THREE POLICY OBJECTIVES OF SECURITIES REGULATION: Always challenge the provisions to say which one of these 3 objectives they fall under 1. Protecting the investing public  Essential function of the regulators to protect those who invest in the market to ensure continued investment which will create confidence in the market  If people don‟t invest in companies because there‟s no confidence in the process, companies won‟t be able to raise money and the economy will fail  Don‟t allow people to make investments unless they‟re informed 2. Ensuring the efficient operation of the Capital Markets  All investing companies must be able to compete on a global basis, cannot survive as a country if people do not invest in the capital markets.  Important to country and economy that there be a capital market that works. Important that there will be investors to give companies money to help them grow and compete in the global market.  National Interest: Need markets to be efficient to attract investors to Canada.  Inherent tension between rules designed to protect the public (1) and rules to make sure the capital market system works (2). But we must strike a balance in order to prevail. 3. Increase & Maintaining Public Confidence in the Capital Markets  Capital markets must maintain a level of integrity if there is to be continued investment – retain capital flow.  If you don‟t have confidence in the capital markets, you won‟t play in the game THREE METHODS USED TO ACHIEVE THESE OBJECTIVES: note that there are exceptions 1. Registration requirements (cannot trade in securities unless registered)  Performance of registrant is carefully regulated by the Ontario Securities Commission. The OSC monitors and ensures that brokers have minimum education, integrity, and discipline them if they don‟t behave (rule 3). Policy - Regulating market participants ensures public confidence in the system.  Exemptions: OSA recognizes that protection is not always required and provides an exemption from the registration requirement for certain trades and/or securities. o Ex: Canada Savings Bonds – guaranteed by the government of Canada, so those who sell them do not have to be licensed…the Canada Savings Bond is a security, without the exemption anyone selling a bond will need to be registered, but this is not what the government wants. Policy - This is the tension in the 3 objectives, in this example it‟s between protecting the public (registration) and efficiency in the markets (not requiring everyone to be registered) 2. Disclosure Requirements(initial prospectus must be filed and OSA requires continuous disclosure once securities are registered – give people sufficient information BEFORE they purchase securities to make an INFORMED decision)  Prospectus is designed to provide investors with full, true and plain disclosure of all material facts about the company and the securities being offered. o Policy - Promote investor protection by ensuring that the information in the market place is accurate.  Problem: prospectus is accurate at a moment in time, but companies change every minute. There must be a system that keeps the prospectus current.



Solution: the company becomes a “reporting issuer”, and it is therefore subject to the continuous disclosure requirements (annual financial statements, press releases). Exemptions: Prospectus requirements are expensive and time consuming, so the OSA “private placement exemptions” (PPEs) that allow for the sale of securities without a prospectus. The normally stringent protection provided in the OSA is unnecessary where: o the purchaser is sufficiently sophisticated that he/she doesn‟t need the prospectus (these people are called accredited investors) o the information is readily available o the securities are “safe” (e.g. Canada Savings Bond). PROBLEM: Some investors are sophisticated, so they can buy without a prospectus. But what happens when they want to sell the shares to 200 other people? They can circumvent the prospectus requirements by selling it to the rich person then having them sell it to 200 of us. There has to be a system that stops that (closed system). Closed System and Resale Restrictions o When securities are acquired pursuant to one of the PPEs and not pursuant to a prospectus, the resale by the initial investors to other investors is restricted and conditions must be satisfied prior to their resale. OSA “closes in” on the second trade of these securities to be in the public domain for a certain period of time before new investors can acquire them o The policy to allow the sophisticated investor to buy the securities without a prospectus was that that investor had enough resources to protect themselves, if that sophisticated investor sells to others then it circumvents the policy that was addressed in the first place. o Therefore, if you purchase securities pursuant to one of the private placement exemptions, you cannot resell them unless:  You issue a prospectus  You sell pursuant to another private placement exemption (another sophisticated investor)  You comply with the resale rules  You receive an exempting order from the OSC Remedies - Civil and criminal remedies for breaches of the above requirements to protect persons who are damaged by persons who fail to comply with the legislation o

Materiality Concept Material Facts  A fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of the securities Material Change  Securities Act- Section 1(1) a change in the business, operations, or capital in the company that would reasonably be expected to have a material effect on market price so it must be disclosed.


Section 1 - GOING PUBLIC
Markets:  Primary Markets - company raises money from the public; sale of shares from the company to all of us and the company gets the money (from company to investors directly).  Secondary Markets – Investors sell securities between themselves. This is how investors realize value on their investment. This sense of liquidity allows continued marketability of those shares (between investors, company plays no role) There are 3 ways for a company to raise money: 1) Borrow money 2) Sell securities by means of prospectus 3) Sell securities by means of a Private placement exemption – without a prospectus Advantages of going public:  Raise Capital Easily o Gives ability to raise cost-efficient funds for capital requirements o Facilitate growth, o Reduce debt etc. o Have money to do what is needed to get done – increase working capital cash.  Facilitates future growth o Allows a company to restructure its financial condition, permitting it to borrow additional capital on more favourable terms. o The more equity means the more cash means the more able you are to borrow in the future – so opens up other avenues of generating cash o Allow investors to have a liquid investment when public.  Menu of Incentives o Provides incentives that private companies don‟t have – attract really good people with options or securities in company. Tangible value o Attract and retain better personnel, share purchase plans, etc. o Corporate image can be enhanced o Improves competitive position, customers become shareholders  Acquisitions o May enable company to undertake successful mergers or acquisitions to diversify its product line, economies of scale o Easier to buy things - two forms of currency in form of cash and securities o Can acquire using shares without depleting its cash/credit facilities  Tax advantages - turning regular income tax at higher rate into capital gains income which is taxed at a lower rate  Shareholder Liquidity - Most significant advantage is you have liquidity. Shareholders will (subject to escrow and control block resale restrictions) hold shares that can be more easily sold in market or used as collateral o Right and ability to divest themselves of the interest in your company and move from opportunity to opportunity which they don‟t have as a private company

Disadvantages of going public:  Loss of Confidentiality – Everyone gets to see your performance, must continually update public and can loose competitive advantage. o Your competitors know what you do. 3

then determine whether trade constitutes a “distribution” of securities 3. Does the transaction involve a security?  If the transaction DOES NOT involve a security. then the prospectus requirement of the Act DOES NOT apply  However. Does the transaction involve a trade?  If the transaction DOES NOT involves a trade. (1) Registration for trading: No person shall. o managers consider how will market react to this development as opposed to what is the best long term decision for my company (shortsightedness)  Reduced Control o two competing considerations of the dilution of owners‟ control and the underwriters‟ desire to assure a sufficiently large „float‟ after offering.  However. o Obligation to disclose your top executives compensation – huge invasion of one‟s privacy and invitation to charities  Reduced Flexibility – can do everything want as a private company but not as public.Can see profitability and can see contracts and assets and concerns and risks etc. then the issuer MUST prepare a preliminary (and final) prospectus UNLESS an exemption can be found 4 . o PROSPECTUS REQUIREMENT (Act = OSA) General Rule – No person shall engage in or hold themselves out as engaging in the business of trading a security. unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director . 53) S. then determine whether transaction involves a “trade” in a security 2. Does the trade amount to a distribution?  If the transaction of a security in the form of a trade DOES NOT amount to a distribution.very expensive  Subject to continuous disclosure obligations  Loss of Tax Advantages – CCPCs will not be entitled to the small business deduction and certain other tax advantages. (1)Prospectus required: No person or company shall trade in a security on his. see where you are vulnerable. without preparing a prospectus (s. Questions to ask: 1. 25 & s. if the transaction of a security in the form of a trade DOES constitute distribution.  Expensive – prospectus prepared with lawyers is a lot of money . o Future offerings may further dilute present owners‟ control. and if a trade is a distribution.53. then the requirements of the Act do not apply  However if the transaction DOES involve a trade in a security. her or its own account or on behalf of any other person or company if the trade would be a distribution of a security. (a) trade in a security or act as an underwriter unless the person or company is registered as a dealer… and the registration has been made in accordance with Ontario securities law… S. without being registered. if the transaction DOES involve a security.  Managing Share Price Instead of Company – “report card” in newspaper everyday – “how am I doing today” o based on stock price rather than on company.25. Thousands of bosses o Opportunities must be for company first over self. then the transaction is outside the scope of Ontario Securities Act.

g. whereas purchasing paper as a commodity is not purchasing a security  the paper is only a security if the underlying commodity is not received  E. if yes. o (c) Any document constituting evidence of an interest in an association of legatees or heirs. 10 of the Interpretation Act . “large and liberal interpretation in order to achieve the objectives of the Act. earnings. stock. and try to determine whether the person is expecting an increase in value. o (h) any certificate of share or interest in a trust. Brigadoon Scotch Distributor)  Look to the instrument that the person is purchasing. the added element of investing for profit.g. property. profits. by a credit union or league to which the Credit Unions and Caisses Populaires Act. o (d) any document constituting evidence of an option.  s. BUT if you purchase scotch for consumption purposes only. o (f) any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets. if someone invests in paper. except a contract issued by an insurance company licensed under the Insurance Act which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser for a benefit payable at maturity. debenture. a layperson would not know the instrument as a security – “commonly known” means known to the most sophisticated legal expert o (b) “any document evidencing title to or interest in capital assets. certificate of share or interest. share. royalties of any person or company”  Courts have said this definition is too broad a definition.every act is deemed to be remedial. 1994 applies or by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act. hoping that it will increase in value. then it is likely a security  e. subscription or other interest in or to a security o (e) any bond.THEREFORE. and not merely an interest in property results in a characterization of the interest as a security (OSC v.” The courts have taken broad provisions and given them broad interpretations. then the receipt you get for it is not a security. o (i) any profit-sharing agreement or certificate. natural gas or mining lease. estate or association. claim or royalty voting trust certificate. 1(1):Security includes (16 sub-definitions and not an exhaustive list): o (a) “a document / instrument / writing commonly known as a security”  (note: this means commonly known by the most sophisticated securities lawyer)  the US court interpreted this to mean  known to the legal or financial community  in sub (a). participation certificate. units or interests at the option of the recipient or of any person or company. If you buy scotch and ask vendor to resell it on your behalf in 5 years in the hopes that it has appreciated. 5 . AND NO EXEMPTION CAN BE FOUND. that it can be found to be a security. note or other evidence of indebtedness. YOU MUST ONLY PREPARE A PROSPECTUS WHEN YOU HAVE A TRADE IN A SECURITY THAT CONSTITUTES A DISTRIBUTION. preorganization certificate or subscription other than a contract of insurance issued by an insurance company licensed under the Insurance Act and an evidence of deposit issued by a bank listed in Schedule I or II to the Bank Act (Canada).courts have limited to only apply to instruments intended for investment are securities and not instruments bought and sold for other commercial purposes  Thus. unit. WHAT CONSTITUTES A “SECURITY”?  Courts have gone to great lengths to ensure that the OSA is broadly applicable – Courts have tended to use s. unit certificate. o (g) any agreement providing that money received will be repaid or treated as a subscription to shares. stock. o (j) any certificate of interest in an oil. then the receipt you get for the scotch is a security.

the transaction was void. A common enterprise will be found where an investor advances money while the success of the enterprise depends on the promoter. A cease trade order was issued. There were 2 ways to buy bags: walk in and buy it. (l) any collateral trust certificate. Howey. (n) “any investment contract”: (See. and (p) any commodity futures contract or any commodity futures option that is not traded on a commodity futures exchange registered with or recognized by the Commission under the Commodity Futures Act or the form of which is not accepted by the Director under that Act. Hawaii Market Centres )  Definition is extremely ambiguous and requires interpretation of the court  Ask: We determine if a particular instrument is a security by asking whether “the person invested on the premise that another person‟s expertise will create profit” in these situations. rather the profits would come from the international silver markets which PCCE had no control over.SCC) . Pacific Coast Coin Exchange (1977. 65% later for a bag of coins and PC holds the purchase as security until you pay the balance). as such this would not be a security b/c they were not solely responsible for the success or failure. or pay on margin (pay 35% today.Investment contract branch of definition – Policy is important in interpreting what constitutes a security Facts: Pacific Coast sold bags of silver coins. o Majority of margin purchasers never actually had possession of the commodity (the silver). (m) any income or annuity contract not issued by an insurance company. lets courts decide based on policy that something is a security and that the tests don‟t need to be closely followed. Both the „Common Enterprise‟ and „Risk Capital‟ Tests were accepted  Comment on Howey -.  Comment on Hawaii – if you use the test set out in Hawaii this was definitely a security…so in essence the SCC here says that whether you follow the Howey or Hawaii test it should be considered a security…The court says that a broader approach is needed. a strict interpretation would result in a finding that they were not securities because the buyers did not expect profits SOLELY from the efforts of PCCE. … The SCC indicated a wide scope of investment contract and security. PCCE would become insolvent. If the price of silver rose drastically. Investors were thus entering into current account commodity contracts w/ PC. it is the policy and not the judicial tests that are decisive. for a benefit that will accrue to both the investor and promoter. took cash instead when price of silver went up Held: Contracts WERE securities under investment contract branch (s. 6 . In the event of a price increase. Investors who lost money claimed that these interests were a security. Pacific Coast. investors need full disclosure of all relevant information (o) any document constituting evidence of an interest in a scholarship or educational plan or trust. but that‟s beside the point) Rationale: Court relied on two US tests: Hawaii and Howey. which PCCE appealed arguing it was not selling securities o Majority of purchasers were margin purchasers. The court also said regarding Common Enterprise: there is no need for the enterprise to be common to the investors between themselves. PCCE would lose money on its contacts with customers but gain money on its futures contracts and visa versa. The key to the success of the venture will be the efforts of the promoter alone. they hedged their exposure.A strict interpretation of the word “solely” would not serve the purpose of the legislation – here. thus it hedged against price escalation by buying silver future contracts. PC didn‟t put coins aside.o o o o o o (k) any oil or natural gas royalties or leases or fractional or other interest therein.1(1)(n)) of the definition and because there was no prospectus everyone should get their money back (but there was no money because the company was bankrupt. and that the actions of PC constituted a trade in a security and since a prospectus was not filed.

