in or hold themselves out as engaging in the business of trading in a security...1 SEGMENT 1: GOING PUBLIC .... without preparing a prospectus .............................................................................................1....................................... 10 Prospectus ONLY IF there is a TRADE in a SECURITY which constitutes a DISTRIBUTION.........2 The Prospectus Requirement: Does the Securities Act Apply?...........................................25 deals with not being able to engage in business of trading securities unless REGISTERED ..................................... 8 3.............................................. 2) Future Growth................... 10 vi Three Policies: Protect Investing Public...................... 25 and 33 .......................3 3........ 2) Ensuring the Efficient Operation of Canadian Capital Markets..................................2 Potential Disadvantages (and to how to mitigate the risk) ......................................................................... without preparing a prospectus (Section 25 and 53.. 4 2............................. without being registered........... 5 Sources..................2. 8 Advantages .................. 8 General Rule– Securities Act........3....................................3....................... 3) Increasing/ Maintaining Confidence in Public Markets & the People who Operate in Them ....................... Increase Confidence....1 Advantages: 1) Raising Capital..........................3 Securities Trading ......................................................................................................................1 2.......................1.............................. ........ 6 Division of power ......................................... remedies ............. Efficient Capital Market...

......... 10 LEGISLATION ACT 2006 ... 11 Implications: takes a broad def and makes it even broader! ............1...... 11 Main Points: Definitions in the OSA are not mutually exclusive.. CM Joiner Leasing Corp.................... not static (Pacific Coast Coin Exchange) -The policy of securities legislation is ‘full and fair disclosure’ with instruments regarded as securities..... 10 Is it a trade in a security?  If NO................. But if yes… then you must prepare a prospectus *unless one of private placement exemptions are available ...Substance not form governs the interpretation of what is a security –it is flexible.... earnings or royalties of any person or company..............1(a) definition that a security includes “any document............... but are catchalls ...................................... Specifically.................. Brigadoon Scotch Distributors (1970 Ont................ 10 Statutory Definitions ... SA does not apply. remedies ......... profits...... Turner Enterprises Inc................ If so… .) .... 10 S..................... 10 CATCH ALL PROVISIONS (Pacific Coast) .................1 What is a security? ................. not likely to be understood by anyone other than legal/ financial community ...........Securities legislation is ‘remedial legislation..........................................1................................................... H..........1....... instrument or writing commonly known as a security............................1... (USA).............................. If so… ............................................................................4 LESS COMMON SECURITIES ...2 3.......................... Glen T...........................1..............................(n) any investment contract ..2.......... not common person......................... Increase Confidence......................................................... assets................................ no Prospectus...............................2...... instrument or writing commonly known as a security” means if known as such by the legal/ financial community...................................... ................................. 12 Ratio: Provides insight into s.............2.......... 11 Ontario (Securities Commission) v..................................................................................................................................2............ 1973) ........... 10 Section 64(1): an act shall be interpreted as being remedial and shall be given such large and liberal interpretation and best ensures the attainment of the object .............. Methods to attain them: Registration......................... 10 3.... vii Three Policies: Protect Investing Public. 12 Test: Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product? ................................... 11 Due to POLICY: most sec are technical in nature............................. SA does not apply.............Interpretation ..... 10 ONTARIO SECURITIES ACT – Interpretation & Definitions ....................... so had to narrow definition (otherwise... property..............................2......................3 3... .............1(1): “security” includes (NOT EXHAUSTIVE= broad def): (a) any document.. 10 3) Does that trade in a security constitute a distribution? If NO............................................. Efficient Capital Market.....1(1)(b): Securities only includes instruments intended as investments and not instruments bought for other commercial purposes.............. (b) any document constituting evidence of title to or interest in the capital..... 11 SEC v................................ disclosure. 12 SEC v............................ 12 Ratio: Act will be construed broadly and in whatever way leads to it to promote the policy objective of investor protection (Purposive approach to interpreting the meaning of “security”)..............C................................................................................................... 11 How Case Law Has Defined a Security........1) 2) Does transaction involve a security?  If NO................1 3............................. 11 Ratio: s.......................... to be ‘construed broadly’ (SEC v CM Joiner Leasing & Pacific Coast Coin Exchange) ................. (US....................................... 10 3..................................................................................................................... could be anything you’re selling) .. 12 Policy: The reason you’re defining this is to figure out if you need to issue a prospectus...........................................

......... transaction or scheme whereby a person invests.................... need to issue prospectus......... .......................... solicitation.......... W....... b) A portion of the initial value is subjected to the risks of the enterprise.................3 TRADES ON BEHALF OF OTHERS ......... Test requires: a) The offeree furnish initial value....................... .................................... ....J................................... advertisement........ 17 viii Three Policies: Protect Investing Public............................... 13 State of Hawaii v........................................ remedies ....... and 3) That the person is led to expect profits (or capital appreciation: see Forman) solely from the efforts of a promoter or third party (pol obj: since it is them who controls success/failure of enterprise) .................. 14 However................................... It is the policy and not the subsequently formulated judicial test that is decisive.2.... uncommon or irregular devices... Efficient Capital Market..2........................... 16 3........... conduct or negotiation directly or indirectly in furtherance of” any of the activities described in the definition............... 16 In order for general rule (Section 53(1) and 25 about being registered) to apply for a prospectus.................................................. 17 Unless exemption is available… if trade is a distribution.........1 3.................................... c) The furnishing of initial value is induced by promises or representations leading to a reasonable expectation or understanding that a benefit above initial value will accrue........................... it is the policy and not the subsequently formed judicial test that is decisive... disclosure..... security... Test requires: ............. Hawaii Market Center Inc..2 What is a trade?  Statutory Definition...........................1(1)(n): an investment contract will be where people are investing in the potential for something to generate profit and are purchasing expertise of someone else....................... novel................ there has to be a trade in a security........ 14 Pacific Coast Coin Exchange of Canada v OSC (SCC. Methods to attain them: Registration.....................................................................2................ 16 OSA............. 14 *Accepts US definition for “investment contract” as a security ............ ............................ Are investors relying on expertise/management —courts have immense discretion................................ 12 SEC v............. purposive approach should be used in interpreting meaning of word “security” (even broader – s.............. 13 Ratio: Common enterprise test for identification of an “investment contract” and therefore............ 14 3.............................interprets s.......... 13 1) A contract....... The primary objective is to protect the investing public......................................................................................... 1978) ...... Howey Co.................... 2) That the investment be in a common enterprise............................. so what is a trade? ............................ and d) The offeree does not have the right to exercise practical and actual control over the managerial decision of the enterprise................................... ............................. Increase Confidence.............. 12 Policy: Purposive approach to interpreting the meaning of “security” required to respond to new.............. 14 Ratio: Risk Capital Test for identifying an investment contract (broader than Howey test to comply with policy objectives)........................ 14 Ratio: Broad..... .... 16 Policy: Overall..................................................2.......... trade is broadly interpreted to promote the “greater good” –prevent ppl from contracting/opting-out of securities regulation ............. 17 What is a distribution? ............... section 1(1): A “trade” includes “any sale or disposition (NOT A PURCHASE) of a security for valuable consideration” AND includes “any act................................... 1946) – reasoning used by SCC in Pacific Coin .............. (USSC..................1(1) is not exhaustive) it is legislative policy to replace the harshness of caveat emptor in security related transactions and courts should seek to attain that goal even if tests carefully formulated in prior cases prove ineffective and must continually be broadened in scope..............................................................

....................................................... 20 Prospectus General Rule . can’t have fancy brochures............. disclosure..... 21 Section 56: (1) Full............... remedies .Distribution (per s........ .......................... or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made..................................1 Lastman’s 3 Main Branches of Distributions ................................ 21 *Governed by NI 41-101 general requirements and 44-101 for short-form prospectus...1........... 21 2) Must comply with the requirements of the Securities Act (including 56.......... 21 3............................................ and any promoter of the issuer) – certifies prospectus is true ........... CFO and two directors that aren’t CFO/CEO.... (c) a trade in previously issued securities of an issuer from the holdings of any control person... 22 ix Three Policies: Protect Investing Public..... .............................. 19 1) Direct issue and private placement........... Methods to attain them: Registration.. 21 Section 58(1) Issuer Certificate (signed by CEO....... purpose is to ensure those who are potentially going to invest in the corp have suff info with which to make an informed investment decision ...... 3) Best efforts underwriting ....................... Very high bar – very diff to know if you’ve missed something...................... true and plain disclosure of all material facts (s................ OSA regulation............ statements or other docs required by the Act or regulations .................... underwriters)............... 2) Offer to Sell (Bought Deal / Offer to Sell/ Marketed Offerings)....................................... 21 3.........................3........ 22 1) Selling Document: Sec Act ensures regulator’s mandate of investor protection by saying only doc you can use to sell sec is the prospectus.. etc..... Efficient Capital Market......................................................................................... 17 3............................................................................ officers....................1(1)(c))......... 58..........s................................. 19 1) Securities that have not been previously issued (s........ (2) Must also include any financial reports.............. you can sue everyone involved (corp.....................................................1(1)(a))............ 21 1) Prospectus must provide full.....................................................3............................ .............................................................................................................................................. billboards................. 59) -Includes OSA........ 56(1)) .. 19 3................... 19 3........................1 Misrepresentation ........... OSC rules and the OSC director............3........ directors.................2 Dual Functions of a Prospectus: Selling + Liability Document ...................................... 21 3...... can’t advertise in any meaningful way......2 Note: 3 Ways Securities can be distributed to the public .......................................................... 21 Policy: Should tell everyone everything they need to know to make informed investment decisions ........... 21 Section 59(1) Underwriter certificate (signed by any/all UWs in a contractual relationship with the issuer or selling securityholder distributing securities through the prospectus) – UW also certifies prospectus is true ....1........................... (d +e) a trade by or on behalf of an underwriter in securities (see full def below) .........2.........3............................1(1) definition: means (EXHAUSTIVE def) (a) trade in sec of an issuer that have not been previously issued......... 21 If there is a misrepresentation........1 Misrepresentation............................. 3) Sales of restricted sec held by exempt purchasers ....................................... true and plain disclosure and complying with all requirements of Ontario securities law......................................................3 Prospectus Preparation .......... Increase Confidence................................................................. (b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer...............................3..... 2) Trades by Control persons (s........... Two principle requirements of a prospectus under OSA: ......................1(1): means (a) untrue statement of material fact........................... 17 Purpose: def determines whether or not there’s a requirement to prep prospectusThus.2...................... .

.......... 130(1) for misrepresentation (see more on underwriters below).... 24 3....................... Efficient Capital Market.........................4 Full..................3.................. .............. 22 Tension between 2 purposes (reckless selling v being too careful): You as a lawyer cannot allow client to recklessly sell in light of the prospectus (they’ll get sued)................. so client will want to be successful/shed the company in its most favourable light........ interest rate or dividend amount)...... 24 Implications: Example of how to deal with forward-looking info.......2) Liability Document: Will need a lot of $.....................................................................3................................ but you also can’t go so far to protect yourself/your client that you have a document that no one will buy securities with....................... amendment must be filed as soon as is practicable.............. red herring) (although requires material facts..................................1.....1 ...... 22 3........................5 Underwriters.......... maturity date............... true and plain disclosure: Section 56(1): A prospectus shall provide full.4 Prospectus/ Distribution Process (After making decision to go public) . regulator makes sure there is sig liability associated with a misrep (misstatement of a material fact/ omission) .................. 25 x Three Policies: Protect Investing Public.... ......... ... 24 Have to do due diligence........................................... and can still be found liable under s............................................. 23 3................ signed...... does not require price.................... remedies 3........ (2) Projection (estimate of results that follow any set of reasonable assumptions) . true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law........................................................... 23 Policy: Recognize tension between prospectus as selling document and prospectus as liability document –do not err on EITHER side –don’t be too hard and don’t be too soft..... 24 *note that a Material Fact and Material Change are different!!!!! ...3 National Instrument 51-102 – Policy on future oriented financial statements in the prospectus 22 Per NI 51-102: no prospectus ever has to put future oriented financial info in it............ just be right . disclosure......... 25 1............................... within TEN days of the change ...................................... A forecast DOES have an implied representation of reasonableness..... means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities................................ 24 Definition of Material Fact: Section 1(1): Material Fact: When used in relation to securities issued or proposed to be issued........ 25 Summary of Steps ................ True and Plain Disclosure of All Material Facts ..................1............... Thus................ 24 Danier Leather SCC ........................................................................................ Amendment Required – 57(1): If there is a MATERIAL CHANGE after receipt is obtained for preliminary prospectus....... and before receipt for final OR after receipt for final is obtained but prior to completion of distribution......3............. 24 Requirement for Full.4......................... and also have a due diligence defence available to them. Methods to attain them: Registration.........1................ but that’s all –just has to be reasonable.............. Complete prelim (certified............................. ........... 24 A change in a material fact does NOT have to be disclosed following the filing of the prospectus (only a material change) ........................ ............ you cannot talk about the future anywhere else...... The choice is always the business’ BUT (1) if you don’t put it in........................... and IN ANY EVENT..................................... 24 3..... Increase Confidence..... and (2) if you do put it in your prospectus you have to comply with national instrument 51-102 for disclosure 22 Two types of data forming financial forecasts: (1) Forecast (written estimate of most probable result of operations of a company for some pt in the future)............................................................................................. 24 If a Material Change Occurs..........

.................................... then delivery the prelim to those who have expressed interest in buying (solicited or not) per s......... Print/Deliver the document to those who expressed interest ....... 25 3................... 26 Preliminary prospectus provides specific items of disclosure and “full..................................... Staff provide a comment letter ....................................................... Vetting/ Comment Letter and Amendments ............................. (2) Gives underwriters an opportunity to assess the market for demand so that they can price it properly ............................... 25 4....................................................................4.... 55).................................54..2 Creating the Preliminary Prospectus: What must be included.................... Need to file it (s... Increase Confidence.......... 26 3.......................................................................................................2...................................... 27 3...................... 28 First receive a preliminary receipt (if comply with all requirements –s.................. ............................... make amendments) ............. auditor’s comfort letter........................................ 26 National Instrument 41-101 (Form 41-101F1): General Prospectus Requirements .................. 25 Waiting period begins: time between receipt for prelim and receipt for final (if anything material changes during this period... once they’re cleared… ..... 28 Section 66 of the OSA – Distribution of Preliminary Prospectus ........ Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations (s...................................................... 28 3....... financial statements)..4.. 29 xi Three Policies: Protect Investing Public..................... underwriting agreement.... and then you will get a receipt for it (s..............54-55) ............................................. you’re not selling securities pursuant to it.........................4....................................2....................................................................g...........................“waiting period” means the period prescribed by regulation or...... material contracts................... resolution of BOD approving prelim....... ............................ OSC rule 45-501.......................... Clear up deficiencies.................................................. disclosure.......2 Filing with Administrator & Obtaining a Receipt for Prelim .....................................................4........ true and plain disclosure of all material facts”... 29 ........... tech reports..........65(1) “Waiting period” defined: In this section................................. Final prospectus/supporting docs can be filed and a receipt obtained (at discretion of securities commission whether it is in the public interest to do so – even if you met all requirements) ..1 Certification Process ...................... Efficient Capital Market............................................................. the period between the Director’s issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Director’s issuance of a receipt for the prospectus.....Director SHALL issue receipt)............................... 25 It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin .................... File with Administrator along with supporting docs (e...................................................................................................................2................................3 The Waiting Period........ Methods to attain them: Registration..................... Long-Form Prospectus: very open ended including all “material facts” (fact that sig affects market price/ value)........................ 25 7........................................... 25 See Form 41-101F1 or 44-101F1 for short-form.......................... if no period is prescribed....... 25 5....... 26 Policy: Can Exclude Pricing Information because: (1) It’s NOT FINAL... 25 6.. then per s. 28 s........... 25 8................................... ............. Staff vet the prospectus ............................................ remedies Section 65 of the OSA – Waiting period .....................................55....... 54(1))......................... consent letters.... 26 Section 54(2): a preliminary prospectus is exactly the same as a final except it can omit the price and what the underwriters get paid and any matters dependent on price . 25 3............................66 of OSA ........................... 27 FORM 41-101F1 AND OSA.........................

........... 34 s.................................................4...................................... Increase Confidence............................ 29 Policy: 3 reasons for waiting period: 1) review for deficiencies...................................... 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............................ 30 OSA....................................................... 31 3....................4 3................ and where you can get the prospectus..................................................... 29 3........................................ and have to keep a list of whoever you deliver it to (s..............................3 Vetting & Comment Letter.................... 68) ...... no projections. 30 Selling activities during the waiting period are constrained: You can only solicit expressions of interest (s...... OSC can also stop any of these s............ 34 (2) Refusal of receipt: The Director shall not issue a receipt for a prospectus or an amendment to a prospectus under the following conditions .. 65) and deliver the preliminary prospectus (s.............. 65 “trading” activities cease until a revised prelim is filed if the prelim ends up being defective (s.......... 31 FACTUAL TEST in furtherance of a trade: OSC staff said in determining whether ads are prohibited...4............. 31 All you can do in terms of advertising during the waiting period is: IDENTIFY the securities......................................................................... no predictions ............ 35 Lake Forest Fund ...................... 67 list (s..... and then send a notice to all investors under your s.............................................61) ............. 32 OSA – PART XV – Prospectus Distribution – Amendments on Material Change ................ state the price of the securities............................ 34 (3) Hearing: The Director shall not refuse to issue a receipt under subsection (1) or (2) without giving the person or company who filed the prospectus an opportunity to be heard .... 29 Constrained selling activities during waiting period .................................................... 32 If a material ADVERSE change occurs..................................................................5 Amendments if there are changes during the waiting period .... disclosure......................................... Part XVI: Distribution Generally ........................................... even though they indicated and DISCLOSED that they were inexperienced .............................3....... Efficient Capital Market.................................... and state the name/address of a person or company who you can buy them from....4 Limitations on advertising during waiting period ...2 3..........................4........................ 35 Rivalda... 57(3))........................... Methods to attain them: Registration.......... 34 Final Receipt ..... 34 OSA – Prospectus Distribution –Final Receipt (s...............4..........4. 31 PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period ...3...... would apply factual test based on whether advertising could reasonably considered to be in furtherance of a trade  no forecasts........4...............................................3.........1 Filing the Final and Obtaining a Receipt and Changes Post-Filing ...... 67) in case you have to amend it.....3.61: (1) Issuance of receipt – PUBLIC INTEREST: Subject to subsection (2) of this section and subsection 63 (4)......... 35 xii Three Policies: Protect Investing Public...............................4....................... ................................................... remedies ...................4.................................................. 30 3........................................................... you have to file an amendment ASAP or in any event within 10 days (s....................... 35 Failed to issue receipt for a junior mining company offering b/c felt directors were too inexperienced..........................................................3............ 31 OSC Test for Whether or not Advertising is Okay ......... 3) allowing for underwriter’s assessment of the market ...........................1 Purpose of the Waiting Period ......3.............. ....... 2) giving investors time to review... 32 3............................................... 66)...... 57(1)).............

.........1)) ............. 38 3.................................................................... Any Change! Not Just Adverse! .. disclosure...... 57(1) says you only have to do an amendment for material adverse change (you can for any change.. but then LET THE PUBLIC DECIDE?...............................4 National Offerings (NI 11-202 Passport System) .............................................................................5.........................4...... none) ... 39 xiii Three Policies: Protect Investing Public.................................................................................................. decisions are typically effective) .....62(1)) and no further distributions of the security can be made without a renewal of the prospectus (per s........................Prospectus Distribution ......................................2 Changes Post Filing of Final Prospectus (Any change must be reported in amendment) ........... 36 Delivery of Prospectus & Inclusion of Purchaser’s Rights .......................... 36 POLICY (keep in mind these are outliers...5........................................................................................ Methods to attain them: Registration......................................................60: Statement of Purchaser rights: Every prospectus shall contain a statement of the rights given to a purchaser by sections 71 (withdrawal rights) and 130 (right to sue for misrepresentation)............... if you want) ............................................................................................................................ 39 Section 62(1) ................................62(1......................................................This is a paternalistic approach: why not just force them to give the information to the public.... Efficient Capital Market....................... 38 OSA 57(1) again except this time.......................6...........3 Lapse of Prospectus........................................... he loves the OSC..................4............................... 39 3......................................4............ you have to deliver an amendment  positive OR Negative change…But during waiting b/w receipt for prelim and receipt for final........................................... 39 3................4... remedies ......5 3.. and overall... After this period...... then it’s the regulator in the jurisdiction with which the issuer has its most substantial connection . s.............. 36 Deprenyl . 36 .............................................1 Consequences for Failure to Deliver/ File Prospectus (practically.................................................................. If head office is in a location that isn’t in any of the jurisdictions of potential principal regulators.............................................................. 38 If there is a material change in affairs of company b/w final receipt and closing................................ 36 BUT COUNTER-ARGUMENT: Cost to society is that people will not invest markets if we don’t protect its integrity and if people lose all their $ on risky investments ............... ......... 38 3.................................. 37 s.5........4..................6 3. 36 3.............................................. 37 Effective Delivery – NP 11-201 (Delivery of Documents by Electronic Means) ..5.............. 37 Withdrawal Right Explanation & Examples (from class handout) ....... 39 Distribution can continue for 12 months from date of receipt for the preliminary prospectus..............Failed to issue receipt because they did not like the disclosed fee structure........................... there is a principal regulator (main rule for choice of PR is jurisdiction in which issuer’s head office is located)....... 37 OSA.. 36 Decision: OSC wouldn’t issue a receipt for final prospectus because success depended on FDA approval of a drug and thus too risky – company made this very clear on the face of the document that drug was not permitted in Canada and needed FDA approval – finally OSC approved – ended up getting FDA approval (but what would happen if no approval –see policy) ................................................................................... the prospectus is said to have lapsed (per s........ Increase Confidence.............. thought too much money would go to the promoter..................... 39 With national filings...................................................................4......... 39 Failure to Deliver ....4......... ........................1 Closing & Any Post-Final Amendments ...................................................................

................... Danier (SCC..........132: In determining what constitutes reasonable investigation or reasonable grounds for belief for the purposes of sections 130 and 131................. ............................... s................. or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made.................... 48 Ratio: Attempts to define level of due diligence required................. if you sign it.8......................................................................... Policy... Increase Confidence.. underwriters............g.2 3..................................... I need to have a reasonable investigation to avoid a misrepresentation ........................4......................... Issuer OR security holder: “Strict” Liability (no Due Diligence Defence......................................................................................... 40 Liability .................................................... (“présentation inexacte des faits”) .....4.................. 41 Section 1(1) Misrepresentation...........................7 3..................................................... Efficient Capital Market... 43 Ratio: Only have to report material CHANGES post-filing.............. NON-EXPERTS (e..................... Methods to attain them: Registration......... and only for expertised portions – has all defences from above available + 1) .................... remedies .................................. officers who signed prospectus......................... and the experts all may be liable for a misrepresentation in the prospectus.......48 There is an overriding obligation to the public and the capital markets............... 43 3... J&S Liability.......... 43 “misrepresentation” means.............................................................................................. tho..................... directors... A forecast can be the subject of misrepresentation... ................................1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to state material fact that is required to be stated or that is necessary to make a statement not misleading in light of circumstances in which it was made....................... 44 Defences ........ 2007)..........................................have everyone liable to give incentive to be careful.................................................................130: Defences......................................... 39 3.. 48 Escott v Barchris (USA........ Directors................... there are few penalties according to Lastman ........... (a) an untrue statement of material fact.......................................... the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case................. 157 ......1 Failure to File (likely not needed) ...... deemed .. has options i or v above) .................. 40 OSA.................................130: sets out liab......................................................... 40 Recall: s............... 45 s... 40 s.............................................. 40 Liability for Misrepresentation in a Prospectus ...................................Company......................................................................................... damages and defences for liab ................... you are liable................ Due Dilig defence for everyone except the issuer and selling securityholder – e............ P does not have to prove reliance................ ................................................ 46 Due Diligence: Standard of Reasonableness – s................................................ officers) ...g.8............................................................................................... disclosure..Penal........... 40 WHO IS LIABLE ......................................4..... 132 ....... 48 s......... but really only says what is not acceptable  It does not matter whether you can read/ understand the prospectus...................... 48 xiv Three Policies: Protect Investing Public......................................... 1968)....................130: Liability for misrepresentation in prospectus......................................................................................... 163 ..... Admin and civil sanctions HOWEVER in reality...... 45 1................................. selling security holders..........3 Damages ............... 46 3........................................................... 43 Kerr v........................................................... not material facts...8.............4.........4.............................................................8 3... Experts (Joint and Several Liability......................... 45 2....

.................................... 54 4............................................................................................ Threshold of materiality  must be considered in light of all facts available ................................................. 50 Sample Prospectus .0 UW Agreement ...................1 Policy Behind Continuous Disclosure Regime – Merger Report (3 objectives) .......4..4.................... (4) Insider Reporting (allowed to trade.................. 49 Ratio: Underwriters’ gatekeeper role therefore has obligation to challenge issuer’s disclosure and go beyond automatic reliance on what issuer presents .... 53 4.................................................1 (1): “It is fundamental that everyone investing in securities have equal access to information that may affect their investment decisions”.....2..Feit v............................................................ and why you need to take it seriouslyCourt found that sale of securities is so fundamental to our law............................................................................... that is NEVER statute-barred...... remedies .......... (5) Insider Trading (to keep things fair........................................... 53 Reporting Issuers ONLY: Only reporting issuers are subject to continuous disclosure (as defined in s...................................................................................................................... 49 Standard of due diligenceshould be ongoing................................................................................2...........................................10 3.................... (4) discourages transactions that don’t meet public scrutiny...........4 Limitation Period & Common Law Rights ...1 Application to Reporting Issuers................... Efficient Capital Market....................................................... Methods to attain them: Registration...................... 53 (1) Investor information........................................... 49 Standards for inside vs.............................................. 50 3............................... 49 YBM Magnex (OSC) ....................................................1 ......... 54 Section 1(1) of the OSA: Reporting Issuer ............4...... 50 Jones v Deacon ......................................... 53 National Policy 51-201: Disclosure Standards .............. (2) accountability technique to encourage more eff management/ deterrent to fraud............ 54 xv Three Policies: Protect Investing Public..............2.. 53 Section 1.......................................................................................................................................................................... 50 Section 25 of the OSA  so to satisfy.... but we want to know what you’re doing)........................... 50 3............................................ (2) timely disclosure (of material changes). and it forever voidable at the instance of the purchaser ................11 4.............................................................................................................................8............................................. 51 SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE ........................... 54 ANNUAL – Section 4........................................ (condemn/ commend) ....could signal takeover bid)................ (5) allows for disciplining of mgmt....................................................................... can’t do)...... 53 4.... disclosure................................................... but only to the extent of tying up lose ends.......9 Registration Requirement............................ get an underwriter ........ 49 3...........2.......... (3) Early Warning (if buying up 10%... outside directors  inside directors expected to make more complete investigation and have more extensive knowledge of facts than outside directors ......................... ................... 50 Implications: Why misrepresentations are all so scary..............................................2 4........................................1 Obligation to File Financial Statements ...................... (3) Creates equality of opportunity for all investors in the marketplace (sellers & buyers).................................... Leasco ............. Increase Confidence.........................................................................4..... 53 4..........................................................1(1) of OSA) ..............................2 PART I: Regular Disclosure .....................53 Five aspects of continuous disclosure: (1) Regular disclosure (quarterly/annually)...........................

... 56 Remember.......... British Columbia (1994.............Every company must prepare annual.................... 58 xvi Three Policies: Protect Investing Public... 54 1... 55 4.... not material facts.......................................... and 4.................................................2 Material Change vs Material Fact ............................3.......................................................................... audited comparative financial statements within 90 days of the end of the fiscal year.. failed to make a timely disclosure................3 PART II: Timely Disclosure (of changes)......................3...........................................3.... Efficient Capital Market.....75 OSA... (2) within 10 days of change.......................Section 4...............................3 4....3(1) of NI 51-102 ........................................ 56 4...........3......................................................................3...........................................................75 (1) must report a material change...........1 Materiality Standard from National Policy 51-201 .... 3) Confidential Reporting (must apply to use this.......... Part XVIII – Continuous Disclosure .4(a)(i) the filing must be completed on or before the 45th day after the end of the interim period in a non-foreign jurisdiction (must file every 3................................................ Report in one of three ways: 1) Full Reporting...............2.............2... remedies ............................................................................. 57 4........ 57 Ratio: Difference in material change vs..3................... Increase Confidence... Efficient capital markets .... or a decision to implement a change referred to above by the board or senior management who believe that confirmation by the board is probable . Methods to attain them: Registration............................................. and can only use if you meet conditions) ....... 54 2.. 1(1): Material Change = change in business operations or capital of a company that would reasonably be expected to have a significant effect on market price or value of the securities.................. (5) requirement to disclose subsequently if someone purchases ............................................... 55 POLICY Tension: Investor Information + Protection VS... (3) exception for confidentiality......................... 57 4................... 54 4....................................... must show: 1) Reporting issuer or any other issuer with a real and substantial connection to the jurisdiction whose securities are publicly traded....................... 3) Acquisition or disposal occurred between the time when a disclosure was required and before the subsequent disclosure of the material change... disclosure....... 54 An issuer must file cumulative............................................................... 57 Pezim v......... 58 1) File a press release per s...... 54 4... You must report material changes in your business...........................................................2.... (4) keep reporting every 10 days.........................................2.............2 INTERIM .................................... comparative financial reports for each interim period ending after it became a reporting issuer.......................................... 5.............. capital or operations (75(1)) ............................ and 9 months) (note: not audited) ................... 58 Complete Public Disclosure ...........................1....................1 What must be filed with a material change (3 Report Options) ...................................... NI 51-201 s.......................................................... 2) File a material change report (Form 51102F3) ............. 2) Incomplete Disclosure.................................................................................................................. 57 DANIER . 2) The P acquired or disposed of a security of the issuer.................................... 57 Also difficult to tell – whether a change in the weather and a subsequent crappy sales promotion of leather goods is a material fact or a material change (TJ found it to be a material fact) ......................................................................... 56 Royal Trust Co v Campbeau .......................................... 57 Ratio: National Policy Statements/ Sec Commissions should be given deference wrt to determining what constitutes a material change ..............1 Statutory Provision: OSA...... material fact (example) only have to disclose material changes....... SCC) ............................... 56 s........ 55 To bring action for Failure by an issuer to make timely disclosure............

.................. 60 Purpose of Early Warning: potential sign of a takeover bid where people will offer premiums to share price................................................... per s................................... .............................................. 62 OSA Section 107 – Insider Reporting .........5................4.............. only part of the material change is not disclosed.......... Efficient Capital Market.......................................... except leave out a fact and persuade the commission (via report) that a particular fact should not be disclosed.......................................................2 4.......... 62 4..4............. 58 Do not have to follow usual procedure of disclosing material change (per s............................................................................... Increase Confidence.......................................................... 58 4........... Methods to attain them: Registration...........3.............................3 NI 55-104 Insider Reporting Requirements (s...... so that the market is aware of what is going on...........7.......2 4...1(1)) if......102....2 & s..............3..............................4 4...........5 STATUTORY PROVISIONS ...................... Prof has never seen this used..................................................3) & Exemptions AND Form 55-102F2 – Insider Reporting ..............5............... 60 4..................................... This is the same......... Here...3... disclosure..................................................4....................................................................................................................................... provide fullest poss knowledge so that investor confidence is maintained (want everyone to play) ..........2..............1 4.......................... Do you want to buy more shares? If yes wait one business day before buying more (s.....................5..........4..... 63 POLICY: maintain integrity of capital markets..2................................................... together with what you already own........................................................ they have an obligation to say so and what their intention is........................................ and the reporting issuer immediately files Form 51102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure........ 58 s........2..............1 – Early Warning ...... remedies ......... 60 PART III: Early Warning .......6 PART V: Insider Trading ............1 4................................................. 7......1 – 10% Rule and 2% Rule.............. 61 PART IV: Insider Reporting .............................1 STEPS: .............................................6.......1(1) and (2) of National Instrument 51-102: Material Change Reports...................3 Confidential Disclosure / Reporting ...................2 Incomplete Public Disclosure ..........4 Best Practices Re: Disclosure (per NP 51-201) .......7............... Have you bought shares that.....................4............3.................................. 63 xvii Three Policies: Protect Investing Public..................................... 60 OSA S...... need escrow arrangements with an IPO so they can’t sell right away .................. 61 POLICY: we actually want insiders to have skin in the game (e. 63 4..........................................3.............9 without disclosure)? If yes (102....................... 62 STATUTORY PROVISIONS ................... 63 4..........2 Analysis: When do insider reporting rules apply? ...............................................3... 60 4...............g.................102.............3......1(3)) ..... .............5...............................................................1(2) it would be (a) unduly detrimental or (b) as a right.............2 4..................(61(2)(g) – director can refuse to issue receipt) .................................................. 63 4..............1 Policy Discussion about Insider Trading / Tipping Prohibition ...................2.................................................................. 58 4.........5.......3.................................................... 63 TWO PARTS: (1) Trading: You cannot sell with insider information and (2) Tipping: you cannot tell anyone else about that information .................................................... If someone acquires a certain percent of the shares of a company.................1(1)) ................... 58 Still Form 51-102F3..... 60 1................... put you at an ownership threshold of 10% (you can trade up to 9..................... 60 2.............1 4....2................................. 62 OSA Section 1(1) Definitions: Insider ................ 60 OSC RULE 62-504: Section 7..

.................................... and you’re guilty of tipping....................2 4.........6.......................... 65 3....................................................................................................................................................................... 67 Info must be effectively disclosed: Before insiders may act on material information......................6..........................................................6....... Increase Confidence........................... CampbeauChanges v. 67 Royal Trust Co v......................................................................................3 4............ 65 2.............. it was a material fact......................... So basically.............................................................. Tipping..............6............ Steps ............4...................... 64 Are you a person or company in a special relationship with a reporting issuer? ............................................................................................. b/c the bid wouldn’t go ahead  today.......................................2 1......... 65 Insider Trading (OSA): s.................76(1) .....1 1................................... 64 Are you trading (buying/selling)?.............................. 67 Question of fact... 64 4............................... 65 4........ Did you share a material fact or change that has not been generally disclosed with anyone else not in the ordinary course of business? ................................... 64 Trading ............................................. you cannot disclose and trade on the information one minute later............................................................ the Director told other SHs not to tender.........................................3............................6.......................................................... and in that case........ 67 In this situation................. ... 64 3............. facts: tipping covers both ..... If you are in a special relationship and traded with knowledge of a material fact OR change (covers both!) that has not been generally disclosed....... even though they decided that knowing a major SH wouldn’t tender their shares was not a material change.......... 67 4.............................................3..................... 2....................... 65 OSA – Section 76 – Trading Where Undisclosed Change/Tipping ................ Are you doing so with knowledge of a material fact OR change (covers both!) that has not been generally disclosed?..................4 Meaning of Generally Disclosed (Defence) ........................ 64 4............................ disclosure............................... remedies ...................... 65 Are you a person or company in a special relationship with a reporting issuer? If not… ........................................... must be effectively disclosed in manner to ensure its availability to investing public..............76(2) +(3)) ............................................................................... 67 76(2) and (3): offence for reporting issuer or someone in a special relationship with reporting issuer or any person proposing to make takeover bid  prohibited from disclosing or giving other people information with respect to a material fact/change that has not been generally disclosed except in the necessary course of business ............................onus on D (accused of insider trading) to show you believe it was generally disclosed ...... 68 National Sea ............... Methods to attain them: Registration.................................. he’d be dead with these rules (due to tipping regs).......................... Did you learn information from someone that you knew or ought to have known was in a special relationship? (76(5)(e) – puts you in a special relationship) ............................................................... 67 76(1): it is an offence for a person or a company in a special relationship with reporting issuer to purchase or sell securities with knowledge of a material fact or material change that has not been generally disclosed .................................... 68 xviii Three Policies: Protect Investing Public.. Efficient Capital Market..................................................................................................................2 Statutory Provisions (OSA) .........................................................................3............................3 Tipping (OSA s....................... 67 4...........................1 4........................ 67 Texas Gulf ......... Telling people not or that they don’t have to tender to protect your job is not in the necessary course of business..... do you have a valid defence? (175 of regs) ...........2...............6................................................6.......2..6.................................

..........6 To fulfill legally binding agreement that happened before material info was known (s............ The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/ complexity of the info (generally................................ 71 Tipping: The Act also provides for an action for damages against a person who informed another of the inside information.............6.......................1 Actions.......... 71 Under s................................. Increase Confidence.................................. Sanctions & Penalties for Insider Trading .........1 4..........6.......... 72 SEGMENT 3: THE CLOSED SYSTEM: ..............................5.....1 Criminal Code prohibits trading on basis of material info concerning an issuer that has not been generally disclosed (similar to OSA s............. even if you knew .. 68 4..................5............................ 68 “Protecting Integrity of the Info” (s...................................................................................... don’t have to breach contract (Policy rationale no uneven playing field \– not making decisions w/ knowledge) .......................................6...................Ratio: Two-part test for when you can trade as an insider: 1...76) ...................................................................................... s................................. and you gave NO advice...................................................... business combination or acquisition......3 4.. 71 The Act provides for an action for damages against a person trading on inside information by the person with whom the trade was made...6...............6 4............................... you’re not guilty of insider trading ........................ Must be disseminated to the trading public...172((a) of Regs) ........ ........................ ................... 71 Penal sanctions – CRIMINAL ........... 70 4.....0 Administrative sanctions ...........................5............. 71 4............7 Trades between 2 People Who Both Know the Info (s..........................................6.................6....2 Defences to Insider Trading / Tipping ................ 68 “Make Use of” Defence – no longer applicable ................................................6. 71 Fine b/c both have same info...................2 Civil Actions ................... 71 4....6..... then you subsequently get knowledge............. finally where the person reasonably believed the information had been generally disclosed..........................................6.................................................................... .......................3 5... disclosure....... 382..........................4 Defence in Practice – Law Firms ................ 70 Trading as an agent & you’ve given no advice (s. Methods to attain them: Registration..........................................................175(2)(c) of regs) 71 Defence b/c entered into legally binding contract BEFORE You had knowledge. not guilty (only if reckless) .5.......... wait one full trading day after release of info).............. ............................................ Efficient Capital Market..................................................175... not guilty of insider trading.........................................6..........5.............. 72 4.......................................6................ 69 REGULATIONS......... Playing field still level....... 70 If automatic dividend reinvestment plan.......................................................... 71 4......... and 2.............175 of Regs) ...............................................................................5.................... remedies ................ 71 Defenceinformation was given in the necessary course of business of the reporting issuer...........5 Automatic Investment Plan (175(2)(b) of Regs) ....... 70 If you trade as AGENT for another person pursuant to unsolicited order..................... 70 4............6...........................................................6................. 69 If you take all reasonable precautions to protect integrity of info and someone else trades....................................6.........................175(5) of Regs) .......5 4.......6....................................................................................5...... no one has advantage over someone else.......................................... 69 4...........73 xix Three Policies: Protect Investing Public................... a defence where the giving of the information is necessary to effect the takeover......

..... 77 SEC v....................... 73 All exemptions focus on :(1) identity of purchaser........................................................1........ 76 R v....................4 of NI 45-106) .......................................................... Ralston Purina – “Need to know” test . 74 5..2 5...1 5.. 77 5....................................................................................... Efficient Capital Market...1 5........................................... if they have common bonds................................2........... without prospectus or proper reliance on private placement exemption ....................................................3 Exemptions based on wealth/ sophistication of purchaser ............................................................ 73 Adv: (1) Speed (No Prior Regulatory Review..............1......... disclosure......................................... 73 General Rule ............ Methods to attain them: Registration................................................................................ (2) inherently safe securities.................................. Pipegrass (AB CA) – Common Bonds Test ........ If it’s a distribution.......................... 73 *Exemptions found in NI 45-106 OR Rule 45-501 ... 77 5.........................................................3........................ 4) Isolated trades (isolated distrib by issuer)...............1 Private Placement & Exemptions .................................... 73 Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor protection)................... 77 Need to know test (Test of whether you’re selling to “the public” -in which case........................................................................1........... 73 Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor protection and efficient capital markets – this is at least what they’re TRYING to do............................... founder/control person/ family).. 74 4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited investor..........................................3......1........................... ............. 2) Limited offering exemptions (govt incentive sec....................... but still highly regulated!!)................................... 74 Limited Offering Exemption .......................... ................................................3............................................................................... even if there are inconsistencies ........ (4) another superior policy objectives ......... 73 General rule: no trading in security............. TEST: Persons b/c of their sophistication or relationship with company who don’t need protection of prospectus are not members of the public......................... Focus of inquiry is NEED of offerees for protection afforded by the act................... then not the public ....................... unless you are registered.......................... 77 Distribution must be an isolated one that is not made (a) in the course of continued and successive transactions of a like nature or (b) by a person whose usual business is trading in securities.......................................................... 77 IS A FINDING OF FACT  the court must see if the sale transcended sales beyond private concern .....................4 Isolated Trades (s... (3) Info already available............... Increase Confidence......1.............5 Discretionary Ruling (74(1)) – not going to happen ...1..... or persons having common bonds of interest or associations.............3 The Private Placement Exemptions .1......30 of NI 45-106)........................3....... 73 5.................... like with prospectus...................................... 75 Trades in Securities of Private Companies (s.................. 3) trades in sec of private companies..........................................................2 Advantages & Objectives of Private Placement .. can’t use priv issuer exemption).. they are considered to be the public... 77 COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused......... remedies .........3........ (2) Confidentiality (almost always more confidential than prospectus) ........................ 73 5......................... min amount).....5............................2........................ 77 Exemption order (1) Upon the application of an interested person or company.....................................................1.......... the Commission may make the following rulings if the Commission is satisfied that to do so would not be prejudicial to the xx Three Policies: Protect Investing Public.....................................................................

................................................................. 78 Rule 14-501 Definitions (s.......................................................... 78 5.............1 of OSA) .... 80 2) Rely on another private placement exemption: Sell to Another Purchaser Pursuant to Another Exemption................ 78 OSC RULE 45-501.. same as s..........................4..130..........................................3 Liability under Offering Memorandum (s..................public interest: 1....................... 78 5........................................ have to be registered ............................................1..................................1.......... 2) Resale rules for control persons (not connected to above rules) ........................................................................................130.................................................. A ruling that any trade............. you must be registered.......................... (2) can impose conditions ............1 Ways of Reselling (Generally) .........................................1.1(2)) (also see 5....1..................... security.....3: you don’t have to deliver any document to AIs in connection with the securities............ 78 5.................................1 NI 31-103 – Registration Requirements.......................................................1............ 80 Resale Rules for Non-Control Persons ..... 78 OSC RULE 45-501...............................................2 Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.............................................................................3) & Deliver (s.............. (2) Defence: not liable if purchaser knew of misrep ......................................................................................... but also omission of MF) ............................6(2) of CP 45-501 for what isn’t one) ......................... If in business of trading securities.... person or company is not subject to section 53.......1 1) If you can get the company to issue a prospectus and offer to sell YOUR securities pursuant to that prospectus (secondary offering) ........................ 77 5........................................... the purchaser has the following rights: 1) right of actions for damages against issuer and selling securityholder........................ must contain a contractual right of action saying you can sue us if there’s a misrepresentation (not only misstatement of material fact....................1..........................1..5 Registration Requirement for Private Placement Exemptions ..1.. 80 Def of Distribution is Important Here .........2................. 79 1) Resale rule for non-control persons: (a) all exemptions other than private issuer and (b) resale rules for those acquiring sec through private issuer exemption.................2............ 79 Goals achieved by resale rules: Preventing back-door underwriting .......................................... Methods to attain them: Registration.....................5... A ruling that any person or company is not subject to section 25.............. Efficient Capital Market.........................1 Offering Memorandum (and problems with it) .......................... s......................4) for rescission ....................... 79 Business Trigger Test: if you are a market participant in the business of trading in securities.......2 Exemption order from OSC ................1 (1) Liability for misrepresentation in offering memorandum where a misrep............4: Delivery of OMIf you do deliver it have to send copy of doc to securities commission w/In 10 days of date of trade ......5............. 77 What is an offering memorandum? .....................5.......................................... 80 3) 4) 5........................... 80 Satisfy Resale Rules – NI 45-102 ........4.... intended trade......5.............................................. 79 General Rule: 2 Components of Resale Rules............................................... 79 5..................................2 Resale Rules ............................................................. 78 s...........................................4 5..4....................1......................... 1(1)............ but if you CHOOSE to issue them an offering memorandum...... 81 xxi Three Policies: Protect Investing Public.............. Increase Confidence...........5........ disclosure.....................2...2..................................................... 79 5............................... 80 5................................................................ 2.... 79 5.................. Exemptions and Ongoing Registrant Obligations (Also section 25 of the OSA) ....2 5..............1(2)) & OSA (s.................... 2) right of rescission against person/ company......................... remedies ......1........ s...........................................

81 1) Firstly...........................................................2........... remedies .2..............2 Resale Rules for a Non-Control Person who Acquired Sec through the Private Issuer Exemption 82 Lastman’s Summary of Rules: ............................... 81 2) SECONDLY.................................. Methods to attain them: Registration.................................................................3..............1 Resale Rules for Control Persons (Separate Regime) ...................................... Exemptions Except Private Issuer Exemption) .........2. 81 NI 45-102: First Trades...................4 5.....................2....... Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade........... not freely tradeable and will have to give a discount for that reason)......... Nova Scotia.....................5 6........................... 81 Lastman’s Summary of Applicable Rules (Non-Control Persons.............................................. 87 xxii Three Policies: Protect Investing Public............................. 84 (e) The control person sells pursuant to the advance notice route ...................................................................... but an exemption  Resale Rules for All Exemptions EXCEPT the “Private Issuer” Exemption ........87 Reasons for Takeover Bids ........................................................................................................ (c) No market manipulation............... ...................................................2.... 1(1) of OSA: Person who alone or in combination with others holds a sufficient # of securities to MATERIALLY AFFECT CONTROL of the company (rebuttable presumption & pure Q of fact – bright-line rule) ... (the re-sell) (b) The trade is not a control distribution.....5......................... ................................................... 85 SEGMENT 4: CONTROL TRANSACTIONS ....... UNLESS You satisfy the rules) ... (d) No extraordinary commission or consideration is paid in respect of the trade.. 85 Resale Rules Class Examples (Handout)....... as long as you are NOT a control person ......... 84 (b) An exemption order is obtained from the OSC (very rare!)..............2........................2..... 83 5.......3... ... 83 5...2.... or ............ Manitoba...................................0 6...... Increase Confidence................ 83 Section 1(1) of the OSA – Control Person Definition – rebuttable.............2 Five Ways a Control Person Can Sell Stock (Lastman Summary) ............................................... 81 3) Resale Rules for All Exemptions Except the Private Issuer Exemption .. Restricted Period and Seasoning Period ............................... if NOT purchased by prospectus...........6 of NI 45-102: if you bought securities pursuant to a PPE.......................................3 5................................................................................................................................. disclosure......5 and 2.............. 84 (d) The control person sells to another control person (also giving rise to resale rules...................... Ontario.................... 84 (a) The control person qualifies a prospectus for the sale of the subject securities ......................................2............................ 84 (c) The control person sells pursuant to another private placement exemption................................ 81 2. 83 (a) The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta................. 83 Definition of Control Person: S.... 82 5.......3 5..........................3............... 85 No tacking with control persons ........... 84 5.......1 Resale rules for non-control person who acquired sec through a private placement exemption other than the private issuer exemption .......................................................... and (e) No grounds to believe issuer is in default................3................. can sell shares that you bought pursuant to prospectus (as opposed to an exemption)............ British Columbia. Efficient Capital Market............3....... can sell them based on these rules (will be deemed a distribution...............................................1 Advance Notice Route..2............................ pure ? of fact .........................................

............................................. 88 2 Kinds of bids: 1) Exempt takeover bids......................................................... the offer price increased)............................................ Methods to attain them: Registration...... this must be communicated to all shareholders who are given an extra 10 days to tender their shares................... 89 Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking them up........... review it and decide whether they want to sell (“tender”)............ the shares are taken-up pro-rata and not first come............. 2) vendor takeover bids . 3) Force mgmt............... ............. 2) Time (i. together with the shares already owned by the purchaser. 87 6............................ 89 SHs offered same consideration + no collateral agreements: All shareholders must be offered the same consideration and no collateral agreements may be entered into............for SH’s to think about it. .............................. 87 Objective of protecting shareholders of offeree company is manifested in 3 ways in carrying out t/o bid rules: 1) Information (inform investment decisions)................................................................... a bid must be open for acceptance for at least 35 days.......................................................................................................... 89 Takeover bid circular: communicates details to shareholders – will describe the offer (the price.......... which are sent by target to all SHs .. generally 20%........................ will put the purchaser’s shareholdings in the target over a certain threshold...................................... 2) Create synergies..e. numner of shares and any conditions) and is sent to all SHs.......1............ 89 xxiii Three Policies: Protect Investing Public.......1............................................ 87 1) Move assets to their most desired uses... ..............................1............................. ... legislators and regulators have decided that takeover bids are a good thing for society If you’re not a reporting issuer in province of Ontario........ 3) creating monopolies.. disclosure.................................... 87 Kimber Report Rationale: To protect investors of offeree company............... Increase Confidence..................................... 89 Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular.........2 Non-Socially Useful Reasons for Takeover Bids ..... .................................. 4) tax advantages ................................. not subject to takeover bid rules .. 87 1) Premium for acquirer....... 89 Director’s Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons.................................... to be efficient ........ 89 Change in Terms of Offer – Extension of Tendering: If a term of the offer is changed (i............................................................... 87 6................1 of Securities Act........PUBLIC POLICY: on the balance of things....... . If you’re not a reporting issuer in province of Ontario.............1 Socially Useful Reasons for Takeover Bids ..................................................................................to allow for an auction)..3 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them ...............................2 Overview of How Takeover Bids Work...... remedies ............................... 2) empire building... 3) Equality ... 88 Dealt with in Sections 89-105.................... not subject to takeover bid rules ..............to get opinion from mgmt....... iii............ a takeover bid is the acquisition of shares of a company (the “target”) which............... a shareholder can withdraw their shares if not paid for within 3 business days after having been taken up........... 88 Takover Bid: Generally speaking............................. ........ Efficient Capital Market............ ii....... 89 SH right of withdrawal: The offeror can’t take-up the tendered shares for 35 days and the shareholder can withdraw the shares at any time before the securities are taken up............................................................................. first serve........................... 89 Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than this number is tendered... 87 6............. 88 6..............

..............................................................................................................1.................................................................. disclosure...........2 6.......3...3.............................. give management an opportunity to give their opinion............ 90 6.................2 6....... s....... 95 Pro Rata (Equality) .......... ....................................... at market price...........1 6............ 92 6...................................................... 90 Exceptions to having to issue t/o bid circular: 1) 100...1......................................................... and you don’t pay more than 115% of market price (realistically................................................................ Efficient Capital Market...............................................................2...................................................... If you want to own or control 20% or more of the securities of a reporting issuer..................................1 6................................ ..........3 6...............................................2.........3....................................2 Section 94....... 92 EXAMPLE OF NO SMART GUYS WITH TAKEOVERS  if you’re going to buy a public company/gain control of it through a private company.................1......................................................................2 ................2 Deemed Ownership ......2 6............ s............ options) .............................................. 95 6.........1 6...........................Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days from the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid integration)............ 92 Sample problems – “Sunlor” ...3..2.................................3..1(1) and Form 62-504F1: Making a Formal Bid .............. Increase Confidence.................................2 s....................................................................1 ............................................ Methods to attain them: Registration........ 92 ................ 94 6.............................................3.........................1..............2.........................89(1) ........................... 92 You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover bid (i.............2.. 92 Russell Holdings (Treats) ........ 2) 100 of OSA: can buy 5% on the open market every 12 months..........3..........1 6................................... 96 xxiv Three Policies: Protect Investing Public......................................1 6...... you have to issue a takeover bid circular .............................. 92 Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one ......... 94 Takeover Bid Circular (Information) ..2.............. 96 Section 97....... 93 Mechanics of a Vendor Takeover Bid....................3 Sections 89(5) and 90(1) ............................e..................2: Consideration ........................... 95 Minimum Period of Bid (Time) ....................................2..1 6...... except pursuant to another circular bid or the exceptions ..............................3 What is a takeover bid? ..................................................1 of OSA: can buy whatever as long as it’s from 5 people or less.................. 92 6.............................................. and give other bidders the chance/right to mount a competing bid (auction) ......................Acquisitions During a Bid By an Acquiror................ you can only do so by takeover bid circular (unless an exemption is available)................. 94 Legislative goal met ...... remedies 6.......................................................................2............................... 94 General Rule: If I what I own + what I buy is over 20................2................3.........102....... can probably only use this once.............. can’t do it without a takeover bid.............. 90 OSA.............................. 95 Legislative Goal Met ....................3.................2................................................................1.....................................2.................................................................. 90 Post-Bid Integration Rules: An offeror can’t purchase shares of the target for 20 business days after the termination of a bid.............................. 90 OSA: Part XX: Takeover Bids and Issuer Bids.......... but don’t know)............ 91 Indirect Acquisition – s. 95 The takeover bid circular must be open for at least 35 clear calendar days in order to give people time to assess................98: Bid Mechanics ..

....1 6...... OR b) Once you’ve taken them up..........3.................3...........5....................... 96 Section 98....................... 98 Legislative Goal Met . OR c) For securities deposited AFTER the date on which the offeror first takes them up have to be paid for by the offeror within 10 days after deposit ........................................... 99 May apply to the OSC to ask them if a certain agreement is okay (s......................7.....................3...s...............4..........1 Section 2.3.......3: Change in Information ................................................ 99 Legislative Goal Met................................................................................. Section 2.............. 97 Legislative Goal Met ...3 6... all holders of the same class of securities shall be offered identical consideration....................... 96 Section 94. 97 Conditions (just investor protection) ....................................................1 6...................4....4...........................................4 6............................................................ 98 Legislative Goal Met ..........................................................4 Post-Bid: Directors’ Circular (Response).........3............................................................... you have 3 days....1 6.........5.......................................................................1.....6 Legislative Goal Met .3.....................1: Withdrawal of securities ..........................104(2)) (Why do you need it? *diff of INTENTION): (a) are you inducing that person to sell you their stock? (not okay) OR (b) do you need them and their expertise or are doing it for a legitimate business purpose that had nothing to do with whether or not that person owned shares? (okay) .................. 97 Legislative Goal Met ................................................... 96 Withdrawal and Change of Info or Variation in Terms (time and info) ..........................4 6......................... 98 6.......................................................2 6........5..................................2 6................................................3.....3....................................................................2 6...1(1) of the OSA says you can’t enter into any agreement to enter shares while bid is outstanding (in a private agreement) ...........2(1) If a formal bid is made................................................................ 98 No collateral agreements .........1 However.....3: Financing Arrangements .............................................................2 6..............................2 Section 98.........................................3.. Methods to attain them: Registration........................................................................... 98 Payment for Securities (investor protection generally) .................................................................................... 96 Section 94...............4............1 ...........................................1(2) of Rule 62-504 (Take Over Bids and Issuer Bids) says I can enter into a lock-up agreement with you  whereby the shareholder and offeror making bid will contract to effect that shareholder will tender his shares to a formal TOB made by the offeror made in accordance with proper terms/conditions of her bid................................................................3..................4: Variation of Terms....... 96 6.....3...................................................3............7.................................................................97.6...1 6................................ 100 xxv Three Policies: Protect Investing Public......3......3......................................4............................ .3: Obligation to Take Up and Pay for Deposited Securities .......... 98 Section 97.... 97 Section 97................................. 99 6..... remedies ....................................... disclosure.............. 99 Section 95: Offeree Issuer’s Obligations ............4......... 98 Test for whether or not collateral agreements are ok ..3............................................5 6........ Efficient Capital Market...................2 6..5 Pre & Post-Bid Integration ................ 100 6...........................................3.......................................................... 100 6..............1(2) of Rule 62-504 .. 100 Lock-up Agreements/ Tendering Agreements (Allowed) .................................................... 100 93.............................6....................1 6......................................7 6................................. 98 Earliest of: a) You have to take up and pay for them within 10 days after expiry of the bid...............5.............................. 100 6........... Increase Confidence........

6.5.1.2 6.5.1.3

Section 93.1: Restrictions on acquisitions during formal take-over bid .................................... 101 OSC RULE 62-504: TAKE OVER BIDS AND ISSUER BIDS .................................................... 101

Per s.2.1(2): Subsection 93.1(1) of the Act does not apply to an agreement between a security holder and the offeror to the effect that the security holder will, in accordance with the terms and conditions of a formal take-over bid, deposit the security holder’s securities under the bid. .............................. 101 6.5.1.4 6.5.2 6.5.2.1 6.5.2.2 6.5.3 6.5.3.1 6.6 Legislative goal is STILL met ..................................................................................................... 101 Pre-Bid Integration ...................................................................................................................... 101 Section 93.2(1): Restrictions on Acquisitions Before Formal Take-Over Bid ........................... 102 Legislative Goal Met .................................................................................................................. 102 Post-Bid Integration ..................................................................................................................... 102 Section 93.3 ................................................................................................................................ 102

Exemption from Pre-Bid and Post-Bid Restrictions – EXEMPT Takeover Bids! ......................... 102 Private Agreement Exemption (s.100.1(1) of OSA, most important) ...................................... 103 S.100 – Normal Course Exemption – Don’t Exceed 5% in 12 Months .................................... 103

6.6.1 6.6.2 6.7

Voting & Non-Voting Shares ............................................................................................................... 103 Canadian Tire (1986, OSC) .................................................................................................................... 103 Ratio: Coattail provision, despite not countering statute or case law, was not allowed to go through as it would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public interest). Found that collateral agreement rule only applies in the context of a t/o bid (since this was not a takeover bid, collateral agreements did not apply) .................................................................... 104

6.8 Director’s Duties and Responsibilities in a Takeover Bid Situation – Defensive Tactics to Buy Time 104 Policy for defensive: you can do w/e you want to fight bid, but if you deprive SH of choice, you’re dead (prob b/c conflict of interest between directors interests and SH’s interests). It’s good to have them, because you maximize value of the enterprise. ........................................................................ 104 6.8.1 6.8.1.1 6.8.1.2 6.8.2 Fiduciary Duty in the Context of Takeover Bid ........................................................................ 104 NP 62-202: Tactics that will come under scrutiny ..................................................................... 105 Duty to Maximize SH Value........................................................................................................ 105 Examples of Defensive Tactics..................................................................................................... 105 Example of defensive tactics – bought a pig farm to make company unattractive to bidder (too extreme, but case was before sec law) ................................................................................................ 105 Labatts (just an example)........................................................................................................................ 105 Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab); after this case brought in law re: defensive tactics (however, board did it’s job to buy time and eventual had a preferable bidder) ...................................................................................................................... 106 Max Milk and Beckers ........................................................................................................................... 106 xxvi
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

Union Enterprise (Unicorp Tender) (Example) ...................................................................................... 105

Example of attempt by Max Milk to find a white knight ................................................................... 106 6.8.2.1 Due Diligence – can restrict access ........................................................................................... 106

Sun Media and TorStar ........................................................................................................................... 106 Example where info was not made available to bidder. Also in this case, complained to competition bureau. Worked out since delay led to higher bid. ............................................................................. 106 Second Cup............................................................................................................................................. 106 Example of poison pill- not actually used, just threatened to give opp to talk ................................... 106 6.8.2.2 6.8.2.3 6.8.3 6.8.3.1 Golden Parachutes – all legal. ................................................................................................... 107 Poison Pills................................................................................................................................. 107 Defensive Tactic Rules - NP 62-202............................................................................................ 107 NP 62-202................................................................................................................................... 107

Main Principles:1) takeover bids are a good thing; 2) primary objective of t/o bid legislation is protection of bona fide interests of SHs of target company; 3) second purpose/ objective: create a reg framework where bids can happen in an open and even-handed manner; 4) Regulators believe it is inappropriate to specify a code of conduct for directors b/c that code runs risk of being insuff in some cases and excessive in others; 5) SH approval desirable (BUT this is unrealistic); 6) administrators believe that unrestricted options produce most desirable results in t/o bids and are reluctant to intervene in contested bids; 9) although auctions are best and don’t want to intervene, administrator will punish you if your action is to deprive SHs of opp/ rt to respond to a bid; 10) cannot come to administrator to get prior approval for defensive tactic...................................................................... 107 6.8.3.2 Case Law .................................................................................................................................... 108 Teck Corp v Miller (BC SC) – Best Interests Test ................................................................................. 108 Ratio: Best interests test: need to act in best interests of SH“The directors must act in good faith. Then there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the company’s interests, then there must be reasonable grounds for that believe. If there are not, that will justify a finding that the directors were actuated by an improper purpose”. ............................................................................................................................................................ 108 Producers Pipelines (Sask CA) – Proportionality Test ........................................................................... 108 Ratio: Canadian law does not conflict with the business judgment rule. ........................................... 108 In takeover situations, directors will often be in a conflict. In implementing a poison pill, the directors “must be able to establish that (a) in good faith they perceived a threat to the corporation, (b) they acted after proper investigation, and (c) the means adopted to oppose the takeover were reasonable in relationship to the threat posed” ......................................................................................................... 108

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Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

1.0 MAJOR THEMES IN THE COURSE 1.1 Three Goals of Securities Regulation 3 purposes: 1) Protection of investing public; 2) Ensuring the Efficient Operation of Canadian Capital Markets; 3) Increasing and Maintaining Public Confidence in Capital Markets / In the Persons and Institutions Operating Them Found in s.1.1 of the OSA under the purposes of the act! The purposes of the 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 Recall Danier case: The securities act is remedial legislation and is to be given a broad interpretation (Pezim). It protects investors from risks of an unregulated market, and by it assurance of fair dealing and by the promotion of the integrity and efficiency of the capital markets it enhances the pool of capital available to entrepreneurs. The act supplants the buyer beware mindset of the common law with compelled disclosure of relevant information… at the same time, recognizes burden it places on issuers and Part XV sets limits on what is required to be disclosed…(para 32) – Binnie J 1. Protection of investing public a. Should not protect public against loss, but ensure that public has knowledge needed to make a decision about the company – assurance that its losses are genuine economic losses (correct pricing via prospectus) b. Very high level consumer protection legislation 2. Ensuring the Efficient Operation of Canadian Capital Markets a. Ensure capital markets facilitate mobility and transferability of financial resources and provide facilities for continuing valuation of financial assets b. Achieved through a free and open securities market with regulator correcting for market failure i. More info prevents problem of adverse selection in the market (drive out high quality securities, leaving only low quality securities which would be a misallocation of financial resources) 3. Increasing and Maintaining Public Confidence in Capital Markets/In the Persons and Institutions Operating in Them a. Investors will be WTP more for new issues of securities in primary market if confident they will be able to sell securities fairly on secondary market (want to know its fair, you can make money!) b. With investors paying more for new issues, more savings would be channelled into investment, thereby improving allocation of financial resources (see goal #2) c. Creating confidence in market, adverse selection is overcome – of assured of accuracy of info, investors WTP more, therefore, higher qual securities more likely to survive *However, reg must not be at excessive cost (therefore, tension between protecting investing public and eff capital markets) Another theme: NO SMART GUYS and NO CERTAINTY   Certainty in almost every circumstance is a bad thing, takes away judgment  judgment is what we need to make the right decisions The Securities Act don’t care what act actually says, care what it ought to say or intended to say. Don’t care about geniuses that spend lives devising schemes to get around SA. Securities regulators or courts say you’re 1
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

and the exceptions are to provide efficient markets for securities that are considered to be very low-risk to the public. but must have info to do so  To provide info: o 1) Prospectus: comprehensive disclosure document . e. we need to give you the information that you need to make an informed investment decision 1. must make sure they have full.) via a prospectus and continuous disclosure  Note: there is an adv to being an investor in a public company the asset is easily liquidated. the company has continuing disclosure/ reporting obligations which requires the company must keep information current.1 Exceptions to the Disclosure Rule  (i) the purchaser is sufficiently sophisticated (wealthy/ well resourced). Efficient Capital Market. Increase Confidence. (Private Placement)  (ii) the information is otherwise readily available. 1.smart. 2 Three Policies: Protect Investing Public. contracts etc.g. disclosure.2. makes sure you are educated and policed  fosters confidence in the market.2 Disclosure Requirement To protect investing public. but who cares… if you’ve done something you think outsmarts securities act. risks.tells investor what they need to know to make an informed decision  Also creates a cause of action for misrepresentations and omissions in a prospectus o 2) Continuous disclosure: once a company goes public. remedies .2. they’ll shut the door on you = no smart guys. 2) Disclosure Requirement. Methods to attain them: Registration.2. 3) Remedies for Breach of 1 and 2 1. b/c they are so safe – unlikely Govt of Can will default) POLICY: This helps ensure accountability. OSA is consumer protection legislation and in order to do that. need to tell the world how many you own and your intentions) POLICY: need to protect investors.1 Registration requirement   Licence people in the business  you cannot trade in securities unless you’re licensed (underwriters) There are exceptions. 1.2. true and plain disclosure of all material facts related to the company (adv/disadv. Continuous disclosure has 4 parts:  1) Regular Financial Reporting  2) Timely Disclosure (for material issues must file press release and amendment to prospectus)  3) Insider Reporting (insiders must disclose when they buy/ sell shares to prevent insider trading)  4) Early Warning (at a certain level of ownership in shares. People will lose confidence if some whackos are selling you securities.2 Three Methods of Achieving these goals 1) Registration Requirement. or  (iii) the securities are "safe" (Canada Savings Bonds) POLICY: Need to balance the objectives of the efficiency of capital markets (would be inefficient to file a prospectus every time a company needs money) with the need to protect the public. can sell Canada Savings Bonds without registering (b/c it wouldn’t make sense in the context to register.

Methods to attain them: Registration. You sell pursuant to another private placement exemption. 4. o The Securities Act is really a policy document where intention is the most important thing. the resale by the initial investors of these securities to other investors on the secondary market is restricted and certain conditions must be satisfied prior to their resale. criminal. disclosure.2 Closed System & Resale Restrictions When securities are acquired pursuant to one of the private placement exemptions and not pursuant to a prospectus. or administrative (more detail below) Policy: investor protection and confidence in the market (fix something when it goes wrong) Now just a bunch of rules that play into one of these three objectives. You comply with the resale rules.3 General Policy of the Course For the exam: 1) Know what the rules are.3 Remedies for Breach of Registration or Disclosure Requirements If you don’t satisfy the requirements. 3 types of policy statements” o OSC Policy  info about how the Ontario Securities Commission will decide o Uniform Act  provinces of BC. Manitioba and ON o National  all of the SCs get together and say how they’re going to use their discretion   3 Three Policies: Protect Investing Public. Conditions that must be satisfied prior to resale: 1.1. 3. You issue a prospectus. Increase Confidence. there are remedies for the investor against you for breaches of these obligations  Remedies can be civil. remedies .2. Alberta. 2. or You receive an exempting order from the Ontario Securities Commission Policy: Transparency is key to the process 1. o The rules that the SA sets out are intended to be appropriate in the circumstances in which they are employed. 2) Look at why they exist (why does the law regulate these activities? What objectives is the rule trying to establish?). Note: will also look at take-over bids  Overall protect shareholders of target company and make sure there is a level playing field o Make sure they have enough info to make an investment decision o Give them suff time to make that decision o Protect against company doing bad things 1. 3) THEN Challenge the rules  Always keep in mind that he wants you to answer WHY it is that you’re doing what you’re doing  WHY does the law regulate this particular activity? (will mostly have to do with achieving the three above goals/dealing with tensions among those goals)  Securities reg is nothing more than sophisticated consumer protection legislation with the consumer being investors.2. Saskatchewan. Efficient Capital Market.2.

e. Liquidation right: entitled to share pro rata in any proceeds of liquidation (to the extent proceeds remain after satisfaction of other claims) o Preferred Shares: given preference wrt distrib of dividends and proceeds of liquidation (usually non-voting).3.g. with security interest – property and/or adherence to ratio tests that may indicate risk of bankruptcy). ST accounts payable). how company will be managed etc. Redemption/Call provision: if shares are redeemable by the company (to facilitate financing of company at specified price) iv. bonds (evidence of indebtedness secured by an asset of borrower). Increase Confidence. Participating: participate in div beyond the specified preferred amount (preferred amount + included in common share amount left over) iii. two parts together constituting “open market in capital” 4 Three Policies: Protect Investing Public.g. Efficient Capital Market. amount unpaid carries over to the next year (usually preferred shares are cumulative) ii.0 INTRODUCTORY CONCEPTS 2. the launching of a business venture/ expanding existing venture (private company goes public becomes a reporting issuer) o To purchase assets that will be used to produce goods/services for which there is a demand sufficient to generate profits comparable to that of other investment opportunities of similar risk. 2. disclosure.1 Open Market in Capital Primary market (sale of securities to investors) and secondary market (investors exchange sec in return for payment from another invested) together permits continued marketability / liquidity of shares  Crucial term.g. Retraction rights: permits shareholder to tender share to co and co has to buy it back at specified price  2.2.1 Purpose of Selling Securities  Securities are primarily sold to raise funds for investment. short-term bank loan (e. commercial paper (obligation to pay specified amount at specified date).g. Cumulative: if div are not declared or are not suff to pay full amount of annual preferred div on preferred shares. election of directors. remedies . line of credit). offering interest payments and principal repayment o Includes trade credit (e.) ii. May carry the following special features: i. longterm bank loan (e. Methods to attain them: Registration. Right to vote (on important matters .3 Securities Trading 2. debenture (unsecured evidence of indebtedness) o Other characteristics of bonds/ debentures:  Call feature: allows borrower to repurchase bond after specified date for specified price (usually prem to face amount/ par value)  Sinking fund: indenture may provide for a fund built up each year to redeem some portion of bonds before maturity or to meet the obligations to pay at maturity  Convertible: right to convert bonds into shares  Warrant: right to buy securities from issuer for exercise/striking price during a specified period Equity: rights to share in the distribution of the profits and the proceeds remaining after the sale of the assets of the business and payment of amounts borrowed. Right to dividends (not obligation – corp can decide to declare dividends to which each common share has a right a share in $ or in stocks where there is a stock dividend) iii.2 Types of Securities Two main types of securities  Debt: Funds can be borrowed. o Common Shares: most frequent bundle of rights in a company that includes the following rights i.e.g.

disclosure.g. o Short selling: Investor sells securities that he/she doesn’t own and takes on a contractual obligation to supply the shares in return for payment by the person purchasing the securities. Methods to attain them: Registration. The money flows through from investors to the company (have benefit of liquidity) Secondary market: investors exchange securities in return for payment from another invested (issuer not generally involved)  Permits continued marketability/ liquidity of shares: For investors to realize on their investment. 2) nature of investment – longer time horizons. they must be able to sell among themselves on various exchanges (e. institutional investors buying or selling in large volumes Over-the-Counter Trades: when issuers are unable to meeting listing requirements of a formal stock exchange they may trade over-the-counter. A stock exchange facilitates both elements.3. 3) held in large Q by institutional investors Other trades: o Alternative trading systems: less restrictive listing requirements. Efficient Capital Market. Canadian Depository for Securities Ltd – CDS) Computerized stock exchanges and trading: Increases transaction speed AND further facilitates communications. Payment would occur and the ownership would change hands (bearer form – less used to prevent theft. brokers would record in their books who the beneficial owners of securities were) Nominee owners: as brokers began to hold too many securities. remedies . Issuers want securities to be traded on exchange b/c it increases their securities’ value and therefore. o Stock exchange: Trading involves 1) communication between buyer and seller. there would be an offer.o o Primary market: sale of securities to investors. and largely automated o Margin trading: Broker loans funds to clients to purchase securities  Restrictions exist regarding 1) the % that the client must pay and 2) to maintain a particular % if the value of the security changes. Buyers can find sellers and sellers can find buyers (brokers meet in a specified place – either real or online) ii. or registered form with name of owner on certificate and on books of company with endorsements) o o o o o Clearing agency: created to simplify transfers between brokers by tracking obligations and notifying brokers of their net obligation Broker inventories: reduce amount of issuances and re-issuances (instead of performing full transfer for every transaction.2 Private Trades    Private trade: Trades without using brokers or a stock exchange – take place directly between the buyer and the seller Upstairs market: involves trades by large.  Broker can facilitate this trade by loaning the investor the securities. TSX)  Simplifications for trading o Brokers: Takes orders from buyers/sellers. Increase Confidence. 2) exchange upon agreement.g.  5 Three Policies: Protect Investing Public. acceptance and consideration (money to be paid in return for shares). locates buyers/sellers for clients and executes trades on behalf of clients. nominee owners name and securities registered to them – bookkeeping entries keep track of who the beneficial owners are Securities Depository corporations: represent a single nominee owner (and sometimes performe clearing role (e. 2. When asking and bid price correspond. with the assistance of a broker o used for bonds/debentures too b/c 1) large denominations. the amount of capital they can raise i. saving the client time/money and increasing the likelihood that security will be sold (for sellers).

regs and rules i. i. etc. 1970 (led to “closed system” statute with emphasis on ongoing disclosure for the purposes of secondary market trading) o Interprovincial cooperation has also been an important part of securities reg. Bulletins. if commission makes material changes to rule must publish amended rule and give further period for comment. Methods to attain them: Registration. beginning in mid 19th century (ON first jurisdiction to adopt English Directors Liability Act in 1891. Provincial and Territorial Securities Acts b. federal law o sometimes prov securities laws do not apply to federal companies Federal government could justify regulating securities under the trade and commerce power (may be necessary due to globalization)  2. NOTE: Major investors in Canadian Securities Market include banks.1 Division of power  Provinces have enacted securities acts under their power to legislate wrt “property and civil rights”includes dealings in prop. 2. credit unions/caisses populaire. Policy statements: issued by securities administrators in Can and indicate how they interpret the legislation. National and multi-lateral instruments: developed cooperatively and agreed to by all securities administrators across country (no binding legal effect. but not conflicting.2 History of securities regulation  Securities reg (regulating brokers. 1920 fraud protection acts. pension funds. rule goes to Minister who can accept/ reject/ return rule to commission for further consideration c. Notices and Accounting Communiqués: released by securities commission and contain info of interest to those who deal with regs on a regular basis f. Efficient Capital Market.4. regs or rules and provide guidance to market participants in complying with legislation.in ON this is no longer allowed (must instead pass a rule) i. Memoranda of Understanding: between diff securities administrators in Can or abroad g. investment funds (mutual funds/investment companies). and reg of business. securities commissions also have power to make rules and regs. Provincial regulations and rules: originally security acts give extensive powers to Lieutenant Governor in Council to make regs. trades and professions o Provincial laws upheld even where there is some overlapping.4 Sources. 1965 (addressed insider trading. when some but not all of Can Securities Administrators is sue an instrument. disclosure. remedies . Procedural requirements include: commission must publicize proposed rule and accept comments for 90 days. contracts.4. National policy statements: issued jointly by Can Securities Administrators e. subject to procedural requirements i. it is a multilaterial instrument d. trust companies.3 Sources of Provincial Securities Regulation 1) Securities Law & Related Sources a. although there is no national regulator yet 2. life insurance companies. Websites and Canadian Securities Administrators Communiqués 6 Three Policies: Protect Investing Public. Blanket orders: securities commissions can issue orders (usually sought and provided on a caseby-case basis).4. requiring prospectus disclosures.) is a rel recent phenomenon. when finalized. Now. but can be adopted in each jurisdiction). Decisions & rulings h. History & Constitutional Division of Powers of Securities Regulation 2. prospectus disclosures in 1947) o Modern Can securities reg = derived from Kimber Report. and individuals (to a lesser extent). Increase Confidence. takeover bids and ongoing disclosure requirements) and Merger Report.

Panel of commissioners: makes orders and rulings and acts as an appeal tribunal from decisions of administrator. Institute of Chartered Financial Analysts (have tests etc. Admin agency headed by chief admin officer: exercises admin functions assigned to administrator under applicable act and implements decisions/directives of commission j.) c. Other self-regulatory orgs: Investment Dealers Association of Canada. Increase Confidence. and govern manner in which trading is conducted i. also formulates policies and makes recommendations to govt for changes in legislation/regs b. remedies . promote development and improvement of efficiency of emerging securities markets by establishing principles and min standards. Securities Commission Review: have power to review and make decisions wrt a by-law. 7 Three Policies: Protect Investing Public. set out requirements for listing of securities of issuers and conditions to be met by listed issuers to maintain their listing. Stock exchanges: pass by-laws and rules to govern qualifications and continued fitness of members for membership in exchange. Canadian Securities Institute. Will also issue policy statements b. disclosure. prepare training and facilitate exchange of info/ expertise 2) Self-regulatory bodies a. rule or other reg instrument made by a self-regulatory org or stock exchange 3) Commission and Administrators: Commissions are 2 tiered structures a.International Organization of Securities Commissions: review major reg issues. Methods to attain them: Registration. Efficient Capital Market.

1 Introduction to Going Public 3. and if a trade constitutes a distribution. without being registered. Future Growth: An equity offering allows the company to: a. but might be expensive. disclosure.1.53 deals with not being able to issue securities without a prospectus 3.2 How Companies Go About Raising Capital 3 Ways: 1) Borrow. remedies . went public again for the right reasons. then you won’t just take instructions. Shareholder Liquidity: Instead of holding shares subject to the escrow requirements and control block sale restrictions. Borrow additional capital on more favorable terms b. Four Seasons Hotels  Used to be a private company. Methods to attain them: Registration. then it became what it is today  one of the finest hotel companies in the world (then went private again but only b/c paid lots of $) 3.1 Advantages Advantages: 1) Raising Capital.0 SEGMENT 1: GOING PUBLIC 3. might not be able to get it 2) Go Public (IPO): first segment of course 3) Private Placement of Securities: third segment 3. Enhanced Corporate Image: Increased public profile (become better known to customers. 6) Shareholder Liquidity 1. Ontario Securities Act). Efficient Capital Market. 4) Enhanced corporate image. have to address those with your client. public investors enjoy increased liquidity allowing for easy diversification by selling parts of the company (constant indication of value due to share price) 8 Three Policies: Protect Investing Public.1. Acquisitions: Cash generated by going public may enable a company to undertake successful M&A. Increase Confidence.3. s. without preparing a prospectus (Section 25 and 53. 2) Go Public (IPO – segment 1).1. ss.1. 3) Employee Incentives. Can expand using stock as a form of currency without depleting cash or taking on debt.25 deals with not being able to engage in business of trading securities unless REGISTERED s. Ex. Lots of advantages/disadvantages of going public. So miserable that it ultimately decided it had to go private again  A few years later. Issue additional equity on the market c. 3) Private Placement of Securities (segment 3) 1) Borrow: Can go to an FI and borrow it. Employee Incentives: Can use stock options as compensation when your public (more attractive to employees b/c stocks become more liquid and provides independent valuation mechanism) 4. 25 and 33 RULE: No person shall engage in or hold themselves out as engaging in the business of trading in a security. if you’re worth anything as a lawyer. Raising Capital: In the primary offering the principle reason to go public is to raise capital to meet the company’s growth and operating objectives 2. but provide advice and guidance. decided it wanted to be a public one for very bad reasons  Went public and was a miserable public company. suppliers and other stakeholders) 5.1 General Rule– Securities Act. 5) Acquisitions. Raise future capital from current shareholders via rights offerings 3. 6.3 Why Go Public?   If a client wants to take a private company public.3. 2) Future Growth.