The furnishing of the initial value is induced by promises or representations leading to a reasonable expectation or understanding that a benefit above initial value will accrue (sounds like part 3 of Howey) 4.US) Common Enterprise Test Facts: Investors could buy a tract of land in an orange grove in Florida – investors advised that lands needed to be serviced and recommended Howey to service lands.‟ HMC argues that they have some control over potential return by selling new memberships. (Note: „Solely‟ was modified in US case Glen T. 344 (1943) The definition of a security should be interpreted broadly to meet purposes of the Act Court: The definition of „security‟ in the Act should not be interpreted to subvert new security interests designed to avoid application of Act or frustrate purposes of Act. Told they could expect average returns of 10% per annum. A portion of that value is subjected to the risks of the enterprise (sounds like part 2 of Howey) 3. says too mechanical and focuses on „solely‟ aspect while losing sight of need to interpret „investment contract‟ as intended by the Act……. The offeree (investor) does NOT have the right to exercise practical and actual control over the managerial decisions of the enterprise (this is new). transaction or scheme whereby a person invests 2) investment is made in a common enterprise 3) that person is led to expect profit a. Turner Enterprises to „the efforts made by those other than the investor are the undeniably significant ones. Security Commission of Hawaii sought injunction against sale of memberships on basis they constituted „investment contracts‟ and thus „securities. Important Notes to Decipher the Cases when it comes to section 1(1)(n):  We determine if a particular instrument is a security by asking whether: o The person invested on the premise that another‟s expertise will create profit o Whether there is a reliance on someone else‟s management expertise to make an investment  In order to protect the investing public when they are putting their money in the hands of others to act for them. Ratio:  Common Enterprise Test to determine if something is an investment contract: 1) A contract. therefore did NOT depend solely on others as required by Howey test Issue: Were memberships in a store an investment contract? Ratio: Court criticized Howey test.S. the investor is relying on the other party) 7 .M. Joiner Leasing Corp. SEC v. C. A court will interpret an instrument in whichever way leads it to promote policy objectives of investor protection. An offeree furnishes initial value to an offeror (sounds like part 1 of Howey) 2. Investment went bad – only way to get their money back was to claim it to be a security without a prospectus thus get money back. Risk Capital Test – Something is a security if: 1. 320 U. those essential managerial efforts which affect the failure or success of the enterprise. Risk Capital Test Facts: Pyramid sales operation in selling memberships.came up with own test. (Note: in subsequent US case United Housing Foundation.US) Response to Howey test become too mechanical.Howey (1946 .‟) Hawaii Market Centers (1971 . the public needs to know information about the people that are making decisions on behalf of them to make an informed decision  Deciding factor mentioned by Lastman: The Securities Act is saying that if an investor is going to give other people their money with the expectation (i. profit interpreted to mean either „capital appreciation‟ or „earnings‟) 4) profits to be derived solely from the efforts of promoter or third party a.e.

(c) any receipt by a registrant of an order to buy or sell a security. installment or otherwise. advertisement. As such. Tries to stop a misrepresentation before it happens. pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith (b) any participation as a trader in any transaction in a security through the facilities of any stock exchange or quotation and trade reporting system. but does not include a purchase of a security or. You need a prospectus to get this information. except as provided in clause (d). solicitation.     that they are going to manage the investor‟s money to create more value for us then the only way that an investor should do that is if the investor asks a thousand questions about the manager to make an informed decision…the primary goal of the Securities Act is to protect investors so that investors will continue to invest to keep the economy running…so the deciding factor is sufficient management control over the investment OSC will find there is a security when there is an investment made on the premise that someone else‟s expertise will create a profit and those who invest require information in order to make an informed decision. 8 .e. a contract will be classified as a security. whether the terms of payment be on margin. One of the main objectives of the Act is to protect the integrity of the Capital Markets and this objective must be balanced w/ the protection of the investing public. and not the formal judicial test. pledge or encumbrancing of securities of an issuer from the holdings of any person or company or combination of persons or companies described in clause (c) of the definition of "distribution" for the purpose of giving collateral for a debt made in good faith. (d) any transfer. they should have known before investing their money. conduct or negotiation directly or indirectly in furtherance of any of the foregoing. and (e) any act. then the OSA will intervene to make sure the investor is fully informed of the expertise (and other factors) by requiring full disclosure in the form of a prospectus.   Policy: Investor Protection . that decides” (Pacific Coast) – the investing public needs protection when they do not have managerial control A security will be considered a security if: o (1) It falls clearly under one of the definitions of the OSA o (2) If can fit under one of the broad definitions and policy considerations demand coverage  Note: Some instruments are expressly excluded b/c they are covered by other pieces of legislation WHAT CONSTITUTES A “TRADE”? s.It is not necessary to sell a security in order for it to be considered a trade – simply trying to sell is enough. If labeling an investment contract a security will achieve the policy objectives of the Act. Tries to stop bad transactions before they occur. which requires a proactive approach. i. the Act can regulate a trade before the sale of a security. 1(1) non-exhaustive. NO straight line answer. a transfer. Securities legislation is proactive. not only a sale but any act or advertisement in furtherance of a trade (a) any sale or disposition of a security for valuable consideration. (policy is what matters) o Whenever an investor should reasonably have certain questions about the expertise of the entity managing their investment. courts are results oriented – “it is policy. The courts have huge amounts of discretion On exam mention the questions that you would tell the client they should have asked.

the legislation not just curative. only the company issuing/selling the security is the target of the prospectus requirement Excludes Most Pledges (a) (d) . it is also prophylactic.So a purchase cannot be a trade because the person who is purchasing the security should not and is not expected to file a prospectus. Sale to Z Policy: Why is a purchase NOT considered a trade? o A purchase of a security is not considered a trade b/c the OSA will not impose on a buyer the obligation of providing a prospectus (don‟t want to impose duty on purchaser. Gift NOT considered trades – no consideration Example: X offers to sell Y shares and sells Z shares of a company of which X owns?  Three trades: Offer to Y.e. the purchasers) . it‟s the purchaser we‟re trying to protect). It seeks to allow the regulators to step in to prevent harm before it occurs Trades that are not Distributions .A pledge involves the transfer of the securities to a lender as collateral .are still considered trades and are restricted 9 . Investor Protection Objective o We are trying to discern whether we need to issue a prospectus to protect investors (i.OSA was not meant to restrict the ability of security holders to use their equity as loan collateral Two Conditions: 1) Debt must be incurred „in good faith‟ – can‟t hide a sale as a lone 2) A Pledge constitutes a trade if the grantor is a „control person‟ (so as to insure the proper governance of non-disclosed information) Participation as a Trader (c) Must be a registrant (securities market professional) in order to buy or sell a security The actions of registrants are defined as trades. b/c the activities of professionals are key to capital markets and in order to adequately protect investors the actions of these persons must be regulated Acts in Furtherance of a Trade (e) A trade occurs even if nothing is bought or sold. Offer to Z.

if the trade took place during that eighteen months. to be sufficient) 4) Deemed distributions on resale  Sometimes. not yet issued = treasury o A prospectus is only required where a security is issued for the first time by the company.WHAT CONSTITUTES A “DISTRIBUTION”?  there are three branches. resale is deemed distribution. o Prospectus is required for primary market o Secondary market is protected by continuous disclosure and previous prospectus on record.  anyone who holds a sufficient number of securities to “materially affect the control of the issuer” is assumed to have privileged access to information and is considered a control person  May mean that control person is no longer controlling issuer  Control person is defined as having sufficient control over voting rights to materially affect control of issuer (20% is deemed. thus it is a distribution to which a prospectus is attached 2) Resale of Securities Returned to Issuer  Must provide prospectus when issuer reissues securities which have been repurchased or returned to it 3) Trades by control persons. the one of importance is an exhaustive definition  s. triggers prospectus requirement  (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. if this purchaser then resells the securities. Four things will amount to a distribution 1) Trades by issuers. acting as underwriter. so acting. 1979 if those securities continued on that date to be owned by or for that underwriter. acting as underwriter. Consequently. in absence of evidence to contrary. subsequent purchase may REQUIRE this protection….1(1) where used in relation to trading securities means: o (a) a trade in securities of an issuer that have not been previously issued  Policy: allowed to trade = issued and outstanding. However. prior to the 15th day of September. o Prospectuses do not need to be filed every time an already issued "share" is distributed  In General.  (e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter. and  (f) any trade that is a distribution under the regulations 10 .  (d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter. 1979.. exemptions exist for prospectus requirement when purchaser does not need such protection.  issuers almost always have better information than the info that is available for buyers.  (c) a trade in previously issued securities of an issuer from the holdings of any control person. within eighteen months after the 15th day of September.

The only sales document allowed is the prospectus  Therefore. accountants.Who are major shareholders? . Your client will pay you to verify that what they‟re telling you is correct. and if you don‟t.How can I re-sell the securities? .Any lawsuits pending against the company? .What debt does the company have? .Who is the management of the company? . it must be attractive enough to engage people but careful enough to protect investors  Lawyer has an obligation to the public. if you go either way to appease your client/underwriter then you/they can be sued 11 .How much does the management own/what are they paid? .What is the future of the company? .What are the uses of the proceeds? (what does the company need your money for?) . and underwriters o The first thing to do if I want a public company and I want people to invest in it is I call my lawyer and accountant.What does the company do? .prior to 1982. Policy:a prospectus is required to allow investors knowledge of what they need to know before they invest in the company (b/c they do not have control) What goes into a prospectus (anticipate what investors needs to know)?Form 45-501 F1 – General Prospectus Requirements and Forms o A prospectus is supposed to answer all of these questions: before you get into a business. better know what that business does. o You can‟t take your client‟s word for it that the facts are the facts. Now they are (see below)  There are also very circumscribed rules as to what is permissible advertising during the course of a public offering . The underwriter hires its own lawyers.What are the company‟s assets? .Historical financial performance. and you must independently verify the facts. as will the underwriters. and future forecasts? . o It takes a LOT of TIME and MONEY to prepare this story.Does company pay dividends? . too much liability will make the shares not sellable.What is the upside potential for the company?   DUAL NATURE OF THE PROSPECTUS:  Tension exists between the prospectus as a selling document (company's desire to raise money) and as a liability document (OSC regulation) o Tension is most apparent with Future Oriented Financial Information (FOFI) .Who are the directors/officers? . . PREPARING A PROSPECTUS Need to first meet with lawyers. hire an investment banker who will be the underwriter and sell the securities for me.Who are the competitors? . It‟s not that difficult to prepare a prospectus: you’re telling a story.What material contracts exist? . and to client o Lawyers need to balance b/w these two roles.What experience does the company have? . the solution to the problem with future predictions was that FOFI was not permitted to be included in a prospectus because it is unreliable. We get together and decide to form a prospectus to tell the world everything they must know for this company. to legal bar. you‟re liable for a misrepresentation of the prospectus.

we can pick 2% or 4% for interest rates. 1(1) of the securities act is any piece of information that would reasonably be expected to have a significant effect of the market price or value of the securities of the company. 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. Don‟t be so conservative in the projections as to make the prospectus unattractive. assume that interest rates are 3% (best guess) next year.. Explicitly set out what material facts and assumptions you used so that the reader can assess for themselves this forward looking information 4. and on the other hand if you let your client write whatever they want to sell the securities then the client is going to get sued for misrepresentation The real challenge of a lawyer is to strike the correct balance.. Securities industry wanted to know what company thought of future o You don't have to include FOFI in a prospectus (optional) o If you don‟t  – you can‟t talk about the future at all o If you do you have to comply with NI 51-102 o Forecast – written estimate about the most probable result of a future state of a company. (2) the prospectus must comply with the act. you would have to use your 3% best guess scenario. OSC did not allow forward looking financials. Review that forward information regularly and update it if there are changes. e. If any changes occur between the time you filed preliminary prospectus and when you filed final. both reasonable. Identify the information in the prospectus as forward looking 2. FUTURE ORIENTED FINANCIAL INFORMATION (FOFI): NI 51-102 Future Oriented Financial Information (hardest area to strike the balance) o Prior to 1982. but don‟t make it too exuberant so as to be sued…strike the balance!!!! You are better to under-promise and not deliver. 1(1) as: (a) An untrue statement of a material fact OR (b) An omission of a material fact 12 . The only time you can‟t use a projection is if it‟s unreasonable for the company to do a forecast (because if it can‟t estimate most probable.. then to do the opposite…. you must include that new information in the final prospectus o Lastman: Be smart. Caution the readers that actual results may vary and there are material risks that actual results might be different than the forecasted results 3.o o If all the lawyer does is protect the client to the fullest the securities will not be sellable.Projection – estimate that follows any set of reasonable assumptions. o Must tell your story the way the OSC tells you to otherwise you will face civil liability in the form of misrepresentation. e. defined in s.g.56: (1) A prospectus shall provide full.g. STAGE 1 – CREATE PRELIMINARY PROSPECTUS GENERAL PROSPECTUS REQUIREMENTS:  s. o A “material fact” as defined in s.. But don‟t be too negative that no one buys. and then tell the reader that you will do this and along with the method of doing this 5. this changed. it can‟t make reasonable assumptions) o A company cannot disclose FOFI unless it has a reasonable basis to do so  If you're uncomfortable with your assumptions – you cannot include FOFI in your prospectus o CONDITIONS TO SATISFY If you want to use FOFI: 1.