Increase Confidence. promotional expense. High Cost of Going Public a. Reduced Flexibility: Owner-manager undertakes a responsibility to the public. Loss of Confidentiality: Significant disclosure (prospectus) and continuing disclosure requirements may prejudice the companies’ position as the information is available to all competitors 2. ii. 2) Reduced flexibility. filings of material changes 3. this creates an incentive to manage share prices in a way that can compromises long term profitability. non-commission costs (1-3% of gross offering. 2) Ensuring the Efficient Operation of Canadian Capital Markets. disclosure..3. 5. Green Shoe (over-allot the issue by granting the right to buy more of the issue for a set period. Everything we talk about will come down to one of those three objectives*exam **and remember methods used to achieve the objectives (Securities Act is just a bunch of rules that play into one or more of these three objectives). 5) Loss of tax advantages.3. Ex. manage the board. b. Reduced Control: A public offering may dilute the owners control to the point that they lose controlling power of the company which may open the company to unfriendly takeover bids. There is no point having a market if nobody plays. Loss of Tax Advantages: Public companies are not entitled to small business deduction and other tax advantages 6. remedies . printing. accountants etc.1. Methods to attain them: Registration. thus. Initial costs: underwriter’s commission (5-7% of gross offering proceeds). the opportunity may be lost to a faster moving private company. 6) High costs of going public (initial costs of IPO and ongoing cont disclosure requirements) 1. 3) Increasing/ Maintaining Confidence in Public Markets & the People who Operate in Them Why do we think it’s so important to regulate public offerings vs.1. but also have a dampening effect on the market. Efficient Capital Market. b. Managing Share Prices: Public companies are scrutinized on a quarter by quarter basis. Can’t just protect the investing public b/c there is nothing to protect if not investing (need to balance these goals) 3) Increasing/Maintaining Confidence in Public Capital markets and People who Operate in Them: Neither of the above two points matter if there’s no confidence in it. 3) Managing share prices. 4) Reduced control. translation in QC) i. which includes: prof fees of lawyers. Broker warrants (right to buy at a set price for a year): This rights provide the underwriters with a continued stake. 4. listing fees. 9 Three Policies: Protect Investing Public. letting the market take care of itself?  Objectives of regulation: Everything in the Securities Act (SA) is designed to deal with one of three objectives (can be conflicting. which imposes fiduciary duties. have to balance) 1) Protection of Investing Public: Impose a lot of rules to make sure these people are protected 2) Make sure Markets Work – efficient operation: rules to ensure the system works a. accounting and lawyers fees that make up governance.2 Potential Disadvantages (and to how to mitigate the risk) Disadv: 1) Loss of confidentiality. Ongoing costs: continuing disclosure requirements. There is lost flexibility as approval from outside directors is needed to make certain decisions a.4 Why do we regulate public offerings (3 objectives) 1) Protection of Investing Public. 3. Need a shareholder meeting in order to approve a large acquisition which takes 60 days.

unit certificate.1 Statutory Definitions LEGISLATION ACT 2006 .2. If so… 2) Is it a trade in a security?  If NO. no Prospectus. COMMON TYPES OF SECURITIES instrument or  A “security” includes “any bond. Efficient Capital Market. contains items capable on taking a broad meaning and is non-exclusive. 1(1) “security” (e)).1(1): “security” includes (NOT EXHAUSTIVE) (a) any document. (b) any document constituting evidence of title to or interest in the capital. Increase Confidence.2. investment contract) 10 Three Policies: Protect Investing Public. If so… 3) Does that trade in a security constitute a distribution? If NO. Recall General Rule: ss.2. 53 of the SA: No person shall engage in or hold themselves out as engaging in the business of trading in a security without being registered and if a trade is a distribution. do I need to prep a prospectus to do that? (to engage in activity I’m proposing) 3.3. s. participation certificate.1(1): “security” includes (NOT EXHAUSTIVE= broad def): (a) any document. (OSA s. share. have to understand what it’s trying to do because we’re going to give it a broad enough interpretation to have it achieve what we wanted it to do  The courts have gone to incredible lengths to make sure that happens. subscription. unit.  Both US and Canadian case law have made it clear that “commonly known” refers to known in the legal/financial community – a sophisticated legal expert (not common to lay person) (b) any document constituting evidence of title to or interest in the capital.g. But if yes… then you must prepare a prospectus *unless one of private placement exemptions are available  The definitions are key to this analysis!  Remember why you care: b/c fundamental question is… I want to do something. property. instrument or writing commonly known as a security. note or other evidence of writing commonly indebtedness.  Also. as well as other less common items – thus.1.(n) any investment contract  Very broad definition Covers common types of securities. stock.1. without preparing a prospectus Analysis for Whether You Need to Issue Prospectus: 1) Does transaction involve a security?  If NO. preorganization certificate or subscription security. 25. “any document constituting evidence of an option. SA does not apply.Interpretation Section 64(1): an act shall be interpreted as being remedial and shall be given such large and liberal interpretation and best ensures the attainment of the object  POLICY: To understand a statute.2 The Prospectus Requirement: Does the Securities Act Apply? Prospectus ONLY IF there is a TRADE in a SECURITY which constitutes a DISTRIBUTION. assets.2 LESS COMMON SECURITIES  Definition sets out a number of specific items all of which would normally involve an initial payment that would be used to produce some future returns (e. SA does not apply. known as a certificate of share or interest. disclosure. profits. earnings or royalties of any person or company. assets.  Also includes “any instrument or writing commonly known as a security”. 3. or other interest in or to a security”. Methods to attain them: Registration. remedies .1 What is a security? 3. debenture. ONTARIO SECURITIES ACT – Interpretation & Definitions S.

not security) (test: is the ind investing in the piece of paper OR are they investing through the piece of paper in a product)  Look to see whether the person is expecting an increase in value – if yes.1.Securities legislation is ‘remedial legislation. Glen T. to be ‘construed broadly’ (SEC v CM Joiner Leasing & Pacific Coast Coin Exchange) . because it is evidence of an interest in property)  Courts have had to narrow this definition.   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. Methods to attain them: Registration. o Includes “a document evidencing title to or an interest in the capital.1.3 CATCH ALL PROVISIONS (Pacific Coast)  Definition is case in open-ended terms o Included items listed—thus non-exhaustive. Implications: takes a broad def and makes it even broader! Due to POLICY: most sec are technical in nature. (n) any investment contract. instrument or writing commonly known as a security.1(a) definition that a security includes “any document. o “a profit sharing agreement or certificate” and o “an investment contract”. so only instruments intended as investments are securities and not instruments bought and sold for other commercial purposes (ex: title to a car is property. need full disclosure of relevant info) 3. not common person. property profits. These are sufficiently broad/vague that interpretations have not gone outside the listed items. it’s commonly known as a security 11 Three Policies: Protect Investing Public.Substance not form governs the interpretation of what is a security –it is flexible. disclosure. assets.  “Commonly Known As” does not mean commonly known as security to ordinary people on the street. 1973) Ratio: s. It falls clearly under one of the definitions of the OSA 2. not likely to be understood by anyone other than legal/ financial community Reasons: interprets US law similar to OSA s. earnings or royalties of a person”. but are catchalls .2. security 3. If can fit under one of the broad definitions and policy considerations demand coverage SEC v. profits.1. Efficient Capital Market. If commonly known as a security to most sophisticated security lawyer in the country. instrument or writing commonly known as a security” means if known as such by the legal/ financial community. not static (Pacific Coast Coin Exchange) -The policy of securities legislation is ‘full and fair disclosure’ with instruments regarded as securities  Something will be considered a security if: 1.2.property.1(1)(a) that provides a security includes: (a) Any document. earnings or royalties of any person or company. remedies . Increase Confidence. Turner Enterprises Inc.  Too broad a definition (so a receipt for the purchase of a hockey stick could theoretically constitute a security.4 How Case Law Has Defined a Security Main Points: Definitions in the OSA are not mutually exclusive. (US.

1(1)(b): Securities only includes instruments intended as investments and not instruments bought for other commercial purposes.g. Test: Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product? Policy: The reason you’re defining this is to figure out if you need to issue a prospectus. novel. interprets s. Increase Confidence.) Ratio: Provides insight into s. Policy: Purposive approach to interpreting the meaning of “security” required to respond to new. It is sufficient that an offering be considered as a legal matter to be a security. so had to narrow definition (otherwise.C. disclosure. a transaction must be commonly known to the man in the street as a security. give you doc evidencing you own it. but some American cases. property.1(1)(n): an investment contract will be where people are investing in the potential for something to generate profit and are purchasing expertise of someone else. Buy a bottle. Efficient Capital Market. regardless of the popular perception of it” Supported by Can courts o Ontario (Securities Commission) v. or interest in the capital. Most securities are rather technical in nature and not likely to be understood except by the legal or financial community. assets. that’s a security No one has any idea what an investment contract means. could be anything you’re selling) Reasons:  Recall: s. then that piece of paper is a security.1(1)(b) Any document constituting evidence of. and then SCC case adopting American reasoning… SEC v. title to. Methods to attain them: Registration. (c) If you enter into an investment contract. Specifically. that receipt does not constitute a security unless you’re planning on selling it in order to make an investment off of it Test for whether or not a title document is a security: o Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product?  E. 12 Three Policies: Protect Investing Public. go to store that ages scotch. that piece of paper is not a security. (USA) Ratio: Act will be construed broadly and in whatever way leads to it to promote the policy objective of investor protection (Purposive approach to interpreting the meaning of “security”). uncommon or irregular devices. CM Joiner Leasing Corp. Brigadoon Scotch Distributors (1970 Ont. profits.  Policy: There’s no incentive of investor protection by covering something like the receipt for the shampoo I bought at the store as securities. earnings or royalties of any person or company o Case interprets section: def of security doesn’t include documents of title bought/ sold for purposes other than investment o Basically if you’re buying something and you get a receipt for it. If my intention is to sell that piece of paper evidencing that I own that bottle at a higher price in the future. age for 5 yrs. “The court doubts that Congress intended that in order to qualify under these general categories. If my intention is to buy the bottle of scotch. remedies . H.

security. disclosure.. The transfer of land was merely a convenient way of allocating the profits of the enterprise. Buyers advised that land needed to be serviced. Decision: the court found that it was not just a sale of an interest in property. Joiner Corp. these investors would have benefitted from some information regarding their decision to buy and put the land under management.M. the definition of a security uses very general terms and can encompass this transaction. Decision: Investment contract  this was more than just a sale of fee simple interests in land. their interests in the plan. 2) That the investment be in a common enterprise. Howey Co. investors likely needed more info on scheme administration etc. and Howey-in-the-Hills Service Inc. tends to be read like an investment contract  means that looking at OSA objectives. transferred a substantial portion to Joiner Corp. For such small investments. through a prospectus If investors are investing in the potential for the item/ doc to generate profit.  Interpret the definition broadly to meet the purpose of the Act – it should not be subverted by new instruments designed to avoid the application of the Act or frustrate its purpose. Howey Co. transaction or scheme whereby a person invests. Groves were for sale and sold in plots of 1 acre each. Anthony acquires leases in Texas.Facts: SEC sought injunction against CM with respect to assignment of leases. and are purchasing the EXPERTISE of someone else. and engaged in sales campaign where they tried to assign leases in land in parcels of 5-20 acres with the promise the Joiner would drill a test well to test the oil producing potential of the land.. investors would have needed information on oil/gas potential of the land. how the plan would be administered. but the sale of the prospect of gaining from the exploration exercise. Again. Methods to attain them: Registration. W.  **note: next two cases are only important b/c reasoning is later adopted by SCC in Pacific Coin Exchange SEC v. owned orange groves in Florida and a hotel. a prospectus made sense. remedies . Test requires: 1) A contract. Efficient Capital Market. o Decision based on POLICY:  The Act must be able to respond to new. the investors could have BENEFITED from OR NEEDED info that would be in a prospectus o In this case. Transaction was set up so that it was arguably only a sale in land. background on the individuals. recommended Howey-in-the-Hills Service Inc. and 3) That the person is led to expect profits (or capital appreciation: see Forman) solely from the efforts of a promoter or third party (pol obj: since it is them who controls success/failure of enterprise) Facts: Howey Co. (USSC. Increase Confidence. Buyers told that 20% returns had occurred but that they could expect 10%. Reasons:  Common enterprise test: contract or transaction where a person invests in something that is a common enterprise that is expected to lead to a profit for the investor.J. 1946) – reasoning used by SCC in Pacific Coin Ratio: Common enterprise test for identification of an “investment contract” and therefore. etc. structure of C.  Ultimately. novel. were under common ownership. and this profit will be derived solely from the efforts of a promoter or third party – key is that someone else controls success/failure of the enterprise and that’s why you would want that information 13 Three Policies: Protect Investing Public. The transaction “had all the evils inherent in the securities transactions which it was the aim of the Securities Act to end” Reasoning:  Although set-up to be a lease in land. Buyers would derive profit from orange groves manages by HHS Service Inc. uncommon or irregular devices.

more about the policy of protecting the investing public who is relying on someone’s expertise/management (with both cases). Two ways to buy from PC: (a) pay 100% $ in cash and receive bag of silver coins. the premium paid for sewing machine was initial value. Hawaii Market Center argued that members had some control over their potential return. we don’t care so much about the judicial test. Pacific Coast Coin Exchange of Canada v OSC (SCC. own it. Ratio: Risk Capital Test for identifying an investment contract (broader than Howey test to comply with policy objectives). disclosure. and in 5 yrs. and get the bag of silver when you pay off balance) Almost everyone bought silver on margin. Facts: A store where only members can shop. Efficient Capital Market. Securities Commission of Hawaii sought an injunction against the sale of these memberships on the basis that they constituted “investment contracts” and thus constituted securities. it is the policy and not the subsequently formed judicial test that is decisive. and thus no way to his/her investment. and did not rely “solely” on others as required by Howey. The primary objective is to protect the investing public. The capital for the store was raised by the sale of founding memberships.State of Hawaii v. c) The furnishing of initial value is induced by promises or representations leading to a reasonable expectation or understanding that a benefit above initial value will accrue. meeting broad securities def) to comply with policy objectives  Here.1(1) is not exhaustive) it is legislative policy to replace the harshness of caveat emptor in security related transactions and courts should seek to attain that goal even if tests carefully formulated in prior cases prove ineffective and must continually be broadened in scope. Earn returns by selling other memberships and by commissions. Held: The court said the problem with the Howey test was its narrow focus on the mechanical test of “solely”. This results in losing sight of the need to interpret investment contract broadly. or (b) you could buy bags of coins on margin through current account commodity agreement  Margin: you buy it. Investor did not have practical and actual control over the investment of the capital or the management of the store. b) A portion of the initial value is subjected to the risks of the enterprise. purposive approach should be used in interpreting meaning of word “security” (even broader – s. Test requires: a) The offeree furnish initial value. It is the policy and not the subsequently formulated judicial test that is decisive. Hawaii Market Center Inc.g. PC after receiving $35 did not keep silver in reserve for the person b/c they wouldn’t make $ doing that. However. 1978) Ratio: Broad. hedged: have an obligation in 5 yrs to deliver 500 bags of silver  enter in futures contract w/ $35 payments. Fixed fees and commissions were expected benefits. Are investors relying on expertise/management—courts have immense discretion. Increase Confidence. Reasons: The RISK CAPITAL TEST for identifying an investment contract should be used as it is broader than Howey test (thereby.  in the end. remedies  . make $ b/c going to decide when the right 14 Three Policies: Protect Investing Public. get back an investment contract on Day 1. if bag is $100 on Day 1. Ability to recoup investment depended on the success of the store. and d) The offeree does not have the right to exercise practical and actual control over the managerial decision of the enterprise. Instead. Methods to attain them: Registration. but you don’t get it until you pay the rest of the balance you owe (e. Give $35 on Day 1. *Accepts US definition for “investment contract” as a security Facts: PCCE was in business of selling bags of silver coins. Costs was $320-$820. give $65.

if worth $100 today. As such. Efficient Capital Market. SCC reasoned that the Q is whether the efforts of the third party are undeniably significant for the success/ failure of the enterprise  Under the 2nd requirement in Howey. and since it was a trade that amounted to a distribution with no prospectus. and goes on to adopt a more realistic test in light of underlying objectives of the Act. and they obviously don’t have it. but the market risk inherent in the price of silver. the third part requires “that the person is led to expect profits…SOLEY from the from the efforts of a promoter/third-party: following this rationale would have caused case to fail. when it’s worth $90. D said they weren’t securities.  Under Howey test. there is no 15 Three Policies: Protect Investing Public. require the investment to be a COMMON ENTERPRISE: Court found significant managerial efforts were made by D (promoter) and that the actions of this promoter lies in the commonality – between investor and promoter. there is no need for enterprise to be common to the investors between themselves 3.  Case indicates that courts will go to great lengths to ensure that the investor has the information he needs to make an informed investment. Expanded the concept behind the Howey test so that it would not be constrained by narrow interpretations of the words “common enterprise” or “solely”. o “Such remedial legislation must be construed broadly. ii) both defs refer to an investment contract. time to buy bags in silver is 5 yrs from now  e. They didn’t. they were selling silver. whether they were a “security” Held: SCC held 8-1 that the contracts were “investment contracts”. All customers come forward with $65 asking for their silver that’s increased dramatically. ii) purpose of legislation was the same and iv) dearth of Can authority 2.e. Issue: whether the “current account commodity agreements” constituted an “investment contract” as defined in s. read in context of economic realities to which it is addressed. disclosure. Any definition must permit fulfillment of statutory purpose of compelling full and fair disclosure. buy 500 bags and make a profit on $10 Crucial to solvency of PC was ability to properly hedge. remedies . Increase Confidence.  Must appreciate economic realities. Must fulfill the statutory purpose of compelling full and fair disclosure relative to the issuance of instruments that fall within the concept of a security Analysis/ Implications: Majority examined tests from two US cases (Howey and Hawaii).1(1)(n) of the Securities Act. Customers sue saying that they should have had a prospectus. It also determined the following: 1. substance not form is the focus. What will fall within the definition of a security is flexible rather than static… capable of adaptation to meet countless and variable schemes to those that seek use of $ of others on promise of profits” Dissent: Laskin reasoned that the source of the buyers’ risk was not the quality of the management brought to the project by PCCE. concludes that a broader approach is required than even these tests.g. i. the investors were entitled to their money back. Methods to attain them: Registration. Appropriate for Canadian courts to consider US jurisprudence b/c i) def of security is similar. Broad purposive approach should be used in interpreting the meaning of the word “security”: This case is a blank cheque to call anything a security as long as it satisfies the underlying policy of the Legislation. The only difference between buying silver from PCCE and buying on the open market was concern over the solvency of PCCE. HOWEVER.

2. Increase Confidence. 16 Three Policies: Protect Investing Public. disclosure. advertisement. and you’re relying on someone else’s expertise. This is extending the definition of security too far. PURCHASING A SECURITY: Every time you invest in something where your expectation of profit is based on the expertise of someone else. were selling expertise in knowing how to hedge it for a profit. because there is no valuable security or.difference between this and commercial contracts where bankruptcy can lead to non-performance. (Note not include a purchase of a that gifts would probably not be trades. remedies . Howey.  This is the only way they can force prospectus/disclosure and to ensure that protection of investing public happens. but mainly investor protection o Joiner. solicitation. so what is a trade? OSA. Buying MANAGEMENT EXPERTISE. section 1(1): A “trade” includes “any sale or disposition (NOT A PURCHASE) of a security for valuable consideration” AND includes “any act. whether the terms o E. there has to be a trade in a security. but does  Incl margin trading & covers primary and secondary markets. you’re buying that expertise and therefore someone is required to give me a prospectus telling me everything that I need to know. pledge or EXCLUDED is the PURCHASE of a security. Methods to attain them: Registration. Policy Notes:  IF PURCHASING EXPERTISE. PC of payment be on margin. the courts will go to whatever length they need to go to find that that’s a security o Remember what you’re trying to do: if you’re investing in something to make a profit from it. instalment or otherwise. the court will find anything to be a security. Efficient Capital Market. Policy: Overall.Sold investment contracts for money. Policy: Basically. conduct or negotiation directly or indirectly in furtherance of” any of the activities described in the definition. o We care about the investing public because we need confidence in capital markets and efficient capital markets (companies will not survive without the public’s $)  3. PC was not selling bags of silver. so long as it fits into the definition – the reason for this relates back to the three objectives.2 What is a trade?  Statutory Definition In order for general rule (Section 53(1) and 25 about being registered) to apply for a prospectus. and Pacific Coast suggest courts will take a purposive approach if it is the type of transaction to which securities regulation was intended to be directed. trade is broadly interpreted to promote the “greater good” –prevent ppl from contracting/opting-out of securities regulation “trade” or “trading” includes (NOT EXHAUSTIVE): (a) any sale or disposition of a VALUABLE CONSIDERATION security for valuable  A trade is a sale of a security for a consideration consideration. but the risk is largely determined by the management of others. o The key difference between buying a product vs. orange tracts – sold security for money. which is a security. Because of this reliance on expertise. o In order to protect the public and to foster confidence in capital markets these people need to have the protection of a prospectus  Here. except as provided in consideration) clause (d) a transfer. – silver . Hawaii. to earn a profit there are 100 questions that need to be asked about the skill and risk before you give them the money.g. it’s a trade. buying something to profit from that someone else is managing is that in the latter cases the profit is not only risky.

encumbrance of securities for the purpose of giving collateral for a debt made in good faith. So of course purchase can’t be a trade. but only Z buys.1(1) definition: means (EXHAUSTIVE def) (a) trade in sec of an issuer that have not been previously issued.2.2.3 What is a distribution? Unless exemption is available… if trade is a distribution. ADVERTISEMENT OR SOLICITATION IN FURTHERANCE OF THE FOREGOING (OF A “TRADE”)  Isn’t only when you sell it. advertisement. disclosure. 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 collateral (b) any participation as a trader in any transaction in a security through the facilities of any exchange or quotation and trade reporting system 3. you can’t wait until you actually sell them. only determining if it’s a trade is to find out if seller has to prep prospectus. Risk that this will influence buyers who rely on pre-sale activities/pressure. but when you TRY to sell securities  May involve pre-sale activities.1 TRADES ON BEHALF OF OTHERS Such persons are required to register. There are 3 trades! The offer to Y. Increase Confidence. doing all this to see if you have to issue prospectus.2. Remember: prospectus requirement is activated when there is a trade in a security which constitutes a distribution. (c) a trade in previously issued securities of an issuer from the holdings of any control person. (b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer. solicitation. At least with respect to the distributions of securities. Not doing it so that purchaser files prospectus before giving you the cash. which can involve pressure tactics/subtle misrepresentations. the offer to Z. remedies . NOT REACTIVE o SA is proactive. and the sale to Z  “Trade” is a key term in determining the application of the securities act. purpose is to ensure those who are potentially going to invest in the corp have suff info with which to make an informed investment decision 17 Three Policies: Protect Investing Public.    Why? Again. Efficient Capital Market.  POLICY: Securities Act Is PROACTIVE legislation. This is consistent with the purposive approach of the courts. A “trade” is defined to include participation as a trader in a transaction in a securities…on the floor or through the facilities of an exchange *Exam Example:  X offers to sell to Y and Z. need to issue prospectus Distribution (per s. (d +e) a trade by or on behalf of an underwriter in securities (see full def below) Purpose: def determines whether or not there’s a requirement to prep prospectusThus. conduct or negotiation directly or indirectly in furtherance of any of the foregoing. is saying we want to stop bad things from happening before they happen b/c protection of investing public/maintaining confidence in the markets is so fundamental to our system that we want to avoid it happening at all costs o If you try to sell securities you must create a prospectus. purchaser is being protected/giving cash. (“operation”) 3.  (e) any act. it is the vendor that is the object of regulation and it is the purchaser that the legislation is intended to protect. PRE-SALE ACTIVITIES: TRADE INCLUDES ANY ACT. Methods to attain them: Registration.

 POLICY: issuers have greater access to information than buyers. “distributed” and “distributing” have a corresponding meaning. (d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter. unless the transaction complies with one of the 4 valid Private Placement Exemptions for a sale of securities without a prospectus. and on and after the 15th day of March. (e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter. acting as underwriter. includes a distribution as referred to in subsections 72 (4). If a trade in a security constitutes a distribution. “placer”. Efficient Capital Market. and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution and “distribute”. these distributions are rare because other corporate statutes prohibit corporations from reselling these types of securities. prior to the 15th day of September.1(1) of the Securities Act: “distribution”. s. b/c when those securities were issued initially they were subject to the prospectus requirement. Increase Confidence. means (EXHAUSTIVE def): (a) a trade in securities of an issuer that have not been previously issued. the issuer is required to assemble. 1979 if those securities continued on that date to be owned by or for that underwriter. company or combination of persons or companies holding a sufficient number of any securities of that issuer to affect materially the control of that issuer  Trade by a control person will often require a prospectus regarding 1) the amount of securities sold and 2) the effect of the sale on the control of the issuer. so acting. (6) and (7). disclosure. acting as underwriter. A prospectus is required where the security is issued for the first time by the company  Covers Treasury Shares owned by the company that have not been issued to the public  Does not cover secondary trades. and the secondary market is protected by the continuous disclosure obligations and previous prospectus on record  This covers treasury shares (shares that are not outstanding = held onto by the board to be issued at a future time if the Directors decide to) that are owned by the company that have not yet been issued to the public. and (f) any trade that is a distribution under the regulations.  A person or combination of persons holding more than 20 percent of the issuer’s outstanding voting securities is deemed to materially affect the control of that issuer (b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer. publicly file and distribute to all buyers and informational document known as a prospectus (both a preliminary and final prospectus). “placé”) 18 Three Policies: Protect Investing Public. if the trade took place during that eighteen months. Methods to attain them: Registration.  In Canada. (c) a trade in previously issued securities of an issuer from the holdings of any control person. (5). 1979. where used in relation to trading in securities. within eighteen months after the 15th day of September. TRADES BY CONTROL PERSON  Any person. so this is a distribution to which a prospectus is attached  Prospectus is required for the primary market. remedies . 1981. (“placement”.

2) Offer to Sell (Bought Deal / Offer to Sell/ Marketed Offerings).2. Efficient Capital Market.POLICY:  The meaning of distribution follows from the policy of the OSA: protecting members of the investing public by ensuring that buyers receive full disclosure of all material facts relating to a given security before purchasing that security. under Distribution – subsection (a). A sale by a control person is deemed to be a distribution to which the prospectus requirement attaches (usually require control person to produce a prospectus in order to provide information about the amount of securities sold and the effect of the sale on the control of the issuer).2.1 Lastman’s 3 Main Branches of Distributions 1) Securities that have not been previously issued (s. A holding of 20% is deemed. A “control person” is defined as a person or group who has sufficient control over voting rights to materially affect the control of the issuer. 3) Best efforts underwriting 1) Direct issue (And Private Placement) a. without the service of an investment banker or dealer (direct contact b/w investor and company). 3. The definition is exhaustive. Direct Issue: Issuer sells the securities itself. have to do so with a prospectus Policy: This prevents backdoor underwriting o The subsequent sales of securities that were previously exempt from the prospectus requirement are considered to be distributions and thus trigger the prospectus requirement.  (3) Sales of Restricted Securities Held by Exempt Purchasers   Deemed distribution on resale: when someone has purchased securities by way of an exemption and then wants to resell them. (2) Trades by control persons  Section 1(1) of OSA. with the buyers having the greatest risk of being taken advantage of. o Don’t want you to file prospectus when you’re selling amongst yourselves.2 Note: 3 Ways Securities can be distributed to the public 1) Direct issue and private placement. corporate issuer and not investors) because issuer will always have better info than the purchasers thus. 3) Sales of restricted sec held by exempt purchasers (1) Securities that have not been previously issued   Section 1(1) of OSA. in the absence of evidence to the contrary. Policy: Focus on primary market (i. 3. under Distribution – subsection (c).3.3. should have to issue a prospectus.1(1)(a)). 19 Three Policies: Protect Investing Public. but includes protection for where there are trades in securities in which the asymmetry between the buyer and the seller is likely to be at its greatest. Methods to attain them: Registration.e. (A Q of Law) Policy: Sales by persons in a position of control are considered to be distributions because it means the person may have better knowledge of the issuer and an ability to alter the value of the issuer/securities o Anyone who holds a sufficient number of securities to “affect materially the control of that issuer” is assumed potentially to have privileged access to information concerning the issuer of the securities) o People who fall within this part of the definition of distribution are “control persons”.1(1)(c)). remedies . to be sufficient to materially affect the control of an issuer. 2) Trades by Control persons (s. Prospectus needed for the primary market. disclosure. Increase Confidence.

except I-banker doesn’t agree to buy securities unconditionally for re-sale.# of shares. such as a material change in the affairs of the issuer.) What is the capital structure? 20 Three Policies: Protect Investing Public. i. This may include:      What does your company DO? How does it make its money? (e. Same as above. Efficient Capital Market. then the underwriter may not be obliged to buy at the specified price.g. the price might be much lower than expected. This says that if certain events occur.3 Prospectus Preparation In general. cease trade order. remedies . Often arranged through a broker who is NOT an agent of the issuer. (Issuers tend to lack expertise re: price fluctuations)  this underwriting/insurance aspect is good for the issuer. Risk allocation 1. This only works with a small number of investors. liabilities. prospectus gives investors full and plain disclosure of all material facts – what the investors want to know. UW is not providing any insurance wrt risk of fluctuations in market price 3. and the issuer will usually know the purchaser intimately (often through a rights offering to existing shareholders) b. Marketed Offering: underwriter will not commit to buy the securities until price is set after marketing the offering to prospective buyers. 3) Best Efforts Underwriting a. to receive dividends. Methods to attain them: Registration.g. ii. Cineplex makes it money on popcorn. The underwriter thus finds buyers. 3. before the prospectus. Agrees to pass proceeds to issuer. UW agrees to act as an agent in selling the shares for the best price it can get. In a bought deal: underwriter makes the commitment to purchase in advance. Once broker has put issuer in touch with Institutional investor buyers. Increase Confidence. net of commission. so good if the underwriter buys in advance… however… 2. Market risk can be shared through a “market out clause”. Commitment to buy is made after prospectus is cleared with securities regulators. Private Placement: Another form of direct issue. 2) Offer to sell (Bought Deal/Offer to Sell/Marketed Offerings) * most common way to sell to public a.i. i. any lawsuits? What interest in the company am I buying? . but lower commission. usually. etc. disclosure. rights (to vote. A bought deal (firm underwriting) thus avoids the risk for issuer of significant market fluctuations during the period in which the prospectus is being prepared. bond issues) i. Note: Standby underwriting: underwriter provides a partial insurance by agreeing to stand ready to take up all or some portion of an issue that cannot be sold at a certain price b. The underwriter then resells the securities to investors. Bought Deal/Offer to Sell: the issuer sells the securities to an underwriter. Agree to use ‘best efforts’ to sell securities on company’s behalf – less risky. by agreeing to give its best efforts. issuer deals directly with/issues securities to the institutional investors. UW is not an UW in strict sense of the word. Securities are sold to institutional investors (e. because of their lack of expertise. not movies) Who is the CEO/ BOD? What are your financial statements – assets.

Methods to attain them: Registration. 59) -Includes OSA.1 Prospectus General Rule *Governed by NI 41-101 general requirements and 44-101 for short-form prospectus. Two principle requirements of a prospectus under OSA: 1) Prospectus must provide full.1(1): means (a) untrue statement of material fact. Very high bar – very diff to know if you’ve missed something. (2) Must also include any financial reports. officers. and any promoter of the issuer) – certifies prospectus is true Section 59(1) Underwriter certificate (signed by any/all UWs in a contractual relationship with the issuer or selling securityholder distributing securities through the prospectus) – UW also certifies prospectus is true A prospectus is a document that must be given to persons to whom securities are distributed.1 Misrepresentation Misrepresentation. technical fulfillment of the statue is not sufficient – must not be misleading 2) Must comply with the requirements of the Securities Act (including 56. securities lawyers must decide what else needs to be included in order to meet this requirement. true and plain disclosure and complying with all requirements of Ontario securities law. statements or other docs required by the Act or regulations Section 58(1) Issuer Certificate (signed by CEO.     What will the investment be used for? What is the underwriter agreement? How much are you paying senior executives? What are the material contracts? Intellectual property? Future projections? *see that all of this is included in NI 41-101 3. OSC rules and the OSC director. underwriters). 56(1))  Not just a question of covering what is on a list.s.3.3. 58. or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. true and plain disclosure of all material facts (s. directors. Efficient Capital Market.1. OSA regulation. Does the “trade” in the “security” constitute a “distribution”? 21 Three Policies: Protect Investing Public. It is the document that is intended to provide information relevant to assessing the value of the securities. Section 56: (1) Full. If there is a misrepresentation. Policy: Should tell everyone everything they need to know to make informed investment decisions Recall when a prospectus is required i. Increase Confidence. disclosure.  Note: can have 2 days to change your mind in securities law 3. CFO and two directors that aren’t CFO/CEO. remedies . Does the transaction involve a “trade”? iii. Does the transaction involve a “security”? ii. you can sue everyone involved (corp.

1. regulator makes sure there is sig liability associated with a misrep (misstatement of a material fact/ omission) Tension between 2 purposes (reckless selling v being too careful): You as a lawyer cannot allow client to recklessly sell in light of the prospectus (they’ll get sued). so let us at least see what company thinks)  Come out with provisions in National Instrument 51-102 for financial forecasts 22 Three Policies: Protect Investing Public. Forecast in prospectus has to state material facts/assumptions that were used in making the forecast 4. that forward looking info comes to be. Has to identify the method the company will use to update that forward looking information a. As time passes. etc. if it’s off. we want to know what the company thinks about the future since that’s the purpose of us buying the securities (taking away an important fact that we need to make an educated investment decision. has to be updated  must review it regularly for changes. and (2) if you do put it in your prospectus you have to comply with national instrument 51-102 for disclosure Steps per NI 51-102: 1. can’t have fancy brochures. unless a preliminary prospectus and a prospectus have been filed and receipts therefore obtained from the Director”. billboards. Thus. Increase Confidence. but you also can’t go so far to protect yourself/your client that you have a document that no one will buy securities with. The choice is always the business’ BUT (1) if you don’t put it in. 53 of the OSA): “No person or company shall trade in a security on his. and identify material risks that could cause it to vary 3. if you try. so client will want to be successful/shed the company in its most favourable light.3. 5. can’t advertise in any meaningful way. Methods to attain them: Registration. remedies . 3.Rule (s. Company should not be disclosing forward-looking information unless it has a reasonable basis for that information 2. disclosure.3. and investors will be hurt (outlawed)  Example of regulator “being a bad lawyer” (overly cautious)  Investors were unhappy  Protecting so much that you’re making us vulnerable.2 Dual Functions of a Prospectus: Selling + Liability Document 1) Selling Document: Sec Act ensures regulator’s mandate of investor protection by saying only doc you can use to sell sec is the prospectus. Efficient Capital Market.  Obviously natural tension b/w the prospectus as a selling doc and prospectus as a liability document o *Practice Note: Lawyers often spend too much time protecting themselves: You can’t legislate every eventuality.3 National Instrument 51-102 – Policy on future oriented financial statements in the prospectus Per NI 51-102: no prospectus ever has to put future oriented financial info in it.1. OSC said none of us can predict the future and it’s too dangerous to let companies try. must caution users that actual results may vary. 2) Liability Document: Will need a lot of $. but how you properly strike that balance b/w assisting your client in prepping a document that is sufficiently comfortable to sell the securities and sufficiently comfortable to protect your client against liability (Judgment call)  Biggest ex of this tension (and of liability for both sides) is financial forecasts (see below) 3. you won’t have a deal or you’ll have an unworkable document. or both o What makes it challenging is not rules/what has to go in it. her or its own account or on behalf of any other person or company where such a trade would be a distribution of such security. A company must disclose in its prospectus that the information is forward-looking (this is a forecast). you cannot talk about the future anywhere else. A prospectus forecast must be updated between preliminary prospectus and final prospectus History:  Prior to 1982.

I use 3)  The only time you can use a projection vs.g.    Note on FOFI (from text)  The information in a prospectus generally consists of verifiable existing facts. or no one will buy securities. and that there ought to be some discipline on the sale process. forecast is if it’s unreasonable to require you to do a forecast  Only where issuer is engaged in business w/ less than 24 months relevant operating history and must be accompanied by cautionary note about potential variance.Financial Forecasts: Two types of data forming financial forecasts: (1) Forecast (written estimate of most probable result of operations of a company for some pt in the future). you have to comply with the law (National Policy 48). they just have to be reasonable. If it’s wrong. Methods to attain them: Registration. if it’s accurate = increases your credibility. predictions about the future may be prone to abuse (and therefore. they can assess reasonableness/probability) Policy Notes: Policy: Recognize tension between prospectus as selling document and prospectus as liability document –do not err on EITHER side –don’t be too hard and don’t be too soft. int rates could be b/w 1-3%. but not share too much to reduce likelihood of liab for misrepresentation (including omissions) o The Form does not tell you that you need to put in financial forecasts. use 3. disclosure.  Although future-oriented information may be quite valuable to investors attempting to assess potential future cash flows from a security.g. always has to be REASONABLE. hurts you. But if you put in forecasts. but even so. they’ll be 3%. it’s optional. this is regulated  protecting investors) 23 Three Policies: Protect Investing Public. Reasonableness is left up to reader. (2) Projection (estimate of results that follow any set of reasonable assumptions) (1) Forecast: Written estimate of the most probable result of operations of a company for some point in the future  e. company is bound to use what it believes to be the MOST PROBABLE assumptions  With Projection. remedies . (e. but most probably. but hard to do this –hard to harness your client because client can legitimately believe that the future for the business is great but you need to educate client that the marketplace understands the liability attached and understands that people are going to be more cautious in their predictions of the future then they would be if wasn’t projection process. They also understand what this is. (and will probably want one. just be right  Tension: Need to include some information about future (make it attractive to investors). You won’t recover if you miss every quarter and keep updating your forecast  BE CAUTIOUS ABOUT PREPARATION Find a happy medium: It’s better to under-reach future financial performance then to oversell and perform short of the future numbers. shifted to reader. Efficient Capital Market. four seasons hotel – how it’s going to do in 2013 (making assumptions)  if you assume that interest rates next year could be anywhere between 2 and 4%. (2) Projection: Estimate of results that follow any set of reasonable assumptions –the assumptions always have to be reasonable but unlike a forecast they have to be the most probable. Credibility: Companies shouldn’t spend their whole lives worried about being sued. o But also don’t want to be too negative. Increase Confidence. but the reasonableness of those assumptions are left to the reader (in projection. they remember what it says. credibility in the market place is extremely important o You don’t get a second chance to make a first impression – so don’t be cavalier (even if you’re bullet proofed against being sued) – people are investing. makes it more likely to sell if you can forecast good results) Practice note: Just have to be right . Difference is in assumptions:  In a forecast.

conditions pertaining to the underwriter’s obligations/rights. have to know that you have one. find misrep. since it would require showing that assumptions on which it was based were unreasonable at the time they were made  there is scope for overly optimistic projections) 3. but does not happen very often under prospectuses b/c (a) class action lawsuits are new here. and before receipt for final OR after receipt for final is obtained but prior to completion of distribution.  Might include information about prospective results of operations.5 Underwriters Have to do due diligence. Efficient Capital Market.  Case: BarChris (US) Will often have distributions assisted by underwriters: 1. and also have a due diligence defence available to them. within TEN days of the change Danier Leather SCC Implications: Example of how to deal with forward-looking info. underwriters may choose to reduce risk by syndicating it with other underwriters wiling to join the underwriting of the issue (other firms might become obligated to buy some portion of the issue. A forecast DOES have an implied representation of reasonableness. A change in a material fact does NOT have to be disclosed following the filing of the prospectus (only a material change) Facts: lawsuit to SCC as to reasonableness of a forecast in a prospectus. financial position. True and Plain Disclosure of All Material Facts Requirement for Full. and (c) in order to sue under prospectus. true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law. amendment must be filed as soon as is practicable. various covenants/representations of the issuer.1. and rights of termination (including a market out clause) 2. etc. Underwriting Agreement: issuer enters into an agreement with the underwriter. *note that a Material Fact and Material Change are different!!!!! If a Material Change Occurs.3. but that’s all –just has to be reasonable. there is no obligation to update purchasers (only have to update if there’s a MATERIAL CHA NGE in business. (b) we’re less litigious than US. Methods to attain them: Registration. Increase Confidence. Amendment Required – 57(1): If there is a MATERIAL CHANGE after receipt is obtained for preliminary prospectus.1. Reasons:  If a material FACT occurs following the filing of the final prospectus that is NOT a material CHANGE. find lawyer.3. 130(1) for misrepresentation (see more on underwriters below). which sets out the terms of their arrangement (obligations of underwriter. for example) 24 Three Policies: Protect Investing Public. or changes in financial position based on assumptions about future economic conditions and courses of action taken by the issuer Note on proving unreasonableness: hard to prove that the information constituted misrepresentation later. 3. Definition of Material Fact: Section 1(1): Material Fact: When used in relation to securities issued or proposed to be issued. operations or capital of the issuer. true and plain disclosure: Section 56(1): A prospectus shall provide full.4 Full. and IN ANY EVENT. disclosure. remedies . Syndicated Underwriting: for larger issues. means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities. because there may be substantial risk associated with the issue. and can still be found liable under s.