PP shall substantially comply w/ the requirements… respecting the form and content of a prospectus…except that the reports or reports of the auditor or accountant required by the regulation need not be required  S. Legal right to get out of deal. and o any matters relating to price to the underwriters  Can only get indications of expression of interest and not binding agreements of final sales (no legal right to buy) at this time. 71says that you not only have to give someone a prospectus if they request one in 48 hours but they can change their mind in 48 hours after seeing the prospectus. 54 (2)PP is the same as a [final] prospectus. 53(2) . After weeks of debate.o S. 130 must contain provision that says if there is a misrepresentation in that document then the buyer can sue. public must protect themselves. 56: mere technical compliance with the Act is not sufficient (can‟t just follow the form) – you have an obligation to anticipate other questions not provided in the act. Public must know OSC is not there as a safeguard for them. but can OMIT o price of securities o underwriter‟s compensation. IS THE STANLEY CUP PART OF WHAT THE LEAFS SELL? OSC COULD TAKE ISSUE WITH THIS  NI 41-101 F1 -every PP and final P must contain a statement on the outside front cover stating that "no securities commission or regulatory authority has expressed an opinion about these securities” o BUT. It doesn‟t matter that the OSC missed something.71 must tell purchasers they can sue you due to misrepresentation  S. there was a picture of the Stanley Cup. PRELIMINARY PROSPECTUS (PP) REQUIREMENTS:  S. OSC told Four Seasons to take picture of a chef out of their prospectus. they let it go through. it must: o Identify the document as a preliminary prospectus o State it is not complete o State that securities may not be sold until a receipt for final prospectus is obtained  Prospectu s can only include graphic displays/pictures of the product you are selling. o Policy: They have a genius at the OSC giving all kinds of opinions. Allows the underwriters to assess the market and determine the demand for the securities. o Old exam: Toronto Maple Leafs are going public.  NI 41-101 F1 PP must have a statement printed in RED INK and italics on the top of front cover [regulation 50] – known as a “Red Herring”. 60 prospectus must tell purchasers what their rights are in section 71 and 130 (if there is a misrepresentation you can sue)  S. credibility will be diminished 13 . 54 (1) Preliminary Prospectus form . OSC can‟t possibly scrutinize every prospectus they receive with that much detail – can‟t possibly do more than a cursory review  Preliminary prospectus is NOT a draft document --there are still liabilities attached for misrepresentation o From a business perspective. this is not true! OSC vets the document and offers opinion on the merits in the form of a receipt. if at any time in the future an omission is found the company will be liable.A preliminary prospectus must be filed in order to become an issuer  S. if that document requires significant amendment. This enables them to set a price after they see the demand – can‟t anticipate in advance Things to INCLUDE in the PP:  S. Essentially the regulators are saying no one should rely on them.  S.

65(2)(c)Underwriters make copies of PP and circulate to potential investors so they have time to read it o Underwriters get a sense for the appetite of the offering.STAGE 2 – SUBMIT PRELIMINARY PROSPECTUS  s. the price. the OSC will disallow such activities 14 .  Corporate image advertising: is allowed BUT will need to satisfy the following test o TEST: Is advertising in furtherance of trading of securities? If so. true and plain disclosure o Company is held to a slightly higher standard because they know more about the business and its actual prospects o Since just to the underwriter‟s knowledge means that the underwriter can escape liability if they prove a certain degree of due diligence.59: of NI 41-101 F1Certificate of underwriters: Underwriters must certify that to the best of their knowledge the foregoing constitutes full. assess the market. and determine the price for which securities should be sold at  s. the underwriters can only deliver copies of the PP and solicit expressions of interest o Expression of interest = an indication by a prospective purchaser that they might want to buy the securities .65(1): of NI 41-101 F1 Waiting period: there has to be a period of at least 10 days between the issuance of receipt of the preliminary prospectus and the issuance of a receipt for the final prospectus.67:Distribution list: Underwriter must keep record of names and addresses of anyone who received the preliminary prospectus o so that they can send any necessary amendments  s.57(3).66Distribution of PP: During the waiting period. 71: Obligation to deliver any amendment and revised final prospectus to all potential purchasers  Gives time to get a lawyer and accountant at the OSC to look it over before they are willing to issue a final P ADVERTISING BAN during waiting period NI 41-101:  During the waiting period the type of materials that can be distributed to the public is extremely limited  All that can be advertised is o (1) company is going to sell securities o (2) where potential investors can find the prospectus and o (3) if known. o Purpose: (1) gives the OSC and accountants time to review/discuss (2) gives investors opportunity to read information before there is a legal obligation to buy (3) gives the underwriter time to supply the preliminary as to identify demand REASONS for waiting period:  s.55 of NI 41-101 F1Issuance of receipt for PP: Director shall issue a receipt for preliminary prospectus IF it complies with the Act o Note: little room for OSC discretion at this stage o Policy: discretion not yet needed b/c you cannot yet offer securities until final P STAGE 3 – WAITING PERIOD  s.  s. there are defenses available to exculpate their liability (these defenses are not available to the CEO. and plain disclosure of all material facts o If there is a misrepresentation in this document. the company will be sued successfully  s. CEO and two other directors of the company must certify that the PP constitutes full. true. CFO and directors).but they are by no means bound to anything by stating this  s.58(1) of NI 41-101 F1 Certificate by issuer: CFO.

when Air Canada went public – because of advertising restrictions. (i) a change in the business. or ii. advertisement. 57(1) Amendment to PP on material change – if a material change occurs that is adverse to the company it must prepare & file an amendment reflecting this as soon as practicable but in any event within 10 days of the event o Must go to every single person who has a preliminary prospectus o If change is not adverse then amendment is optional b/c they will get the info in the final prospectus and deal is not final until 2 days after receipt. i. only a certain number of persons were able to access these securities o He says this creates a special club for institutional investors and that although the rules are designed to protect the common public. Can you do this? Nope. they also hold the public back because we are prevented from finding out info until it is too late – “it prevents public from making ANY decision not just BAD decisions” MATERIALCHANGE during waiting period:  S. (a) by the board of directors of the issuer or the board of directors of the investment fund manager of the issuer or other persons acting in a similar capacity. operations or affairs of the issuer that would be considered important by a reasonable investor in determining whether to purchase or continue to hold securities of the issuer. a change in the business. only about where to find it. conduct or negotiation directly or indirectly in the furtherance of any of the foregoing…” o Since trading is not allowed during the waiting period. means. 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. 1(1)(e) of OSA “trading includes … any act. advertising is not allowed Exam Q: The Leafs advertised in the newspaper here are upcoming tickets available and you should buy our prospectus. means. or (c) by senior management of the investment fund manager of the issuer who believe that confirmation of the decision by the board of directors of the investment fund manager of the issuer or such other persons acting in a similar capacity is probable.g. therefore investor already protected 15 . (b) by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable. solicitation. and (b) when used in relation to an issuer that is an investment fund. 1(1)Material change: (a) when used in relation to an issuer other than an investment fund. or (ii) a decision to implement a change referred to in subclause (i) made. not allowed to talk about the prospectus. Policy – Lastman disagrees with advertising ban for the following reasons: o Lastman comments that investors should be dissatisfied with the rules regarding advertising because they „handicap the public‟ o e. (“changement important”)  S.   Recall s. a decision to implement a change referred to in (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.

but the OSC really considers the integrity of the capital markets as the trump card. Schulman came back to Canada. The prospectus repeatedly disclosed that: E is not permitted in Canada. o Deprenyl  Facts: Dr. Shulman suffered from Parkinson‟s. In essence this is a lawyer at the OSC making the call whether to not let a drug into Canada. o Lastman: What could be seen to be wrong with Depernol – the OSC is making the call to not let the drug into Canada by denying its public offering because it is risky. and if the drug is never approved in Canada. but also the merits of the securities being offered  Note it‟s more than ensuring that the disclosure requirements are met. not allowing unnecessary risk into the capital market is a small price to pay in order to protect the investing public and maintain the integrity of the capital markets – In Depernol the OSC is showing that the integrity of the capital markets reigns supreme over individual business interests. there is no assurance that it will ever be approved.OSC reserves the right to refuse receipt. and every time you want to issue more you need to issue another prospectus  OSC using its s.STAGE 4 – RECEIPT FOR FINAL PROSPECTUS  S. It did not matter that the prospectus disclosed that directors had no experience o Lake Forest Fund: OSC did not grant a final receipt b/c it did not like the fee structure set out in the prospectus. not leaving it about to potential investors to make their own decision on whether it‟s a good investment. went to US and used drug E. 61 . to let D go public and a year later. the OSC commonly reviews the merits of the security – if deemed too risky they won‟t issue a receipt. after a lot of pressure. but OSC still refused to issue receipt for final prospectus  Even despite all the disclosure that the company was making the OSC believed that the investment was simply too risky  Held: OSC agreed.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 (super broad discretion) o Broad discretion under S. Lastman agrees with this because he thinks the OSC is reasonable and some governing structure needs to be in place to ensure the system works. o In the Depernol case the facts support that the OSC maybe should have allowed it because it involved a drug that could potentially help people. the investors will lose their money – OSC issues comment letter with suggestions. changes made.61(1) Discretionary Powers o Rivalda: OSC refused to grant final receipt to a junior mining company b/c it felt the directors were too inexperienced. o In the opinion of the OSC.  Policy: Why should lawyers and accountants decide what we invest in – they don‟t have any particular industry expertise o Protecting the economy at large > individual people‟s interest who think they know…Someone has to look after the greater good –commission wants to maintain the integrity of the capital markets and if the listed securities on the exchange are too risky it will erode company‟s ability to raise capital particularly through international investment. 16 .61(1) .  Only a limited number of subscribed securities issued for sale. E worked for him. incorporated a company and filed a P for the sole purpose of seeking FDA approval for E so Canadians could access it and so that the shareholders of Deprenyl could make a lot of money. the OSC has a mandate to review not only that the disclosure requirements have been met. E approved by FDA. E was not approved in Canada under FDA so Dr.

61(2)Other reasons to not be issued a final prospectus: a) Did not substantially comply with the Act . there is no document going into the public domain that can clarify the situation.If there are any material changes(good or bad) after the final receipt and before closing an amendment must be filed as soon as practical and no later than 10 DAYS after and deliver a copy to all those who received a final prospectus. 60: Statement of Rights in Prospectus . set price. Contains a misrepresentation (pure disclosure) b) Unconscionable consideration paid to the promoter – (review of the merits).57(1) .g. go to OSC. you have to say what the money the company trying to raise is for. so new investors know you aren‟t bailing.there is typically a 3 week lapse between issuance of receipt and closing of transaction. fraud (not concerned about murder. This is way beyond disclosure. promises. bad faith/ fraud f) A person or company that has prepared or certified any part of the prospectus. This comprises money that is being raised by way of a prospectus as well as money already on hand).  S. 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 STAGE 5 – CLOSING THE TRANSACTION  After receipt for final prospectus is received .remove the Red Herring. setup deal with Underwriting Agreement (obtaining binding agreements for purchase and sale). estimates or forecast that are misleading. except those whose 2 day cooling off period has expired o Why positive OR negative?  Final Prospectus is the only document that will pick this info up  Unlike waiting period after PP where only negative info is required because any positive changes will be reflected later in the FP at that point…whereas after final receipt and before closing. so to 17 . statements. 71.S.Every Prospectus shall contain a statement of the rights provided by S.Cooling off period.&S. or that is named as having prepared or certified a report or valuation used in connection with the prospectus.  If someone involved in process is an unacceptable professional (certification) (e. false or deceptive . If you go public for the first time. (The company needs to be able to acquire the full amount of money needed to complete whatever the project is that the money is being raised for) d) Financial condition of company or those running seems too risky or irresponsible – financial responsibility e) Past conduct of issuer/Os/Ds/promoters/anyone holding significant interest in company suggest lack of integrity and will put markets in disrepute . you have to agree with the OSC that you won‟t sell more than a third of your shares per year over the next three years.Misrepresentation MATERIAL CHANGE between receipt for final prospectus and closing:  S.bad faith. is not acceptable. Investors are comforted by the fact that founders have economic risks. lawyer is a crook) g) If escrow arrangements are not satisfactory– (the economic risks of going public must be shared by the founders and the investors alike) (NP 46-201)  Escrow is way of ensuring by contract that I am not going to sell you securities in my company and sell them out at the same moment. even if you disclosed such consideration c) Insufficient Proceeds for purpose set out in prospectus (recall. final prospectus in hand and certify it  Note . the OSC can search on the background of the directors and other senior managers of the company  Policy: conduct by someone that would lead to disrupt in mkt if shares were issued. this is criminal. the OSC is protecting the capital markets).130.

but we want to make sure people know about negative changes so they are not buried in the final prospectus. a broker selling you securities over the phone) o If you never get a prospectus. ANY change must be made to ensure the record is complete  The marketplace needs to know everything in order to make an informed decision. the final. the purchaser is bound to buy the securities 18 . COOLING OFF PERIOD:  S. if it‟s positive and you don‟t want to put it in it will be there but if it‟s negative it‟s sooo important you will learn it so they don‟t want to assume you will notice it in the final…after the final is issued there is no later document to be issued t o clear the record so you have to do a positive or negative amendment because there‟s going to be all this trading in the secondary market that is not subject to this continual do not need to have a good reason to change your mind.. if there is a positive change it will be included in the final prospectus.e.71(8) Onus of proof is on the dealer to show that cooling-off period has expired  Once the cooling off period is over. every dealer of securities must send a copy of the prospectus and any amendment prior to the second business day following the entering into an agreement (i.71(1) Obligation to deliver Prospectus – must deliver to the purchaser the latest prospectus and any amendments either before they entered into an agreement and sale or not later than midnight on the second day after running into such an agreement o Basically. this rule presents great potential to purchasers b/c securities fluctuate in price during this interval  S. this is where business judgment plays a role Exam question: why is it that in the waiting period after PP you only need to do an amendment for an adverse change but after final receipt before closing an amendment is needed for both positive and negative ones?.e.. and there is no other forum for that to occur.o o make sure final document is complete. Note: the decision as to what is adverse and material is unknown – it is a subjective answer.Answer: Between PP and final there will be another document that reflects that change i. you are never bound to buy at any point down the road  S. In the waiting period.71(2): Withdrawal from purchase – an agreement of purchase and sale is not binding if the purchaser withdraws not later than midnight on the second day after receipt by the purchaser of the latest prospectus and any amendment o Purchaser has right of rescission o Investors must have 48 hours with ALL the information before they are bound to buy o Policy -Act wants to make sure the purchaser has made an informed decision and that the purchaser has had the opportunity to re-think and re-consider the agreement to purchase the securities o NOTE .

opinions and statements E)Every person/company who signed the prospectus/amendment (officer) 19 . you had more than 48 hours with all the information.where there is a misrepresentation each purchaser is deemed to have relied on the misrepresentation o Strict Liability = reverse onus on company to prove they did NOT rely on misrepresentation o What about a secondary market transaction during the period of distribution??  S. However evidentiary burden [via s. courts have found them unenforceable as contrary to the public interest C)Every directors at the time of prospectus/amendment issuance  Policy: may discourage people to sit on the BOD. but you can issue an IPO w/ “no name directors” but if so.DAY 1 BUY DAY 3 DAY 4 PROSPECTUS DAY 6 COOLING OFF OVER – bound to buy AMENDMENT AMENDMENT DAY 8 DAY 9 DAY 11 AS LONG AS EVENT OCCURS W/I the COOLING OFF THEN IT WILL BE EXTENDED BUY BUY BUY FIRE PROSPECTUS PROSPECTUS PROSPECTUS FIRE FIRE IN BAHAMAS PROSPECTUS COOLING OFF OVER COOLING OFF OVER COMPANY FINDS OUT AMENDMENT COOLING OFF OVER COOLING OFF OVER? BUY COOLING OFF OVER? FIRE AMENDMENT? **It does not matter what information is in the company’s mind – if the fire occurred w/in your 48hr cooling off period it will still reset you period asover to 2 days after the time YOU Cooling off = bound to buy receive the amendment** By policy.130(1) Liability for misrepresentation in a Prospectus . D)Every person/company whose consent to disclosure of information (experts)  Note: but only w/ respect to their reports. There needs to be a balance. you cannot mention the names of potential future members – if BOD is limiting their liability by not being included in Prospectus then company cannot benefit from their involvement during the IPO  Policy: Lastman – if we make our directors so liable they will just stop being directors and we won‟t have society‟s brightest minds running our companies anymore. so no cooling off period. 130 (1) Action against: Public deemed to have relied on misrepresentation … and has an action against: A)Issuer / selling security holder (company & secondary offerers) B)Each underwriter who signed  Note: In underwriter agreements there are usually indemnity clauses.71(8)] will be on issuer to show company MISREPRESENTATION LIABILITY  Common law: Persons liable for inaccurate statements in Prospectus if they‟ve been fraudulent/ to show that they had it @ da y 6 – easier for purchaser to argue that they did not recklessly disregarded truth have it until day of buying the shares hence fire occurred during cooling off period o Not entirely clear under CL if you‟re liable if you have been reckless in reviewing document (Hedley Byrne)  S.

this overturned by Appeal Court and upheld by the SCC Reasons  Ont. unless the court finds that contribution is not warranted o Policy: Act is pro-active…want to limit opportunity for misrepresentation by holding as many people liable as possible – more people that can be held liable the less likely a mistake will be made. the company filed a revised forecast with the OSC. Poor 4th quarter revenue and earnings were material adverse facts that Danier had to disclose. This resulted in a material temporary drop in share price. 20 . which in the end it was.133. S. deference is accorded to the board‟s decision. not objective. Danier Leather Material fact vs. the directors of Danier held liable. 130 (10):No derogation of rights: Rights of rescission or damages are in addition to and without derogation from rights under common law.Liability of Dealer or Offeror – provides for a right of rescission or damages if the dealer or offeror failed to comply w/ the applicable requirements – particularly w/ reference to s. Trial Div: Danier and senior officers liable for P misrepresentation relating to earnings forecast in their prospectus: 1.51 only requires an amendment if there is a material change (not a material fact).71 . Not a question of being “objectively reasonable”. Ratio: Not the court‟s place to question a company‟s subjectively reasonable and genuine business judgment Note: The SCC said that you need to give directors sufficient latitude to run their businesses reasonably. Failed to give enough credence to “business judgment” rule. 130(8) Liability is joint and several.  No continuing obligation to disclose material facts occurring between date of P and date of closing when no material change has occurred. not just those P‟s are likely to go after b/c of deep pockets. There may have been facts but there was no change in the business. Issue: whether Danier Leather and two of its senior officers were liable under section 130 of the Act for failing to disclose material facts that became known to them after the filing of the prospectus at issue but before the closing of the offering Held: At trial.  Ds made what they believed to be a reasonable decision. S. The test is subjective. 2. but can seek contribution from the other parties. The directors genuinely believed that it would be OK. o Common Law – liable for a fraudulent and reckless disregard for the truth o Negligent misrepresentation (Hedley Byrne) Purchaser‟s Election of Rescission “the purchaser may elect to exercise the right of rescission against such person. Because they knew before closing that they were unlikely to meet the forecast and didn‟t disclose it.they did not mail amendments Kerr v. not the court’s place to question a company’s subjectively reasonable and genuine business judgment Facts: After seeing a drop in sales due to unseasonably hot weather. Everyone will be careful in preparing the prospectus. 3.    S. When it was written the people believe it was right. not a perfect decision as long as Ds have selected one of several reasonable alternatives. judges can‟t exercise their own business judgment to override judgment of senior management. this amounted to a misrepresentation  CA: Trial judge erred in three ways: Danier wins! 1. However. weather cooled and before the amendment was officially made. SHs sued claiming original forecast was a misrepresentation. company or underwriter. the managers still genuinely believed that they would meet the forecasts therefore no obligation to file an amendment. Material Change. Danier had substantially achieved its original forecast. in which case the purchaser will have no right of damages…” S. If directors and senior management genuinely believed they would meet their forecast. 2. Prospectus provided that forecast was true and accurate at time it was written and at time of closing 3.

Not liable for diminution in value that did not result from the misrepresentation o Reverse onus on the defendant to prove this. directors. o Seems inconsistent with s. but isn‟t since you can go after all the other parties for their amounts. is liable under subsection (1). 130(1)(d):Experts are only responsible for expertized portion of the prospectus  S. if she proves. As a result. DEFENCES  S. there is only strict liability for issuing company and selling security holder. other than the issuer or selling security holder.130(6):Underwriter is only liable for the total public offering price represented by the portion of the distribution underwritten by him  S. You have to actually believe that there wasn‟t a 21 . Everyone else has certain defences available  S. statement or opinion  Non-experts are not liable for misrepresentation in expert portion of prospectus if they had no reasonable grounds to believe there was a misrepresentation and that they in fact did not believe a misrepresentation existed. so basically if a representation is shown there are going to be lots of damages  S. and that. no one would issue prospectuses because liability was too harsh and can't reasonably know everything .130(7):Defendant is not liable for all/a portion of the damages that it can prove was not the result of the depreciation of the security value. so if there‟s any question between you and the innocent buyer. which is almost impossible to prove. o  Applies to underwriters.  S. o  Not liable if you withdraw consent and give general notice to OSC prior to a purchase (c) Liability for Non-Experts for the Expert portion had no reasonable grounds to believe that there was a misrepresentation or that such part did not fairly constitute a report or was not a fair copy of said report. her or its knowledge or consent. she or it forthwith gave reasonable general notice that it was so filed.e. i. o (a) Signed without knowledge or consent  that the prospectus or the amendment to the prospectus was filed without his. 130(8): All the defendants who are liable are jointly and severally liable to the whole. he. you should know everything. she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefore. subject to the right to recover from other defendants unless the court denies that right. o Only defence for issuing company or selling security holder  Policy: If everyone involved had the same liability as the company.No person or company is liable if it‟s proven that the purchaser purchased the securities with knowledge of the misrepresentation o Strict liability for company or selling security holder…onus is on the company to prove.DAMAGES  If the plaintiff elects damages over rescission.130(6)&(1)(d). on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he. and officers who signed and the experts (b) Withdrawal prior to purchase  that. the plaintiff can claim the diminution in value of the securities resulting from the misrepresentation of the prospectus  S. on becoming aware of its filing. In no case shall the amount recoverable exceed the price at which the securities were offered o Note: There‟s no opportunity cost available. obviously this is very hard for the company to do. you‟ll be held liable.130(3)No person or company. you can‟t say if you didn‟t buy RIM because of the misrepresentation you would have bought Apple and that went up in value a lot and you would have capitalized on that. after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser.130(9)Limit on the damages is whatever the plaintiff paid for the securities.130(2) Purchaser Knowledge of misrepresentation . The theory is that if you are the company or the selling security holder. This tells you that you can‟t just rely on the information in a prospectus.

b/c imposing layers of investor-protection and liabilities won‟t protect investors since we‟ll end up with bad directors. The OSC can‟t set a standard because every company is different. 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. o Lastman: no one knows what this means – USELESS clarification – but it is better than creating a code for situations which are so varied that would be insufficient in some situations or too much 22 . other than the issuer or selling security holder. but if they set a standard to objectively determine whether directors are careful. opinion or statement…… not liable IF  (i) after reasonable investigation they had a reasonable ground to believe and did believe that prospectus fairly represented… AND  (ii) on becoming aware that it did not they advised the Commission…that they would not be responsible .No additional requirement for Ds to prove a reasonable investigation was undertaken to verify the accuracy of the expert‟s opinion 130(4) Expert Due Diligence Defence – No person or company. then everyone is comfortable. opinion or statement of an expert unless he. opinion or statement as an expert unless he. Securities legislation is proactive. she or it.  misrepresentation (subjective) and also there shouldn‟t be grounds for a misrepresentation (objective)  The defendants have the burden of proving such a belief and reasonable grounds. o (a) they failed to conduct reasonable investigations as to provide reasonable grounds for belief that there had been no misrepresentation. and we won‟t find it with a Code.132 Standard of Reasonableness = what is required of a prudent person in the circumstances of that particular case o Policy for vague standard -. 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.130(5)Due Diligence Defence – No person or company. o (a) they failed to conduct reasonable investigations as to provide reasonable grounds for belief that there had been no misrepresentation. EXCEPT issuer and selling security holder. The only way to encourage brightest people on boards is to make the standard reasonable. OR o (b) believed there had been a misrepresentation DUE DILIGENCE TEST: Available to all. Not responsible if they can show: 1. there is no additional requirement (as there is in the case of the non-expertised portion of the prospectus) for the defendants to prove that a reasonable investigation was undertaken to verify the accuracy of the expert’s opinion o (d)Liability of Experts for the Expert Portion  misrepresentation attributable to failure to represent fairly their report. AND 3. which is the only way to ensure balance between 3 objectives. her or its own report. she or it.Wilful blindness is not acceptable . other than the issuer or selling security holder. OR o (b) believed there had been a misrepresentation S.Defendants have the burden of proving such a belief and reasonable grounds . Actual Belief that there was no misrepresentation (subjective). We must find a balance between investor protection and efficient capital markets. Reasonable grounds for that belief (objective). Conducted reasonable investigation to support that belief  S.We want to maintain confidence in the capital market system. her or its own authority as an expert or purporting to be a copy of or an extract from his. AND 2.