Certify the prospectus (issuer certificate under Section 58 and underwriter certificate under Section 59) 6. etc. Staff vet the prospectus  Vetting is not a passing on the merits of the securities offered. material contracts. Methods to attain them: Registration.g. 2.4.4 Prospectus/ Distribution Process (After making decision to go public) 1. Staff provide a comment letter 7. If there is a misrepresentation in the prospectus. then deliver it. it’s for public/investor to decide what needs to be in there  you as the UW can’t just say you followed client’s instructions if they don’t allow you to read a k.54-55)  Section 54: prelim must be in compliance with all requirements of ON Securities law. auditor’s comfort letter. respecting form/content. File Preliminary Prospectus and get a receipt. Waiting Period 8. remedies . Vet the Preliminary Prospectus (forward looking information. make amendments)  Limits on advertising during this time (policy to protect public) 4. underwriter does due diligence. and registrant underwriter to sell securities on your behalf (underwriter also hires lawyer).2 Creating the Preliminary Prospectus: What must be included 25 Three Policies: Protect Investing Public. Final prospectus/supporting docs can be filed and a receipt obtained (at discretion of securities commission whether it is in the public interest to do so – even if you met all requirements) It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin 3. once they’re cleared… 8.) 5. Clear up deficiencies. interest rate or dividend amount). and comply with requirements of Ontario Securities Law (Section 56(1)) (FTPD is a judgment call) 4.4. Print/Deliver the document to those who expressed interest 5. nor is it a representation that it contains full disclosure  it is a determination of: o (a) whether the required items of disclosure have been provided and o (b) whether there are any gaps in the information that are apparent from the material filed (can take several weeks) 6. do due diligence. Put all of the correct things in the prospectus (NI 41-101 and Rule 45-501) 3.3. 2. etc. there is liability for it 3. maturity date. File with Administrator along with supporting docs (e.  Integrity of capital markets dictates that this must be highly regulated. resolution of BOD approving prelim. accountant. management team. financial statements). red herring) (although requires material facts. Respond to deficiencies/file final prospectus (administrator can refuse receipt on broader grounds than for the prelim) 10. and start the process  Is not just up to the client what goes in the prospectus. Increase Confidence. Comment Letter and Clearing Period 9. consent letters. tech reports. does not require price. Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations (s. 3. Ensure it contains full. Complete prelim (certified. 7. signed. and  Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little discretion with giving receipt for prelim as long as it appears to have all the things required) Waiting period begins: time between receipt for prelim and receipt for final (if anything material changes during this period. underwriting agreement.1 Summary of Steps 1. disclosure. true and plain disclosure of all material facts related to the securities issued or proposed to be distributed. Distribution 11. Have to create the prospectus  hire a lawyer. Efficient Capital Market.

Increase Confidence.60: Statement of rights – every prospectus shall contain a statement of rights given to a purchaser by s. etc. OSC rule 45-501. Long-Form Prospectus: very open ended including all “material facts” (fact that sig affects market price/ value). Is actually kind of a lie (b/c sec comm will have looked at it). no securities commission or regulatory authority has in any way passed upon the merits of this offer. (2) Idem: A preliminary prospectus may exclude information with respect to the price to the underwriter and offering price of any securities and other matters dependent upon or relating to such prices. Need to file it (s. Section 54(2): a preliminary prospectus is exactly the same as a final except it can omit the price and what the underwriters get paid and any matters dependent on price  It need not contain information about the offering price or anything else relating to or dependent on the price (things like price. 5) financial statements of issuer Preliminary prospectus provides specific items of disclosure and “full. true and plain disclosure of all material facts”. 4) name and structure of corp. Includes 1) # and types of securities offered under prospectus. but… POLICY: Letting public know that no securities commission has blessed this (but not completely true. interest rate. you’re not selling securities pursuant to it. 55) Section 54 of the OSA – Preliminary Prospectus Requirements (And Excluded Info)  (1) Preliminary prospectus: A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting the form and content of a prospectus.71 and 130  Section 55: Receipt for Preliminary Prospectus: The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof. disclosure. o **Also note s. 5) description of issuer’s business. Every preliminary prospectus must have a statement printed in red ink and in italics at the top. maturity date. front cover. and no one can buy securities from this doc until a final receipt is obtained Page 1185 1. 54(1)). 112 of the text or look at ToC for 41-101F1.1: Required Statement (Lies) Description Both prelim and final prospectus (in SA is the phrase prelim.  List of factors that it must include are on p. except that the report or reports of the auditor or accountant required by the regulations need not be included.2: Prelim prospectus disclosure (Red This is removed in final prospectus Herring) *Remember that preliminary is NOT a draft document! Liability + credibility 1185 26 Three Policies: Protect Investing Public. are often not included  things affected by market conditions that may change b/w filing of prelim and filing of final prospectus) Policy: Can Exclude Pricing Information because: (1) It’s NOT FINAL. Information is incomplete. not final. 3) use of proceeds of issuance. but want to make sure that no one’s buying this based on comfort that a securities commission has reviewed it). and then you will get a receipt for it (s. dividend amt. saying that this is a PRELIMINARY prospectus. remedies . (2) Gives underwriters an opportunity to assess the market for demand so that they can price it properly National Instrument 41-101 (Form 41-101F1): General Prospectus Requirements Section Item 1.See Form 41-101F1 or 44-101F1 for short-form. Methods to attain them: Registration. 2) method of distrib. Efficient Capital Market. is just prospectus) must contain on the outside front cover a statement that says.

statement that certifies by these people that foregoing in document constitutes full disclosure. you lose credibility (don’t get a 2nd chance to make a 1st impression) Therefore. but NOT an obligation to be right!! POLICY: Additional protection for investor.2 AND 58(1) of OSA: Issuer Certificate Description **ALSO NOTE CORRESPONDING 58(1) OF OSA Every preliminary prospectus shall contain a statement signed by the CFO. officers. CEO. lawyers.1 Certification Process  When all parties are done preparing this prelim prospectus. plain and true disclosure of all material facts. and two other directors. disclosure. balances is the best regulators can achieve b/w investor protection and efficient capital markets 27 Three Policies: Protect Investing Public. and they sign it (have to do so via securities act regulations) Item 37. Increase Confidence. that the underwriter feels comfortable saying that (directors. the document constitutes full.3 AND 59(1) of OSA: Underwrite r Certificate …**ALSO NOTE CORRESPONDING 59(1) OF OSA… … Underwriter certifies: To the best of their knowledge. but not an obligation to be right (company has an obligation to be RIGHT (directors are personally liable)  Difference is b/c it’s practical. not that it IS true)  Defences: have obligation to be responsible/careful. true and plain disclosure of all material facts relating to the securities being offered. (the instrument says “except in Ontario… but have OSA to cover it) Issuer has an obligation to be RIGHT (they have more access to information) Notes: At the end of EVERY prelim and final prospectus. remedies Page 1123 1124 . do not treat the document causally 3.   Can be held liable for it (even though you can’t sell sec under it) If it’s wrong  have to make amendments to it (when you say it was wrong. certifying that the prelim prospectus constitutes full. information and belief. put in red herring. identified all risk/explained business.2. hasn’t passed upon merits. Methods to attain them: Registration. complied with law. underwriters all have to be comfortable signing this)  should show that they’ve done their due diligence Notes: Why different requirement for UWs?  b/c company ought to know everything about itself  feeds perfectly into investor protection but also need capital markets that work  if underwriters are liable for ANY misrep for prospectus for any co they’re involved in they are not going to play  wouldn’t have efficient capital market  Have to put some bumper guard on the underwriter’s liability (to the best of their knowledge/belief. They have an obligation to be careful/ responsible. certification process begins… FORM 41-101F1 AND OSA Section 37.4. financial forecast. people lose faith in you. Efficient Capital Market.

then per s. then they’re liable. there’s a trade in a security that constitutes a distribution. Increase Confidence.2 Filing with Administrator & Obtaining a Receipt for Prelim First receive a preliminary receipt (if comply with all requirements –s. 3. were careful. Preliminary Receipt: 1) Complete prelim (certified. if there’s a misrep in that doc you didn’t know about and onus is on company to show that you know about it (almost impossible).Why certify?  b/c of liability for misrepresentation   Under s. 130(1) of the OSA: if there is a misrepresentation in that prospectus (omission or misstatement)  the company has STRICT liability For Issuer: Only defence is that purchaser purchased with knowledge of the misrep. Doesn’t matter if they intended to make a mistake. filed a preliminary prospectus.4. red herring) 2) File with Administrator along with supporting docs 3) Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations a.2.3 The Waiting Period. More culpable than you are. Vetting/ Comment Letter and Amendments      At this point. respecting form/content.Director SHALL issue receipt).66: Any dealer distributing a security to which section 65 applies shall. without solicitation. then delivery the prelim to those who have expressed interest in buying (solicited or not) per s.4. send a copy of the preliminary prospectus to each prospective purchaser who. signed. Can be 3-4 weeks or longer 28 Three Policies: Protect Investing Public. Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little discretion with giving receipt for prelim as long as it appears to have all the things required) 4) waiting period begins + delivery a. remedies . Section 54: prelim must be in compliance with all requirements of ON Securities law. 3. But just $. it ought to be the company over you. indicates an interest in purchasing the security and requests a copy of such preliminary prospectus. Interval of time b/w when you get receipt for PPr when you get started gathering interest Securities cannot be sold until the final prospectus is filed and a receipt is obtained. and b. Delivery of Prelim to those who have expressed interest in buying (solicited or not)  You must deliver the preliminary prospectus to all those who have expressed an interest in purchasing (whether you’ve solicited their interest or not – so even if unsolicited) Section 66 of the OSA – Distribution of Preliminary Prospectus  S. disclosure. It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin B. then waiting period begins. Efficient Capital Market. If Innocent misrep and one of them has to lose money. Methods to attain them: Registration. It gives potential investors time to consider the features of an investment. in addition to the requirements of clause 65 (2) (c).66 of OSA A.54. Underwriter has a due diligence defence o Huge obligation. obtained a receipt. The preliminary prospectus is the sole document containing representations about the security during the waiting period.55.

etc. if every such notice. o (b) distribute prelim: to distribute a preliminary prospectus. or Stanley cups?)  POLICY: You’re going to lose if you challenge the comments  they’re protecting the investing public. 29 Three Policies: Protect Investing Public.3. o (a) communicate re: price and such.4. letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained. her or it. the period between the Director’s issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Director’s issuance of a receipt for the prospectus. When you deliver that PPr to the Securities Commission.1 Purpose of the Waiting Period Policy: 3 reasons for waiting period: 1) review for deficiencies.  (2) Distribution of material during waiting period: Despite section 53.65(1) “Waiting period” defined: In this section.“waiting period” means the period prescribed by regulation or. pictures of chef in the prospectus for Four Seasons  not selling chefs  are you selling hockey.  Example: Pictures: OSC freaks out about pictures b/c don’t want it to be too flashy/salesman -ish. No point giving investors information if you don’t give them time to digest it. 2) giving investors time to review. they assign some accountant/lawyer to your prospectus and they review that document to list deficiencies you have to fix before you get a receipt for the final Prospectus (this is the lie – by saying they haven’t passed on merits.g. prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security. 3) allowing for underwriter’s assessment of the market 1) Deficiencies a. lots of time to read it. disclosure. a copy of the preliminary prospectus is forwarded to him. advertisement. and o (c) soicit expressions of interest. then communicate to underwriter to determine demand and therefore price 3. No fast sales-person tactics. You can challenge the deficiencies. but subject to Part XIII. 2) Underwriter’s Assessment of the Market a. Efficient Capital Market. 3. impulse buying. can cause tensions. need time for company to deliver copies of Ppr to the investors. circular. Conflicts Between Issuer and Securities Commission  Accountant/lawyer at SC will issue the comment letter  issuer may not agree with deficiencies. remedies .4. underwriter that’s going to sell them and be responsible for the sale has to assess the market. a “comment letter” or “deficiency letter” will be provided. advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued. if then determined. IF it has name of place where they can get prelim: to distribute a notice. b. Methods to attain them: Registration. Increase Confidence. the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations.Section 65 of the OSA – Waiting period s. the OSC. stating the price thereof.2 Vetting & Comment Letter When vetting is complete. it is permissible during the waiting period. if no period is prescribed.3. lawyers. go through and give a list of deficiencies) 1) Investors have time to Review a. circular. (e. instead. IF a copy is then forwarded: to solicit expressions of interest from a prospective purchaser if.

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. 66: Distribution of Prelim Prospectus 67: Distribution List . send a copy of the preliminary prospectus to each prospective purchaser who. If representations were allowed prior to a final prospectus. OSA. Part XVI: Distribution Generally Sections 65. price. circular. the price. . letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained. 66 and 67 Section Description 65(2)(a)-(c): (2) Distribution of material during waiting period Despite section 53. it is permissible during the waiting Waiting period. stating the price thereof.3. Efficient Capital Market. and (c) to solicit expressions of interest from a prospective purchaser if.3. advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued. her or it. indicates an interest in purchasing the security and requests a copy of such preliminary prospectus. advertisement.3 Constrained selling activities during waiting period Selling activities during the waiting period are constrained: You can only solicit expressions of interest (s. without solicitation. 65 “trading” activities cease until a revised prelim is filed if the prelim ends up being defective (s. prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security. Increase Confidence. OSC can also stop any of these s. where it can be bought. identifying security. the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations. 68) All you CAN DO is: advertise that there IS a security. 67) in case you have to amend it. . if every such notice. circular. Period (a) to distribute a notice. in addition to the requirements of clause 65 (2) (c). 66). Notes: Can have some advertising.4. The reason is that it would defeat the purpose of a prospectus with statutory liability for misrepresentation if selling were allowed. (b) to distribute a preliminary prospectus. a copy of the preliminary prospectus is forwarded to him. 65) and deliver the preliminary prospectus (s. and where you can get a copy of the prospectus (NI 41-101) POLICY: Selling during the waiting period is constrained. if then determined. but subject to Part XIII. the investor would not be protected by statutory liability for false representations. so everyone who got a copy of the prelim can get a copy of the amendment 30 Three Policies: Protect Investing Public. Methods to attain them: Registration. and have to keep a list of whoever you deliver it to (s. Why? In case there is a material change. disclosure. remedies Page . and can give out prelim prospectus (41-101) Distribution of preliminary prospectus Any dealer distributing a security to which section 65 applies shall.

but acting in furtherance of a sale in securities will result in penalties (because it’s a TRADE without a prospectus)  This creates bizarre results EXAMPLES  Eg. Increase Confidence. without giving notice. can’t put ads on TV of no payment until 2078  corporate image advertising is okay. Methods to attain them: Registration. and state the name/address of a person or company who you can buy them from. Canwest Global goes public  in waiting period. has to be governed by real integrity (need a legitimate. Does this make sense?   E. it circumvents the role of the prospectus  if you can advertise with glossy brochures with high lights and no low lights. no predictions  OSC will look at why you’re advertising: normal corporate image advertising is acceptable. impossible. but can’t use that to promote sale of securities. can’t sell securities pursuant to the elephant)  E. advertising during waiting period (CTV’s gonna play it at the same time. Sharon. Lois and Bram goes public  interviewed the elephant (No . disclosure. the Director may. put their leading story to say guess what. credible capital markets system that ppl can rely on) o We can’t police the advertising. no projections. SC – too bad)  E. remedies .Advertising during waiting period. and where you can get the prospectus. no restrictions on advertising during waiting period  BP for instance. would apply factual test based on whether advertising could reasonably considered to be in furtherance of a trade  no forecasts. in UK. so have to make these rules to ensure that integrity of capital markets is paramount Other Side:  31 Three Policies: Protect Investing Public.g. does that mean during 6 weeks of waiting period.g.3. Efficient Capital Market.68: Defective Prelim Prospectus Defective preliminary prospectus Where it appears to the Director that a preliminary prospectus is defective in that it does not substantially comply with the requirements of Ontario securities law as to form and content. 6:00 news.4. OSC Test for Whether or not Advertising is Okay FACTUAL TEST in furtherance of a trade: OSC staff said in determining whether ads are prohibited. 3. . The Brick  goes public.g.4 Limitations on advertising during waiting period POLICY: If you allow advertising. you’ve circumvented the whole process because investors never get to read the risks via final prospectus PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period All you can do in terms of advertising during the waiting period is: IDENTIFY the securities. SC says you can’t do that. we’re going public. state the price of the securities. OSC Argument: o b/c capital markets are so fundamental to our operation as a country – can’t allow system to be governed by slick advertising. order that the trading permitted by subsection 65 (2) in the security to which the preliminary prospectus relates shall cease until a revised preliminary prospectus satisfactory to the Director is filed and forwarded to each recipient of the defective preliminary prospectus according to the record maintained under section 67.

67 list (s. POLICY: All we’re doing is excluding the 99% of people benefitting from these transactions. here’s where you can get a prospectus. disclosure. and you should o I think it’s elitist to assume people won’t understand it. and [… investment blabla] (1) Where a material adverse change occurs after a receipt is obtained for a 57(1): Amendment preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or. Increase Confidence. won’t even know it exists (protecting you from big profit  don’t advertise so people don’t know about them)”  Legal Fiction  how can you advertise a preliminary prospectus is available if you can’t advertise?  you don’t. obviously there’s a risk that there will be a change in the business (e. will hire lawyers/accountants to do protect themselves) o Note: Perhaps this will change with social media/ internet – ppl will engage in uncontrolled advertising o 3. 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. you’re not smart enough to figure out the risks of the market o Countering the huge risk argument  once it’s on the TSX. just have to be sophisticated when it first goes public for $6 *good question – should you be able to advertise them in a flashy way? *Exam o Can just advertise the prospectus. but none of us understood this until we heard it in this course o Dumb b/c whole reason for prospectus fiction is to protect the investors (the big investors don’t need the protection. an amendment to such preliminary prospectus or prospectus. where a material change occurs after the to Preliminary receipt for the prospectus is obtained but prior to the completion of the distribution on Material under such prospectus.  People make lots of $ off public offerings  “we’re going to protect you so much that we deny you access to the capital markets. you have to file an amendment ASAP or in any event within 10 days (s. […] (3) Notice of amendment 32 Three Policies: Protect Investing Public. b/c as a normal person. Methods to attain them: Registration. shall be filed as soon as practicable and in any event within ten days Change after the change occurs. means. remedies Page . Would need some protections.5 Amendments if there are changes during the waiting period Because there’s a period of time b/w receipt for prelim and final prospectus. or (ii) a decision to implement a change referred to in sub-clause (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. .3. and you don’t get to play/participate!  They’re saying if you’re not rich. . Material Change (i) a change in the business. fire. The 1% that has a broker and has access and knowledge and gets prospectuses/isn’t normal. 57(1)). and then send a notice to all investors under your s.g. Don’t have to be sophisticated. 57(3)). Efficient Capital Market. as the case may be. (a) when used in relation to an issuer other than an investment fund. OSA – PART XV – Prospectus Distribution – Amendments on Material Change Sections 1(1). say we’re gonna sell it. you can go buy them. gets the profit from the stuff and the entire public doesn’t.4. maybe not the actual sale of it. new k) If a material ADVERSE change occurs. 57(1) and (3) Section Description 1(1): “material change”.

Increase Confidence. in the time btwn final prospectus and closing there is no other time to correct (must send amendment) 33 Three Policies: Protect Investing Public. forthwith after it has been filed. Methods to attain them: Registration. Efficient Capital Market. ***NOTE: B/w prelim and final. only ADVERSE changes must be reported. be forwarded to each recipient of the preliminary prospectus according to the record maintained under section 67.An amendment to a preliminary prospectus referred to in subsection (1) shall. disclosure. B/w filing final and end of distribution. HOWEVER. remedies . ANY CHANGE must be reported (adverse/not)  Reason for difference: more important for investors to know about neg than pos things.

and (ii) the other resources of the issuer. basically have to show that you have financing so that there’s less risk to the investor’s $ and they can make an appropriately informed decision (d) the issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of the financial condition of. or (iii) contains a misrepresentation. overall: Lastman is comforted by this provision.4.  (i) the issuer. (ii) contains any statement. because the company is too new. what you’re doing with $ and where it’s going. etc. 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.g. remedies . Methods to attain them: Registration.61: (1) Issuance of receipt – PUBLIC INTEREST: Subject to subsection (2) of this section and subsection 63 (4).    (i) does not comply in any substantial respect with any of the requirements of this Act or the regulations.1 Final Receipt  This is when the OSC moves away from regulating disclosure and the quality of it. disclosure. even if you’ve disclosed everything. (2) Refusal of receipt: The Director shall not issue a receipt for a prospectus or an amendment to a prospectus under the following conditions (a) the prospectus or any document required to be filed with it.3. The Commission (lawyers and accountants) has the authority to say no to the public offering. estimate or forward-looking information that is misleading.4.. false or deceptive. the Commission has the authority to say no.61) s. Efficient Capital Market. venture is too risky. promise. Increase Confidence.4.  Have to include “use of proceeds” in prospectus. is insufficient to accomplish the purpose of the issue stated in the prospectus. Even if investors are fully informed.)  HOWEVER. POLICY:  May not be a good thing for them to be refusing a receipt for the reasons typically used (e. in that an objective third party is looking after the efficiency/integrity of the capital markets (someone with a greater interest than individual investors who think they know better)  See after case examples below: OSA – Prospectus Distribution – Final Receipt (s. and ACTUALLY goes on to regulate the MERITS of the offering  This section gives them a mandate to review the offering.4 Filing the Final and Obtaining a Receipt and Changes Post-Filing 3.  Note: Clear statutory authority to eval prospectus on its merits (discretion of commission at play) (c) the aggregate of. (b) an unconscionable consideration has been paid or given or is intended to be paid or given for any services or promotional purposes or for the acquisition of property. (i) the proceeds from the sale of the securities under the prospectus that are to be paid into the treasury of the issuer. 34 Three Policies: Protect Investing Public.

then the company will bail. could mention that they may not ISSUE a receipt if they’re concerned about this (even if it’s just a rumour) o *POLICY: is WAY beyond disclosure. is about regulating the merits of the offering. (3) Hearing: The Director shall not refuse to issue a receipt under subsection (1) or (2) without giving the person or company who filed the prospectus an opportunity to be heard CASE EXAMPLES OF OSC REFUSAL Rivalda Failed to issue receipt for a junior mining company offering b/c felt directors were too inexperienced. Methods to attain them: Registration. directors. directors or control persons. or (iii) the investment fund manager of the issuer or any of the investment fund manager’s officers. sell all their shares in the secondary market and peace out. (ii) any of the issuer’s officers. but not if it sacrifices investor protection and confidence) (f) unacceptable professional discretion: a person or company that has prepared or certified any part of the prospectus. Balance of risk b/w new owners/old owners to ensure that you’re not buying into something where the founders don’t have any skin in the game (h) adequate arrangements have not been made for the holding in trust of the proceeds payable to the issuer from the sale of the securities pending the distribution of the securities. promoters. directors. directors or control persons. That doesn’t sound good. Therefore. is not acceptable. or  Note NP 46-201: Escrow for Initial Public Offerings: o Remember IPO is first time that company is going public with shares (doesn’t apply to more mature companies returning to the market).    (i) the issuer. worried that all the investors will give the company their money. (same kind of deal. or (iii) the investment fund manager of the issuer or any of the investment fund manager’s officers. have to enter into satisfactory escrow arrangement that provides that you are not entitled to sell more than 1/3rd of your shares every year for the first 3 years (termed escrow agreement). o Therefore. o Notes: *so on that past exam. Efficient Capital Market. even though they indicated and DISCLOSED that they were inexperienced Lake Forest Fund 35 Three Policies: Protect Investing Public. promoters. or that is named as having prepared or certified a report or valuation used in connection with the prospectus. or control persons. are not going to allow you access to the public markets if unhappy with your director or whoever’s conduct. disclosure. if they’re unhappy with an expert) (g) an escrow or pooling agreement in the form that the Director considers necessary or advisable with respect to the securities has not been entered into. Balance b/w investor protection/ confidence in the market and efficiency of the market (want to have IPOs. remedies .  (ii) any of the issuer’s officers. (e) the business of the issuer may not be conducted with integrity and in the best interests of the security holders of the issuer because of the past conduct of. Increase Confidence. or control persons.

etc. no section 61 problems. he loves the OSC. Methods to attain them: Registration.4. not trying to protect one investor (not that myopic). His take on OSC:  Confident to have fate held in reasonable hands of reasonable people making decisions in the interest of the public good o As long as they’re acting in the best interests of the public (which they do). Decision: OSC wouldn’t issue a receipt for final prospectus because success depended on FDA approval of a drug and thus too risky – company made this very clear on the face of the document that drug was not permitted in Canada and needed FDA approval – finally OSC approved – ended up getting FDA approval (but what would happen if no approval –see policy) POLICY NOTES POLICY (keep in mind these are outliers. thought too much money would go to the promoter. We need to protect our capital markets b/c if they suck. but then LET THE PUBLIC DECIDE?  Seems hard/sketchy in a situation where you have lawyers/accountants at the OSC telling people suffering from late stage Parkinson’s that they can’t get access to this great drug because the OSC thinks it’s too risky (even though disclosure is all there) BUT COUNTER-ARGUMENT: Cost to society is that people will not invest markets if we don’t protect its integrity and if people lose all their $ on risky investments  need to take steps to protect the economy. take out red herring. Was obvious in doc that they might never get approval. no company can go public. Efficient Capital Market.  At the end of the day. if we don’t have confidence in those markets) (cost-benefit analysis to keep markets efficient) 3. even against people who think they know better. and then your $ is lost. Files Prelim prospectus to raise $ to get FDA approval.therapy for late stage Parkinson’s. Decided to come back to Canada and form a private company (Deprenyl).5 Closing & Any Post-Final Amendments  Assuming you’ve made all the changes. put in price/matters dependent on price. get receipt for final prospectus which finally gives you right to sell securities. and overall. disclosure. then decisions are almost always right o Decisions made by people that are thoughtful/caring. sign underwriting agreement.This is a paternalistic approach: why not just force them to give the information to the public. no drug can come to market.Failed to issue receipt because they did not like the disclosed fee structure. Deprenyl Facts: Parkinson’s sufferer goes to US and finds a drug that helps the symptoms . remedies . now get ready to close 36 Three Policies: Protect Investing Public. but protect integrity of capital markets (sometimes means companies can’t go public. decisions are typically effective) . then that’s a price worth paying to protect integrity of capital markets b/c without that. He took it and felt better. investors will go elsewhere and then we’re bankrupt. we don’t have anything. or can’t bring beneficial drugs to market. finally deliver prospectus to anyone who asked/anyone we want to sell it to. which comforts him as opposed to arbitrary code. Increase Confidence.

5. s. S. then you agreed to buy 4 days ago. you received prospectus today. send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day. after receipt by the purchaser of the latest prospectus and any amendment to the prospectus. sign a bunch of doc. 37 Three Policies: Protect Investing Public. o NOTE:You want to deliver the prospectus as quickly as possible after entering into the agmt of purchase and sale b/c they have this two day period to change their minds o POLICY: The cooling off period gives purchasers an opportunity to have time with the final prospectus (for every offering. amendment delivered on Day 6. o Day 8: Amendment filed. not just IPOs Withdrawal Right Explanation & Examples (from class handout) When does the cooling off period?  Scenario A: if you agreed to buy 6 days ago and received the prospectus todayDay 3  Scenario B: if there was a fire 6 days ago. receive prospectus today.4. Efficient Capital Market. exclusive of Saturdays. Sundays and holidays. deliver cheques. Increase Confidence.1 Delivery of Prospectus & Inclusion of Purchaser’s Rights  Final prospectus must be delivered to everyone (except to those whose 2 day cooling off period has expired) o A dealer upon receiving an order or subscription for a security offered in a distribution must send the purchaser a copy of the prospectus before or within two business days of entering into a written confirmation of sale of the security o Further.5. disclosure. received prospectus today and amendment delivered on 2nd dayDay 4 (b/c that’s when you received info)  Scenario C: if you agreed to buy 4 days ago. R. something occurs. Methods to attain them: Registration. but a fire occurs on day two and amendment delivered on day 12 Day 14 since buyer has not had 48 hour with all info until Day 12  Scenario D: if you agree to buy 4 days ago. o ANSWER: On Day 4: I am bound.  (2) Withdrawal from purchase (2 day cooling off period): An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser. unless the dealer has previously done so. o Day 2: I say I’ll buy and do. Closing is really nothing more than collection of cheques. o Day 6: fire occurs. the purchaser has a two-day cooling off period to change their mind OSA. 1990. c. remedies . exclusive of Saturdays. Sundays and holidays. a fire occurs on day 2. 71 (1).O. after entering into such agreement. then the company is a reporting issuer under laws of Ontario 3.60: Statement of Purchaser rights: Every prospectus shall contain a statement of the rights given to a purchaser by sections 71 (withdrawal rights) and 130 (right to sue for misrepresentation).  Section 71 (1) Obligation to deliver prospectus: A dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection 53 (1) or section 62 is applicable shall. if the dealer from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day. Want to issue share certificates in these denominations to these people.S.Prospectus Distribution s. a strike occurs on day 12 and amendment delivered on day 16 Day 8 b/c it is 48 hours after the provision of the latest information – recall can’t give you more than 48 hours so strike is just tough luck  Scenario E: o Day 1: Prospectus Delivery. certificates distributed.

remedies . 57(1) says you only have to do an amendment for material adverse change (you can for any change. where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus. send copies.5. you have to deliver an amendment  positive OR Negative change…But during waiting b/w receipt for prelim and receipt for final. exchange cheques for certificates and close. but positive or negative has to be disclosed?  During waiting period o If negative  We don’t know if people will read the whole thing again at the final stages. haven’t been able to enter into binding agreements of purchase and sale. shall be filed as soon as practicable and in any event within ten days after the change occurs. want to bring it to your attention o But if it’s positive.  As long as you’ve had 48 hours with all the information. s.130 (below) = second statutory right 3. etc. b/c they can disclose positive if they wish (and probably would to induce sales)  After receipt for final prospectus o There is no document IN BETWEEN the final prospectus and the continuous disclosure regime that kicks in AFTER they become a reporting issuer (nothing to keep the file complete during closing)  need something to make sure information is always picked up 38 Three Policies: Protect Investing Public. and fourth  deliverers are supposed to take proper steps to ensure that the docs arrive at their destination in an unaltered form  See liability under s. strike. Efficient Capital Market.  things can change If there is a material change in affairs of company b/w final receipt and closing. Increase Confidence. collect cheques. Methods to attain them: Registration. Whereas if the fire occurred on day 3. and WHEN I became AWARE of the change Effective Delivery – NP 11-201 (Delivery of Documents by Electronic Means )  NP 11-201: allows the prospectus to be delivered electronically if four components are met for satisfactory delivery: o I) Notice: recipient of document should receive notice that the doc has been or will be sent electronically o II) Easy Access: recipient should have easy access to the document o III) Evidence that doc has been delivered: deliverer has to have evidence that doc was delivered or otherwise made available to the recipient o IV) Must not be different: the doc received by the recipient must not be different than the doc delivered  First 3 can be satisfied if informed consent of recipient is obtained. Send prospectus. and the amendment comes out on day 6. fire. Any Change! Not Just Adverse! (1) 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. you are bound. disclosure. then go to company. sign papers. but that takes a long time (let’s say 3 weeks) But company doesn’t stand still for those 3 weeks  sign contracts. an amendment to such preliminary prospectus or prospectus. POLICY BEHIND DIFFERENCE:Why would you have to do amendment for MAE during waiting. get printed. as the case may be. don’t mind b/c it’ll be picked up in the final prospectus o We’re more worried about negative things than positive things. I’m not bound until Day 8 because I didn’t have all the information until Day 6.4. so if something negative happens.2 Changes Post Filing of Final Prospectus (Any change must be reported in amendment)   Closing: If you have to raise $200m.  it matters WHEN the CHANGE happened. if you want) OSA 57(1) again except this time.

o

B/w receipt and closing, only thing to make sure it’s entirely complete, demand there’s an amendment for positive or negative change Otherwise, there could be a gap.

3.4.5.3 Lapse of Prospectus Distribution can continue for 12 months from date of receipt for the preliminary prospectus. After this period, the prospectus is said to have lapsed (per s.62(1)) and no further distributions of the security can be made without a renewal of the prospectus (per s.62(1.1)) Section 62(1) s.62(1) Refiling of prospectus: “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. (1.1) Same: 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. 3.4.5.4 National Offerings (NI 11-202 Passport System) With national filings, there is a principal regulator (main rule for choice of PR is jurisdiction in which issuer’s head office is located). If head office is in a location that isn’t in any of the jurisdictions of potential principal regulators, then it’s the regulator in the jurisdiction with which the issuer has its most substantial connection  Procedure: o Issuer files prelim prospectus and supporting material with regulator in each province where securities are to be distributed. Issues a decision document if satisfied (the PR), which serves as a receipt for the prelim. o The non-principal regulators have to use best efforts to advise PR within 5 days if they have any material concerns that would cause them to opt out o If they have no material concerns, indicate on SEDAR filing status screen that they’re ready to receive final prospectus. When comments have been dealt with, principal jdiction can issue MRRS decision document that operates as a receipt for the final prospectus on behalf of PR and NPRs that have not opted out 3.4.6 Consequences for Failure to Deliver/ File Prospectus (practically, none) 3.4.6.1 Failure to Deliver Penal, Admin and civil sanctions HOWEVER in reality, there are few penalties according to Lastman 1. Penal Sanctions  Failure to deliver a prospectus may expose the dealer (who would act as principal or agent) to a penal sanction of fine or imprisonment. 2. Administrative Sanctions  Imposed by securities commission or administrator  Can include cease trade orders, reprimand or sanction, denial of exemptions, an order directing compliance, restriction on registration. 3. Civil Sanctions  Where the prospectus is not delivered as required, the purchaser has a right of action for (1) rescission (undoing the contract from the beginning) or (2) damages against the dealer who failed to deliver the prospectus. 39
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

This is subject to a limitation periods o OSA 138(a): 180 days after the date of the transaction that gave rise to the cause of action o In any action other than rescission: 138(b): the earlier of (i) 180 days after P first had knowledge of the facts giving rise to the cause of action or (ii) three years after the date of the transaction that gave rise to the cause of action

3.4.7 Failure to File (likely not needed) Penal, administrative, and civil sanctions. 1. Penal Sanctions  Failure to file a prospectus where required, or distributing a security without having obtained a receipt for a prospectus as required can lead to penal sanction of a fine or imprisonment. 2. Administrative Sanctions  Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 88.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrant’s registration 3. Civil Sanctions  Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 88.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrant’s registration 3.4.8 Liability for Misrepresentation in a Prospectus 3.4.8.1 Liability WHO IS LIABLE - Company, directors, selling security holders, officers who signed prospectus, underwriters, and the experts all may be liable for a misrepresentation in the prospectus. Policy- have everyone liable to give incentive to be careful.  Selling Securityholders: o (a) have to get company to agree to sell your shares under prospectus o (b) understand that you’re liable for misrepresentation under that prospectus  POLICY: Why have everyone liable? To give incentive to be careful. Underwriters/Directors/Selling Secholders will be more careful if they’re going to be liable, Directors will actually read it. o Prob – may have made it harder for high quality directors to serve on boards of public companies as they are worried about liability therefore, less competitive companies s.130: sets out liab, damages and defences for liab Recall: s.1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to state material fact that is required to be stated or that is necessary to make a statement not misleading in light of circumstances in which it was made.  Can be liable for not amending the prospectus to reflect a material change, but not for failing to report material FACT (Danier)  Option of Claims for Purchaser Upon Misrepresentation: 40
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

o o

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(i) CONTRACTUAL CLAIMS: Rescission (get money back) (ii) DAMAGES: statutory rights under 130 of OSA  130(10): “these statutory rights are in addition to and not in derogation of any rights at common law”  Plaintiff must show: (a) purchase of the security offered under the prospectus, (b) that the purchase was made during the period of the distribution and (c) that there was a “misrepresentation” in the prospectus.  If they establish this, subject to some defences: plaintiff is entitled to rescission or damages (iii) TORT: (a) fraudulent misrepresentation (b) negligent misrepresentation (Hedley Byrne, Queen v. Cognos p. 153)  Fraudulent misrep: D made false statement knowingly or without belief in its truth or was recklessly careless whether it be true or false & P relied on the statement to his detriment  Negligent misrepresentation: Duty of Care based on a special relationship between representor and representee; rep was untrue, inaccurate or misleading; representor acted negligently in making misrep; representee relied, in a reasonable manner, on the misrep; AND reliance was detrimental (damages resulted)

Establishing a Claim for Damages for Misrepresentation: In a document: i. Issuer is either A. Reporting issuer B. Any other issuer with a real and substantial connection to the jurisdiction any securities of which are publicly traded. ii. Disclosure “document” contains a “misrepresentation” (which includes both misstatements and omissions) and iii. The P “acquired or disposed of” a security during the period in which the document was released and before the time the misrepresentation was corrected. OSA, s.130: Liability for misrepresentation in prospectus (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), 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.