which will be judged in hindsight. you cannot rely on management. The question of the effort needed to verify is a question of degree but in this case they did basically nothing. o Accountant: relied on others – should have known and cannot rely on other experts. and which were liable (jointly and severally) / had a due diligence defense available. It becomes a question of degree. Barchris Construction (1968. Court said cannot just rely on the company. You need to make sure that your investigations are reasonable under the circumstances. if it is b/w you and an innocent investor you will be the one liable if you did not take reasonable steps to ensure access to accurate information…basically what is going on here is the legislative requirement for these people to be careful. The only question left was regarding ALL of the defendants.  Reasonable due diligence seems to indicate an obligation to conduct independent investigation to verify statements made by the issuer to ensure the prospectus constitutes FULL. Needed money so did a public offering. they each need to take more action and take reasonable efforts to verify the information given to them. He claimed that it was the company‟s responsibility to get it right. Court: The prospectus was misleading and there were misrepresentations in it. Company went bankrupt the next year. (liable as an officer who signed the prospectus) o President & VP (founders): despite limited expertise & education. Court held that whether or not you understood was irrelevant . 23 .in others. and they signed it. No due diligence defence available. TRUE and PLAIN disclosure Facts: B constructed and equipped bowling alleys. The court cited the purpose of the statute to protect investors and therefore underwriters are part of the system and they cannot simply rely on other underwriters or the company. o Underwriters: One underwriter did all the investigations. Court said he made no reasonable investigation and he relied on others and he should have known his reasonable legal obligations. No DD defence  liable  There is no code for how much effort you need to put in. FAIR and PLAIN disclosure. The P was found to be misleading so the only issue is whether there is a due diligence offence available. Reasonable due diligence seems to indicate an obligation on each and every party to conduct independent investigation to verify statements made by the issuer to ensure the prospectus constitutes FULL. aware of relevant facts – no DDD available. o Company: Strict liability (statute). Shareholders sued for a misrepresentation in the prospectus. also need to do your own DD o Outside Directors: obliged to do independent investigation = no DD Defense…it doesn‟t matter if you‟re new to the company. o CFO: did not reasonably investigate and was in a position to know and must have known of the misrepresentation – did not conduct reasonable investigation – cannot blame lawyer o CEO: Signed prospectus. Escott v. It is difficult to say how much effort is needed when the judgment comes in hindsight of how much effort you put in.they knew or OUGHT TO HAVE KNOWN all the relevant facts. US)Leading US case. all others relied on him. attempted to define the level of Due Diligence required by various parties in the prospectus. The OSC is saying that investor protection trumps requiring all the front line parties having to take reasonable steps to be careful. o Young in-house Lawyer: became a director after PP but before the FP (when he signed an amendment) but he wasn‟t an executive officer and did not participate in management of the company.

however defendants are expected to examine those documents which are readily available. COMPANY AND UNDERWRITERS.  If it comes down to the innocent investor and someone who has been involved w/ preparing the P – if you have NOT done due diligence you will carry the cost  Securities legislation is proactive. A reasonable investigation and reasonable ground to believe will vary with the degree of involvement of the individual. in order to make them more careful. his expertise.if allowed to rely on management then no extra protection for the public by inclusion of underwriters.trying to avoid people making misrepresentations in advance and by holding as many people liable as possible (joint & several).What may be reasonable for one director may not be reasonable for another by virtue of their differing positions Inside directors with intimate knowledge of corporate affairs and of the particular transactions 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 Policy for Due Diligence Defense:  Protect the investors .A completely independent and duplicate investigation is not required. 24 . and his access to the pertinent information and data Reasons .  THE POLICY OF THE STATUTE IS TO MAKE AS MANY PEOPLE CAREFUL AS POSSIBLE ON THE FRONT END E. Leasco – A reasonable investigation and reasonable grounds will vary with the degree of involvement of the party in question Ratio .G.Feit v.

Very clear and certain. OR it could be unplanned (lawsuit. If you buy or sell securities with inside information. 3) Early Warning: This is designed to give advance notice to the marketplace that someone is accumulating a block of stock – indication of a potential takeover bid. This is the most difficult area of the disclosure requirement. Five Types of Continuous Disclosure: 1) Regular Financial Disclosure: at predictable and fixed intervals. 1(1)  essentially you are a reporting issuer if you have filed a prospectus 25 . fire). Recall that the prospectus tells everything you need to know at one moment in time. This disclosure is created as a result of some material event that changes the nature of the co.Section 2–AFTER GOING PUBLIC     Continuous Disclosure: That disclosure required of a company which has distributed its securities to the public. disclosure. Who is subject to Continuous Disclosure Regime? Continuous Disclosure regime only applies to “reporting issuers” as defined by S. 2) Timely Disclosure: at irregular and unpredictable intervals. equality of treatment and information upon which investment decisions are made This all applies to companies that are reporting issuers. so we need to have a mechanism to keep info current: starts with prospectus and continues as events and time pass Policy  Protect integrity of capital markets. This is important to let investors know what insiders think of their company and to stop insider trading. 5) Insider Trading: Prohibits the use of information that is not in the public domain in the buying and selling of securities.g. This change could be something that is planned (closing a building). The company must report events even if the public already knows through a newspaper etc. The fact that insiders are buying and selling is useful information in the marketplace. 4) Insider Reporting: when insiders of a company buy or sell public securities. and as described in the Act you become a reporting issuer by filing a prospectus. is doing. e. Policy Must ensure info is kept current to facilitate the secondary market. you will go to jail. This is info. such that the marketplace has to be informed. they have an obligation to disclose. that is useful to the market to assess how the co. ensure fairness. quarterly and annual reports.

companies must file with Commission and any investor who request is. and in any even within 10. the reporting issuer shall advise the Commission in writing where it believes the report should continue to remain confidential within 10 days of the date of filing of the initial report and every 10 days thereafter until the material change is generally disclosed in the manner referred to in subsection (1) or. where a material change occurs in the affairs of a reporting issuer. 75 must be read in conjunction with NI 51-201 o s. together with written reasons for nondisclosure o s. the reporting issuer shall promptly generally disclose the material change in the manner referred to in subsection (1) upon the reporting issuer becoming aware. within 45 days of the end of each quarter. it shall issue and file a news release authorized by a senior officer disclosing the nature and substance of the change o s.2) and deliver to any investor who requests it. forthwith file with the Commission the report required under subsection (2) marked so as to indicate that it is confidential. o S. in lieu of compliance with subsection (1). the reporting issuer shall file a report of such material change in accordance with the regulations as soon as practicable.days of the date on which the change occurs. until that decision has been rejected by the board of directors of the issuer. o s. (a) in the opinion of the reporting issuer. provide unaudited financial statements o At end of every year. the disclosure required by subsections (1) and (2) would be unduly detrimental to the interests of the reporting issuer. 74(5) Need to report right away . reporting issuer must file with OSC (Item 4.  26 . provide audited financial statements TIMELY DISCLOSURE  S. And you must prepare interim quarterly statements (unaudited) within 45 days of the end of each quarter. 75: There is a duty to disclose if you are a reporting issuer (a company that‟s filed a prospectus) upon the occurrence of a material change (not material fact) in the affairs of the reporting issuer o s. the reporting issuer may. 75(2)Report of Material change: subject to subsection (3). 75(1)Publication of material change: Subject to (3). cumulative quarterly unaudited FS o At end of every quarter. 75(4) Report every 10 days Where a report has been filed with the Commission under (3). and if that opinion is arrived at in a reasonable manner. or (b) the material change consists of a decision to implement a change made by senior management of the issuer who believe that confirmation of the decision by the board of directors is probable and senior management of the issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the issuer. annual audited comparative financial statements (Item give the marketplace information on a timely basis so they know what they‟re doing when they‟re buying and selling shares.REGULAR FINANCIAL DISCLOSURE  NI 51-102 says if you are a reporting issuer in Ontario you must file audited financial statements within 90 days of your year end.Although a report has been filed with the Commission under (3).6)  Interim Financial statements: In addition to the annual audited comparative FS. or having reasonable grounds to believe.  Annual Financial statements: Within 90 days of financial year end.75(3) Except for where. if the material change consists of a decision of the type referred to in clause (3)(b). Policy reason for timely disclosure . There‟s confidence in the markets because you as a shareholder know that information gets put into the market immediately. that persons or companies are purchasing or selling securities of the reporting issuer with knowledge of the material change that has not been generally disclosed.

27 . includes a decision to implement such change made by the Board or senior management who believed that confirmation of the decision by the Board is probable. that triggers timely disclosure. when management wants to close the Oshawa plant. not the actual closing of the plant. you DO have an obligation to disclose  Example – Shoppers used to sell cigarettes. the decision triggers the disclosure obligation. Material Fact . 1(1) Material change: a change in the business. there is an obligation to disclose o External – if the government in Canada raises the prime rate that has material effect on your business. When senior management has decided to do something and they believe that board of director approval is probable.  NP 51-102 – if that external change has a greater impact on your business than on the rest of the world.What is a Material Change?  S. When the government banned cigarettes from drug stores. a lockout. that external event had a huge impact on shoppers.e. It was a destination stop that resulted in other purchases beyond the cigarettes. o Proposed – The obligation to disclose arises when you‟ve decided to do something even when you‟re not going to implement it for a while. it‟s hard to tell if that has a significant impact on Mac‟s Milk.  Actual v. “material change” provides 2 situations where a decision to do something in the future triggers timely disclosure: 1. close an Oshawa plant in 3 months). as opposed to a material fact. So there would be an obligation on shoppers to disclose. a fire. all result in an obligation to disclose. or capital of a company that would reasonably be expected to have a significant effect on the market price or value of a security of the issuer. When the board of directors has decided to do something (i. lawsuit. contract. External Change o Internal – a fire. For these changes. 2. that they must disclose. when the government continues to tax cigarettes at higher rates. If they‟re all material. Proposed Change o Actual – A strike. a sale of a major asset. Today. In that context. For example. there must be timely disclosure. o So proposed changes only become material when  The BOD decides to do something. or  Senior management decides to do something and believe BOD confirmation is probable  Internal v.  Consistent with the objectives of timely disclosure – get the information in the marketplace at the most appropriate time so people are trading with the most recent information. o NOTE: that your mere intention to do something that you lack the control or power to do is inappropriate disclosure  Material change v. and they believe that the board will ultimately support that decision (recall that the board will make the decision). operations.Timely disclosure is triggered upon the material change in the affairs. that is not internalized to your business and there‟s no obligation to disclose.

Similarly.Royal Trust Co. When there is a material change in the affairs of a reporting issuer. and if it had an impact on the company it would have been a material change. The fact that the weather was bad was a material fact. and there‟s no obligation under the OSA to make timely disclosure of material facts. Court: Directors NOT liable. Campo – material change v. Reasons: Timely disclosure is only required when there’s a material change in the affairs of the company. but nothing has changed in the business of RT.  Tension between investor protection and efficient capital markets Premature Disclosure:  OSC said premature disclosure can be equally destabilizing as late disclosure  Can‟t disclose late and can‟t disclose early. material fact was at issue. Not to contain unnecessary details. The bid was unsuccessful and C sued. as there was no material change. the reporting issuer is subject to 2 obligations: o (a) Press Release: Immediately issue press release discussing the nature & substance of change  Press releases are to be factual and balanced with complete and promote disclosure with unfavourable / favourable news. NI 51-102 3 types of reports when there IS a MATERIAL CHANGE: 1. 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 (think internally of the business) Material Fact: a fact that would reasonably be expected to have a significant effect on the market price or value of the securities (think externally from the business) Policy Balance – timely information vs. Have to disclose at just the right time. and promotional commentary. recall Danier .SCC: Danier did not have an obligation to disclose the poor revenue and earnings for the first half of the 4th quarter unless it amounted to a material change. but in any event within 10 days of the date of the change. because if they had known that the bid was going to fail. exaggerations. here there was only a material fact Facts: Directors of RT knew that 60% of the shareholders were not going to tender (agree with) C‟s takeover bid.premature disclosure)  Premature disclosure is a problem because can screw around with market – doesn‟t create confidence in capital market  You are in a gigantic disadvantage if you had to disclose every time you are about to make a deal – only want to announce a deal when you know the deal is final. Complete public disclosure  The most common circumstance. they would not have wasted money doing it (trying). 28 . The FACT that 60% of the shares were not going to tender to the bid is a material fact. Definition from s.1(1) Material Change: a change in the business.  Supposed to be more detailed – describing what happened and the consequence to the business  Must be filed as soon as practicable. o (b) Material change report: Report disclosing in detail the nature and substance of the material change. So there was no obligation to disclose…Court said they would not interfere with genuine business judgment. v. confidentiality and market manipulation (markets can‟t function properly if there is too much speculation . only a material fact (knowledge that the bid would fail).

75(3)  There is no press release / material change report. and if you can‟t prove this. but you don‟t have to file this unduly detrimental fact. the disclosure required by subsections (1) and (2) would be unduly detrimental to the interests of the reporting issuer. you must disclose the information. and if that opinion is arrived at in a reasonable manner. that persons or companies are purchasing or selling securities of the reporting issuer with knowledge of the material change that has not been generally disclosed. 75(3) below S. the information is no longer considered confidential and you must disclose it You can file this report in 2 circumstances: o (1) Unduly Detrimental:  Must prove to the OSC that to disclose this information to the marketplace would be unduly detrimental to the company………. together with written reasons for non-disclosure (4) Where a report has been filed with the Commission under subsection (3). Incomplete public disclosure – Lastman has never seen this happen  The same as (1) except there is some fact that you can show the OSC that is unduly detrimental to include. NI 51-102 . the reporting issuer shall advise the Commission in writing where it believes the report should continue to remain confidential within ten days of the date of filing of the initial report and every ten days thereafter until the material change is generally disclosed in the manner referred to in subsection (1) or. if the material change consists of a decision of the type referred to in clause (3) (b). forthwith file with the Commission the report required under subsection (2) marked so as to indicate that it is confidential. You must also include in your letter to the OSC that to the best of your knowledge there is no insider trading going on. the reporting issuer shall promptly generally disclose the material change in the manner referred to in subsection (1) upon the reporting issuer becoming aware. until that decision has been rejected by the board of directors of the issuer. (5) Although a report has been filed with the Commission under subsection (3). or (b) the material change consists of a decision to implement a change made by senior management of the issuer who believe that confirmation of the decision by the board of directors is probable and senior management of the issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the issuer. o So you ask the OSC to grant permission for you not to include this information. Courts have taken a strict interpretation of the words “unduly detrimental”  Niagara Wire Weaving : unduly detrimental = undue economic harm to the corporation that is not outweighed by the benefit realized to the market and its goals  Can‟t use “just kidding” defence: Lastman has never seen a material change that has been deemed to be unduly detrimental and therefore has resulted in confidential disclosure. Confidential report  Effectively you‟re saying that something is material but you are asking the OSC for permission to not include it  See S.   S. You can‟t assume something is confidential just because you want it to be. (a) in the opinion of the reporting issuer. Courts take strict interpretation to „unduly detrimental‟  There is a HUGE bias towards disclosure.75(3): Confidential Report S. in lieu of compliance with subsection (1). or having reasonable grounds to believe. you have made the decision that the change is material.2. and 29 . the reporting issuer may.75(3) Where. By seeking confidential disclosure. If they grant it. and regulators are unlikely to be persuaded in a simple circumstance that you should be entitled to keep this information confidential. o Note: If it leaks to the press or if rumours start circulating. you still file the press release and the material change report. 3.Every 10 days you must advise the OSC why it should remain confidential.

who knowingly influenced the issuer or any person / company acting on behalf of the issuer in the failure. BIG RISK o (2) As of right:  Also acknowledging there is a material change. The OSC needs to be able to monitor these companies. or o Was guilty of gross misconduct. you‟re asking for confidential disclosure until the board approves a certain move that management has put forward.  Once the board approves it. or who knowingly influenced the D or O of the issuer to authorize in the failure  P does not have to prove that he relied on the a 30 . a plaintiff must prove o A reporting issuer failed to make timely disclosure o Plaintiff acquired or disposed of the security of the issuer o The acquisition or disposal of the security occurred between the time when the material change was required to be disclosed. and the subsequent disclosure of the material change  Where D is not the issuer / an officer of the issuer. P must also prove that at the time that the failure occurred. then it becomes full public disclosure Consequences of failure to make timely disclosure in accordance with the Act:  To prove failure by a public issuer to make timely disclosure. You want to put the OSC on notice that something‟s happening so they can watch the stock. D: o Knew of the change and that it was a material change o Deliberately avoided acquiring knowledge of the change or that it was a material change. at which point you must fully disclose.therefore if you‟re denied confidentiality. When management makes this request the OSC wants to make sure that no one will trade on this information that‟s being kept confidential. in connection w/ the failure to make timely disclosure  Failure to comply with the continuous disclosure requirements can lead to o Penal sanction (as can a misrepresentation in the required disclosure) o Compliance orders can be obtained o OSC could make a cease trade order or remove an issuer‟s right to use the various exemptions provided in the Act  People responsible for failure of the issuer to make timely disclosure are o The issuer o Directors and officers who authorized the failure o Influential persons – each influential person and each D & O of the influential person.  Purpose: You‟re putting management in an impossible position if they decided to do something and have to go to their bosses if they must disclose this before they go to their bosses. disclosure is mandatory…BE CAREFUL. through action/failure to act.  You get confidential disclosure “as of right” until the board has decided to implement the decision (or when senior management thinks the decision is probable).

102. You will want to buy the small shareholders up first so that you can get to 9. so if you buy 23rd. Gives time for market to adjust to new information NOTE: Early warning continues up until the time of the takeover bid. Will make you file early warning report as soon as possible (<2 day maximum). Must be able to prove the ability to meet the financial obligation.1Acquiror = you. the stock price skyrockets.1(2)Further 2% Rule: Every time you acquire an additional 2% of the outstanding securities of the class to which disclosure required under (1) relates. Once you put out your press release. o Purpose: This rule enables the market to digest the information of a potential takeover bid and encourages acquirers to file their reports quickly. sell or hold shares as takeovers usually put stocks at a premium. o Policy: Early warning that someone is accumulating a significant block of stock. 102. you must go through the same process (file a press release and report). cannot buy anymore securities of the company until one business day after you have filed your report – “freeze period”…This means there needs to be 1 whole business day of no trading. Should buy strategically to maximize the number of shares you can buy before early warning rules come into effect.92  Contents of Press Release: NI 62-103. usually need to hire a bank to approve financing. It might influence their decisions to buy. and pay a high fee to the bank to do so!  Policy: The investing public should know when somebody is taking a run at acquiring a company. including securities that are convertible into an additional 2% of the outstanding securities referred to above o Purpose: This can give the target corporation an early warning of a potential takeover bid.they have to disclose their intentions going forward  S. It is only the trade that puts you over 10% that has to be disclosed.1(3):Period when Acquisitions are Prohibited . that entity has an obligation to (a) immediately file a press release containing the information prescribed by the regulations. or others acting jointly or in concert with you. can‟t buy again till 25th. Obligation on a shareholder if they own 10% of a public company or more of the outstanding voting securities of an issuer .1(1): Early Warning Obligations: Once an entity acquires 10% or more of the voting or equity securities of a public company. So the strategy is to get to 9. and current shareholders should be cognisant of that fact as they may want to hold on to stock o Note: You can‟t do anything indirectly that you are not permitted to do directly s. To do so. they all say “we have no present intention”. can‟t beat the system by joining with another party who has 9. but after 20% the freeze period stops happening.99% later on. o S. and therefore they may be making a takeover bid at a premium. only the reporting needs to continue. o o    The theory of takeover bids is to acquire as much as you can as fast as you can. 102. Once you are at 9. The goal is to get the largest amount over 10% before the company has to follow the early warning disclosure rules (get to 20% faster).EARLY WARNING SYSTEM – Subjected to this when you own 10% of a class of shares!  Used to show possible change in control  Takeover bids are very expensive in Canada. and can signal to the others the potential gain from acquiring the target. Appendix E S.99% and save the largest transaction to the end. 1(f): Must disclose intention – tell why you are buying stock In practice.99%. This will increase the potential for competing bids and will allow target management more time to engage in defensive tactics s. but everyone knows intuitively that stock will go up and what their true intentions are s.99% then you want to make the large buy to put you the furthest over 10%. and (b) must file within 2 business days a report with the OSC containing same information as press release. 31 .

you can tender your shares to defray your costs from what will be an inflated share price. the 5% early warning rule applies. they just want you to give advance notice to the marketplace. This happens every 2% until the company reaches 20% (at which point takeover bid rules apply . 5% rule: If there is a takeover bid already outstanding. INSIDER REPORTING – Subjected to this when you own 10% of a class of shares!    Used to show how insiders feel about company S. 107(1) Insider Reporting: As soon as you become an “insider” of a public company.EXAMPLE – What‟s your purchase order? A) 4%. B) 5%. C are shareholders in a public company. securities of the reporting issuer). then anyone else that acquires 5% of the stock has to put out a press release before the opening of trading on the next business day saying that they have acquired 5% (added to previously acquired securities = 5%)  No report required and no freeze on the stock (this information is prescribed by the regulations)  There is a different set of rules dealing w/ early warning during an outstanding takeover bid. o There‟s no obligation to file a report. Which would you buy if you owned 9.  s. you must file an electronic report (Form 51-501F) explaining that you‟re an insider and how you became one within 10 days of becoming an insider S.then regular early warning regime  Policy: No report or waiting time required.99% already? A = 3% B = 4% C = 2% Answer: If you have 9.102. 5% Rule Acquisitions during a bid. then takeover bids would be too expensive in Canada. so you would get there faster this way. C) 9%. simply to allow the market to know that a bidding war may ensue. You would want to buy as much as possible first. no freeze. EXAMPLE: A. EXAMPLE: What‟s your purchase order? A) 4%. so that you get to 9% and then the bell doesn‟t go off until you hit 15%. If they didn‟t allow up to 10%. B. 107(2) Once you are an insider EVERY TIME you buy or sell securities of the reporting issuer you must report this change within 10 days of the event saying you bought and sold (with the same requirements as above) o Must disclose any direct/indirect beneficial ownership of.2(1): Outstanding Takeover Bid. Legislatures have decided that takeover bids are a good thing for society.9%.a press release and report are still required but the freeze period no longer exists –NI 62-103  When someone has already announced a takeover this will create an auction for the shares. o There is nothing wrong with insiders of a public company buying or selling securities in their OWN company 32 . or control over. o That obligation continues every 2% until you hit 10%. B) 1%. D) 3% Answer: A. B. Efficient and effective means of economic growth. D then C: First purchase you make that puts you over 10% triggers the early warning system. C) 6% Answer: you will want to buy A then B then C. Note: It is beneficial to buy stock before you announce a bid so you have less to buy. and if you lose to another bidder. During the course of the takeover bid.  Policy: Why allow even 9. You want to reach 20%.99%? There is an exception to insider trading about trading on your own information. no press release requirement. so you would buy B. there is still no need for disclosure.

Therefore.1(1) as a company with 50% or more of its shares owned by another company o Person or company who beneficially owns. o Every D or senior O of a company that is itself an insider or subsidiary of a reporting issuer. You are subject to early warning **Once you acquire 10% of shares in a public company bells should be going off because you now have to file initial insider trading materials and early warning disclosure documents. i. This is very important information to shareholders (want to know what insiders think of the company)..5% because they don‟t want to deal with the complications o A reporting issuer where it has purchased/ redeemed / otherwise acquired any of its own securities  For so long as it holds any of its securities. 33 . they can investigate). when you own 10%. Deterring insider trading keeps confidence in the public markets o Therefore. it is a useful information tool for investors and it discourages insider trading  S. 1(1)“Insider” of a public company: . 1. or both. or exercises control/direction. Policy why insider reporting is a good idea: Obligation on the insiders of a company to report when they buy / sell shares. information that is not in the public domain (in fact.e.  “subsidiary” defined under s. o Nothing wrong with insiders buying or selling shares so long as they are not doing it based on insider info.(narrower than special relationship) o Every director or officer of a reporting issuer. over voting securities of a reporting issuer carrying more than 10% of the voting rights attached to all the issuer‟s outstanding voting securities  Often you‟ll see shareholders who hold 9. trades should be encouraged) o Reporting is used as a deterrent to insider trading (if OSC knows about trades. You become an insider 2. directly/indirectly.