 

(2) Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER – STRICT LIABILITY (+ under (7) showing that the diminution in value wasn’t from misrep) 41
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his.  (a) that the prospectus or the amendment to the prospectus was filed without his. and that. her or its report. on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he. (i) the person or company had.   (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation. after reasonable investigation. she or it had reasonable grounds to believe and did believe that the statement was true. her or its own report. reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his. she or it forthwith gave reasonable general notice that it was so filed. 42 Three Policies: Protect Investing Public. opinion or statement as an expert. opinion or statement of the expert or was not a fair copy of or extract from the report. he. Increase Confidence. and he. she or it would not be responsible for that part of the prospectus or the amendment to the prospectus. opinion or statement as an expert. 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. or (e) that. or (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his. disclosure. Methods to attain them: Registration. No person or company is liable under subsection (1) if he. with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his. she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor. he. she or it proves. her or its report. 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. after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser. (c) that. opinion or statement of the expert. she or it. her or its own report. is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his. Efficient Capital Market. her or its own authority as an expert or purporting to be a copy of or an extract from his. (d) that. he. other than the issuer or selling security holder. she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he. (b) 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. remedies . opinion or statement. her or its own authority as an expert or purporting to be a copy of or an extract from his. on becoming aware of its filing. other than the issuer or selling security holder. it was a correct and fair representation of the statement or copy of or extract from the document. opinion or statement as an expert unless he. her or its knowledge or consent. her or its report.       (4) Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company. she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. opinion or statement of an expert. (3) Idem: No person or company. is liable under subsection (1) if he. or (b) believed there had been a misrepresentation.

because they believed target would be met by the end of the quarter. is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report. Actual revenues were not that far off of estimate by the end of the year.   (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation. (8) Joint and several liability: All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable. Efficient Capital Market. Chose not to issue press release. Methods to attain them: Registration. but before final. but before end of distribution. opinion or statement of an expert unless he. remedies . (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that (6) Limitation re underwriters: No underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter. or (b) believed there had been a misrepresentation. and it did not go well. Sold for $11. (9) Limitation re amount recoverable: In no case shall the amount recoverable under this section exceed the price at which the securities were offered to the public. if sued separately. 157 Ratio: Only have to report material CHANGES post-filing. 2007). Danier (SCC. (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1). (“présentation inexacte des faits”) Kerr v. and realized they were lagging behind. have to show (1) you believed there was no misrepresentation. not material facts. disclosure. deemed Facts: Danier began distributing shares under a final prospectus in 1998.25/share. Increase Confidence. Issued a revised forecast to the OSC. Danier’s shareholders that lost $ sued to 43 Three Policies: Protect Investing Public. After final. had a sale that didn’t go great. other than the issuer or selling security holder.(5) Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company. would have been liable to make the same payment provided that the court may deny the right to recover such contribution where. 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. They then issued a press release/material change report and the stock price went down on the date of the announcement. Q4 revenues were lower than forecast. P does not have to prove reliance. Forecast of sales (FOFI) contained a warning that “there is no guarantee that such Forecast will be achieved in whole or in part”. (10) No derogation of rights: The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. Did an internal (not required) review of the numbers. Then had a Victoria Day sales promotion. A forecast can be the subject of misrepresentation. it is satisfied that to permit recovery of such contribution would not be just and equitable. o Notes: Thus. After prelim. she or it. (a) an untrue statement of material fact. in all the circumstances of the case. Section 1(1) Misrepresentation “misrepresentation” means. or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made.

since securities are offered under the prospectus during the period of distribution. Leave given to SCC.  In May 2004. but onus is on D to prove (almost impossible) Section 130(2): also not liable if you show they knew about the misrep Section 130(9): Can only recover what was spent: the most you can recover is what you spent (what securities were offered to public for). only material changes: Issuers do not have an obligation to update a prospectus to reflect material facts after filing and do not have civil liability for failing to do so. ON TJ held that Danier and its officers were liable for statutory misrep in prospectus relating to an earning’s forecastpoor revenue was a material FACT that Danier was required to disclose. o **HE SAYS SCC APPLIES BJR.get back $ they lost. underwriter only responsible for portion underwritten by them (total public offering price of their part) Section 130(1)(d): Experts only liable for Expertised Portion: experts only responsible for expertised portion (so if giving tax opinion. Need only to report material changes. reliance is deemed if it was misrep at time of purchase: The plaintiff does not have to prove reliance. the plaintiff is deemed to have relied on the misrepresentation if it was a misrepresentation at the time of the purchase. o Also note: and “include an omission to make a statement not misleading” is meant to capture “half-truths. and says they won’t interfere with business judgment. Don’t have to do an amendment for material fact (trial judge didn’t give suff deference to business judgment rule – fact that directors were wrong wasn’t the issue). Instead.2 Damages UNDER STATUTORY ACTION: Purchaser would claim diminution of security as a result of misleading nature      Section 130(7): Defence of showing that SH loss was not from misrepresentation: defendant is not liable for all or portions of damage if diminution is not the result of the misrepresentation. Implications:  Issuers do not have an obligation to update prospectus to reflect material facts. Efficient Capital Market. It also may apply to secondary market purchases as well. and said that it was a misrepresentation for Danier not to include the initial information about lagging behind (saying it was necessary to make the forecast not misleading under (b) of the misrep definition Decision: In December 2005: ON CA: reversed trial decision. To impose civil liability where an issuer has complied with the Act would be contrary to the securities legislative framework. remedies . then only liable for that) o Would have to show under 130(4) that you did your due diligence o Joint and Several Liability if you ARE liable under expert portion 44 Three Policies: Protect Investing Public. not material facts.”  3. no opportunity costs Section 130(6): Proportionate for Underwriters: if more than one. disclosure. In 2007: SCC: dismissed the appeal. The business judgment rule does NOT apply to limit statutory disclosure obligations if an obligation to make disclosure otherwise exists.4. Increase Confidence. upheld ON CA’s decision.8. Methods to attain them: Registration. but they actually don’t  they disagree that the BJR applies (only part of ON CA judgment they don’t uphold) (they actually say that business judgment has nothing to do with disclosure  you’re obligated to provide certain disclosure and you cannot “business judgment” your way out of that. Purchasers do not have to prove reliance.

ii. He or she did not consent to the filing of the prospectus or that consent was withdrawn. b/c won’t play  but if you say you have an obligation to be CAREFUL  that sounds reasonable (due diligence is so that someone will be CAREFUL)  *It’s hard to get good directors when we over-regulate everything to death. Can’t hold them to absolute standard. with reasonable general notice of the withdrawal and the reason for it. you should have known everything. disclosure. v. she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. He or she conducted a reasonable investigation to produce reasonable grounds for a belief that there was no misrepresentation and he or she did not believe there had been a misrepresentation: due diligence defence. one has to lose money. iv.130: Defences 1. who should suffer b/c of it? Issuer. Section 130(8): J&S Liability: all defendants jointly and severally liable for the whole. you can get it back from them) (2) but also need efficient capital markets  which is why we have defences  Absent defences. not investor. Efficient Capital Market. you had all info  Thus. The person purchasing the securities had knowledge of the misrepresentation. hard to balance Defences Defendants can avoid liability by showing that: i. but they can seek contribution from each other unless the court denies that right to contribution (if not “just & equitable”) POLICY: (1) Investor protection: : will be more careful if you’re fully liable (also with J&S liability  you’re liable so shouldn’t put the burden on the plaintiff to sue different people to get the $)  Between two innocent people (expert and buyer. going to be expert. the depreciation in the value of the security was not caused by the misrepresentation. unless they knew. s. remedies . J&S Liability.8. Methods to attain them: Registration. Issuer OR security holder: “Strict” Liability (no Due Diligence Defence. has options i or v above)  Even if innocent mistake in misrep. iii. and did not believe. 45 Three Policies: Protect Investing Public.4. the issuer/selling securityholder only has two defences (both extremely hard to prove) and NO due diligence: o Section 130(2) and (7)  (2) Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER – STRICT LIABILITY (+ under (7) showing that the diminution in value wasn’t from misrep)  No person or company is liable under subsection (1) if he. who is going to play?  How are we going to get underwriters to sell securities if they’ll be liable for any misrep in any prospectus for hundreds of millions of dollars when they only make 2 million? (if they don’t play. The statement was not made by him or her and her or she had no reason to believe. prior to the purchase of the securities by the purchaser. Increase Confidence. we don‘t need investor protection b/c no one’s selling securities) 3. tho. that it was a misrepresentation.3 Defences POLICY –Why do we have defences?  Defences are rooted in the concept of efficient capital markets – you cannot be leaning so hard toward investor protection that it doesn’t work. investor has cleaner hands than you.

diminution in value. 130 (2) Again – showing they knew. Due Dilig defence for everyone except the issuer and selling securityholder – e. Methods to attain them: Registration. 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.  (a) that the prospectus or the amendment to the prospectus was filed without his. have to show (1) you believed there was no misrepresentation. disclosure. on becoming aware of its filing.  Notes: Thus. o (3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) – “reasonable grounds” – see below or above. her or its own authority as an expert or purporting to be a copy of or an extract from his. Experts (Joint and Several Liability. other than the issuer or selling security holder. the “they knew”. and that. and only for expertised portions – has all defences from above available + 1)  Experts are only liable for expertised portions. (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove)  In an action for damages pursuant to subsection (1). her or its own report.g. opinion or statement as an expert unless he. she or it. she or it forthwith gave reasonable general notice that it was so filed. and depreciation not from misrep and also have separate defences for their liability of the EXPERTISED portions  S. have a defence for DD. 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. opinion or statement of the expert or was not a fair copy of or extract from the report. 3. Increase Confidence. did not consent. he. her or its knowledge or consent. or  (b) believed there had been a misrepresentation.  (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation. (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that o (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1). Efficient Capital Market.  (c) that. the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. remedies . due diligence. opinion or statement of the expert. he.g. the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. Directors. NON-EXPERTS (e. o (4) Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company. is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his. officers) Have defences that purchaser knew.130 (2) that the purchaser knew 46 Three Policies: Protect Investing Public. 2. and statement not made by them (failure to fairly rep opinion) o s.

have to show (1) you believed there was no misrepresentation. opinion or statement. reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his. her or its report. he. Methods to attain them: Registration. opinion or statement of the expert or was not a fair copy of or extract from the report. other than the issuer or selling security holder. o (c) that. and that. she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he. she or it would not be responsible for that part of the prospectus or the amendment to the prospectus. o (a) that the prospectus or the amendment to the prospectus was filed without his. with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his.   (3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) – “reasonable grounds”: No person or company. and he. her or its report. her or its report. 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. o (b) that. or  (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his. (5) Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company. is liable under subsection (1) if he. she or it forthwith gave reasonable general notice that it was so filed. other than the issuer or selling security holder. 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. is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report. (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that (7) depreciation wasn’t b/c of misrep DUE DILIGENCE DEFENCE 47 Three Policies: Protect Investing Public. her or its knowledge or consent. opinion or statement of the expert. on becoming aware of its filing.  (i) the person or company had. o (d) that. disclosure. after reasonable investigation. opinion or statement of an expert unless he. her or its own authority as an expert or purporting to be a copy of or an extract from his. he. opinion or statement as an expert. o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation. he. her or its own report. or o (b) believed there had been a misrepresentation. opinion or statement of an expert.  Notes: Thus. opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his. Increase Confidence. remedies . or o (e) that. on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he. she or it. opinion or statement as an expert. she or it proves. she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor. after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser. it was a correct and fair representation of the statement or copy of or extract from the document. Efficient Capital Market. 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. she or it had reasonable grounds to believe and did believe that the statement was true.

and did not investigate others. o No better way to say be careful than to be careful. Alleys forced to shut. liable. Counsel: young lawyer. In the middle of financial troubles. It simply establishes what is not acceptable (only a guideline). They could not. 132 s. Know your obligations and investigate. CFO: liable. and no way to define it other than be careful in that particular set of facts with that particular company. Customer failures in payments were understated. ought to know the facts. Underwriters need to make reasonable efforts to verify the data submitted to them. Irrelevant whether they knew what they were signing. company failed to state it was operating bowling alleys. this is the best we have.    Implications:  What is not acceptable for due diligence: This case doesn’t actually define due diligence. but really only says what is not acceptable  It does not matter whether you can read/ understand the prospectus. strict liability. you need to do your level of due diligence. Seniority does not matter. founders. Treasurer.Due Diligence: Standard of Reasonableness – s. or anyone else to found a due diligence defence. BarChris sold debentures containing several misrepresentations in the registration statement and prospectus. and there is little guidance in the OSA  Difficult to balance efficient markets and investor protection. Auditors also liable. industry overbuilt. Efficient Capital Market.132: In determining what constitutes reasonable investigation or reasonable grounds for belief for the purposes of sections 130 and 131. Need a reasonable investigation of your own. Methods to attain them: Registration. 163 Ratio: Attempts to define level of due diligence required. the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case. liable. you are liable. Can only evade liability if they prove purchaser purchased with knowledge of misrepresentation. No evidence of due diligence. Should have known BarChris was operating a bowling alley. Outside director (lawyer): liable. Knew about some of the contracts that were not enforceable. Escott v Barchris (USA. Lead underwriter found liable—relied on its legal counsel to do the investigation. POLICY and Client Info: due diligence is a judgment call:  Difficult to tell your client what a “reasonable investigation” actually means. so liable. 1968). disclosure. Decision:     Company liable. so keep that in mind. o POLICY: Integrity of capital markets needs you to be careful 48 Three Policies: Protect Investing Public. I need to have a reasonable investigation to avoid a misrepresentation Facts: BarChris was a construction company building bowling alleys. if not. Increase Confidence. Just tell client there’s an obligation to be careful (not necessary to be right) and you’ll be judged in hindsight. You cannot simply rely on experts. Lead underwriter not excused on the basis that it relied on its legal counsel. if you sign it. Cannot simply ask management if prospectus is accurate—you cannot simply rely on management. remedies . There is an overriding obligation to the public and the capital markets. President and Vice president found liable.

Appears to have imposed a higher standard on directors who are also company counsel. o Underwriter “Gatekeeper”: The underwriter “is a gatekeeper of the public interest” and therefore also has an obligation to challenge the issuer’s disclosure and go beyond automatically reliance on what the issuer presents YBM Magnex (OSC) Standard of due diligenceshould be ongoing. Outside: “Inside directors with intimate knowledge of corporate affairs…will be expected to make a more complete investigation and have more extensive knowledge of facts supporting or contradicting inclusions in the registration statements than outside directors”. remedies . Methods to attain them: Registration. An action was brought against Leaseco and its directors. Leasco Ratio: Underwriters’ gatekeeper role therefore has obligation to challenge issuer’s disclosure and go beyond automatic reliance on what issuer presents Standards for inside vs. you are liable: In this case. If you sign it. the risk of doing business in Eastern Europe. Decision: Court. Efficient Capital Market. o Underwriters argued they were entitled to rely on statements of officers of company. “then the inclusion of underwriters among those liable…affords the investors no additional protection”. Implications:  Threshold for materiality – in light of all facts available: Materiality must also be considered in light of all the facts available to the persons responsible for the assessment. It does not matter whether you can read/ understand the prospectus. but did not mention specific investigations against its directors for criminal behaviour over there. disclosure. but you sign it. in its discussion of risk factors. If they were allowed to escape liability on the basis of officers’ statements. outside directors  inside directors expected to make more complete investigation and have more extensive knowledge of facts than outside directors Facts: Takeover of Reliance Insurance by Leaseco. you will be liable if there is a misrepresentation o McLean J. Implications:  Different directors may be held to different standards for due diligence: o Inside Directors vs. Threshold of materiality  must be considered in light of all facts available Facts: YBM issued a prospectus noting. McLean noted that the purpose of making underwriters liable was investor protection. but only to the extent of tying up lose ends. exercise of judgment and reasonable diligence. in BarChris. Registration statement failed to disclose amount of Reliances’ “surplus surplus” which consisted of liquid assets of an insurance company which were available for use in non-regulated enterprises. Decision: Commission held that YBM failed to disclose that it was “subject to unique risks”. applied to President/VP. Leasco offered shares and warrants in exchange for shares of Reliance. Even if you have limited education and cannot read or understand the prospectus. Feit v. reiterated the views of McLean J. noted that “a check of matters easily verifiable [would not be] unreasonable”. noting that “a completely independent and duplicate investigation is not required…[but] the defendants were expected to examine those documents which were readily available”. Increase Confidence. 49 Three Policies: Protect Investing Public.

10 UW Agreement  UW purchase from corp in exchange for a fee (for resale to public). Offered or sale shares of Bachova without a prospectus. Buys securities act. but only to the extent that “the remaining work only consists of tying up loose ends” When further significant investigations are required. and it forever voidable at the instance of the purchaser Facts: Deacon Hodgson was an investment dealer. remedies . Increase Confidence. too bad. doesn’t help client relations if you lose. Hodgson Bought the shares in 1982.4. which has nothing to do with bachova investment. Jones  I don’t think this is ever statute barred Decision: court found that the sale of securities (our general rule that no person shall trade w/o being registered. nothing to do. 4 yrs after he bought securities. realizes that investment in Bachova was against the rules. Due diligence should not be ongoing . true and plain disclosure. dates in which final needs to be filed so they can get securities into hands of buyers (and “out” clauses for underwriters) 50 Three Policies: Protect Investing Public.8.4 Limitation Period & Common Law Rights   Statutory civil right is in addition to and not in derogation of any other right. Cam Deacon was ordered to fly down to Australia to testify against Jones (completely unrelated).) is so fundamental to our law.  Three year limitation: Was no prospectus. Looks at investment 4 years ago. distrib w/o prospectus. Jones was put in prison in Australia. I want my $ back. 3.4. A course of conduct must be completed before an underwriter can affirm that to the best of its knowledge. want to cry b/c it’s real money. As part of Cam’s testimony. Contemplated that it’ll be executed with final prospectus. that is NEVER statute-barred. and it is forever voidable at the instance of the purchaser right now this is the law! (never been appealed) Implications:  Sale of securities is never statute barred!!!: When you combine fact that there is no statute bar and these exemptions are so flaky. o Prior to signing. this is not the proper process. As part of that fraud case. BUT LIABILITY FOR MISREP UNDER STATUTE HAS NO BAR!!!!!! Jones v Deacon Implications: Why misrepresentations are all so scary. 3. Jones in Australia. This preserves the common law rights of action which may be of value given limitation periods. etc. disclosure. and in 1986… Jones was charged with fraud in Australia (the buyer). statute barred. only tying up loose ends: Due diligence should be ongoing following the filing of a preliminary prospectus. o Filing in different jurisdictions. and never properly relied on exemption. In 1980. get an underwriter 3. For example.9 Registration Requirement Section 25 of the OSA  so to satisfy. Efficient Capital Market. rescission is limited to 180 days from the date of the transaction. From prison.4. Cam never gave me prospectus. no proper compliance on exemption  but 3 year statute of limitations period. the document contains full. no binding agreement. and why you need to take it seriouslyCourt found that sale of securities is so fundamental to our law. Whether you’re liable or not b/c you told them I don’t know. without properly relying on a private placement exemption. Deacon said ha ha. pissed. created private company called Bachova investments to invest in oil business. brought action against Hodgson in Ontario. that it is never statute-barred. Methods to attain them: Registration. information and belief.

remedies . Increase Confidence. indemnification (obligation to file amendment asap and at most w/in 10 days of material change) o Re: indemnification: if there is a misrep in prospectus. certificates 51 Three Policies: Protect Investing Public. You’ve contracted out of the obligation to do proper due diligence o Hasn’t been challenged in Canada. they’re not enforceable. company will indemnify the directors. disclosure. he thinks Canadian courts would say the same thing o Legal fiction in mature companies doing IPOs (not start ups. the UW has a right to go back to the company for its share of that misrep o Have a right to seek contribution of company for what you’re not responsible for (UWs responsible for part underwritten by them) o s. directors/officers). purchaser’s stat rights. financial forecast and warnings. employees and agents against liab (likely will not uphold as would not ensure ppl to take. certificate of underwriters (gives rise to due diligence defence) o Obligations of UW may be terminated at their discretion based on their assessment of state of financial markets (market out clause). Material contracts (and risks).11 Sample Prospectus o See 44-101F1. escrow arrangements (to balance risks between new and old shareholders). Never tested in Can. but US cts consistently said indemnity provisions not enforceable – contrary to public policy – BUT if acting for underwriters incl anyways – can’t hurt) Problem with company indemnification (Policy): The underwriter has no incentive to properly do their due diligence if they know the company is good for it. o Warning at the top: No securities commission has passed upon the merits (have to o Tells you whether it is a new issue OR secondary offering (Note: if this was a prelim prospectus would have a red herring at top) o How much $ to UWs/company o Risk factors o Summary (b/c every prospectus must have a summary) o Everything about company that is material. certificate of company (strict liab). otherwise UWs are exposed to contingencies of market. but this is not a substitute for due diligence. use of proceeds (must disclose what you will do with money).    Certificates of accuracy of prospectus. including: business of company.4. must independently verify if you’re the UWs o When copies of prospectus are to be delievered and how many copies (quickly b/c of cooling off. want to be exposed for as little time as possible) o Underwriter only distrib sec where there is a receipt for a final prospectus Other: Notify of material change. financial statements (capital. though) Contribution: Interesting. in the US. o Although never tested in Canada. Methods to attain them: Registration. remedy for rescission/damage. AND legal proceedings. Efficient Capital Market. says if the UW gets sued for misrep and they go after them for the whole thing. 130(8): of securities act – you can get contribution unless court denies you that right (contractually providing for right to contribution) o Policy: Protect investors by holding as many people responsible as possible –contribution makes sure everyone has to be worried about it. principal shareholders. not just the person with the deepest pocket  encourages more people to be more careful. reps and warranties. means people are scared (unclear when it can be relied upon – not if market simply having a bad wk OR blip) o 3. UW agreement details (market out clause: obligations of UW can be terminated). which is what the legislation is meant to do Termination: Market Out: UW can terminate agreement.

Methods to attain them: Registration. Efficient Capital Market. remedies . disclosure. Increase Confidence.52 Three Policies: Protect Investing Public.

Methods to attain them: Registration. the info from prospectus goes stale (to ensure ppl buy on primary market.  In some instances. disclosure. requires that there be free/open publicity. 4.2 PART I: Regular Disclosure Reporting Issuers ONLY: Only reporting issuers are subject to continuous disclosure (as defined in s. open securities markets.1 Policy Behind Continuous Disclosure Regime – Merger Report (3 objectives) (1) Investor information. if you have to disclose everything this leads to an Efficient Market . and people are still trading on secondary market.1 (1): “It is fundamental that everyone investing in securities have equal access to information that may affect their investment decisions”. (condemn/ commend) (1) Investor Information: Give investors ability to determine whether they want to buy/sell or not. (2) timely disclosure (of material changes). (5) Insider Trading (to keep things fair. non-reporting distinguishes between issuers whose securities are sold to those presumed to need to know and those who do not.1(1) of OSA)  Reasoning: the securities of reporting issuers are traded in markets in which some potential investors will need to know the information that must be disclosed. (5) allows for disciplining of mgmt. Excessive disclosure can raise the cost of obtaining significant information. establishes true market value (3) Creates equality of opportunity for all investors in the marketplace (sellers and buyers): According to OSC. (2) accountability technique to encourage more eff management/ deterrent to fraud. but we want to know what you’re doing). must maintain efficiency of secondary market) 4.4. (3) Early Warning (if buying up 10%.confidence necessary to run efficient capital markets (object is to make avail at all times. (3) Creates equality of opportunity for all investors in the marketplace (sellers & buyers). o Thus. can’t do) Want to make sure investors are protected and a fundamental tenet of that Is disclosure  Companies change. Increase Confidence. Competing concerns  Cost of disclosure can be high. disclosure may deter productive activity. what price ought to be AND ensure this info remains current (2) Accountability technique to encourage more eff management /deterrent to fraud: a) Should have to let investors know info so they can make educated decisions. competing judgments of buyer/seller reflects just price. 53 Three Policies: Protect Investing Public. (4) Insider Reporting (allowed to trade.could signal takeover bid). Efficient Capital Market.  Too much information can lead to overload.0 SEGMENT 2: AFTER GOING PUBLIC: CONTINUOUS DISCLOSURE Five aspects of continuous disclosure: (1) Regular disclosure (quarterly/annually). reporting v. info investor needs) (4) Discourages transactions that don’t meet public scrutiny: sunlight is the best disinfectant (5) Allows for disciplining of management (condemn or commend) National Policy 51-201: Disclosure Standards Section 1. (4) discourages transactions that don’t meet public scrutiny. remedies . (b) Creation of free.

disclosure. or (f) that is designated as a reporting issuer in an order made under subsection 1 (11). a contract.2. Efficient Capital Market. That information has to get into the market place. o (i) a statutory amalgamation or arrangement. where one of the amalgamating or merged companies or the continuing company has been a reporting issuer for at least twelve months. (“émetteur assujetti”)       4.2. and 9 months) (note: not audited)  Section 80 of the OSA: exemptions in particular circumstances from financial requirements (we don’t need to know them) 4.2. or o (ii) a statutory procedure under which one company takes title to the assets of the other company that in turn loses its existence by operation of law.4(a)(i) the filing must be completed on or before the 45th day after the end of the interim period in a non-foreign jurisdiction (must file every 3. You must report material changes in your business. remedies . is offering its securities to the public. (b) that has filed a prospectus and for which the Director has issued a receipt under this Act.  (a) that has issued voting securities on or after the 1st day of May. a strike. (d) to which the Business Corporations Act applies and which.1 ANNUAL – Section 4.3(1) of NI 51-102 An issuer must file cumulative. and 4.2.3 PART II: Timely Disclosure (of changes)   Section 75 of the SA in conjunction with NP 51-201 Irregular and unpredictable intervals.2 INTERIM .Section 4. Steps: 1. for the purposes of that Act.1) that has filed a securities exchange take-over bid circular under this Act before December 14. 5. comparative financial reports for each interim period ending after it became a reporting issuer. or under which the existing companies merge into a new company.o Key feature of a reporting issuer is that it is an issuer that has issued securities under a prospectus in the province. 1979 listed and posted for trading on any exchange in Ontario recognized by the Commission. (b. 4. capital or operations (75(1)) 54 Three Policies: Protect Investing Public.1 Every company must prepare annual. 1999. Methods to attain them: Registration. a flood.2 Obligation to File Financial Statements 4. audited comparative financial statements within 90 days of the end of the fiscal year 4. a new product.2. regardless of when such listing and posting for trading commenced.2.1 Application to Reporting Issuers Section 1(1) of the OSA: Reporting Issue r “reporting issuer” means an issuer. A fire. (c) any of whose securities have been at any time since the 15th day of September. Increase Confidence. 1967 in respect of which a prospectus was filed and a receipt therefor obtained under a predecessor of this Act or in respect of which a securities exchange take-over bid circular was filed under a predecessor of this Act. (e) that is the company whose existence continues following the exchange of securities of a company by or for the account of such company with another company or the holders of the securities of that other company in connection with.

g.  Tension: BUT HARD TO DECIDE WHEN YOU SHOULD DISCLOSE POLICY Tension: Investor Information + Protection VS. 2) The P acquired or disposed of a security of the issuer. disclosure. 3) Confidential Reporting (must apply to use this. 2) Incomplete Disclosure. or o (b) as of right if mgmt makes a decision that is likely to be approved by board and no one is trading with the info. o Also NP 51-201 indicates that disclosure must be factual and balanced (must disclose unfavourable news just as quickly as favourable news)  Internal Changes or External if Impacting Differently: Material and internal. 4. Efficient Capital Market.3NP 51-201 recommends: Erring on the side of materiality and disclose (although keeping in mind risk of premature disclosure)  Actual AND Proposed Changes: Definition of Material Change in 1(1) and NP 51-201 o Actual: things that have occurred (e.Timing: You must report them at the right time (not too early. judgment against you. and can only use if you meet conditions)  Conditions for confidential reporting: o (a) unduly detrimental to disclose. Financial Post – would have to disclose its losses which could reduce its advertising revenues). operations in a way that it does not affect others (per NP 51-201)  CHANGES not FACTS and should be MATERIAL: o Definition in 1(1): Affects business. fire) o Proposed:  (a) when board decides to do something (BEFORE they’ve actually done it)  (why: fact decision is made is the info they want to get into the marketplace so that market is efficient. Increase Confidence. Report in one of three ways: 1) Full Reporting. 2. not too late) o Difficult to determine b/c hard to determine on the margin o Don’t want to disclose b/c it can be really harmful (e.g. if it is a material change. and then must disclose once it’s approved/or if it leaks To bring action for Failure by an issuer to make timely disclosure. say you’re buying at a premium just so price will go up). both are bad)  (a) Confidentiality/ Privacy issues: You cannot have a proper negotiation if public companies need to disclose that they’re in talks (lets the person buying negotiate a lower price b/c you look stupid if you don’t end up selling) . capital or operations o Examples in NP 51-201.g. remedies  . Steve Jobs being ill – hard to draw line and decide when appropriate to disclose (it is relevant and material to company HOWEVER we are talking about someone who deserves privacy)  (b) Regulators Afraid of premature disclosure: do not want you to manipulate the market (e. failed to make a timely disclosure. Efficient capital markets Efficient Capital Markets (don’t want premature or late disclosure. war in another country) affects your business.g. 3) Acquisition or disposal occurred between the time when a disclosure was required and before the subsequent disclosure of the material change. o also rumours: if premature disclosue happens. you are in trouble – disappointed investor expectations 55 Three Policies: Protect Investing Public. HOWEVER. unless the external change (e. POLICY:  Equal Access to Information and proper valuation: Intended to provide investors with up-to-date information which is equal to the access enjoyed by insiders and proper valuation results. Methods to attain them: Registration. must show: 1) Reporting issuer or any other issuer with a real and substantial connection to the jurisdiction whose securities are publicly traded. you have no choice.g.you cannot disclose every time you get a sense something material might happen (no one will sell or buy ever) o e. and is trading with best possible information)  (b) when management decides to do something and they believe BoD approval is probable. capital. works.

 (2) Report of material change: Subject to subsection (3). (4) keep reporting every 10 days.if someone purchases. marked as confidential. it shall forthwith issue and file a news release authorized by a senior officer disclosing the nature and substance of the change. Part XVIII – Continuous Disclosure s. 1(1): Material Change = change in business operations or capital of a company that would reasonably be expected to have a significant effect on market price or value of the securities. unless that external change impacts your business in a way that is more fundamental than rest of the world (then you have an obligation to disclose) 56 Three Policies: Protect Investing Public. the reporting issuer shall file a report of such material change in accordance with the regulations as soon as practicable and in any event within ten days of the date on which the change occurs.3. promptly file with the Commission the report required under subsection (2). the reporting issuer shall advise the Commission in writing where it believes the report should continue to remain confidential within ten days of the date of filing of the initial report and every ten days thereafter until the material change is generally disclosed in the manner referred to in subsection (1) or. no later and they’ll decide in hindsight.75 (1) must report a material change. have to disclose: A reporting issuer that has filed a report under subsection (3) shall promptly disclose the material change in the manner referred to in subsection (1) if the reporting issuer becomes aware or has reasonable grounds to believe that a person or company having knowledge of the material change is purchasing or selling securities of the reporting issuer or trading a related derivative. Efficient Capital Market. and  (ii) has no reason to believe that any person or company with knowledge of the material change has purchased or sold the reporting issuer’s securities or traded a related derivative. (5) requirement to disclose subsequently if someone purchases  S. until that decision has been rejected by the board of directors of the issuer. Spectrum  at what point in these discussions is disclosure required? 4. They just want you reporting MATERIAL CHANGE UPON ITS OCCURRENCE.  (i) believes that confirmation by the board of directors of the decision to implement the change is probable. (2) within 10 days of change. or o (b) the material change consists of a decision made by the senior management of the reporting issuer to implement a change and the senior management. no sooner. (3) exception for confidentiality.  (5) Requirement to disclose subsequently . and its written reasons for doing so if. remedies .  (3) Exception – Confidentiality: A reporting issuer may.  (4) Idem – keep reporting every 10 days: Where a report has been filed with the Commission under subsection (3).3. Methods to attain them: Registration. disclosure.2 Material Change vs Material Fact Remember. Increase Confidence. or a decision to implement a change referred to above by the board or senior management who believe that confirmation by the board is probable  This definition distinguishes the following: o a) Internal vs external changes: Limited to internal changes (business operations or capital of company).1 Statutory Provision: OSA.material change: Subject to subsection (3).75(1): What you must report . where a material change occurs in the affairs of a reporting issuer. instead of complying with subsection (1). 4. o (a) the reporting issuer reasonably believes that a disclosure required under subsections (1) and (2) would be unduly detrimental to its interests. if the material change consists of a decision of the type referred to in clause (3) (b).

stock was going to go way up in price.  Note: it is likely that when mgmt.g. British Columbia (1994. not facts  Lines get blurred b/w material facts/changes all the time  difficult to determine  Royal Trust Co v Campbeau Ratio: Difference in material change vs. and proposed by directors OR proposed by managers who believe that approval of directors is probable  Proposed: decision to make change. planned stock splits/ consolidation/ share exchange/ stock dividend. When it failed. 4. Standard Trust Co realized that those holding lots of votes were not going to tender to bid.1 Materiality Standard from National Policy 51-201 Pezim v. take-over bids) o Changes in capital structure (sale of additional sec. material modification in rights of sec holders) o Changes in financial results (sig increase/ decrease in earnings. SCC) Ratio: National Policy Statements/ Sec Commissions should be given deference wrt to determining what constitutes a material change Per Iacobucci: “the Commission’s policy-making role is limited. has decided. Campbeau complained. not a material CHANGE (doesn’t affect operations/business of the company)  no obligation under s. By that I mean that their policies cannot be elevated to the status of law”. shifts in financial circumstances – cash flow red. the fact that shareholders won’t tender to the bid.o o E. remedies . However. Increase Confidence. material fact (example) only have to disclose material changes. had obligation to disclose that  had they done that. and Campbell bid was going to fail. b) Actual vs proposed: Definition in 1(1) of Material Change covers both – actual. poss initiation of proxy fight. NP 51-201. Methods to attain them: Registration. that is a MATERIAL FACT.3. disclosure. 75 to disclose material fact DANIER Also difficult to tell – whether a change in the weather and a subsequent crappy sales promotion of leather goods is a material fact or a material change (TJ found it to be a material fact) 4. I wouldn’t have spent all this $ on this bid Decision: No. Efficient Capital Market. saying directors told people that they knew 40% of shares would not tender to the bid. changes in value/ composition of corp’s assets) 57 Three Policies: Protect Investing Public. unexpected changes in financial results.3 o Changes in corp structure (changes in controlling share ownership. major reorgs/ M&A. changes in dividend payments/ policies. you can likely see that on a balance of probabilities it will be accepted by the board c) Material change vs fact: Obligation to disclose material CHANGES. not material facts Facts: Campbeau going to make bid for Royal Trust Co based on getting 2/3 SH approval. triggers the disclosure  makes sense since you are trying to get info to marketplace in time for it to be useful to marketplace. fact that government passes law such that cigarettes can no longer be sold at drugstores is material for Shoppers’ Drug Mart. Iacobucci J: also noted that considerable deference should be accorded to the securities commission in determining what constitutes a “material change” because this is within the expertise of the commission What Must be Reported?  “Material change” in issuer’s business.2. planned repurchases of sec.

3 What must be filed with a material change (3 Report Options) 4. and (b) as soon as practicable. o 4.1(1)) S.3.7. except leave out a fact and persuade the commission (via report) that a particular fact should not be disclosed. if a material change occurs in the affairs of a reporting issuer. the reporting issuer must  (a) immediately issue and file a news release authorized by an executive officer disclosing the nature and substance of the change.3. major labour disputes. file a Form 51-102F3 Material Change Report with respect to the material change.1(2) it would be (a) unduly detrimental or (b) as a right. 7. sig new/ losses of contracts.75 OSA. developments in material legal proceedings.1.1(1)) if. o Example: a fire occurs.1(1) and (2) of National Instrument 51 -102: Material Change Reports Do not have to follow usual procedure of disclosing material change (per s. NI 51-201 s. Prof has never seen this used. and the reporting issuer immediately files Form 51-102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure Statute (OSA s.7.3. Changes in business and operations (development that affects corp’s resources. sig change in capital investment plans.7. disclosure. de-listing of corp’s sec) o Acquisitions and dispositions o Changes in credit arrangements 4.3 Confidential Disclosure / Reporting s. products or markets.3. 2) File a material change report (Form 51-102F3)  1) File a press release immediately disclosing the nature and substance of the change o NP 51-201. within 10 days of the change. This is the same.1 Complete Public Disclosure 1) File a press release per s. Increase Confidence. o Obligation: to be factual and balanced (BUT no more said by Securities Commission)  2) File a material change report (Form 51-102F3) disclosing in greater detail the nature and substance of the change. remedies . Here.3. tech.1(1) Publication of Material Change: Subject to subsection (2). changes to BOD. Avoid including unnecessary details. Efficient Capital Market.2 Incomplete Public Disclosure Still Form 51-102F3.2.2(2) of Policy encourages issuers to err on the side of disclosing the information if there is any doubt. and in any event within 10 days of the date on which the change occurs. It is material. exaggerated reports or promotional commentary”.3. 4. Description  58 Three Policies: Protect Investing Public. per s.1: “A company's press release should contain enough detail to enable the media and investors to understand the substance and importance of the change it is disclosing. File material change report within 10 days.7. Methods to attain them: Registration. File press release immediately. 4. only part of the material change is not disclosed.3. 2.

Methods to attain them: Registration. you’re into regular disclosure Why do they allow a material change not to be reported to the world yet? Preserve right of directors to make decisions: Forces directors to do it. so may as well stay away from it.2 of NP 51-201: Comparative: Detriment outweighing benefits of disclosure (undue economic detriment). the Harold Ballard heart condition – disclosable or not?   Where senior management has decided to do something. If that harm outweighs the general benefits to the market of immediate disclosure. will give you confidential disclosure as of right until board has approved it and when they have. disclosure. (a) Unduly Detrimental: in the opinion of the reporting issuer. together with written reasons for non-disclosure. Material change in affairs of company but you do not file a press release or a report. they can monitor the stock. Have to let them know that no one is trading with that knowledge. The point of this confidential disclosure request to the commission (vs just not disclosing if you decide it is confidential): o So that commission knows insiders aren’t trading.7. This hardly ever applies. remedies . if you’ve announced it.1(1)) (2) Subsection (1) does not apply if. Efficient Capital Market. just keep in mind that application of this is difficult (of whether it’s a material material change)  e. and senior management of the reporting issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the reporting issuer. corp has to disclose fact – seems to have looked Tension b/w investor protection and efficient capital markets: don’t want people using info to exploit. or ability to complete a transaction. taking decision away from the directors o BUT HAVE TO DISCLOSE WHEN:  (a) board has approved decision  or as punishment when: (b) if you let it leak and people are trading with it  No sympathy b/c should have protected info. you’re screwed and you have to disclose. and you seek a confidential ruling from the securities commission  (b) As of right: the material change consists of a decision to implement a change made by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors is probable. the disclosure required by subsection (1) would be unduly detrimental to the interests of the reporting issuer. have to protect investors in marketplace. You’ve removed any judgment from you or your client. Increase Confidence. under obligation to disclose  issue press release and file material change report Must advise commission every 10 days until disclosed If board says no – therefore. Once approved by board. but don’t want to create situation where management can pre-empt board and this is the compromise. or Description 2.Statute (OSA s. with ongoing negotiations.  POLICY Tensions: o Investor protection: should be able to assume all material changes have been published and can be pissed about making inv decision w/o that info vs o Efficient Markets/Having People Play: There are circumstances where disclosure may be unduly detrimental. then withholding disclosure is justified. make sure people aren’t trading with the information o If regulator sees trading.g. and if that opinion is arrived at in a reasonable manner. and you’re obligated to disclose: so if your request is denied.  WHY THIS IS A PROBLEM: You are admitting that it’s material and discloseable. making commission surrogate for investors Basically. nothing to release o and the reporting issuer immediately files the report required under paragraph (1)(b) marked so as to indicate that it is confidential.    and the reporting issuer immediately files Form 51-102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure    59 Three Policies: Protect Investing Public. doing long-term harm to all investors potentially. Might happen where disclosure would interfere with a company’s pursuit of a specific objective or strategy. b/w innocent parties.