Go through the analysis and the policy. and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship  The potential chain of tippees is infinite. but it doesn‟t say that the company can‟t buy shares in the company they are going to make a take-over bid for…this is because if this was done it would completely prevent a take-over bid from starting  (iii) a person or company that is proposing to become a party to a reorganization. Was it in the necessary course of business? (If YES. if you were formerly in a special relationship and learned information. not guilty of tipping). for the securities of the reporting issuer.  (ii) a person or company that is proposing to make a take-overbid. o a) a person or company that is an “insider”. merger or arrangement or similar business combination w/ the reporting issuer or to acquire a substantial portion of its property.  i. you are still in a special relationship. Did the person buy or sell on the basis of this information? If YES… 2) Tipping .  Policy: we need a level playing field so people are making informed decisions based on the same information. Did the person pass on or tip other people with respect to undisclosed material fact or change? If YES… 3.Guilty of Insider Trading (unless there is a defence) 1.Guilty of tipping 1.76(1): Prohibition against trading where undisclosed change: Offence for someone in a special relationship with the reporting issuer to buy or sell securities having knowledge of a material fact or material change that has not been generally disclosed  s. amalgamation. officer or employee of the reporting issuer or of a person or company described in (a) (ii) or (iii) [i. [e. 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 (a) (ii) or (iii). or – this says that an insider of the company proposing to make a take-over bid can‟t buy shares in the company. Is the person in a special relationship with the reporting issuer? If YES… 2. but are no longer the lawyer) o e) Tippee = 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. Ensure that there isn‟t an informational advantage with relation to the buying or selling of securities (Kimber Report. (e.e. 1965 report in favour of establishing a Canadian securities regulator).e. affiliate or associate of  (i) the reporting issuer.INSIDER TRADING 1) Special Relationship .g: reporting issuer‟s lawyer] o c) a person who is a director. Prepare an answer ahead of time. Note: There will likely be a question on insider trading on the exam. 1) SPECIAL RELATIONSHIP  s. 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). company making a takeover bid] or clause (b). as defined in Part XX. Is there a material fact or change that has not been generally disclosed? If YES… 3. Is the person in a special relationship with the reporting issuer? If YES… 2. if you obtained information as a lawyer.g. This is unique to Canadian law – different in US 34 . 76(5):Special relationship with a reporting issuer means. (b) or (c). This maintains confidence in the system. including a person or company described in this clause.

if not allowed at all then business would be impossible  Obligation on tipper to make sure tippee is aware that info is confidential and should not be acted upon or disclosed  Generally does not apply to analysts. reorganization. but no policy to allow directors of the company taking over to get rich! The company making the takeover bid is not in a special relationship because there is a policy consideration that allows the company to buy shares of the company. there is a disclosure requirement if more than 10% of the shares are purchased. 35 . o Policy: to ensure efficient capital markets. as takeover bids are a good thing.  2) TIPPING  s. it cannot trade those shares.e. if that company learns other confidential information through a friendly bid. whether or not the other party acts on the tip o Offence to convey insider information whether or not shares are purchased as a result of the tip o Objective and subjective test: you have to KNOW that the person is not in a special relationship and you OUGHT to reasonably have known that the person is not in a special relationship o Tipping in the necessary course of business is NOT an offence. You can trade on your own information. which it intends to takeover (however. etc: Except in the necessary course of business “Necessary Course of Business”: NP 51-201  Mixed question of fact and law that must be determined in light of the policy reasons for the tipping provisions. lawyers make sure that nothing is disclosed that is not in the public domain or that it is immediately disclose or the takeover company would be prevented from trading… o If the take-over company learns of a material fact/change from the target company they themselves are then considered to be in a special relationship as a tippee and could subsequently not buy the company.76(3):Prohibition against tipping for person or company proposing takeover bid. amalgamation. However.76(2): Prohibition against tipping: Offence for a reporting issuer and a person or company in a special relationship with the reporting issuer to pass on information or tip other people except with respect to undisclosed material fact or changes in the necessary course of business o You can never be guilty of insider trading unless you are a person in a special relationship! o You can trade on this information once it is generally disclosed o Policy: we need a level playing field by ensuring that there isn‟t an informational advantage  need to maintain public confidence in the market o There must be a positive action resulting to invoke insider-trading regulations EXCEPT with tipping o If you give an inside tip you are guilty of insider trading. so gotta be careful there). Don‟t give an information advantage to someone who might use it )  If the information starts to leak there is no safe harbour – must disclose immediately. Tippees of tippees are also included as part of the special relationship if they know or ought reasonably to know that the tippor is in a special relationship (depends on facts) Note about takeover bids: Nothing wrong with the company buying shares of another reporting issuer. institutional investors (i.  This is a pure question of fact (Example: if you disclose information to your lawyer when attempting a takeover)  No bright line test  s. There is a policy in place to allow takeover bids.

A buys shares knowing that they will increase. there is nothing offensive about A buying securities of B with information about what A is going to do.Royal Trustco (2004. Sometimes. You buy Coca Cola stock. partner is caught by the Act. He didn‟t really give you any material information that hadn‟t been disclosed. Drug company may have just fallen onto the information. since 60% of shareholders were not tendering to Campeau‟s bid. 36 . you are not caught by the Act – you have no special relationship with the public company whose shares you are short selling. Example 3: Law firm working secretly on a takeover bid. By definition. But. Held: The information was not given in the necessary course of business and therefore tipping occurred immediately when the information was passed to SHs. B and Co. Ratio: There is no circumstance where you can give an informational advantage to a shareholder and claim it is in the necessary course of business. you cannot be caught by the definition of "special relationship". o NOT INSIDER TRADING o Intuitively. you should be caught. this is not insider trading. Example 1: You are the president of a company that has a patent on a drug and a competitor comes out with a press release that they are getting a patent on that drug. directors of A cannot trade because they should not be allowed to profit from the information that they know (there is no public benefit here). technically. Example 4: If you are a lawyer acting for a company that is suing a public company can you be caught for short-selling your shares of the public company that your client is suing? o NOT INSIDER TRADING o Technically. not knowing that firm is working on the file. A is planning a takeover bid of Co. o YES INSIDER TRADING o Too bad. o Different from the drug company example because lawyer is looking to profit from client info. they put up Chinese walls to prevent the flow of info. Are you a tipee? o NOT CLEAR o No clear answer. o Law firms often deal with this by circulating lists of companies that you cannot trade in. Policy Usually you are still caught if you violate the spirit of the Act but not in the case of insider trading because dealing with a criminal situation. it is not "insider trading". You are in the same restaurant and he gives you a wink. Takeover Bid example: If Co. He might have just had something in his eye. The price of that company's stock increases dramatically and you short sell (knowing that price will eventually go down). Intuitively. Why? o To promote takeover activity. you should not be able to do the transaction but. OCA) IT IS TIPPING!! Facts: Directors of Royal Trust Co knew that Campeau could not win his takeover bid and told a shareholder that there was no risk. Partner trades. o Policy: How far do you want to cast the net of insider trading? Example 2: President of Coca Cola is in a meeting with Pepsi.

or demand that the broker execute (which it does) – this is the better option and avoids flagging to the world that something is going on (rather than demand that your broker refuse) o A broker can execute the trade and it will not be insider trading. 3.e.  Defence: If you are found guilty of insider trading because you are deemed to have inside information. you barely know what you know! Insider trading is a very serious offence.g. a charge of insider trading is detrimental to ones career b/c they will be all over the papers. I call my broker who knows Onyx is about to buy Air Canada. Automatic Dividend Investment Plan Defence Reg. In such cases. so that they can take advantage of this defence. 175  Problem: Under agency law. you have a defence if you can prove the following 4 things: o (1) The information was known to one of your directors.  Reg. 37 . employees. Unsolicited Order Defence Reg.175(1) the OSC will consider the extent company /person has procedures & policies to prevent contraventions of S. and you tell him to buy 5000 shares of Air Canada.  E. officers. 175 (2)(a)  Purchase or sale was entered into as an agent of another person or company pursuant to a specific unsolicited order. 76(1) o If a law firm is sloppy in guarding the info. Chinese Wall Defence – Reg.DEFENCES TO INSIDER TRADING  Even if not convicted.175 (3) in determining whether the person / company sustained the burden of proof under S. Your broker doesn‟t tell you anything one way or another. 175(2)(b)  Automatic dividend plans. You were in a special relationship with a reporting issuer 2. the lawyer who purchases the shares will likely not go to jail but will have to repay the innocent vendor (civil suit).  Investment banks have physical geographic barriers between the people doing the deals and the people doing the trading. offended ss. they must phone a designated person/s in the law firm to say that they want to buy shares of A. If he says something to you this would make you curious). and must ask if A is on the firm‟s restricted list? Any time someone learns of a new matter that may involve insider trading concerns. This happens in the case that your broker knows that Stelco is being taken over. 2. You had knowledge of an undisclosed material fact or change 3. etc. when they are let go there will not be nearly as much publicity  Once the case has been made against you for insider trading. (does not satisfy #4). partners. with two innocent parties. 76(1) or 76(2)… 1. you call and ask him to buy shares (broker has two options: execute trade or tell you he cannot do it. if you are partner in mid to large firm. and I‟m only deemed to know b/c one of my partners knew) o (3) No advice given with respect to the trade was given by the person who had actual knowledge to the person who made the decision to trade (My partner didn‟t tell me to do it) o (4) An appropriate Chinese wall was in existence to prevent the flow of information from the person who had the actual knowledge to the person who made the decision to trade (obligation to be careful)  Restricted List: Before anyone in a firm can buy / sell securities. You purchased or sold securities of that issuer or passed the info on to another person 1. so we need a way to protect really innocent people from bad facts. i. In reality. the sloppy one must pay.  Law can demand that your broker refuse. „me‟ being the person that traded) o (2) The decision to buy / sell was made by someone who did not have actual knowledge of the information (I didn‟t know. they must call this designated person to put the company on the restricted list. I am only deemed to know. if entered into prior to the acquisition of the knowledge of the material fact or change. you are deemed to know what is going on in your firm. or agents (Not known by me.

o IE. as it depends on: o The nature of the market for the stock o The place of the market for the stock o The place of dissemination of news release o Rule: An insider may not trade with the release of the news as in this case. Plan: lease don‟t ask us to send you 3 cents every quarter. and o The trading public must have it in its possession for long enough to digest it. buy them. and will send you the certificate when the money equals the cost of another share. A in two weeks. and you exercise the option. will differ in each case depending on the industry and the size of the co. i.  TEST: did they reasonably believe the other had knowledge? 6. 4. and we‟ll keep the money and buy you another share of Disney with that money. when you enter into a contract to purchase the shares of Co. Reasonable belief in disclosure: o The Information must be disseminated to the trading public (a news report is only the first step to disseminate the information). 175(2)(c)  If purchase or sale was made to fulfill a legally binding obligation prior to the acquisition of the knowledge of the material fact or change. as you need to give market time to digest o NP 51-201: By press release in a responsible manner.  Policy: this purchase was not based on undisclosed information that you now are aware of  If there‟s an automatic decision for you to get shares. (for less significant issuers. o Rule of thumb: wait one full trading day. 5. o Law: Do nothing. stock pays dividends of 3 cents / quarter. Legally Binding Obligation Reg. it is not insider trading (they can exchange shares on a level playing field – no disadvantage to either party). called to buy the stock. the intervention of a calendar week would suffice).  You sign up for this plan in the beginning (many companies do this)  What if you signed up for this plan and then 4 days before there are enough dividend cheques to buy more shares. then you did not rely on the information to make any type of decision and it would not be insider trading. An exact timeline does not exist b/c the dissemination of info. and you learn that Disney stock is going to triple? o Law says do nothing! You entered this plan with no information (it was automatic). o **National Sea: No firm rule on timing. Both Parties Have the Same Info  If both parties to the trade have access to the same material information. so there is no harm no foul if you happen to learn something in an intervening period. they won‟t make you pay for commission. Two days later. Reasonable Belief in Disclosure Defence  If you can show that you reasonably believed that the material facts had been generally disclosed.e. Since this is good for them. o **Texas Gulf (OSC) Facts: Company had lots of information and put out press release. You entered into a contract knowing nothing. not the newspaper‟s obligation to disclose o You need to understand that a press release may not be sufficient disclosure to have the defence.  When has information been generally disclosed? (OSC does not give guidance) o Massive onus of proof (YOU must prove this) o Just because something is in a newspaper does not mean it is generally disclosed o It is YOUR obligation to disclose. So you can‟t exercise your option if you find out about something before. so they came up with this plan. This was kind of stupid. o This defence does not apply if you have an option to buy. so there‟s no reason to interrupt this cycle because you have to learn new information. and must let the information be disseminated and the market needs to digest the 38  . Next minute. you find out that a takeover is happening.Most kids have a share of Walt Disney.