2 STATUTORY PROVISIONS 4. disclosure. identifying the person/extent of their control over the voting securities (7.4. even if there are 4 ppl with different amounts (under 10%). Methods to attain them: Registration.1(3)) a. 1 business day freeze after you’ve filed report.2.7.4 Best Practices Re: Disclosure (per NP 51-201) 1) 2) 3) 4) Establish a corp disclosure policy and oversee its implementation Have board/ audit committee review disclosure Authorize limited # of company spokespersons Adopt a “no comment” policy to rumours  otherwise inconsistent response may be interpreted as tipping 4. If you have 2 who own separate securities agree to vote together (and don’t buy additional shares).102. and allows management time to engage in defensive tactics. Every additional 2% up to 20: triggers same obligation to file press release.1(1)) a. FILE A REPORT: giving the details as soon as is practicable (also 7.3. remedies .1(3)) (give market time to digest and incentive to get info out faster – efficient markets) b.102.1) c. If 2% more in proportion of securities of that class of voting securities. Efficient Capital Market. if necessary 4.1(2)) i.4 PART III: Early Warning Purpose of Early Warning: potential sign of a takeover bid where people will offer premiums to share price. how much you have.1 STEPS: 1. and your intentions by issuing and filing a press release. they have an obligation to say so and what their intention is.1 of Rule 62-504) i. **ALSO REMEMBER (and see below): HAVE TO FULFILL INSIDER REPORTING TOO!!! 2. you should buy whatever the next biggest block is if you want to acquire control so you get as much as possible w/o reporting again 1.9 without disclosure)? If yes (102. put you at an ownership threshold of 10% (you can trade up to 9. PRESS RELEASE: Disclose that you bought them. get someone to sell to one seller) so that you can buy the max amount in one trade 2. have to do it again (102.4. but I can’t disclose it for this reason 4. sec act holds the entire group as one - no wise guys! b.Statute (OSA s. so that the market is aware of what is going on.4. If you want control: if you own 9%. Do you want to buy more shares? If yes wait one business day before buying more (s. If someone acquires a certain percent of the shares of a company. this doesn’t trigger any obligation 4. file report ASAP.1 – 10% Rule and 2% Rule 60 Three Policies: Protect Investing Public. then TOB rules ii. Have you bought shares that.3. Increase Confidence. Freeze: you must WAIT ONE BUSINESS DAY before buying more (102.g. Can’t go to prepare your sellers (e.1(1)) Description saying this has happened. continues to 20%. together with what you already own.  Give advance notice to the world that someone is accumulating stock because it might be relevant to your investment decision  The most important thing: increases potential for competing bids.1 OSA S.

2: if someone announces a takeover bid.4. further 2 per cent rule: 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 any of the following events occur: o 1. Note: Section 102.1 – Early Warning s. remedies . o Applies until 20% acquired  4.102.1 Early warning: An acquiror under subsections 102. an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates. If someone else acquires 5% or more. or the power to exercise control or direction over.  4. together with the acquiror’s securities of that class. Efficient Capital Market.  i. or  ii. Increase Confidence. There is a change in any material fact in the disclosure required under paragraph 1 or under subsection (1).2. shall disclose the acquisition in the manner and form required by regulation. Methods to attain them: Registration. disclosure. that person has to (1) put out a press release (before opening of trading next day) and (2) disclose every 2% thereafter. or the power to exercise control or direction over. 7. 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.  (a) promptly issue and file a news release containing the information required by section 3. (3) Period when acquisitions prohibited – ONE BUSINESS DAY FREEZE: 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.2 OSC RULE 62-504: Section 7.5 PART IV: Insider Reporting 61 Three Policies: Protect Investing Public. and (b) within 2 business days from the day of the acquisition. The acquiror or any person or company acting jointly or in concert with the acquiror acquires beneficial ownership of. when added to the acquiror’s securities of that class. constitute 20 per cent or more of the outstanding securities of that class.    S.1 of National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues. there is a second obligation under early warning.1(1): 10 per cent rule: Every acquiror (someone buying securities w/o making formal bid) who acquires beneficial ownership of. voting or equity securities of any class of a reporting issuer or securities convertible into voting or equity securities of any class of a reporting issuer that. o POLICY: to allow market to digest information (4) Exemption – FREEZE does not apply to person with 20% (because they have different rules): Subsection (3) does not apply to an acquiror who has beneficial ownership of. file a report containing the information required by section 3. o 2. securities that. (2) Same. or the power to exercise control or direction over. would constitute 10 per cent or more of the outstanding securities of that class.1 of National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.1(1) or (2) of the Act shall. securities convertible into an additional 2 per cent or more of the outstanding securities referred to in subparagraph i.

(d) a reporting issuer that has purchased.1 Analysis: When do insider reporting rules apply?  Are you an insider of a reporting issuer? If yes. (c) a person or company that has. remedies   . (d) a RI that has purchased. securities of a reporting issuer carrying 10 per cent or more of the voting rights attached to all the reporting issuer’s outstanding voting securities. (b) how you’re an insider. directly or indirectly. and control or direction over. (e) designated as an insider under ss 11 Comply with proper disclosure: o File a report within 5 days of becoming one: to disclose any ownership and any interest in. why should you?). for the purpose of the calculation of the percentage held. Therefore. the price.g. the price. (b) a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer.5. Why do insiders have to disclose? Because investors want to know if insiders are trading (if they don’t believe in company. 62 Three Policies: Protect Investing Public. quantity and date o If you already are one. any securities held by the person or company as underwriter in the course of a distribution. redeemed or otherwise acquired a security of its own issue.5. Methods to attain them: Registration. or control or direction over.1 OSA Section 1(1) Definitions: Insider “insider” means. excluding.2. Increase Confidence. have to file report within 10 (5? In NI 55-104 and Lastman) days of change in your holdings: Also have to disclose if there is any change in your ownership (107(2))  Have to say (a) im an insider. redeemed or otherwise acquired a security of its own issue for as long as it holds it. for the purpose of the calculation of the percentage held. 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.(61(2)(g) – director can refuse to issue receipt)   They should be able to buy and sell. o Insider: 1(1): Director or officer of reporting issuer.Insider: big shareholders. or right or obligation associated with. disclosure. but not when it’s based on information not available to the public. managers.    (a) a director or officer of a reporting issuer.2 STATUTORY PROVISIONS 4. directors  people that have information POLICY: we actually want insiders to have skin in the game (e. that’s fine if you tell everyone. (c) file a report within 10 days of becoming one indicating that you bought/sold. or o (ii) a combination of beneficial ownership of. (b) how you’re an insider. (b) director or officer of a person or company that is an insider or a subsidiary of the RI. and make any other disclosure required by the regulations (price you bought/sold them at) (107(1) and 3. excluding. for so long as it continues to hold that security. (e) a person or company designated as an insider in an order made under subsection (11). Efficient Capital Market.5. directly or indirectly. ultimately increases confidence in sec market 4.2 of NI 55-104)  Have to say (a) im an insider. (c) someone who (i) owns 10% of the voting shares (excluding underwriters). (c) file a report within 10 days of becoming one indicating that you bought/sold. a related financial instrument. if you’re an insider and you’re buying or selling. o (i) beneficial ownership of. need escrow arrangements with an IPO so they can’t sell right away . any securities held by the person or company as underwriter in the course of a distribution. quantity and date  4.

(“initié”) 4. as they thereby acquire direct financial interest in welfare of co. an insider of a reporting issuer. or right or obligation associated with. securities of the reporting issuer or any interest in. such change and the insider shall make such other disclosure as may be required by the regulations. Should be free/open market with prices thereon based on fullest possible knowledge of all material facts among traders. 63 Three Policies: Protect Investing Public. any direct or indirect beneficial ownership of or control or direction over securities of the reporting issuer and any interest in. BUT improper for insider to use confidential info acquired by virtue of his position as insider to make profits by trading in securities of company. Increase Confidence. (2) Same  Within 10 days. a person or company who becomes an insider of a reporting issuer.2. or control or direction over. Impossible to justify proposition that investment so made can’t be realized or liquidated merely bc investor is insider.3) & Exemptions AND Form 55-102F2 – Insider Reporting Sections 3. remedies . other than a mutual fund. provide fullest poss knowledge so that investor confidence is maintained (want everyone to play)  “Not improper for insider to buy/sell securities in their own company…generally accepted that it’s beneficial to have officers/directors purchase. shall file a report disclosing.5. other than a mutual fund.5. a related financial instrument.2. or right or obligation associated with. in the prescribed manner and form. of any change in the direct or indirect beneficial ownership of.1 Policy Discussion about Insider Trading / Tipping Prohibition Why do we have the rules? (why can’t you trade with info not generally disclosed?)  Kimber Report POLICY: maintain integrity of capital markets.2: have to fill out a report within 10 days of becoming an insider disclosing (a) beneficial ownership of. Methods to attain them: Registration. Efficient Capital Market. a related financial instrument and the insider shall make such other disclosure as may be required by the regulations.2 OSA Section 107 – Insider Reporting (1) Insider reporting  Within 10 days of becoming an insider or within such other time period as may be prescribed.2 & s. 3. shall file a report disclosing.6 PART V: Insider Trading TWO PARTS: (1) Trading: You cannot sell with insider information and (2) Tipping: you cannot tell anyone else about that information 4.3:   3.6. disclosure.3 NI 55-104 Insider Reporting Requirements (s. hard to monitor. in the prescribed manner and form. Anything that puts that into question reduces confidence in the market place and is therefore a matter of public concern” Why doesn’t this work?  Not many successful prosecutions out of millions of trades.2 and 3.3: same as 107(2) above – except it’s FIVE days after a change in ownership you have to file report Form 55-102F2: Form to fill out for insider reporting 4. or within such other time period as may be prescribed.3. 4.3. control or direction over securities and (b) interest in or blabla same as sec act above. (f) a person or company that is in a class of persons or companies designated under subparagraph 40 v of subsection 143 (1).

(b) a person (or co) engaging in or proposing to engage in business on behalf of reporting issuer or a person described in abc. If they were traded b/w two people who both knew the information (175(2)(c)) 64 Three Policies: Protect Investing Public. Apple has a better chance of stopping insider trading than the securities commission These people have better chance of controlling b/c their career depends on integrity of their company or game 4.2. Are you a person or company in a special relationship with a reporting issuer? a.6. or engaged in business. Options?  Abolish Insider Trading laws. Cannot disclose and then trade right away. person proposing to become part of a reorganization. If you are in a special relationship and traded with knowledge of a material fact OR change (covers both!) that has not been generally disclosed. etc. etc. officer. affiliate or associate of: the reporting issuer.2 Steps 4. Regulators should just be honest: there is no way to stop insider trading. reorganizing. Let the industry/market regulate itself. or else people won’t want to buy your stuff. 6 people at OSC. must be effective disclosure (Texas Gulf) iii. giving DD defence o Or have both. do you have a valid defence? (175 of regs) a. Reverse Onus: Onus on defendant to show that they believed it was generally disclosed (76(4)) ii. Methods to attain them: Registration. bad reputation o NBA Example – commissioner cares b/c if people don’t have confidence in integrity of the market. or (e) person or co who learns info from any other person described in the section (in a special rel/ship) and knows or reasonably ought to have known that the person they learned it from was in a special relationship 2. disclosure. can show that you protected integrity of the information (REGS 175) c. You as an investor should not rely on the fact that there is a level playing field  false sense of confidence. they aren’t going to play (did a lot more than the police to prevent fixing games). partner. If true. o Opposite argument: these rules still serve a massive deterrent effect (just b/c people do bad things doesn’t mean you shouldn’t regulate that activity) o Maybe: give liability to CEOs who don’t monitor it. Increase Confidence. If you’re trading as an agent (broker) for someone else (and you DID NOT give the info out to that principal) (175(2)(a)) d. Are you doing so with knowledge of a material fact OR change (covers both!) that has not been generally disclosed? a. Special relationship: (a) insider.  Manager or directors will police execs better than securities regulators. (c) director.. If they were purchased as part of an automatic reinvestment plan (175(2)(b)) e.6. When market knows and has had time to digest (“reasonableness”) (National Sea) iv. Generally disclosed: question of fact i. *if you’re deemed to have knowledge b/c you’re an employee. That it was generally disclosed (or that you reasonably believed it was) (76(4)) b. Millions of people trading.1 Trading 1. directors. employee of reporting issuer or of person making takeover bid. a person proposing to make a takeover bid. in a company that had the information. remedies . amalg. Efficient Capital Market. (d) person or co who learned of mat fact or change while they were person in abc. Are you trading (buying/selling)? 3. Safe rule is one trading day (National Sea) 4.

(5) Definition: For the purposes of this section.2 Tipping 1. 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.  Notes: Takeover Bids: Insiders of the company making the takeover bid are in a special relationship (like directors/officers). disclosure. for the securities of the reporting issuer. shall inform another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed except where the information is given in the necessary course of business to effect the take-over bid. Are you a person or company in a special relationship with a reporting issuer? If not… a. merger. Did you learn information from someone that you knew or ought to have known was in a special relationship? (76(5)(e) – puts you in a special relationship) 3.3.6. business combination or acquisition. Material fact or change b. (3) Idem: No person or company that proposes. Did you share a material fact or change that has not been generally disclosed with anyone else not in the ordinary course of business? a. other than in the necessary course of business. arrangement or similar business combination with a reporting issuer. (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. (4) Defence. Methods to attain them: Registration. as defined in Part XX. but the company itself can still trade shares  why? o Policy objective saying it’s a good thing to allow people to make takeover bids (balancing of investor protection and efficient capital 65 Three Policies: Protect Investing Public. Not in the ordinary course of business 4. Efficient Capital Market. Generally disclosed c. amalgamation.“person or company in a special relationship with a reporting issuer” means. amalgamation.reasonably believing it was generally disclosed: No person or company shall be found to have contravened subsection (1). for the securities of a reporting issuer.6. or o (c) to acquire a substantial portion of the property of a reporting issuer. merger or arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its property.2. (2) Tipping: No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform.6.  (ii) a person or company that is proposing to make a take-over bid.  (i) the reporting issuer. remedies      . as defined in Part XX. affiliate or associate of.3 Statutory Provisions (OSA) 4. o (a) to make a take-over bid. See def of special relationship above 2. o (a) a person or company that is an insider. o (b) to become a party to a reorganization. Increase Confidence.4.1 OSA – Section 76 – Trading Where Undisclosed Change/Tipping  (1) Trading where undisclosed change: 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. or  (iii) a person or company that is proposing to become a party to a reorganization.

 If you are the bidding company and you go to the company you want to sell – must agree nothing will be told in mtg that is not public info (otherwise would put in a special relationship) o (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 sub-clause (a) (ii) or (iii). learned something they’re going to do. and the only realistic way to do that is to buy shares to complete the transaction. o (b) a security. can’t trade. Efficient Capital Market.g. the market price of which varies materially with the market price of the securities of the issuer. officer or employee of the reporting issuer or of a person or company described in subclause (a) (ii) or (iii) or clause (b). there’s no policy justification for that. Methods to attain them: Registration. including a person or company described in this clause. call. affiliate. (b) or (c). (“personne ou compagnie ayant des rapports particuliers avec un émetteur assujetti”)  Note: Deliberately vague. disclosure. more of an issue) 66 Three Policies: Protect Investing Public. and insider in 1(1) MISSING A CATEGORY: Tippees who don’t know or ought to know that the person they got the info from was in a special relationship!!  persons who learn of information from a person in a special relationship and knows or ought to know that the person was in a special relationship are people in a special relationship.  Note: e.  Note: catches lawyers here o (c) a person who is a director. but not enrich directors/officers. o (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.  ought not be insider trading b/c something else we want to protect  don’t want the insider directors (or from other company) to prosper from it. if I WAS a lawyer. if taxi driver tells you to buy RIM. then they fire you. (“émetteur assujetti”) (6) Idem: For the purpose of subsection (1). b/c a code is either insuff or excessive  Recall: “reporting issuer” includes an issuer that has a real and substantial connection to Ontario and whose securities are listed and posted for trading on the TSX Venture Exchange. o (a) a put. to defray their costs. fine. a security of the reporting issuer shall be deemed to include. remedies . or o (c) a related derivative. and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship. o (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).g. So want to allow take-over-bids. markets). option or other right or obligation to purchase or sell securities of the reporting issuer. Increase Confidence. but misses those people who don’t know or ought to know  *on an exam: look for hints that the person knows or ought to have known: (e. you don’t know or ought to know.  **note definitions of associate. If his last name is same of CEO of RIM.

76(2) +(3)) 76(2) and (3): offence for reporting issuer or someone in a special relationship with reporting issuer or any person proposing to make takeover bid  prohibited from disclosing or giving other people information with respect to a material fact/change that has not been generally disclosed except in the necessary course of business  Relevant that this applies to both an undisclosed material FACT and CHANGE o If you’re in a special relationship with RI and you have info not in public domain. govt agencies and credit rating agencies  However. remedies . (b) announcement through press conference (although it is good to disclose on company website. employees and officers. and has had time to digest it. facts: tipping covers both In this situation. labour unions and industry assoc.76(1) 76(1): it is an offence for a person or a company in a special relationship with reporting issuer to purchase or sell securities with knowledge of a material fact or material change that has not been generally disclosed  See 76(4) for Definition of Special Relationship  THE ONLY ONES WHO CAN BE CHARGED are those in a special relationship with reporting issuer 4.3 Tipping (OSA s. tell them why  Other cases of necessary course of business mentioned by NP 51-201. I need $100m. o NP 51-201 indicates that corp can meet “generally disclosed” defence by (a) news release. this is not enough) Texas Gulf 67 Three Policies: Protect Investing Public.6. dealings with vendors/ suppliers. What is definition of trade? SALE OF SECURITY  doesn’t include a purchase  POLICY: Level Playing Field: We’re trying to avoid people with knowledge from using that knowledge to detriment of market b/c not a level playing field!  NECESSARY COURSE OF BUSINESS: o Is a question of FACT (depends on the circumstances) –  Easy example: If I’m a company and I want to make a takeover bid for RIM. Also must make sure the receiver of info does not given info to anyone else Royal Trust Co v. the Director told other SHs not to tender. he’d be dead with these rules (due to tipping regs). b/c the bid wouldn’t go ahead  today. o Onus on the defendant being accused of insider trading to show that you believe it was generally disclosed (reverse onus) o Market knows. legal counsel.2 Insider Trading (OSA): s. parties to negotiation.3. Methods to attain them: Registration. Have to hire a banker. Increase Confidence.4. I have to call a lawyer to help me make a takeover bid for RIM. disclosure. and in that case.3. but in the necessary course of business b/c I can’t do it without a lawyer. it was a material fact. you can’t tell anyone that. except in regular course of business until it’s generally disclosed  Note: the Phrase is actually a Misnomer: Tipping is not trading  don’t even have to trade. and you’re guilty of tipping  Whenever you give an informational adv that is considered tipping 4.6.6. I’m TIPPING. Campbeau  Changes v.4 Meaning of Generally Disclosed (Defence) Question of fact.onus on D (accused of insider trading) to show you believe it was generally disclosed  When is it satisfactory general disclosure? When is it generally disclosed?  Question of fact. How long is that? Whatever’s Reasonable. would not incl analysts. Telling people not or that they don’t have to tender to protect your job is not in the necessary course of business. Efficient Capital Market. even though they decided that knowing a major SH wouldn’t tender their shares was not a material change.

Must be disseminated to the trading public. disclosure. must be effectively disclosed in manner to ensure its availability to investing public.g. for instance.Facts: TG puts out press release.5. whoever has their ear to the ground and is monitoring the Dow Jones. insiders are NOT free to trade as soon as press release is on Dow Jones News Wire need to give it enough time to be effectively disclosed No Firm rule re: interval. Said you still have to wait. National Sea Ratio: Two-part test for when you can trade as an insider: 1. Methods to attain them: Registration. So basically. but made decision to trade before I knew this (found guilty of lying about insider trading. insiders bought up huge quantities of shares. nature of market for stock o c. Info must be effectively disclosed: Before insiders may act on material information. not just that they bought it) o People in securities market not happy  can’t have an efficient market if you have such severe consequences and a broad rule 68 Three Policies: Protect Investing Public. Bright line tests don’t work  you cannot legislate integrity 4. but didn’t MAKE USE OF IT (I would have bought it anyways) o E. b/c now the public gets to buy it before you do. The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/complexity of the information  Thus.5 Defences to Insider Trading / Tipping 4. not guilty OF Insider trading) Made it impossible to convict anyone or find them liable for insider trading (to prove that they USED that knowledge to buy the securities. still should have waited until it could reasonably have been expected to appear in broad circulation. wait one full trading day after release of info) Facts: Insiders bought a bunch of shares once it was on the wire. place of disseminating info thru news release   Policy Notes:   Reverse Policy issue: *my argument: doesn’t really create equal playing field. and 2. nature/complexity of information o b. and o 2. and immediately. place of company’s operations vs. you cannot disclose and trade on the information one minute later. Investors reading the news release is only one step in the process for complying with regulatory objective of allowing all investors to make an informed investment decision. remedies  .6. Releasing a news release and then trading right away is not appropriate. Efficient Capital Market. The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/ complexity of the info (generally. BUT a safe working rule: should wait a minimum of one full trading day after release of information Factors to consider in length of time: o a.1 “Make Use of” Defence – no longer applicable  Used to be a defence in Canada saying that you had info. Martha Stewart  knew it. Increase Confidence.6. Must be disseminated to the trading public. Reasons:  Two part test for when you can trade as an insider and one day general rule: o 1. Even assuming the contents of the release could be instantaneously acted upon.

Efficient Capital Market. may hamper effectiveness of provision) 4. o (a) the purchase or sale was entered into as agent of another person or company pursuant to a specific unsolicited order from that other person or company to purchase or sell. s. partner. 175(1) A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act.2 “Protecting Integrity of the Info” (s. officer.now only requires that person “has knowledge” of a material fact that has not been disclosed (although Crim Code insider trading provision.6. Increase Confidence. employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities by a director. 69 Three Policies: Protect Investing Public. o (a) no director. but if you’re reckless and they’re still not sure. partner. partners or employees o (b) decision to buy/sell was made by someone who did not have ACTUAL knowledge of the information o (c) no advice was given by person who had actual knowledge to person who made decision to trade o (d) appropriate mechanism (wall) was in place to prevent flow of information from person who had actual knowledge to person who made decision to trade o firm or business took reasonable precautions to protect the integrity of that information REGULATIONS. employee or agent of the person or company who had actual knowledge of the material fact or the material change. requires that accused sold sec “knowingly using insider info” – therefore. Methods to attain them: Registration.5. directors.175 of Regs) If you take all reasonable precautions to protect integrity of info and someone else trades.o In response to that: created another defence under OSA. not guilty (only if reckless)  Under agency law: partner is deemed to know what partners now (when in reality. officer.175  s. if you take all reasonable precautions to protect integrity of that information and someone else trades. you don’t) o Thus.1. where the person or company proves that. s. remedies . and o (b) no advice was given with respect to the purchase or sale of the securities to the director. o but this exemption is not available to an individual who had actual knowledge of the material fact or change.  (2) AGENTS/INVESTMENT PLANS/FULFILLING CONTRACTS: A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act. officer. where the person or company proves that.182. rather take $ from you than investor o Policy considerations to protect shareholders Rule:  If you’re a person in a special relationship. disclosure. employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities of the reporting issuer had actual knowledge of the material fact or material change. you buy/sell securities with knowledge of material change/fact that hasn’t been generally disclosed. not guilty. partner. you’re NOT guilty of insider trading if ALL of the following conditions are met: o (a) only reason you’re deemed to have knowledge is bc info was known to one of your officers.

4 Trading as an agent & you’ve given no advice (s.5. I’ve learned something.5 Automatic Investment Plan (175(2)(b) of Regs) If automatic dividend reinvestment plan. disclosure. remedies . My broker knows that apple is about to make a massive announcement.172((a) of Regs) If you trade as AGENT for another person pursuant to unsolicited order. (4) A person or company who purchases or sells a security of a reporting issuer as agent or trustee for a person or company who is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act by reason of clause (2) (b) or (c). Increase Confidence. so bankers can’t get access to broker’s information (doesn’t work in law firm) 4. o as the case may be. he’s guilty of insider trading. o Restricted List: Some say. say buy apple.6.6. not guilty of insider trading.05 if you own 1 share  accumulate dividends for you. 4. o 4. In absence of defence. we buy you one 70 Three Policies: Protect Investing Public.5. even if you knew  Example: Disney: automatic dividend reinvestment plan: don’t want to send you cheques every quarter for . (3) In determining whether a person or company has sustained the burden of proof under subsection (1).6. and you gave NO advice. or o (b) the person or company informed of the material fact or material change. you have an obligation to phone a designated person and put that company on a restricted list so that someone in the law firm knows that people in that law firm cannot buy/sell shares b/c “we have knowledge of…” o Either way. or o (c) the purchase or sale was made to fulfil a legally binding obligation entered into by the person or company prior to the acquisition of knowledge of the material fact or material change. Efficient Capital Market. you’re not guilty of insider trading  I phone my broker. if my broker executes that trade. If broker tells me I can’t do that trade. (5) A person or company is exempt from subsections 76 (1). Methods to attain them: Registration. Integrity of information is protected (so you can use the defence) o In investment banks: Geographic separation b/w traders/investment bankers doing the deal. o (a) the other party to a purchase or sale of securities.3 Defence in Practice – Law Firms  Protect themselves against inadvertent trade – they all have rules on insider trading. when it reaches price of a share. He shouldn’t be. had knowledge of the material fact or material change. So there’s a defence.   (b) the purchase or sale was made pursuant to participation in an automatic dividend reinvestment plan. is also exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act. every time you have transaction involving public company that is material. it shall be relevant whether and to what extent the person or company has implemented and maintained reasonable policies and procedures to prevent contraventions of subsection 76 (1) of the Act by persons making or influencing investment decisions on its behalf and to prevent transmission of information concerning a material fact or material change contrary to subsection 76 (2) or (3) of the Act. What should my broker do? o Not say anything. share purchase plan or other similar automatic plan that was entered into by the person or company prior to the acquisition of knowledge of the material fact or material change. trying to stop inadvertent/unintended insider trading claim.5. (2) and (3) of the Act where the person or company proves that such person or company reasonably believed that.

Sanctions & Penalties for Insider Trading 4. Conviction for tipping/informing: i.5. They’re doing it for you w/o you asking 4. finally where the person reasonably believed the information had been generally disclosed. remedies .6 To fulfill legally binding agreement that happened before material info was known (s. Then I get insider info that stock is going down.6.175(5) of Regs) Fine b/c both have same info. 4. disclosure. 4.g. Enter into legally binding agreement that on Halloween.6. you’re not guilty of insider trading. Accused informed another person of a material fact or material change with respect to the reporting issuer. you’ll buy 100 shares of apple from me. we both know nothing.6.175(2)(c) of regs) Defence b/c entered into legally binding contract BEFORE You had knowledge. no one has advantage over someone else. Accused purchased or sold securities of the reporting issuer iii.6. b/c option not a legally binding contract.6. Methods to attain them: Registration.1 Penal sanctions – CRIMINAL Under s.76) Conviction for insider trading: Prosecution must prove: i.5. 382.1 Criminal Code prohibits trading on basis of material info concerning an issuer that has not been generally disclosed (similar to OSA s. Halloween comes. Playing field still level. Accused person was in a special relationship with reporting issuer ii. Increase Confidence.6 Actions. even if you knew. Efficient Capital Market. business combination or acquisition. Accused informed another person of the material fact or material change before it was generally disclosed. D was in “special relationship” with RI 71 Three Policies: Protect Investing Public.6. *also note: that unlike OSA.2 Civil Actions The Act provides for an action for damages against a person trading on inside information by the person with whom the trade was made. then you subsequently get knowledge. Crim Code does not cover tippees of tippees *also makes no distinction between reporting issuers and non-reporting issuers (who would not have to disclose insider trading under OSA) Defenceinformation was given in the necessary course of business of the reporting issuer. Accused made the purchase or sale with knowledge of a “material fact” or “material change” concerning the affairs of the reporting issuer. Accused was in a “special relationship” ii. iii. If you know someone is going to bid for Disney and they automatically buy you a share pursuant to Automatic Dividend Reinvestment Plan.6. don’t have to breach contract (Policy rationale no uneven playing field \– not making decisions w/ knowledge)  E. That the material fact or material change had not been generally disclosed. P must show: i. what should law be? OKAY  What if I have an option. then I learn information? No. a defence where the giving of the information is necessary to effect the takeover.7 Trades between 2 People Who Both Know the Info (s. AND iv.  NOTE: insider trading isn’t designed to create equal opportunities or be fair in every circumstance can’t do everything 4.

Cease trade orders Removal of exemptions Prohibitions from acting as a director or officer Administrative penalty Insider reporting. Issuer must show that the person was an “insider”. remedies .3 Administrative sanctions i. Increase Confidence. ii. *subject to defences above 72 Three Policies: Protect Investing Public. iv. disclosure. and that they did so before the information was generally disclosed. iv. Actions by or on Behalf of the Reporting Issuer  Issuer can bring action against insider. that the person bought or sold with knowledge of material information. D purchased or sold securities of RI D made purchase or sale with knowledge of a material fact or change Material fact or change had not been generally disclosed. iii. Information was given before material information generally disclosed. Efficient Capital Market. 4. P must prove: i. “affiliate” or “associate” of the issuer. D informed another person of material information iii. v. Methods to attain them: Registration.6. or informed.  The Securities Commission can bring an application for leave to bring an action in the name of and on behalf of the issuer to enforce the duty to account if the issuer does not.6.ii. D is RI was in “special relationship” with issuer ii. iii. Tipping: The Act also provides for an action for damages against a person who informed another of the inside information.

If it’s a distribution.1 General Rule General rule: no trading in security. like with prospectus. E.g.1 Private Placement & Exemptions 5.0 SEGMENT 3: THE CLOSED SYSTEM: 5. Need to provide adequate information to the investing public. 5. remedies . Provide a prospectus. Increase Confidence. (3) base of information to sophisticated investors whose trading causes market price to reflect underlying value.1. unless you are registered.  (ii) Resale Restrictions: allow a person who purchased under an exemption to sell to members of the investing public as long as certain conditions concerning adequate disclosure are met. (2) Confidentiality (almost always more confidential than prospectus) Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor protection and efficient capital markets – this is at least what they’re TRYING to do. Efficient Capital Markets  In third segment. without prospectus or proper reliance on private placement exemption Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor protection) Two Requirements  Disclosure requirement – satisfied by prospectus. Methods to attain them: Registration. accountants. Exemption available only where purchasers do not need to know prospectus information o Trading outside the closed market:  (i) Prospectus Disclosure Followed by Continuous Disclosure. even if there are inconsistencies  No flexibility on these exemptions so be very careful All exemptions focus on :(1) identity of purchaser. Efficient Capital Market. comprehensive disclosure document  Registration requirement – satisfied by underwriter selling securities Tension b/w Investor Protection vs. advisors 73 Three Policies: Protect Investing Public.1. This requires a “seasoning period”: the period of time to allow a build-up of information. see tension b/w investor protection (do a prospectus) and efficient capital markets (not every company can feasibly do a prospectus)  Allows sale of securities to public without time. hiring lawyers. (4) another superior policy objectives (1) Identity of Purchaser: Purchaser is so sufficiently sophisticated or wealthy that they do not need the protections of the securities act. (2) information for professional investment advice. o Trading within the closed market: Secondary market trading within closed market can only occur in reliance on an exemption.2 Advantages & Objectives of Private Placement *Exemptions found in NI 45-106 OR Rule 45-501 Adv: (1) Speed (No Prior Regulatory Review. continuous disclosure. Purpose to protect investors by (1) access to information to those who care to gather it. (3) Info already available. Bank  you’ll protect yourself.5. trouble and expense of using a prospectus through private placement exemptions The Concept of the Closed System  Securities will only be allowed to trade outside of this closed system if that trading is supported by adequate continuous disclosure. but still highly regulated!!). (2) inherently safe securities. disclosure.

3 of NI 45-106)  Can use it as many times as you want. etc. so to require it again is stupid (4) Another Superior Policy Objective: Some other policy objective trumping investor protection to some extent. disclosure. 2) Limited offering exemptions (govt incentive sec.000 a pop with you without getting information.no wise guys! This circumvents the rationale that you have the money and will protect yourself 74 Three Policies: Protect Investing Public.3. as long as a (a) purchaser purchases as principal. govnt will default on obligation to pay) (3) Information already Available: Information already available in a different form. is important enough to give exemption even if it detracts a bit from investor protection 5. electric cars. founder/control person/ family). and (c) it’s from only one issuer (at $150. someone recognized as OSC as AI.000 paid in cash at the time of the trade. E. or those who individually or spouse have net assets of at least $5m  *Note problem with offering memorandum (don’t have to. min amount).2.3 The Private Placement Exemptions 4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited investor.g.000 (even if you created a corp to do so)– would NOT allow. Efficient Capital Market. Canada Savings Bonds  not worried that if you buy these. o B) Minimum Amount Exemption (Section 2.000 – incentive to be careful)  Note: (2): corporation could buy like this.1 of Definitions: banks. Increase Confidence.1. (NSGs)  They want to know that you have enough $ that you’ll protect yourself (if you could drop this much money at one time. 1476)  Rich people: Those individually or with a spouse own financial assets of aggregate realizable value before taxes of $1m.  *also random: discretionary ruling under 74(1) of OSA – never going to happen! 5. then will take precautions themselves)  *SAME ISSUE WITH OFFERING MEMORANDUM and practical reality that no one will invest $150. (b) has an aggregate acquisition cost of not less than $150. Trying to promote investment in oil/gas. or those whose net income reaches $200.1. gold. remedies . don’t need protection of securities act Includes: o A) Accredited investor exemption (s. pension funds.000. 4) Isolated trades (isolated distrib by issuer). but NOT if you only set it up just to use the exemption. then must have contractual right of action o If you got 30 people to raise the $150.g. from a policy perspective. and rich people (see definition on p. 3) trades in sec of private companies.  trying to do something that.10 of NI 45-106):  (1) You can sell securities without a prospectus. or combined w/ spouse exceeded $300. it will have a contractual right of action if there is a misstatement / omission.1 Exemptions based on wealth/ sophistication of purchaser   POLICY: sophisticated investors can take care of themselves. but if you do…): What you have delivered is then deemed to be an offering memorandum and if so. to as many purchasers. as long as you’re selling to Accreditor Investors  no disclosure required  s 1. Methods to attain them: Registration.(2) Inherently Safe Securities: Securities are so inherently safe that to need OSA to get involved is stupid (e. insurance companies. reasonable expectation of exceeding that in current year.000.

that’s ok.  (e) Cannot use this exemption more than once in any calendar year! 75 Three Policies: Protect Investing Public.2.  (c) Before you can enter into agreement with someone. spouse or child of those. 1561). here. no one will read prospectus/OM. Efficient Capital Market. If another (legitimate) corp bought $150K of securities. whatever. can’t solicit more than 75. Increase Confidence. from time to time)  Preconditions to use:  (a) Can only solicit 75 people. you can’t fix that. p. gold business w/e.1. should show low lights if highlights. Methods to attain them: Registration. dealing with naked purchaser (not differentiating purchasers. differentiating activity)  Therefore are more severe on the preconditions to use b/c have to protect purchase o STEPS:  First. B/C it was created for a legitimate purpose and not to circumvent the spirit of the legislation NOTE: securities is an area of law that doesn’t allow for certainty. but things like officers/directors.3. etc. each of whom must purchase as principal o Have to be smart. or (i) person by virtue of net worth/investment experience is able to properly evaluate investment. so be careful who you solicit (# OMs from 1-75) must be careful b/c if you get caught soliciting 76. you would be soliciting to more than 75 people o Regulators freaked out by advertising  if you do that. going to make it easier for companies to sell securities by designating them as government incentive securities so they can sell them easier (has to do with nature of company/business the govnt is trying to promote) o Unlike other exemptions where regulators feel good b/c nature of investor made investor protection more likely/unnecessary. need to have government-incentive security (designated by regulators as being 1. must provide them with substantially same information that a prospectus would provide o They’re “scared. it’s over. remedies . only trying to promote right vs wrong o 5.  (b) Must give an offering memorandum with certain info (see p. These are the only people you can solicit/send info to. identifying promoters. giving particulars of qualifications. if you make them prep document like a prospectus.” need to “dress the naked purchaser” and do that by wrapping them in something that sounds/looks/feels like a prospectus (although doesn’t have to be reviewed by the regulator it is very similar) o AND (ii) Purchaser has to be executive officer or director. then it’s basically the same  (d) Cannot advertise in connection with this exemption o if you did. etc. in order to create activity that’s good for the country.1 of OSC Rule 45-501. o Have to Put rep in document: you are a person who by virtue of net worth/investment experience is able to properly evaluate the investment (might not be enough) o Losing sight of policy for exemptions. moving more toward investor protection: Need to raise $ for businesses. 1561): o Policy behind the exemption is different: government has said that they want to promote activity in the oil/gas industry. disclosure.2 Limited Offering Exemption  (A) Government-incentive security exemption (s. can only sell to 50.

but you don’t know members of public are o These categories are very diff to qualify/ define  if it is found that you are not one of the permitted purchasers. child or grandchild of a director. exec officer. employee. Efficient Capital Market.o NOTE: *There is nothing wrong with combining exemptions i. remedies . sister. parent. founder or CP (ind who has had suff prior bus dealings. disclosure.3 Trades in Securities of Private Companies (s. grandparent. it’s how they get going Have to satisfy two things to rely on exemption: (1) Private Company  Look at articles of incorp to see if there are these 3 things: o (i) Restriction on transfer of shares: no one can buy/sell shares of company unless they get authorization from board transferring shares from A-B.4(2)) o (a) a director. 1482 – s.2.etc…. o (ii) Number of shareholders in company (exclusive of employees/former employees) cannot exceed 50 o (iii) Restriction has to say that only a certain IDENTITY of person can buy your shares (can’t distribute shares to public) (2) Specific identity as a purchaser  In third part of the articles. or  a person that is a control person of the issuer 5. started business)  an affiliate of the founder of the issuer  a spouse. Need to be smart about this though. sister.4 of NI 45-106) To help companies in their early stages. exec officer.worried about protecting purchaser. Want efficient capital market to allow private companies to raise money from people that aren’t members of public. Methods to attain them: Registration. grandparent.3. parent. brother. must be direct) o (f) a close business associate of director.1.first ask ppl if they are an accredited investor before govt-exemption (b/c govt exemption one is ltd to 75 ppl and once per yr while other is unltd)  (B) Founder. executive officer. direct) o (g) a spouse…. grandchild or child of an executive officer.2.e. director or founder of the issuer. officer.of selling security holder or selling security holder’s spouse o (h) securityholder of the issuer o (i) an accredited investor […] o (L) *A person who is not the public  Policy: Stupid for good intentions. Control Person and Family Exception o Prospectus requirement doesn’t apply if you Purchase as principal and you are:  a founder of company (who alone or with others. Increase Confidence. officer or employee of an affiliate of the issuer o (c) a spouse. raising some money with $150k exemption and $500k with govt incentive-exemption. founder or CP (knows someone well enough that they trust them.  Who you can sell to: (see p. brother. it has a large econ impact (can’t be used again) WHO IS THE PUBLIC? A Question of Fact – Case Law Two Tests: 1) common bonds AND 2) “need to know” 76 Three Policies: Protect Investing Public. founder or control person of the issuer o (b) a director. founder or control person of the issuer o (e) a close personal friend of the director.

Employees here did not have access to the info that a prospectus would provide. Issue: Were these 5 people “the public”? – YES. person or company is not subject to section 53. Pipegrass (AB CA) – Common Bonds Test COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused.3. Efficient Capital Market. or they don’t. and some will not. the Commission may make the following rulings if the Commission is satisfied that to do so would not be prejudicial to the public interest: 1. bakeshop foreman.1. or persons having common bonds of interest or associations.  Very rarely used (prob not on exam) 5. a clerk.30 of NI 45-106) Distribution must be an isolated one that is not made (a) in the course of continued and successive transactions of a like nature or (b) by a person whose usual business is trading in securities. US Ct Decision: common bonds test is dumb. Some will (e.3. remedies .4 Isolated Trades (s. “offer for sale to the public”. Focus of inquiry is NEED of offerees for protection afforded by the act.4 Offering Memorandum (and problems with it) 77 Three Policies: Protect Investing Public. SEC v. Among those who bought were several production employees. it’s “need to know” test.R v. it will. exec officers). Those who are able to fend for themselves = not a public offering. (2) can impose conditions 5.5 Discretionary Ruling (74(1)) – not going to happen Exemption order (1) Upon the application of an interested person or company. differs in each instance. Methods to attain them: Registration. they are considered to be the public. So should turn on whether the class of persons affected needs protection of the act. Facts: Company did NOT SOLICIT ANYONE. A ruling that any person or company is not subject to section 25. TEST: Persons b/c of their sophistication or relationship with company who don’t need protection of prospectus are not members of the public. If the court or regulators think that they need the protection.2.g.1. Decision: Constitutes a distrib to the public Reasons:  Private corp can’t seek to sell securities – it is clear that it is imposs to define what is meant by the term. then not the public IS A FINDING OF FACT  the court must see if the sale transcended sales beyond private concern Facts: Promoter sought 50k by soliciting farmers with whom there was a previous business dealing. they’ll act accordingly.1. secretary. Implications:  The exemption is for those for whom there is no practical need for application of the prospectus. intended trade. security. but it’s like what a security is  if they think that the act ought to apply. **BOTTOM LINE: Not sure which test applies. disclosure. 2. Increase Confidence. A ruling that any trade. can’t use priv issuer exemption). Employees aren’t necessarily going to qualify as not being the public and therefore being able to sell to them under the exemption. but offered shares to employees.  5. Etc. if they have common bonds. Ralston Purina – “Need to know” test Need to know test (Test of whether you’re selling to “the public” -in which case. electrician.

o (b) can’t be ambiguous.3 Liability under Offering Memorandum (s. Increase Confidence. must contain a contractual right of action saying you can sue us if there’s a misrepresentation (not only misstatement of material fact.4.5. the following rights: o 1. practical import of that is zero  no one lets you sell securities just by laying out deal  5. Efficient Capital Market. (2) Defence: not liable if purchaser knew of misrep  (1) Where an offering memorandum contains a misrepresentation. eff cap mark):  If you give an OM. remedies .4. but if you do. disclosure. Not likely anyone will give you $ without information. and no statutory authority to clarify.1 (1) Liability for misrepresentation in offering memorandum where a misrep.1(2)) & OSA (s. 1(1).1(2)) (also see 5. s.5.130. the purchaser has the following rights: 1) right of actions for damages against issuer and selling securityholder.1.5.6(2) of CP 45-501  if you provide a term sheet JUST setting out the deal. a purchaser who purchases a security offered by the offering memorandum during the period of distribution has. 2) right of rescission against person/ company. same as s. but now we’ve made it very difficult. true and plain disclosure  Thus offering memo is no less complicated than a prospectus  All the guidance we have: o (a) as long and short as necessary.Some and at least one of the exemptions gives legal obligation on company to deliver document that meets definition of offering memorandum (looks/acts like a prospectus) 5. so you end up being in prospectus territory (“looks/costs like one”) o Actually a huge burden: have to (a) tell the truth and (b) not omit anything (which forces you to think about what you don’t know) 5.6(2) of CP 45501 for what isn’t one) Offering memorandum: a document prepared by a seller of securities which describes the business and affairs of the company in order to provide the prospective purchasers (investors) with sufficient information as to whether they want to make an investment Not sure what it is.2 Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.130. but if you CHOOSE to issue them an offering memorandum. Methods to attain them: Registration. sounds like full.4) for rescission OSC RULE 45-501. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made.1.1.1 What is an offering memorandum? Rule 14-501 Definitions (s. without regard to whether the purchaser relied on the misrepresentation. that’s not an OM o Again.4.5.1. we’ll call it an OM and it has to give all info you need to know o Problem in Practice: Try to make it easy.3: you don’t have to deliver any document to AIs in connection with the securities. o (c) needs statutory right of action Not every doc is an offering memorandum: per s. have an obligation to be accurate and include everything OSC RULE 45-501.1 of OSA) s.3) & Deliver (s. that’s cool.4: Delivery of OMIf you do deliver it have to send copy of doc to securities commission w/In 10 days of date of trade  Tension and Critique: if you give NO information. 78 Three Policies: Protect Investing Public. just know you need truth and no omissions. but problem: (Inv prot v.5. s.1. but also omission of MF)  Exemptions Should technically be fast.

Prospectus: Advantage of having a prospectus  freely tradeable shares. If in business of trading securities. but then people behaved badly. Methods to attain them: Registration. and then that person can go sell straight away to secondary market purchasers  bad b/c the secondary purchaser may not have the information it needs to make an informed decision (can’t circumvent purpose of the statute) 79 Three Policies: Protect Investing Public. must still comply with NI 51-102. you must be registered.  2. so investors presumably have all of the information they need  Key Question: How do we sell securities that we bought pursuant to a private placement exemption?****Remember this is what we’re doing/trying to figure out  POLICY: Tension b/w efficient capital market + investor protection.1 NI 31-103 – Registration Requirements. If the purchaser exercises this right.2 Resale Rules 5. have to be registered  Always need to use a registrant!! o And instead of entering in UW agreement. (3) Limitation in action for damages: In an action for damages pursuant to subsection (1). or else takes you out of the exemption 5. but you can’t go out and do it right away because that would be “back-door” Goals achieved by resale rules: Preventing back-door underwriting Whereby you can sell pursuant to an exemption with no prospectus. 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. the purchaser ceases to have a right of action for damages against the person or company. 2) Resale rules for control persons (not connected to above rules) Resale Rules for Control Persons:  Buying pursuant to an exemption vs.1 General Rule: 2 Components of Resale Rules 1) Resale rule for non-control persons: (a) all exemptions other than private issuer and (b) resale rules for those acquiring sec through private issuer exemption. you do have to be able to sell them at some point or no one will want them. (2) Defence: No person or company is liable under subsection (1) if he. remedies . she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. o *if including a forecast. except almost always “using best efforts” to sell securities on your behalf 5.2. the reporting issuer would be subject to a continuous disclosure regime. the purchaser may elect to exercise a right of rescission against the person or company. Efficient Capital Market. disclosure. enter into agency agreement  looks like UW agreement.5 Registration Requirement for Private Placement Exemptions 5. Exemptions and Ongoing Registrant Obligations (Also section 25 of the OSA) Business Trigger Test: if you are a market participant in the business of trading in securities.5. Increase Confidence.1. If the purchaser purchased the security from a person or company referred to in paragraph 1.1. have to be registered  Used to be exemptions from registration.  Thus… b/c it was putting integrity of marketplace into question: now have universal registration system  If you’re in business of trading in securities.

Liability for selling securityholder is basically the same as issuer (unless you can prove that person purchased with knowledge of misrep. can sell it to another AI. If you can get company to do a secondary offering of YOUR securities. so you may not find a willing buyer  e. Discount: If you’re the re-purchaser and you can’t sell it. prospectus – offering and secondary offering. Commitment to file prospectus during a certain period of time so I can re-sell eventually: essentially have to contract that you WILL file a prospectus eventually so that shares can be resold  huge penalty if you don’t do it o 4. but you’re still inclined to buy the sec. or with government incentive. you can immediately sell them pursuant to that prospectus  Problems: o 1. Efficient Capital Market. So sales by a control person OR sales by someone who 80 Three Policies: Protect Investing Public. that’s a distribution requiring prospectus unless another PPE is available  Recall this was noted previously in def of distribution o 3) How control person sells Why does this matter? *POLICY: for second and third branch: The only way to stop people from selling securities without prospectus is to call it a distribution. remedies . Methods to attain them: Registration. offering a security the purchaser can’t sell for a while vs.1. Hard to re-sell b/c of restrictions: The purchaser you’re selling to will probably have problems re-selling (restrictions). Two securities exactly the same aren’t worth as much if you can’t re-sell immediately. if you bought pursuant to the AI exemption.000 (underlying policy obj is still met) o e.5.2 Def of Distribution is Important Here RECALL Definition of distribution: Section 1(1) of OSA  if it’s a trade In a security that amts to distribution you have to issue prospectus UNLESS an exemption applies  3 branches: o 1) Trade in sec that haven’t been previously issued (need prospectus) o 2) Sec you obtained pursuant to a private placement exemption –unless another PPE is avail  b/c trying to sell sec you acquired through PPE. zero for life. o 3. offering one they can sell tomorrow  the one that has less risk is more attractive and that’s the one you can sell immediately o 2.2. or pursuant to group of 25.1 Ways of Reselling (Generally) 1) If you can get the company to issue a prospectus and offer to sell YOUR securities pursuant to that prospectus (secondary offering)  e. 4) Satisfy Resale Rules – NI 45-102  Talking about regulation of second trades of securities sold under an exemption 5. and o 3.g.000 that same policy would say that I should also be able to sell them to someone else for $150. Have to pay proportionate share of expenses of public offering. Might want an offering memorandum to have information anyway: huge time/expense.g. can sell among that group. so they’re not worth as much.2. can sell among the 50  Problems: *Hard to find people that fit these exemptions: o 1. You as the re-seller have to sell securities at a discount.g. similar to a prospectus 3) Exemption order from OSC  Lastman: forget about it. Unless you’re a significant person in company. co won’t do that for you o 2.1. will want a discount. disclosure. Increase Confidence. you’re liable for misrep) 2) Rely on another private placement exemption: Sell to Another Purchaser Pursuant to Another Exemption  If there’s a policy saying I can sell them to you for $150.

as long as you are NOT a control person  RULE: Securities Acquired pursuant to a prospectus are freely tradeable unless the seller is a “control person”  RATIONALE: Information is available in the marketplace to allow investors to make an informed investment decision and ongoing continuous disclosure obligations ensure that the information remains current. if NOT purchased by prospectus.5 and 2. NI 45-102: First Trades. Methods to attain them: Registration. Restricted Period and Seasoning Period 2. the seller cannot resell them unless: o (a) a prospectus is filed wrt trade of subject securities. Otherwise.2.6 of NI 45-102: if you bought securities pursuant to a PPE. disclosure. Other policy considerations prevent control persons from selling securities. the sale is to a member of the. o (c) an exemption order is obtained from OSC (very rare). throw that away and just use (b) o (b) how did you acquire securities?   If by prospectus. even if acquired pursuant to a prospectus. UNLESS You satisfy the rules)  if you’re not a control person. OR have to sell pursuant to another PPE  If any other exemption: hold it for 4 months. and you bought securities pursuant to a PPE OTHER THAN THE PRIVATE ISSUER EXEMPTION.2. or 81 Three Policies: Protect Investing Public.2 Resale Rules for Non-Control Persons 5. you can ONLY re-sell them in these circumstances (or issue a prospectus. can sell shares that you bought pursuant to prospectus (as opposed to an exemption).7 below) Lastman’s Summary of Applicable Rules (Non-Control Persons. then sell. or in government incentive securities exemption. Increase Confidence. as per 2.  If control person: also have to know answer to first question  meet both sets of resale rules. o (b) seller relies on another PPE. Exemptions Except Private Issuer Exemption) 1) Firstly.1 Resale rules for non-control person who acquired sec through a private placement exemption other than the private issuer exemption *Exam resale rules question: analysis:  Ask two questions: o (a) who are you? if not a control person. 2) SECONDLY.2. or o (d) resale rules referred to below are satisfied (set out in instrument 45-102)  RATIONALE FOR THIS: The private placement exemptions permit the issuance of securities without the concomitant/related obligation to provide complete disclosure to investors and without the continuous disclosure obligations. you can never sell again. Efficient Capital Market. original 50 purchasers. remedies . can sell them based on these rules (will be deemed a distribution.acquired the securities pursuant to a PPE are DEEMED TO BE A DISTRIBUTION unless certain rules are satisfied! 5. which exemption?  If Private issuer: have to wait until they become a reporting issuer. but an exemption  Resale Rules for All Exemptions EXCEPT the “Private Issuer” Exemption  Rule for sales of sec acquired pursuant to PPE: If securities are acquired pursuant to a private placement exemption.  If PPE. The Act permits these transactions because either: (i) The sophistication of the purchaser or his or her knowledge of the business and affairs of the issuer reduces the need for prospectus-like disclosure. then you can sell right away. go sell.

it will not be a reporting issuer and will not meet the requirement to be a 82 Three Policies: Protect Investing Public.  “distribution date” = date of the original private placement (PPE)  Rationale is to give people time to digest the info before dumping the securities into the market o C) Legend: The share certificate of the resale securities must include the prescribed legend setting out the restriction on transfer. 3) Resale Rules for All Exemptions Except the Private Issuer Exemption  Rule: THIS IS 2.  Can sell day after  IF co NEVER becomes a reporting issuer and you cannot find another exemption. However. the Act has to regulate the second trade following a PPE in such securities until such a time as the protections afforded by a prospectus are available. in order to ensure that there are not subsequent sales of securities to persons who need the protection offered by a prospectus. (or if there is no certificate. Nova Scotia. Increase Confidence. Methods to attain them: Registration.e.2. and o G) The seller has no grounds to believe the issuer is in default of any securities law ***ALL RULES MUST BE SATISFIED Side notes:  just b/c you file prospectus. in which case the 4 month seasoning period does NOT apply.e. have to do PPE or file prospectus  so reasons why you’d do PPE: don’t want to file prospectus.6 apply – seasoning period)  Rationale: not really a concern that they’ll be selling to people who need prospectus-information b/c if the issuer remains a private issuer.2. Manitoba.2 Resale Rules for a Non-Control Person who Acquired Sec through the Private Issuer Exemption Only difference b/w this and the other exemptions: there is no 4 month hold under private issuer exemption (he can’t tell us why) **only a seasoning period. British Columbia. Quebec or Saskatchewan and is a reporting issuer in a jurisdiction at the time of the trade (the time that the original purchaser is reselling). no restricted (rules from 2. you can never re-sell those securities  also reason why you would put conditions on purchase of PPE (would want them to become a reporting issuer) o B) At least 4 months have elapsed from the distribution date (the “Restricted Period”). the seller cannot re-sell them unless: o A) The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately preceding the trade (i.  Nobody prepared the market for this event by artificially inflating or decreasing the value (or advertising) o F) No extraordinary commission or consideration is paid in respect of the trade. (ii) The legislators are trying to address some more important policy objective. Ontario.  Person reselling the security cannot be a control person o E) No market manipulation.5 OF NI 45-102: If securities are acquired pursuant to a private placement exemption. the date of the resale of the security)  2.. the date of the original private placement) by filing a prospectus in Alberta. OR the company is private 5. Efficient Capital Market.7: unless the issuer became a reporting issuer after the distribution date (i. Any time you issue new securities. a written notice containing such restriction must be provided)  Share certificate received on the PPE will have a legend that says there is a hold on the stock o D) The trade is not a control distribution. doesn’t mean you can issue new sec all the time. disclosure. remedies .

British Columbia. and (e) No grounds to believe issuer is in default. to hold a sufficient number of the voting rights to affect materially the control of the issuer. Increase Confidence.2. Ontario. Nova Scotia. disclosure. Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade. which holds in total a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer. by prospectus or PPE)? – so basically. the person or company is deemed. another PPE.1 Section 1(1) of the OSA – Control Person Definition – rebuttable. “control person” means.3. or o (b) each person or company in a combination of persons or companies. if a combination of persons or companies holds 83 Three Policies: Protect Investing Public. pure ? of fact Definition of Control Person: S. (d) No extraordinary commission or consideration is paid in respect of the trade. acting in concert by virtue of an agreement. or the company becomes a reporting issuer. arrangement. Manitoba. is it a control person?  Different set of resale rules if person selling securities is a control person Ask:  1. o (a) a person or company who holds a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer. Methods to attain them: Registration. (c) No market manipulation. (the re-sell) (b) The trade is not a control distribution. remedies . 5. OSC Exemption.g. go back to rules above)  2. in the absence of evidence to the contrary. any denomination 5. How did you acquire them (exemption or otherwise)? o DOES NOT MATTER!! STILL HAVE TO SELL ACCORDING TO THESE RULES (and follow the insider reporting rules probably)  Prospectus.3 Resale Rules for Control Persons (Separate Regime) Analysis:  Is this a control person selling shares that they acquired IN ANY WAY (e. 1(1) of OSA: Person who alone or in combination with others holds a sufficient # of securities to MATERIALLY AFFECT CONTROL of the company (rebuttable presumption & pure Q of fact – bright-line rule)  Per s. and. and. then purchaser can re-sell right away (b/c issuer is one at the time of that trade  2. A subsequent trade by a person who purchased under the exemption will be a distribution unless the person sells to another person who qualifies under the private issuer exemption (so we’re not concerned). Who are you? If control person (if not control person.7 of 45-102 and that information is out in the public domain now) (this is what can’t really be explained) Lastman’s Summary of Rules : (a) The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta.reporting issuer (seasoning) of the resale rule.1(1) of OSA. another control person  PROBABLY will go advance notice route  Shares freely tradeable. if a person or company holds more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer. to as many people as you want. Efficient Capital Market.2. commitment or understanding.

(c) The control person sells pursuant to another private placement exemption. not freely tradeable and will have to give a discount for that reason). Increase Confidence. remedies  . to anyone you want in the mkt (and stock in the purchaser’s hands is freely tradeable) o BUT… can only do this if…  (1) Company must be reporting issuer  (2) You must have held for 4 months (can’t get better treatment than anyone else)  (3) No market manipulation  RATIONALE: o Reason for protecting against resale of control persons has nothing to do with policy obj behind reselling those acquired pursuant to PPE o Here. control persons can sell in any denominations to anyone they want. this is a rebuttable presumption  And this is a pure question of fact  Doesn’t always make sense.more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer. less than 20% and be a control person. Methods to attain them: Registration. If I control the company. so you can hold more than 20% and not be control person maybe. have to get the company to do it.2 Five Ways a Control Person Can Sell Stock (Lastman Summary) No matter how a control person acquires securities (even if by prospectus and would otherwise by freely tradeable if they weren’t a control person or by PPE and if they weren’t a control person.2. o The policy behind regulating trading by control persons is to prevent abuses by such persons of their access to material information concerning the affairs of an issuer where that information has not generally been disclosed Critique/Rationale: o double protection: might seem kind of dumb b/c already have insider trading rules  but it’s safer if control people can’t SELL STOCK without meeting certain conditions  this is why we 84 Three Policies: Protect Investing Public. forces secondary buyer to have a hold period – not attractive to seller (b/c you have to sell at a discount & might not find a buyer) (d) The control person sells to another control person (also giving rise to resale rules. or (e) The control person sells pursuant to the advance notice route  By relying on this. would have to follow the PPE resale rules). you are deemed to be a control person if you hold more than 20% of outstanding voting shares of company. you can sell them in any denom. Securities Act believes you have an unfair advantage: you have more information about the company. disclosure. have to tell world you’re selling your shares  Says as long as you (a) give advance notice to OSC and stock exchange and make public statement that you’re a control person and want to sell shares  for next 30 days (and can be extended). I might have access to information that you don’t have. in the absence of evidence to the contrary. (“personne qui a le contrôle”)  Main determinantif you materially affect control!  In absence of evidence to the contrary. Efficient Capital Market. and potentially serious liability consequences (b) An exemption order is obtained from the OSC (very rare!).3. very expensive.  Which gives rise to resale rules and same issues as before – discount. to hold a sufficient number of the voting rights to affect materially the control of the issuer. but this is the bright-line rule 5. the combination of persons or companies is deemed. they cannot be resold unless: (a) The control person qualifies a prospectus for the sale of the subject securities  (get the company to qualify wrt your securities) – same issues. and shares are freely tradeable in the buyer’s hands  Want world to know that it’s a control person selling their shares (and # of shares)  Before you can sell them.

Ontario.3.3 Advance Notice Route    Issuer would Do this because: Can issue freely tradeable shares instead of having the person who’s purchasing them from you be stuck with the resale rules (hold periods and other bad things about it). 5.3. Ontario. When can purchaser resell? 4 months a. Nova Scotia. Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade. REMEMBER*** Distribution:  ***Only way to stop people from selling securities without prospectus is to call it a distribution (to stop. When can purchaser resell? 1 day a.4 No tacking with control persons **Also note with tacking:  If I buy pursuant to AI exemption and hold for 2 months. when can control person sell them? If control person wasn’t a control person. company is a reporting issuer. 2010 private issuer becomes a reporting issuer on Feb 1. in which case the 4 month seasoning period does NOT apply. (c) No market manipulation. the date of the resale of the security) unless the issuer became a reporting issuer after the distribution date (i.e.5 Resale Rules Class Examples (Handout) 1) Private placement of securities of a reporting issuer pursuant to the accredited investor exemption on Jan 1. and you can’t get an order from OSC  Go advance notice route 5. you don’t want to be subject to resale rules. remedies .3. then I sell them to a control person. so they need a hold period 4 months from the date of the trade 2) Private placement of sec of a private issuer pursuant to the private issuer exemption on Jan 1.2. only exemption that doesn’t have a hold period is when you become a reporting issuer 85 Three Policies: Protect Investing Public. Quebec or Saskatchewan for the 4 months immediately preceding the trade (i. selling/purchasing) Again. British Columbia. 2010 by filing a prospectus in ON. Methods to attain them: Registration. no tacking for control persons b/c no relationship b/w two resale rules 5.have these rules IN ADDITION to how they ACQUIRE STOCK (controlling it from both ends. British Columbia. (b) The control person has held the securities for at least 4 months.. Efficient Capital Market..  But control person  have to hold for 4 months.2. Increase Confidence. PPE resale is a distribution and sales by control person is distribution if certain conditions are not met  in definition of distribution. the date of the original private placement) by filing a prospectus in Alberta.e. disclosure. and (e) No grounds to believe issuer is in default.2. (d) No extraordinary commission or consideration is paid in respect of the trade. and avoid having to discount your shares b/c they’re subject to those rules Rationale behind reg of trading by control persons: The policy behind regulating trading by control persons is to prevent abuses by such persons of their access to material information concerning the affairs of an issuer where that information has not been generally disclosed Conditions for Advance Notice Rule: (a) The issuer is and has been a reporting issuer in Alberta. third branch) If you’re a control person and you don’t want to issue a prospectus. Nova Scotia. could sell two months later b/c of tacking. 2010.

Since can only sell the later of: i) 4 months from the date of the private placement. Methods to attain them: Registration. and not the holder. tacking is permitted – it doesn’t matter that the sec since changed hands. by the time. disclosure. Since the 4-month hold period is attached to the security. Note: Bob would have never been able to sell to Melissa if she was not accredited investor OR paid $150k 86 Three Policies: Protect Investing Public.3) Private placement of security of a private issuer pursuant to the accredited investor exemption on Jan 1. there is still only 1-month hold period left. 2010 by filing a prospectus in ON. 2010. When can Melissa resell? May 1 a. 2010 to Bob  Bob sells sec to Melissa pursuant to the accredited investor exemption on April 1. Efficient Capital Market. she bought them 3 months had already gone by. remedies . HOWEVER. Melissa acquired sec that had a 4-month hold period originally. When can the purchaser resell? May 1 a. Increase Confidence. 2010- private issuer becomes a reporting issuer on Feb 1. May 1 would still be 4 months after the AI exemption was used b. or ii) date the company becomes a reporting issuer 4) Private placement of sec of a reporting issuer pursuant to the accredited investor exemption on Jan 1. c.

– didn’t make bus sense) (3) Creates Monopolies: If no price pressure. 2) Create synergies. 3) Force mgmt.2 Non-Socially Useful Reasons for Takeover Bids 1) Premium for acquirer. legislators and regulators have decided that takeover bids are a good thing for society If you’re not a reporting issuer in province of Ontario. disclosure.6. beer.1 Socially Useful Reasons for Takeover Bids 1) Move assets to their most desired uses. of the issuer/ firm can be friendly (approach target mgmt. is they want to protect interests of target SHs (the SHs of the company being taken over)  Make an informed decision on whether they want to sell you their shares or not o Per Kimber Report: “Primary objective of any recommendations for legislation wrt takeover bid transactions would be protection of the interests of the SHs of the offeree company (the company being acquired)… SHs should have made available to them sufficient updated information to allow them to come to a reasonable decision about the desirability of a bid for their shares… but also balance: ensure recommendations would not unduly impede potential bidders or put them at commercially disadvantageous position or in a hostile situation with offeree company” 87 Three Policies: Protect Investing Public. to be efficient (1) Moves assets to their most desired uses: Move assets together. by force)  Battle for control and to manage assets Takeover bid: general offer to shareholders to purchase shares of a part issuer. if TorStar bought Sun Media.1 Reasons for Takeover Bids PUBLIC POLICY: on the balance of things. 3) creating monopolies. Methods to attain them: Registration.0 SEGMENT 4: CONTROL TRANSACTIONS Takeover: change in control over mgmt.1. become more valuable than they are apart (2) Creates synergies: B/c ACC owns leafs + raptors is a way more efficient building than if it only owned one of them (3) Forces management to be efficient: Threat of being taken over forces management to behave properly 6. just keep charging more  w/ takeover bids: people often argue it’s a monopoly and that we should stop it (e. 2) empire building. food. which results in offeror obtaining suff shares to control the target 6.1.3 Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them Kimber Report Rationale: To protect investors of offeree company  Traditional reason given for why we legislate/regulate takeover bids. 4) tax advantages (1) Premium for themselves: IF buying companies under-value. keeps prices down. Star trying to take over Sun Media  showed that advertisement in Toronto was cheaper than in SK  so much competition for advertising in Toronto. etc. not subject to takeover bid rules 6. Efficient Capital Market. Labatt owned TSN. prices would go up) (4) Tax Advantages: Not helpful for anyone if this is the reason you’re doing it 6. remedies .1.g.) OR hostile (more frequent. taking premium for themselves which doesn’t help anyone (2) Empire building: Combine assets with no synergies (at one time. Increase Confidence.

2) vendor takeover bids Two Kinds of Bids: (1) Exempt Takeover Bids (Next section. or equality? If you can’t find somewhere to put it. you don’t understand d the rule (from here to end of course) How objective of protecting SHs is manifested in t/o bid rules: 1) Information (Inform Investment Decisions): Designed to give target SHs sufficient information to make an informed decision to whether they want to tender their shares 2) Time a. There is no point in giving people information if we don’t give people time to digest it ii. this is their chance to get it. Can’t enter into agreements giving some people higher premiums than others (or have diff types of consideration e. If you’re not a reporting issuer in province of Ontario.. information. Efficient Capital Market.2 Overview of How Takeover Bids Work Dealt with in Sections 89-105.1 of Securities Act. Have to take shares from everyone who tenders. means market is efficient and someone doesn’t get deal at a bargain (so more people will play) i. pro rata*** i. Not first come first serve or choose which ones you want to buy. cash v shares) 6. Definition 88 Three Policies: Protect Investing Public.Objective of protecting shareholders of offeree company is manifested in 3 ways in carrying out t/o bid rules: 1) Information (inform investment decisions). I don’t have to tell anyone anything. I can buy as many as I want from wherever. All SHs whose shares you’re buying have to get identical consideration i.  When I hit 10%.to allow for an auction). disclosure. Manifested in regs as follows: a. Methods to attain them: Registration. I can buy 50% or 100% of company. Overview of Process: A. and every 2% thereafter until I hit 20.) (2) Vendor Takeover bids  If I own no shares of a public company. Increase Confidence. whenever talking about the regulation of takeover bids. give them time to think about it b. not subject to takeover bid rules 2 Kinds of bids: 1) Exempt takeover bids. whoever. so need time for bidders 3) Equality: All SHs of target company/offeree must be treated the same. Time for SHs to think about it i. Time to get an opinion from management: Also gives management time to inform SHs of what they think (good or bad idea. come in and push it to highest price available. always mention what objective is being carried out with that rule (info.for SH’s to think about it. When company is in play. time or equality)  *Exam: are rules here to provide time. good or bad price) c. ii. have insider reporting and early warning. 3) Equality **on exam. remedies .to get opinion from mgmt. in takeover bid regime. IF you want them to tender shares to a takeover bid. you have to take 50% of everyone’s shares! b. 2) Time (i.g. Time also allows for an auction: Best thing it could happen for regulators (and SH).  When I hit 20%. iii. Time to give another bidder to come forward ii.

e. Policy/Object of Legislation  The object of takeover bid legislation is to ensure that shareholders and the investing public receive sufficient information about the terms of the bid and that all shareholders are treated alike. C. disclosure. a shareholder can withdraw their shares if not paid for within 3 business days after having been taken up. a Directors Circular must be sent out G. the offer price increased). a takeover bid is the acquisition of shares of a company (the “target”) which.  This allows shares which have been tendered to be withdrawn if the shareholder changes his/her mind (which generally occurs when a higher offer is made). Takeover Bid Circular Takeover bid circular: communicates details to shareholders – will describe the offer (the price. 89 Three Policies: Protect Investing Public. first serve. Change in Terms of Offer – Extension of Tendering Change in Terms of Offer – Extension of Tendering: If a term of the offer is changed (i. Bid Open for 35 Days Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular. I. Shares are Taken up Pro Rata Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than this number is tendered. numner of shares and any conditions) and is sent to all SHs D. the shares are taken-up pro-rata and not first come. E.Takover Bid: Generally speaking. SHs offered Same Consideration and No Collateral Agmts SHs offered same consideration + no collateral agreements: All shareholders must be offered the same consideration and no collateral agreements may be entered into. remedies . will put the purchaser’s shareholdings in the target over a certain threshold. Methods to attain them: Registration.  Most changes (other than an increase in price or the waiver of a condition) allow a shareholder to withdraw tendered shares for 10 days. H. which are sent by target to all SHs  Shareholders in deciding whether to tender would generally consider the advice of directors of the target. For this reason. generally 20%. this must be communicated to all shareholders who are given an extra 10 days to tender their shares. a bid must be open for acceptance for at least 35 days. F.. Director’s Circular of Recommendations Director’s Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons. Efficient Capital Market. together with the shares already owned by the purchaser. B. J. Increase Confidence. Withdrawal if no Payment Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking them up. review it and decide whether they want to sell (“tender”). Shareholder Right of Withdrawal SH right of withdrawal: The offeror can’t take-up the tendered shares for 35 days and the shareholder can withdraw the shares at any time before the securities are taken up.  This ensures shareholders are not pressured to tender early (and can therefore review all pertinent information) and are treated equally.

together with what you’re about to by.1. deemed owned if exercisable in the next 60 days** see exam Q handout  90 Three Policies: Protect Investing Public. if I own 14%.that is a takeover bid! You can’t do that unless you make the same offer to all SHs pursuant to a takeover bid circular  E. after shares have been taken up. or an acceptance of an offer to sell  Indirect Acquisition: defined in s. K. or deemed by s. at market price. e.89(1) Takeover Bid: Means an offer to acquire outstanding voting or equity securities of a class made to one or more persons or companies. Efficient Capital Market. This ensures that a higher price per share is not paid for larger blocks or for shares tendered early. but continues…) (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.2. any of whom is in Ontario or whose last address on the books is in Ontario. B buy 10. and I want to buy 7%. the offer price is increased.1 What is a takeover bid? 6. merger.2. remedies .g.1 of OSA: can buy whatever as long as it’s from 5 people or less. 2) 100 of OSA: can buy 5% on the open market every 12 months. what I own w/ what I want to buy is over 20.89(1)  s. beneficially owned. Increase Confidence. disclosure. s. Pre-Bid Integration Rules Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days from the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid integration). treats (see below)  Offeror’s Securities: includes securities controlled. have to do takeover bid and give same consideration to everyone  Offer to Acquire: means an offer to purchase. 92: includes a direct or indirect offer to acquire or the direct/indirect acquisition of securities. and C buy 10 without issuing a circular and then say hah! We have 30% and we now control you  *note: for options. reorganization or arrangement that requires approval in a vote of security holders).  An offeror must offer to buy from the public the highest percentage of shares at the highest price acquired in that 90 day period L. If. or a solicitation of an offer to sell.1 OSA: Part XX: Takeover Bids and Issuer Bids. including those whose shares have already been taken up. is 20% or more . can probably only use this once. Post-Bid Integration Rules Post-Bid Integration Rules: An offeror can’t purchase shares of the target for 20 business days after the termination of a bid.. except pursuant to another circular bid or the exceptions M. constitute in the aggregate 20% or more of the outstanding securities of that class (this is the important part. 6. together with the offeror’s securities. Exceptions to having to issue a takeover bid circular Exceptions to having to issue t/o bid circular: 1) 100. o Interpretation of Rules:  If what you own. all shareholders. Methods to attain them: Registration. where the securities subject to the offer to acquire. but don’t know). and you don’t pay more than 115% of market price (realistically. are entitled to the higher price.g. 90(1) to be beneficially owned by an offeror or persons acting jointly or in concert with the Offeror  therefore includes securities you own and anyone you’re acting jointly or in concert with  So A can’t buy 10.

that premium you’re going to get for control does not belong to YOU. disclosure. or the power to exercise control or direction over. and you own 49%. you can exercise it. Only way you can sell it is if person buying it agrees to buy it at same price/same percentage from all other SHs (they don’t all have to tender to it.50.2. you decide we shouldn’t. so there won’t be a PREMIUM PAID for those extra shares.Acquisitions During a Bid By an Acquiror  s. further 2 per cent rule: 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. (2) Same. But b/c you’re public company and you’ve invited everyone else into the game. Let’s vote.g. they say 20  20% is stupid bright line test (effective control at 20%. remedies . if you thought about it. but they still have to take part in the takeover bid regime. where owner gets all of premium o Instead of 51-49. an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates. but if you’re getting $1.. the acquiror shall disclose the acquisition in the manner and form required by regulation. 5 per cent rule: If. after a formal bid has been made for voting or equity securities of a reporting issuer and before the expiry of the bid. I vote yes. I will always win vote (ignoring special resolution).2 OSA.6.102. company worth that. 91 Three Policies: Protect Investing Public.2 of RULE 62-504: this person has to follow the format for disclosure POLICY: Why do you need to do this?  Because there will have to be a PREMIUM on the shares you’re purchasing that put you into a control position o E. BUT this doesn’t work in all fact scenarios) Have to make offers to all SHs on same terms o  *Problem with 20% Bright Line Test:  Someone might already own 70% of the company. or any company.2(1): Acquisitions during a bid by an acquiror.2 . but those that do will get a share in the premium) o Note: this is very diff than other aspects of society.1. or the power to exercise control or direction over.  **ALSO SEE 7. Increase Confidence.50 is the premium for control and has to be shared with all SHs. but then they want to buy another 20%. if every share is worth $1 and there are 100 outstanding. I win. the extra . constitute 5 per cent or more of the outstanding securities of that class. it belongs to the whole company and you have to share that evenly with the rest of the company You can get that $1 for your shares. s. o If I say I’ll sell you 2% of company. Methods to attain them: Registration. I decide I want to pay a dividend. an acquiror acquires beneficial ownership of. even though I only own 2% more than you. you’ll pay me more than $2 for those shares  Premium you’re prepared to pay to get control of this company So trick: (Achieving Equality Goal)  Securities act says as long as you own control. Efficient Capital Market. you vote no. when added to the acquiror’s securities of that class. If I own 51% of shares of public company. This is where bright line test breaks down. securities of the class subject to the bid which.. the price you pay for doing that is that when you go to sell control to someone else.102. you’d pay me a lot more for that 2% than what it’s actually worth. They ALREADY HAVE CONTROL. with that 2% comes control and control is valuable b/c then you set direction of company o If shares worth $100.

5 SGs own Russell holdings. o (a) a security shall be deemed to be convertible into a security of another class if. 92  Section 92: Application to direct and indirect offers: For the purposes of this Part.1. offered the owners of the private company that OWNS Treats $25 a share for their ownership in Russell Holdings. and 92 Three Policies: Protect Investing Public. options) 6. no law stopping it (t/o bids don’t apply to private companies).6. 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. but stopped it anyway.e. I don’t want to buy all shares at $20 a share to gain control because that’s a lot.2 Deemed Ownership You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover bid (i. have to make a takeover bid Bad Facts make Bad Law: That’s what happens when entire sec act is 92stupid people do stupid things.2. 92 introduced by OSCno one in universe knows what this means. Increase Confidence. Efficient Capital Market.2.1 Sections 89(5) and 90(1)  89(5) Deemed convertible securities: For the purposes of this Part. therefore. buy public through private. end up with stupid legislation.2. treats SH got nothing and control changed hands Two things happen: (1) OSC said damn. SGs got a huge premium. treats is trading at 10/share. a security of the other class. Don’t want to pay SHs $. or the direct or indirect control or direction over securities. whether of the same or another issuer. Takeover bids don’t apply to private companies (they don’t have to share premium with anyone else who might own piece of it).3 Indirect Acquisition – s. Note: Sec commission knew about this. remedies . Other than know that you can’t do that above situation. Russell Holdings (Treats) Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one EXAMPLE OF NO SMART GUYS WITH TAKEOVERS  if you’re going to buy a public company/gain control of it through a private company. private company. whether or not on conditions.2. Methods to attain them: Registration. Dumbest section in. Russell would only be able to sell a fractional amount of its shares (wouldn’t want to do that) Policy Notes:   Cannot indirectly acquire a company without issuing a t/o bid circular: So if they were going to take over the private company. Then “Smart Guy” controlled Treats through that private company. Smart Guy came and said. b/c of need to report after ownership of more than 10% of shares (insider rules)  Why did he go after the Russell holding shares?  strategic – Smart Guy could have bought shares from all shareholders of Treats pro rata (maybe for same price) BUT b/c it would be pro rata. or if it carries the right or obligation to acquire. as the case may be. it is or may be convertible into or exchangeable for. disclosure. a public company. (2) s. you have to issue a takeover bid circular Facts: Russell Holdings. 6. holds 60% of treats.

I own 10%.2. (b) a security that is convertible into a security of another class shall be deemed to be convertible into a security or securities of each class into which the second-mentioned security may be converted. I have an option from the company to purchase 9% of shares exercisable at any time. deemed to own 9% that I can exercise from company (will be outstanding if I buy them). 90(1): Deemed beneficial ownership*** o For the purposes of this Part. the offeror or the person or company shall be deemed to have acquired and to be the beneficial owner of a security.  (b) When I exercise option for 9% is it a takeover bid? o No  because if I’ve bought 2% on open market. either directly or through securities of one or more other classes of securities that are themselves convertible. I consider buying 2% on the open market. I only own 12% with the option to take the 9 in six months. in determining the beneficial ownership of securities of an offeror or of any person or company acting jointly or in concert with the offeror. which puts me over 20% total ownership)  I have to issue a takeover bid circular to all SHs to treat them equally and not give a premium to the SH from whom bought that last 2 on the open market Question 2: On Day 1. I own 10%. whether or not on conditions. I now own 12%. and then on day 6. by a single transaction or a series of linked transactions. Question 3: Day 1. and then I buy 2% = puts me over 20. on Day 4. Is the acquisition of 2% a takeover bid?  Yes  Own 10%. and on day 6. Then on day 6. I have option from an individual to purchase 9% of common shares exercisable in 6 months. Methods to attain them: Registration. deemed 19%. I bought the portion that put me over 20% and the portion that gives me control (so paying a premium for these) on the open market (I bought 2% of OUTSTANDING shares. I own 10%. and the 9% of outstanding shares from the person puts me over. Day 4.  (a) Is acquisition of 2% a takeover bid? o No. including an unissued security. to acquire beneficial ownership of the security within 60 days. if the offeror or the person or company is the beneficial owner of a security convertible into the security within 60 days following that date or has a right or obligation permitting or requiring the offeror or the person or company.  (a) Is the acquisition of 2% a takeover bid? o No  because I only own 12% and that’s all I’m deemed to own (I can’t exercise option in the next 60 days)  b) When I exercise the option for 9%. Is the acquisition of 2% a takeover bid?  Yes  still exercisable at any time. Efficient Capital Market. disclosure. exercisable at any time. Question 4: Own 10% on day 1. and the 2% puts me over. on Day 4. I’m then purchasing shares from the COMPANY. on day 6 I consider buying 2% on open market. I have option to purchase 9% from an individual.2. is it a takeover bid? o Yes  I own 12% after buying on market. I consider buying 2% on open market. at any given date. I consider buying 2% on the open market. o 6. option from company to purchase 9% in six months. meaning that I’m not buying outstanding shares that put me over the 20% 93 Three Policies: Protect Investing Public. Increase Confidence. remedies .2 Sample problems – “Sunlor” What matters:  Order of Purchase  Who Purchasing From Question 1: If on Day 1. again.

o (a) 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. I can buy as many as I want from wherever. mandates information like a prospectus: objective is to give people sufficient information to make an informed decision 94 Three Policies: Protect Investing Public.1 Takeover Bid Circular (Information) General Rule: If I what I own + what I buy is over 20.1. they helped to create value POLICY: premiums are to be shared by all shareholders equally. ORDER: you bought the part that put you over 20 on the open market. remedies  .1(1): Deliver doc to all securityholders. I don’t have to tell anyone anything. 6. which really means it’s going to the SHs) The whole purpose for takeover bid legislation is that when you buy control at a premium it belongs to ALL shareholders because.1 Section 94.o o (so not being unfair to SHs by offering a premium to some SHs over others for control. or o (b) by sending the bid to the security holders described in section 94 (all securityholders. 100 and 100. Efficient Capital Market. (2) Exempt Takeover Bid (see rules below. you can only do so by takeover bid circular (unless an exemption is available) 6. and every 2% thereafter until I hit 20. control can be sold by the company and its not a problem b/c the value of that control goes to the company and indirectly to all shareholders  Only when you’re buying outstanding (already issued) shares from other SHs would you be giving a bigger premium to those SHs  this does exactly what the takeover bid legislation is designed to do  ALSO. whoever. disclosure. publish advertisement in a newspaper. Methods to attain them: Registration. if there are not premiums resulting from the proposed transaction (i. all holders of class of securities subject to the bid who are in Ontario) Form 62-504F1: The Circular: Must contain information set out in Form 62-504F1  tells you what has to go in t/o bid circular. (b) information to SHs and (c) equality *Two types: (1) Vendor Takeover Bid and o If I own no shares of a public company.3. o When I hit 10%. can’t do it without a takeover bid. If you want to own or control 20% or more of the securities of a reporting issuer. o When I hit 20%.1 of OSA) The following mechanics are for a vendor takeover bid. therefore.3 Mechanics of a Vendor Takeover Bid **remember each of these is achieving one of three things in order to achieve the overall objective of protecting SHs of the target company: (a) time.3. have insider reporting and early warning. then immediately file takeover bid circular with everybody 94. order matters… what you pay for first 49 shares isn’t what you pay for 50 and 51 and 20 is new 50 6. Increase Confidence.1(1) and Form 62-504F1: Making a Formal Bid   Section 94.1 (1) Commencement of formal t/o bid: An offeror shall commence a formal take-over bid. in takeover bid regime.e. option being exercised from the company) there is no problem  Thus. it’s going to the company. in theory.

method/time of pmt for shares.98: Bid Mechanics (1) Minimum deposit period: An offeror shall allow securities to be deposited under a formal bid for at least 35 days from the date of the bid.  Takeover Bid Circular provides information similar to a prospectus and provides information relating to the bid. and company and shareholders want more time (for reasons below) Provides time for: (a) Shareholders: to assess the merits of the bid and decide whether or not to tender shares (and can take them back w/in 35 days) (b) Management: to make recommendations and try to maybe attract others (c) Other Potential Bidders: To create an auction and entice a White Knight  To create auctions (by allowing other people to make competing bids). disclosure.3. remedies . info indicating a material change in the offeree issuer since last interim/ annual financial statements.3.  To make sure that the company is purchased for the best price (makes market efficient.2 Legislative Goal Met Protect SHs by providing Time  Note: Bidders have interest in doing transaction as quickly as poss.2. ownership and trading by offeror.2 Legislative goal met *Protect SHs by providing Information and Time (1) Information  Provides information to assist the offeree SH in deciding whether of offer share or hold shares in hopes of (i) sharing in gain accruing post-takeover or (ii) getting a subsequent competing offer.3.1. and give other bidders the chance/right to mount a competing bid (auction) 6.o Information in takeover bid circular includes: name of offeror and issuer. (2) Time: Allows them time to review what’s in the circular 6. source of funds to be used for pmt.1 s. Methods to attain them: Registration. material facts rel to offeree issuer. 6.2. appropriate prospectus info if offer is a share exchange offer 6. Efficient Capital Market. don’t want anyone to get it at a large discount. whether offeror intends to purchase shares subject to the bid in the mkt.2 Minimum Period of Bid (Time) The takeover bid circular must be open for at least 35 clear calendar days in order to give people time to assess. Increase Confidence.3.  Interpretation:May be open longer than 35 days (2) Prohibition on Take Up: An offeror shall not take up securities deposited under a formal bid until the expiration of 35 days from the date of the bid. should reflect actual value as much as possible)  Need to find a white knight (the person you actually want to buy it) 95 Three Policies: Protect Investing Public. give management an opportunity to give their opinion.

3.3 or a notice of variation under section 94.2: Consideration s. first-serve offers are NOT ALLOWED IF more shares are tendered than requested.4. In practice: company wants it to be as long as possible (so they can find higher bidders). all holders of the same class of securities shall be offered identical consideration. o (a) at any time before the securities have been taken up by the offeror. buy 75% of each SH’s tendered holdings to get to your desired amount) 6.97.1 Section 98. Efficient Capital Market. disclosure. or o (c) if the securities have not been paid for by the offeror within three business days after the securities have been taken up. and o (b) send a notice of the change to every person or company to whom the bid was required to be sent and whose securities were not taken up before the date of the change. they MUST be taken up on a PRO RATA basis (e.3. o (b) at any time before the expiration of 10 days from the date of a notice of change under section 94. If there is a variation in the bid.3.3 Pro Rata (Equality)   First-come. 96 Three Policies: Protect Investing Public.3.g. first serve) 6. purchaser wants it shorter to buy it at cheapest price (tensions in practice happen here) 6.1 Section 97. a change has occurred in 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 of the offeree issuer to accept or reject the bid.4.4 Withdrawal and Change of Info or Variation in Terms (time and info)   Shares cannot be taken up for 35 days and shares deposited within the 35 day period can be withdrawn at any time prior to the end of the 35 day period.3. 6.3. before the expiry of a formal bid or after the expiry of a bid but before the expiry of all rights to withdraw the securities deposited under the bid. Increase Confidence. no SH is benefitting more from a premium than another (2) Time to review/no pressure: Gives the SH time to review the transaction and all of the pertinent information to ensure an informed decision because they are NOT PRESSURED TO BID EARLY (since it’s not first come.2(1) If a formal bid is made. Methods to attain them: Registration.3: Change in Information  (1) If. the offeror shall promptly o (a) issue and file a news release. 6.1: Withdrawal of securities  (1) A security holder may withdraw securities deposited under a formal bid. remedies .2 Legislative Goal Met Protect SHs by ensuring equality among them and providing time Provides: (1) Equality: treated equally.3.2 Section 94. 6.3.4. the withdrawal right is extended by 10 days unless the shares have already been taken up (35 days has passed) or the variation is simply an increase in the consideration offered or a waiver of a condition.

4 Legislative Goal Met Protect SHs by providing time and information (and payment) (1) Gives Time for SHs to Wait and See if there is a Higher Bid:  Everyone tenders on last day anyway.5 Conditions (just investor protection)   You can attach any condition you want to your bid. Methods to attain them: Registration.3. Astral BCE  BCE made bid to buy Astral.3: Financing Arrangements  (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. 6. and hope I find the $” o In Canada: can’t make takeover bid unless you can reasonably show that you can come up with $ POLICY: Cant put company into chaos and then not be able to complete it $$ Problem:  Very expensive. and whether or not that variation results from the exercise of any right contained in the bid. as long as shares haven’t already been taken up (3) Encourages Company to Pay 6. disclosure. being able to get out of it). CRTC turned it down) Biggest difference b/w Canada and US  One condition you CANNOT do in Canada is making your bid subj to financing o In US: I can say “I want to make bid for 100% of apple.g. charge you a shit ton of interest to have it there for you (to give you right to be able to call It if you need it)  why there are fewer takeover bids in Canada 6.4: Variation of Terms  (1) If there is a variation in the terms of a formal bid. gives time to assess information:  10 day w/d right.4. the offeror shall promptly issue and file a news release and send a notice of variation to every person or company to whom the bid was required to be sent and whose securities were not taken up before the date of the variation. conditional upon me getting 2/3rds of shares.6. If you have conditions attached. remedies . conditional on CRTC approval. etc. 97 Three Policies: Protect Investing Public. makes it less attractive.g.1 Section 97. Increase Confidence.3 Section 94. you want to win. Competition Act approval.4.g. opportunities for others to beat you (although sometimes you need conditions  e.5. Efficient Capital Market. 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. bc they’re waiting to see if there is a higher one (2) After Amendment. including any extension of the period during which securities may be deposited under the bid.3. except financing Best to have AS FEW CONDITIONS as possible on the offeror’s bid: sounds good to attach conditions to a bid and protect themselves (e. but at end of the day. when you need standby loan from bank for $1b.3.3. (e. CRTC approval. Best way to win is to have as clean a bid as possible.

3: Obligation to Take Up and Pay for Deposited Securities  (1) If all the terms and conditions of a formal bid have been complied with or waived. have to make sure they get paid within a reasonable time after tendering their shares (protecting their reasonable expectations) 6. commitment or understanding that has the effect.  6. disclosure.7. Methods to attain them: Registration.3. but does protect investors.3. but does protect investors.5.6.3. (2) Exception. (2) Same: An offeror shall pay for any securities taken up under a formal bid as soon as possible.2 Legislative Goal Met investor protection: Doesn’t really reach one of 3 obj.1 Section 98. Increase Confidence.3.2 Legislative Goal Met Equality : Ensures that all shareholders are getting an equal share of the premium for their securities and you can’t go making agreements that allow you to circumvent this rule by providing extra consideration to other people under the table for their shares How do you determine if you’re entering into an agreement that provides a security holder of the offeree issuer 98 Three Policies: Protect Investing Public.3. (3) Same: Securities deposited under a formal bid subsequent to the date on which the offeror first takes up securities deposited under the bid shall be taken up and paid for by the offeror not later than 10 days after the deposit of the securities. employment benefit arrangements: Subsection (1) does not apply to such employment compensation arrangements.7 No collateral agreements You cannot enter into a collateral agmt with anyone 6. 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.6. you have to be able to complete the bid.3. can’t put everything in complete chaos and then not go through with it b/c you couldn’t get financing 6. you have 3 days.   6.6 Payment for Securities (investor protection generally) Earliest of: a) You have to take up and pay for them within 10 days after expiry of the bid.1  Prohibition against collateral agreements: If a person or company makes or intends to make a formal bid. OR c) For securities deposited AFTER the date on which the offeror first takes them up have to be paid for by the offeror within 10 days after deposit 6. directly or indirectly. whichever is earliest.2 Legislative Goal Met Investor protection: Doesn’t really reach one of 3 obj. Efficient Capital Market.3. severance arrangements or other employment benefit arrangements as may be specified by regulation. and in any event not later than three business days after the securities deposited under the bid are taken up. the person or company or any person or company acting jointly or in concert with that person or company shall not enter into any collateral agreement. 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). remedies . OR b) Once you’ve taken them up.6.1 Section 97.7.

g. If I’m doing it to induce them to tender their shares and I’m finding a way to get their shares without directly paying them more money. you can do it later in a second document as long as it is 7 days BEFORE the expiry of the bid As SHs. you are entitled to know what your directors/managers think of this bid! o *and keep in mind that directors don’t always act in the company’s best interest b/c it conflicts with their own interests  6. Increase Confidence.g. Dealers pay 6% royalty for right to carry on dealership. or o (c) shall advise security holders that the board is considering whether to make a recommendation to accept or reject the bid. Efficient Capital Market. say I’m going to make takeover bid for CT.4. disclosure. in the directors’ circular.with consideration of greater value than that offered to the other security holders of the same class of securities vs. If I go to dealers. and I’m going to pay everyone $50 a share. Methods to attain them: Registration.4 Post-Bid: Directors’ Circular (Response)  The directors of the target company have an obligation to deliver a director’s circular to all their shareholders within 15 days from the date of the bid o They must tell SHs that they recommend that the shareholders accept the bid. (2) Duty to Evaluate and Advise: The board of directors of the offeree issuer shall evaluate the terms of a formal take-over bid and. then it’s fine. not later than 15 days after the date of the bid. a recommendation and state the reasons for being unable to make a recommendation or for not making a recommendation. o (b) shall advise security holders that the board is unable to make. one that is allowed?  E. you should know. remedies  . and give their reasons for any of these decisions o If within the 15 day period you aren’t ready to give your reasons. or say that they’ll let them know at a later time.104(2)) (Why do you need it? *diff of INTENTION): (a) are you inducing that person to sell you their stock? (not okay) OR (b) do you need them and their expertise or are doing it for a legitimate business purpose that had nothing to do with whether or not that person owned shares? (okay)  If I’m trying to maintain them and their expertise for the best interests of the corporation and I’m dropping all of this $ and think that they’d better be sticking around if I’m going to spend that much. the board of directors of the offeree issuer shall prepare and send. I want to buy Canadian tire and 30% of those shares owned by dealers of CT. See test below. if I’m successful in acquiring.1 Section 95: Offeree Issuer’s Obligations  (1) Duty to Prepare and Send Directors’ Circular: If a formal take-over bid has been made. I’m raising your compensation from 50m a year to 150m. I’m giving someone else a benefit that I’m not giving to the other SHs 6. 2: If I want to buy apple. reject the bid. o (a) shall recommend to security holders that they accept or reject the bid and give reasons for the recommendation. Should I be able to do that? Depends on the reason (intention). make no recommendation at all. a directors’ circular to every person or company to whom the bid was required to be sent.  E. Test for whether or not collateral agreements are ok May apply to the OSC to ask them if a certain agreement is okay (s. Go to CEO and say. shall state the reasons for not making a recommendation in the 99 Three Policies: Protect Investing Public. I’m going to cut your royalty from 6% to 3% (good for dealer). If I’m successful. Want to retain dealers. or is not making. then not okay. give everyone $750 for their shares.

1. or is not making. taking up shares pro rata). they have to let the SHs know of their decision with enough time for the SHs to make an informed decision about tendering 6. and make sure they get the $20 bid (the premium) NOTE!!! – and see below chart for legislative goals  still have to comply with the terms and conditions of a takeover bid (e.5. (3) Further Communication: If clause (2) (c) applies. or not. Section 2. in the clause it may state that the SH is not obligated to tender to the original bidder at a certain price if a higher bidder comes along BUT then the SH must give the original bidder a % of the profits. Efficient Capital Market. together with the reasons for the recommendation or the decision.g.4. directors’ circular and may advise security holders that they should not deposit their securities under the bid until they receive further communication from the board in accordance with clause (a) or (b).1 Section 2. sit with share at $10 or agree to lockup agreement. Then negotiate (you can add whatever conditions you want.g.5. have it irrevocable where they cannot withdraw the tender and tender to a higher competing bid. you’re a big SH and I say I’m thinking of making bid at $20 a share.1(1) of the OSA says you can’t enter into any agreement to enter shares while bid is outstanding (in a private agreement) 6. Increase Confidence.1 Lock-up Agreements/ Tendering Agreements (Allowed) 93. probably would though) Why would a big SH do that?  The large shareholder would encumber themselves like this in order to ensure the bid happens and their shares get bought  If they said no. If there is NO such clause in the LU agreement. 6. o E. there is no extra consideration or premium going to the SH who is a part of the lock up agmt 100 Three Policies: Protect Investing Public. but I will only make that bid if you agree that you’ll tender to it. the board of directors shall communicate to security holders a recommendation or the decision that it is unable to make. disclosure.2 Legislative Goal Met Information and time (1) Shareholders are entitled to know what the directors think: gives them sufficient information. not doing it for $20 a share… two choices. remedies . Methods to attain them: Registration. it’s a contract  For instance. at least seven days before the scheduled expiry of the period during which securities may be deposited under the bid.1(2) of Rule 62-504 (Take Over Bids and Issuer Bids) says I can enter into a lock-up agreement with you  whereby the shareholder and offeror making bid will contract to effect that shareholder will tender his shares to a formal TOB made by the offeror made in accordance with proper terms/conditions of her bid  You can negotiate this.1(2) of Rule 62-504 However. considering they may have less knowledge than the individuals working on the inside (2) Have enough time to make an informed decision: If they’re going to give a recommendation (or not give one). then the SH is stuck.5 Pre & Post-Bid Integration 6. a recommendation. nothing untoward going on.

o

Pre-bid integration only protects little guys (doesn’t matter that previous purchases were for less)

Ex. Say 60 D before offer to buy all shares of A (at $9/share); 45 D before offer to buy all of B’s shares (at $12/share). Then take-over bid (might be prejudicial to other parties). Therefore, take-over bid must be for highest price and highest % you purchased in the previous 90 day period.  Thus to legitimize these transaction would have to buy for $12 and 100% (higher payment and higher % than before – note: therefore, should not buy up 100% of A first) 6.5.1.2 Section 93.1: Restrictions on acquisitions during formal take-over bid 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. 6.5.1.3 OSC RULE 62-504: TAKE OVER BIDS AND ISSUER BIDS Per s.2.1(2): Subsection 93.1(1) of the Act does not apply to an agreement between a security holder and the offeror to the effect that the security holder will, in accordance with the terms and conditions of a formal take-over bid, deposit the security holder’s securities under the bid.  Interpretation: So this means they will deposit their securities in accordance with the usual bidding rules! 6.5.1.4 Legislative goal is STILL met Promote TOB, Equality and Information – policy as to why this is allowed (1) Equality: all SHs are being treated equally: b/c all SHs being treated equally, big SH not getting more money than little SH (2) Information: This is not secret (it will be disclosed in the takeover circular) (3) Promotes TOB: Is not a collateral agmt b/c SHs still treated equally, however lock-ups help to allay the expense of TOBs to offerors b/c it lowers the risk of the bid failing and are thus in accordance with the intention of the Act to promote TOBs 6.5.2 Pre-Bid Integration Pre-Bid Integration: Only applies to private agreements, you can do this on the open market if you want b/c it’s random  E.g. If I know I’ll make a takeover bid tomorrow, I own no shares of a public company. B owns 19% of shares. Ill buy all your shares at $50 a share, stock trading at $10, you buy them. Nothing to stop that, 019, early warning, insider reporting, but nothing stopping it. Tomorrow, I make bid for the rest of the company at $20 a share = … no. o OSA 93.2(1): when you make a formal t/o bid, going to look BACK 90 days from the date of your takeover bid. If in that 90 day period, you bought shares by way of private agreement from anybody, your t/o bid has to be for the highest price and highest percentage of shares you bought in that 90 day period. (if 91 days?) o 90 days is a stupid bright line test, no significance. Can do it at 91 and you’re a-okay.  E.g. 40 days before, I buy 100% of A’s shares at $10, B I buy 50% of their shares at $12 at day 30. My bid has to be for 100% of shares of company at $12

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Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

6.5.2.1 Section 93.2(1): Restrictions on Acquisitions Before Formal Take-Over Bid s.93.2(1): Restrictions on Acquisitions before Formal Take-Over Bid: 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, (private agmt ONLY)  (a) the offeror shall offer, o (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 o (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.

(2) Exception **once again, the rule in (1) ONLY APPLIES TO PRIVATE AGMTS!!: 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. 6.5.2.2 Legislative Goal Met Equality: Ensures that certain shareholders are not being paid a premium that other SHs are not getting the advantage of, just b/c it was done in a roundabout way prior to the formal bid 6.5.3 Post-Bid Integration Same as above in that this only applies to private agmts, not trades on market  E.g. If you have takeover bid outstanding, you’re a big SH. You don’t want to tender at $20 a share and I need your shares. I say don’t worry, let me buy everyone else’s at $20, then buy yours a day after I close by bid by priv agreement at $25 a share (or do a new bid) o Obviously can’t do this o Section 93.3(1): if you have t/o bid outstanding, you cannot enter into any agmt with anyone else to buy their shares at a different price, or make a takeover bid at a higher price for at least 20 trading days after the expiry of the bid 6.5.3.1 Section 93.3  s.93.3(1) Restrictions on acquisitions after formal bid: 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. **MUST BE ON IDENTICAL TERMS TO THE BID AND OPEN TO EVERYONE!! (2) Exception **again only applies to PRIVATE agmts: 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.

6.6 Exemption from Pre-Bid and Post-Bid Restrictions – EXEMPT Takeover Bids! 102
Three Policies: Protect Investing Public; Efficient Capital Market; Increase Confidence. Methods to attain them: Registration, disclosure, remedies

Sometimes can take over 100% without doing t/o bid circular 6.6.1 Private Agreement Exemption (s.100.1(1) of OSA, most important)  S.100.1(1): Takeover bid exempt from rules (requirement to do t/o bid circular to all SHs) if you’re going to buy from 5 or fewer people and the price you’re going to pay, including commissions, does not exceed 115% of the market price at the date of the takeover bid (or if no public listing, then what they think would be 115%) o market price: defined as 20 day avg closing price (20 days preceding your bid)  your purchase from your 5 people can’t be for more than 115% above that market price o Can OFFER to more than 5, but can only buy from 5 o * Remember, you cannot act jointly. You cannot prepare your seller to fit within the 5 or fewer exemption

POLICY: why have this exemption?  TOB: we don’t care who owns it or controls it, we care if you’re selling it at a premium, that doesn’t belong to you, belongs to all shareholders. But if premium is small enough and they define 15% as de minimis, then all it is is whether you control company it or I control it, and who cares? So 15% is insignificant. They only care if there’s a big enough premium that it should be shared b/w everyone, all SHs (if it’s small, it doesn’t matter). If control person wants to sell it for under 15% premium, not really a control premium (theory)  Overall: efficiency of capital markets, want big SHs to be able to extract themselves from companies, if they want to extract from without a big premium, then cool 6.6.2 S.100 – Normal Course Exemption – Don’t Exceed 5% in 12 Months   Even though what you own together with what you buy will come out to more than 20, we’ll exempt you from takeover bid requirements if you buy no more than 5% of shares in any 12 month period and price you pay does not exceed market price If market is dumb enough to let you keep doing it, then fine we don’t care, not at a premium

Ex. Exam Q: A(2%); B(4%)H(3%)  Always get to 19.9% with fewest purchasers poss (enter with 5/fewer sellers) – therefore, own most amount without triggering T/o bid 6.7 Voting & Non-Voting Shares I need to raise money, but I don’t want to lose control; thus, issue shares in classes, some voting, some not. I can issue equity without losing control. Investors are satisfied because they just want your expertise, don’t want to own the company. Problem: investor does not have a problem with founder controlling the company, but there would be a huge issue if controlling SH can sell shares at a PREMIUM that investors have no right to participate in. Solution - Canada Decides… (a) IF you want to create restricted voting shares, have to get a majority of the minority vote (b) Have to call them restricted voting shares and (c) COATTAIL Provision: if someone makes a takeover bid for my shares, then my shares become exactly like yours and we all get one vote, i.e. a bidder cannot attain control without making the same offer to all SHs. Canadian Tire (1986, OSC) 103
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Increase Confidence. No law. remedies .4% of the voting shares. you’re dead (prob b/c conflict of interest between directors interests and SH’s interests). but if you deprive SH of choice. Dealers read the coattail. Dealers already owned 17. and we get control of Canadian Tire (we already own 17%). there is a valid contract! (arbitrary!) Collateral Agreement Rule Only Applies in the Context of a Takeover Bid This is not a takeover bid. and everyone gets the same price. Collateral benefits only apply to takeover bids. no takeover bid and collateral agreements don’t apply. 30 million was merely a deposit.66% of the voting shares. each non-voting share shall be entitled to 1 vote. directors’ actions evaluated under the “business judgment rule” (Smith v. Coattail was triggered by an offer.1 Fiduciary Duty in the Context of Takeover Bid  Traditionally.  Counter Argument: Can we not rely on the commercial world for certainty? The law is the law. not precedent. 6. Now. and said look at this. and we can shut out the rest of the public. If they were successful in their offer. It is simply a contract between dealers and Billes family. It was not a premium. when the stock was at $16/share= a massive premium for the voting shares of Canadian Tire!) As evidence of good faith. It’s good to have them. (a legit one). despite not countering statute or case law. Methods to attain them: Registration.  Now diff classes of shares and coattail provisions are much rarer 6. we only have to buy from Controlling Family. Van Gorkom) and have fiduciary duties of care/loyalty under CBCA However. a more stringent view emerges. everyone would get the same price. (Thus. because you maximize value of the enterprise.24/share.  Decision: OSC says nothing in this coattail stops this transaction.8 Director’s Duties and Responsibilities in a Takeover Bid Situation – Defensive Tactics to Buy Time Policy for defensive: you can do w/e you want to fight bid. Once the OSC said no takeover bid. The non-voting SHs go apoplectic. On that promise to SHs. this isn’t a takeover bid because the OSC said it isn’t a takeover bid.Ratio: Coattail provision. therefore collateral benefits do not apply. collateral agreements did not apply) Facts: Dealers of Canadian Tire formed a company. Found that collateral agreement rule only applies in the context of a t/o bid (since this was not a takeover bid. it doesn’t trigger the coattail. So they do it. 30 million dollar irrevocable deposit. If we make an offer for 49% of the voting shares. disclosure. There is nothing in the case law that would stop the dealers. no contract stopping this. they would own 66. But they stopped it anyway – cease trade. irrevocable. in the context of defensive measures. if there is a takeover bid. Nothing in the statute stops this transaction. Efficient Capital Market. we won’t get a premium you won’t get – protected in event of TOB). they agreed to take back non-voting shares and give the family voting shares. I have no way of stopping the transaction. the DEPOSIT will be deducted from the same price.  Coattail says in the event an offer is made and a majority of the voting shares have been tendered. Directors must show: 104 Three Policies: Protect Investing Public. made an offer to purchase 49% of voting shares of Canadian Tire from Controlling SH (at a price of 160.8. was not allowed to go through as it would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public interest).

substantial debt on hand for successful bidder—less valuable company) Delay the bid: commence litigation seeking an injunction until litigation is resolved. Unicorp makes hostile bid for union enterprises. to believe that the takeover threat is harmful to the enterprise. and if you win bid and buy union enterprises. 6. competition laws. Before they had defensive tactics. Issuance of grant on. Sale or acquisition of asset of a material amount c. will give you new shares of Union Enterprises. Find two people that own one worth $10m. Decide they need a pig farm. 6. Methods to attain them: Registration. or purchase of outstanding securities of target b.2 Duty to Maximize SH Value Competing goals of the directors: immediate maximization of SH value and pursuing the long-term best interests of the corporation. Then a little nobody company.e. Unicorp still buys union enterprises. based upon good faith and reasonable investigation. and (b) Actions taken in response to the threat are reasonable or “proportionate” in relation to the threat posed.e. disclosure. Efficient Capital Market. Labatts (just an example) 105 Three Policies: Protect Investing Public. i. option. union enterprises to fight it. Entering into a contract other than in the normal course of business.” If you do that. will expect you not to tender your shares to the unicorp bid. Union Enterprise (Unicorp Tender) (Example) Example of defensive tactics – bought a pig farm to make company unattractive to bidder (too extreme. but case was before sec law) Facts: Union enterprises was a massive utility company in Canada. they get lots of perks. Makes bid at least $80m more expensive b/c new shares out there they have to buy. Scorched earth – make it so unattractive bidder won’t want the company anymore.8. grant option to third party to purchase “jewel” at low price if hostile bid succeeds Bust-up fee with white knight: if white knight’s bid is unsuccessful. Increase Confidence. Costing Unicorp millions. poison pill (see below) Regulation tends to encourage defensive tactics. Looks like unicorp is going to win.1 NP 62-202: Tactics that will come under scrutiny Tactics that will come under scrutiny include: a. say “we’re going to pay you $80m for your pig farm.2 Examples of Defensive Tactics       Issue new shares Seek a “white knight” Issuer bid for own shares “Crown Jewel”: sell of asset coveted by bidder. Directors don’t like that.8. It also facilitate white knight defences.8.  (a) They have reasonable grounds. somehow was allowed to happen.1.1. Also makes it hard b/c those 80m shares won’t be tendered to the bid. target must pay a significant sum to white knight (i. but won’t give you cash. Or. fight goes on for mont hs. And Union Enterprise comes up with a smart idea. remedies . o This is Intended to address the potential conflict of interest between management and SHs (that directors will just act in their own best interests in a TOB situation to entrench themselves) 6. you get a utility AND a pig farm! They do the deal.

everyone. If someone acquires control of Labatts. Facts: Sun Media went to competition bureau to buy itself time to think about TorStar bid. remedies . Saw stupid provision in income tax act – if we turn TSN from a corporation into a partnership. didn’t tell anyone.2. never heard of success Sun Media and TorStar Example where info was not made available to bidder. Increase Confidence. complained to competition bureau. everyone gets access except original bidder. Second Cup Example of poison pill. Everyone thought it was over.  So they decided poison pill  turned down by SHs. then made a deal with Beckers (paid a lot). 2 years later Couche-Tard bought both! 6. disclosure. But keep in mind you can’t fix this one!!  SH of Sun Media and TorStar angry – took decision out of their hands! However. But then someone else came and bought it from Belgium (COMPANY DID THEIR JOB. goes nuts suing board. Existing directors put in a poison pill (once x% acquired then every SH. Methods to attain them: Registration. so everyone wanted it. For months. Labatts done. Time is $ for takeover bids. Example of making info available to all bidders except you. Couche-Tard made an offer to buy Max Milk. if we change from corp to partnership.not actually used. directors insulated b/c they bought time – then Quebecor made a higher bid! So it worked out. Labatts wants white knight. owned 40-50% of Labatt. THEY BOUGHT TIME) Max Milk and Beckers Example of attempt by Max Milk to find a white knight Facts: fierce rivals for years. they owned beer company. gets ability to buy shares) 106 Three Policies: Protect Investing Public. and allowed Onex and Labatt to talk about it (Onex realized it would be long and drawn out if they didn’t talk to the board).1 Due Diligence – can restrict access  Want to find white knight.Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab).8. Had big fight with CEO of Labatt. Efficient Capital Market. Worked out since delay led to higher bid. food. might complain to anti-competition bureau and maybe a better bid comes along. will pay $150m of tax for nothing. after this case brought in law re: defensive tactics (however. TSN. Had some time (unusual) to prep for takeover bid (it’s usually by surprise). Onyx sees change.  If in the same industry. so evidence it would absolutely be in play. etc. just threatened to give opp to talk Facts: Owned partially by Cara. Then Onex makes hostile t/o bid at huge premium to market. then we can trigger $150m tax liability on a change of control of Labatts. speculation someone was going to make a takeover bid for Labatts. So changed it.. Also in this case. Toronto blue jays. (after defensive tactics introduced)  Onex Argument: “these guys are crooks b/c they entrenched themselves. suing directors. Onyx wants it to go quickly. denied SHs right to decide if they want to take our bid or not by creating an artificial $150m tax liability for no reason”  This actually levelled the playing field. Sold shares on condition that they wouldn’t tender them to Couche-Tard. Rumour they’d be taken over (Labatt). board did it’s job to buy time and eventual had a preferable bidder) Facts: Labatts was controlled by Brascan. And when OG bidder sues all directors. Made bid to own rest of company. but only triggered if someone gains control.  Every time bid is made on hostile basis.

relieving you of any personal concerns of losing your job.NP 62-202 Rules developed after Unicorp: Needed to have a system that’s conscientious and fair to determine what defensive tactics are ok in the context of a TOB 6. it levels the playing field.8. 9) although auctions are best and don’t want to intervene. NO ONE has ever actually triggered a poison pill – just threatened often to give an opp to talk 6. so astronomical price. 4) Regulators believe it is inappropriate to specify a code of conduct for directors b/c that code runs risk of being insuff in some cases and excessive in others. 10) cannot come to administrator to get prior approval for defensive tactic (1) Takeover Bids are a Good Thing : Media try to paint good/bad guys. Methods to attain them: Registration. we have a weapon. (e.   Temptation to offer everyone a huge severance in case they get taken over b/c it’s the acquiror’s money.8. and it creates a bit of leverage for there to be a negotiation o SEC COMM CAN LIFT IT!!.2. no company in history of world has ever executed a rights plan. either b/c they think it’s best for the company to do so/want a higher offer (good).2 Golden Parachutes – all legal. 3) second purpose/ objective: create a reg framework where bids can happen in an open and even-handed manner. It buys time. Policy argument is: important to behave in best interests of SHs. so if they give you that golden parachute.  (a) discipline on management (to make sure they do a good job)  (b) reallocation of resources to their most effective uses  But we recognize that there’s a possibility that interests of management/board of target might differ from its SHs.3 Poison Pills  “Rights Plan” . there are just people that want to make $. 6. Increase Confidence. Management and board might take certain steps to defeat that bid. but rarely would. This is LEGAL. Talk to us. 5) SH approval desirable (BUT this is unrealistic). 6) administrators believe that unrestricted options produce most desirable results in t/o bids and are reluctant to intervene in contested bids.Put provision in articles of corp saying “if someone acquires more than 20% of shares of this company. remedies . every single company says don’t push us or we’ll exercise our rights plan. or to entrench themselves (bad) 107 Three Policies: Protect Investing Public. every SH of this company automatically [except person owning 20%] gets the right to buy 10 more shares at a penny”  Makes the company impossible to buy b/c there are 10X as many shares that everyone acquires for a penny. Because we need to talk.  Almost every company subj to poison pill threatens to sue. Efficient Capital Market.g.8.3. 2) primary objective of t/o bid legislation is protection of bona fide interests of SHs of target company. so you can just act BIC 6. levels the playing field:  tells acquirer just relax.8. disclosure. Cara for Second Cup) o Don’t lift it usually b/c think it creates opportunity for someone to come in at a higher price b/c that’s what they want. If you think you’ll dictate terms.2. every company fighting takeover bid is afraid of implementing it.1 NP 62-202 Main Principles:1) takeover bids are a good thing. Again.3 Defensive Tactic Rules . administrator will punish you if your action is to deprive SHs of opp/ rt to respond to a bid.

If there are not.3. won’t bless your transaction 6. if you don’t engage in DTs. Methods to attain them: Registration. SHs get more. bid you don’t want might walk.8. they’ll review tactics in hindsight. If they say that they believe there will be substantial damage to the company’s interests. disclosure. the game is over. (4) We. and (c) the means adopted to oppose the takeover were reasonable in relationship to the threat posed”  Defensive tactics that result in shareholders being deprived of the ability to respond to a takeover bid or to a competing bid are unacceptable 108 Three Policies: Protect Investing Public. we’ll tell you if you’re right or wrong with benefit of hindsight later. takeover bids are fast – unrealistic in almost every case. Efficient Capital Market. “we’ll kill you” (5) SH Approval (unrealistic)  If you’re worried. But if you do. they don’t own it. (6)***most significant point they’re going to make: administrators believe that unrestricted options produce most desirable results in takeover bids. it’s okay. That sounds okay. IF they’re abusive to SHs (denies them rt to make choice). do best for your client. (b) they acted after proper investigation. In takeover situations. and are reluctant to intervene in contested bids  They want an auction!  get as many bidders as possible. In implementing a poison pill. we really are going to kill you if results of your action is to deprive SHs of opportunity/right to respond to a bid***  Difficult b/c forgetting bad intentions. Producers Pipelines (Sask CA) – Proportionality Test Ratio: Canadian law does not conflict with the business judgment rule. and no white knight will come in  looks like you’ve denied SHs right to make a decision  **blabla about not being worried about protecting yourself as a lawyer. but measured risk that makes sense (10) don’t think you can come to us and get prior approval for defensive tactic  Do whatever you think you have to do. the regulators.2 Case Law Teck Corp v Miller (BC SC) – Best Interests Test Ratio: Best interests test: need to act in best interests of SH“The directors must act in good faith. directors will often be in a conflict. believe is it inappropriate to specify a code of conduct for directors of a target company b/c that code runs risk of being insufficient in some cases and excessive in others  Uncertain. get SH approval of your defensive tactic. Then there must be reasonable grounds for their belief. get price as high as possible for SHs  **why it might be okay to engage in these tactics: have time to get other bidders. remedies . might get a bad bid.(2) Primary objective of takeover bid legislation is protection of bona fide interests of SHs of target company (3) Second purpose/objective: create a regulatory framework where bids can happen in an open and evenhanded manner (shouldn’t favour management or offeror  should put SHs in a position to make a fully informed decision)  Concerned that certain defensive tactics employed by board may frustrate a fair bid and deny SHs the right to make the choice  Directors MIND the store. Increase Confidence. the directors “must be able to establish that (a) in good faith they perceived a threat to the corporation. if they say it’s okay. then there must be reasonable grounds for that believe. (9) although that’s the case and auctions are best results/we don’t want to intervene. that will justify a finding that the directors were actuated by an improper purpose”. If you’re legitimately pursuing higher offer or better deal for SHs and a risk it might turn out badly. but taking meeting of SH takes 60 days min. o When it turns out properly.