39 . Then you look to the possible defenses.  Additionally. Don‟t assume that the client knows what “special relationship” or whatever is. You are guilty of insider trading whether you buy or sell. EXAM: How to do an insider trading question: link concepts from different segments of the course (LINK THE 3 OBJECTIVES BACK). Then did you buy or sell with knowledge that hadn‟t been disclosed. The amount of time must reflect the purpose of the Act. Communicate to the client in the way that they will understand. Define special relationship. Then decide whether material change or material fact. Under the Securities Act a “trade” is defined as a sale of securities.o information (safe working rule = 1 full trading day) after the release of the information before insider trading issues are removed. that is. So you cite the section of the Act that says what it does. to protect investors Why is the term “insider trading” a misnomer?  It doesn‟t apply just to insiders – applies to “people within a special relationship to reporting issuer”  It doesn‟t necessarily involve a trade. Spell it out in ordinary terms. you don‟t have to buy or sell in order to be guilty of the offense. Talk in English as if you‟re the lawyer and he‟s the client and explain it in a way that the client can understand.

or 2) Information is otherwise readily available from some other source.g. Canada Savings Bonds) Reflect back on the policy and always ask: why does rule exist? What are they trying to accomplish? How are they trying to accomplish it? And why is that ok?       All of the following exemptions are found in one of two places: (1) NI 45-106 OR (2) Rule 45-501 There are FOUR types of Exemptions: 1) 2) 3) 4) Exemptions based on wealth or sophistication of the purchaser Limited offering exemptions – limited in their scope (Government Incentive Securities ??) Trades in securities of private issuers Isolated Trades 40 .The rules are supposed to be in place to allow small companies access to markets. o (2) Confidentiality: transaction is not subject to full. true and plain disclosure of all material facts. Policy: Advantages from system perspective o Reflects the trade-off between investor protection and efficient capital markets (allowing small companies to gain access to financing without significant expense)  We cannot survive as a country if the only way for companies to access the market is through a prospectus – many companies can‟t afford it or don‟t want to be public. PP exemptions are subject to supervisory review.  An efficient capital market needs another way to access the market Problem is that regulators are OCD! . More than superficially regulated! Failure to meet the conditions set out in the Act carries significant consequences (e. since they have to meet the conditions.g. either because 1) Purchaser is sufficiently sophisticated (deemed to be a function of wealth) and therefore doesn‟t need protection of a prospectus – will go through time and trouble of protecting themselves. but the conditions that a company now has to meet are so restrictive that small companies can‟t qualify for the exemptions anymore 3 underlying policy assumptions: All exemptions are usually premised on the view that the normally stringent protections afforded by the prospectus are unnecessary. or is subject to the Continuous Disclosure regime. unless an exemption can be found. Advantages from company perspective o (1) Speed: since there is no prior regulatory review PP‟s can be done quickly (no waiting period. SECTION 3 – PRIVATE PLACEMENT EXEMPTIONS Three ways to sell securities to the public (3 ways to raise money): o (1) Prospectus o (2) Private Placement Exemption: allows you to sell securities without a prospectus o (3) Discretionary Ruling from the OSC: Allows you to sell securities without a prospectus and without a PPE.  However. or 3) Securities are considered inherently safe that to require a prospectus would be ridiculous (e. but it‟s really more of an idea than a reality because there‟ll never be a case where this is granted. no review by OSC). transaction can be void). General Rule: OSA requires registration and the filing of a prospectus with the OSC.

then the OSA says that that document you delivered to investors. (No legal obligation to describe the business / affairs of the company). which has a single acquisition cost to that purchaser of at least $ may have to (same rule about OM applies here)  Policy: If you‟re a wealthy investor you‟ll take the time to protect yourself.000. and they don‟t want you paying for it over a number of years because the present value may drop.EXEMPTIONS BASED ON WEALTH OR SOPHISTICATION 1. you must deliver a copy of this memorandum to the OSC within 10 days of the time of the trade.#1 .000. officer or director o Promoter of an issuer or affiliate of the company o A company. you can sue me”  If you have delivered an offering memorandum with this exemption. if the trade is in a security of a company. o Example: Set up a company with 30 people at $5000 each. 130. parent. where the company purchases as principal for $130. practically speaking. other than the shares.“If I misrepresented this to you. and this would not be allowed. is an offering memorandum. although there‟s no obligation if business practice dictates that you do.3) 2. Minimum amount exemptions ($150.2) . grandparent. and they therefore don‟t need the protections of a prospectus  Examples of accredited investors: (mostly large institutional investors or really rich people) o Prescribed financial institutions o Charities o Pension funds o Insurance companies o Governments o “Individuals who either individually or with a spouse own financial assets with an aggregate.Allows a company to raise any amount of money from any number of investors as long as each of those investors is an accredited investor o No minimum purchase price o No restriction on the number of times a person can sell securities using this exemption o An accredited investor may qualify under this exemption and a closely-held issuer exemption  Policy: Accredited investors are so sufficiently sophisticated and wealthy that they‟ll go to the time. estate. 2.(s. 4.3 of NI 45-106 . Accredited investor exemption  s. The rule would say that this company was only set up to do indirectly what you couldn‟t do directly. child of a promoter.  So. LP. realizable value before taxes exceeding $1 million. o But.000 exemption)  s. or individual with net assets of at least $5 million  When you sell securities and rely on this exemption. trouble. 41 . but as a matter of business practice . The policy is defeated if you‟re only going to pay $5. o Spouse. o The cash requirement is so that you‟ll have enough financial assets to pay for it now. (s. 4. these people don‟t usually give you big checks unless you provide them sufficient information in writing so they can evaluate the investment. and it must contain a statutory right of action referred to in s. and expense of protecting themselves.01 of NI 45-106 – Exemption where the purchaser purchases as principal.000 paid in cash at the time of the trade. o Aggregate acquisition of the cost of the securities purchased must be at least 150K in cash on closing of trade o Lastman thinks this is a modest benefit – hard to find people who have 150K to invest o No need to deliver any information to investors. trust. 2. there is no requirement for you to deliver anything to the accredited investor.

and so people can rely on this exemption. #2 – LIMITED OFFERING EXEMPTIONS Policy – either there is some policy more important than investor protection that the government is trying to promote.  To keep track of this. – if you set up a company in order to defeat the purposes of the statute. or on advice from a registered advisor. but if you do it‟s an offering memorandum. must either be:  an executive officer or director of the company.  To rely on this. o Government-incentive securities  those which from time to time the government sets out. o You can‟t sell to more than 50. so there‟s nothing wrong with it. they go too far and impose the following precondition.000? This is OK. o Example: What if Apple wants to buy a share unit for $150. so all mining securities are government-incentive securities. this essentially triggers the offering memorandum  The whole point of this is that we don‟t want to get into this! But they get scared because unlike with the wealth exemptions there‟s no guarantee that these people can protect themselves because they‟re wealthy  The only way to satisfy this is to deliver a document that is an offering memorandum and includes a statutory right of action in the event of a misrepresentation. 1.1 of OSC Rule 45-501 – Exemption if you are trading in government-incentive securities where solicitations are made to no more than 75 solicitations. the OSC is not going to help you You don‟t need to give paper. or  the spouse or child of that executive officer or director of the company. This just makes the legislators feel better. by virtue of their net worth and investment experience. o Can‟t advertise in connection with this exemption  Purpose: This would be soliciting to more than 75 people. and sales are not made to more than 50 purchasers. like investment in gold/mining.Purpose: Basically they‟re still motivated by protecting investors. or  a person who. o You must provide each purchaser with substantially the same information concerning the company that a prospectus would provide. because they haven‟t been incorporated for that purpose. you must satisfy some preconditions o You can‟t solicit more than 75 people. 2. companies provide and number the offering memoranda . because on one hand they want to promote a certain industry. OR they‟re giving companies the ability to start up a business or rehabilitate an older one. Government-incentive securities exemption  s. is able to properly evaluate the investment . whatever industry the government wants to promote at the moment  Example: The government wants to promote the mining industry. each of whom must be purchasing as principal. as these are not accredited investors (and cannot protect themselves). This is also to create an opportunity for establishment of a new enterprise. but on the other hand. or rehabilitation of an old enterprise. but it doesn‟t actually protect the investors.  So you better be really careful about who you show this to. They didn‟t set up apple to buy this unit. o It’s all about policy. who are effectively “naked” purchasers and have no attributes to protect themselves.but Lastman has seen multiple numbering so people try to solicit to more than 75  Contradictory nature of the exemption. and OSC generally doesn‟t like advertising 42 . o Each of the purchasers.

or child of any of those people 43 . so sometimes private companies do private placements. which is typically what we‟re thinking of.o No promoter can use this exemption more than once in any calendar year (the promoter is the person responsible for founding. founder.PRIVATE ISSUER EXEMPTION  s. and is a founder of the company. identity of the purchaser is very relevant o Policy: Designed to facilitate the ability of companies to raise money at a very early stage of their existence. Articles must limit the number of shareholders to 50 – exclusive of current and former employees 3. and sometimes public companies do private placements. you may want to use the accredited investor exemption to avoid going through continuous disclosure.You must be selling securities of a private issuer to an enumerated list of purchasers who purchase as principal.7 of NI 45-106. or control-person of the company  Spouse. why not prepare a prospectus so you‟re not limited to 75 solicitations and 50 purchasers? o No prior regulatory review – so it‟s quicker o No continuous disclosure obligation. and they aren‟t government -incentive securities exemptions  Private issuer: Defined as an entity with 3 qualifications: 1. creating. etc) 2. So don‟t assume. even though it‟s usually the case. etc…  Note on public companies using the exemptions: Every time you sell securities you must do one of the 3 things (above). because they‟re already public. that private placement exemptions are exclusively in the domain of private companies. Once you file a prospectus. officer. parent. sister. or to someone who is not the public o Therefore. offering memorandum rules apply #3 . such that they are “not a member of the public”? o No restriction on the number of purchasers that you can approach. but once you‟re already subject to the continuous disclosure regime. 2. annual financial statements. you‟re a public company and must do regular financial reporting. Articles say any invitation to the public is prohibited Note: No restriction on the number of purchasers or number of solicitations (subject to the 50 security holder limit)  Identity of the purchaser. or the spouse/brother/parent/sister/child of an executive officer or director or founder. they don‟t have rich friends. as long as they qualify o Ridiculous list of people who classify as an acceptable purchaser  Director. brother.Exemption if you sell a security to a person who purchases as principal. Articles of incorporation restrict the transfer of shares a. So we as a country must promote the ability of those entrepreneurs to have a chance. They can‟t file a prospectus. or a control-person of the company o Control person person who alone or in conjunction with others has the effective right to control the company o No disclosure obligation. The small entrepreneurs are what create value in jobs from nothing. grandparent. Public companies never go to this particular exemption. and running the company)  Consider: If you‟re going to go through the time of essentially preparing the prospectus. Founder and Family Exemption  s. 2. No one in this company can transfer their shares in the company without the written consent of the directors (or shareholders. employee. 2(4) of NI 45-106 . but if you provide an offering memorandum.

under which any employee could purchase shares. The relationship must be direct. An insider includes a director. and lawyers don‟t know how to give advice about it. US) o Facts: Company established a stock purchase plan. client. Employees are just as much members of the investing public as any of their neighbours in the community. The investment went bad. and the investor demanded money back. Of those 5. Some employee offerings could be exempt. do not need the information a prospectus would provide. or a member of a religious group  A close business associate of any of those people – Sufficient business dealings to assess capabilities and trustworthiness. Offers to employees will be exempt from the prospectus requirement only where it can be proven that those employees would already have access to the pertinent information that the prospectus would contain (i. P was required to be registered. personal friend of any of those people – An individual who knows the person well enough and for a sufficient period of time to assess their capabilities and trustworthiness. are not members of the public. employees are in need of protection through full disclosure of pertinent information. Company argued that it wasn‟t the public. as they were members of the public. former client. customer. Not sufficient to be a client. customer or former customer. CA) o Facts: Company solicited the purchase of shares from a large group. Alta. they would not need to know the information b/c they already have access to it)  ***Need to know test: Persons who. because of their sophistication or relation to the company.e. the company had previous dealings with 4 of them. o Held: These were sales to the public since the 4 purchasers with previous dealings were not in any sense friends or associates of the D. Ralston Purina (1953. absent special circumstances. former client. 5 of whom eventually purchased. then that individual will not be construed as a member of the public. such as those made to executive personnel who have access to the same kind of information that the Act would make available. or extremely confident  44 . personal friend / business associate  Person that is not the public (cannot solicit shares in the public)  Accredited investor Canadian courts have relied on 2 US cases with different tests: Pipegrass (1959. The fifth was a complete stranger.    A close. or persons having common bonds of interest or association. parent. The relationships must be direct. or former customer. When investment went bad. Among those that purchased were several low-level employees. Lastman: WTF are they talking about?! Nobody knows how to rely on this exemption. o Held: This was an offering to the public. The focus on the inquiry should be on the need of the offerees of the OSA protections. Unless you are desperate. Those who are able to fend for themselves for a transaction are those who are not the public (clarify)…The design of the act is to protect those investors that need protection. Thus.  Spouse. officer or shareholder of the issuer. child of the close. brother. grandparent.  “Common bonds test”: If an individual has common bonds of interest or association with an insider (friends or associates of the seller). It‟s not enough to be related. they argued the company did not comply with the PPE. No solicitation by the company was permitted or conducted. arguing that the company sold him securities without a prospectus and without proper reliance on a PPE. But. sister.

or by a person whose usual business is trading in securities o Lastman: no clue what an isolated trade is. It‟s a really important exemption for the country. you‟re FUCKED! #4 . if it would not be detrimental to the public interest to do so. and then I invite 10 more people into this room.If I have to raise $10 million dollars. 45 . Note about Multiple Exemptions  There is nothing wrong in law and policy with combining exemptions.  Lastman – it is impossible to do so.Allow you to sell securities without a prospectus / private placement exemption. o Example: If you can‟t prove that you never solicited for the government -incentive exemption and only spoke to them about the $150.ISOLATED TRADE  s. and it‟s nearly impossible to rely on it.that your kid won‟t sue you. and 10 of them said they‟d like to write checks for $200. It‟s all really unclear what‟s going on here. as long as you‟re not trying to be smart o Example .  Must be explicit about who you are soliciting.000. I can raise $5 million from 80 accredited investors. you have no basis to rely on this exemption. and for what.  As soon as I find out that people will spend $200. you can‟t then say “I don‟t want to waste a solicitation on you” and invite in 10 more people.000. There is such a bias towards disclosure that it‟s hard to think of a situation where the OSC would say that it‟s in the public interest to do this (forget it!). 74(1) . but they make it so hard and come up with these ridiculous concepts.  DON‟T USE THIS ON THE EXAM! Discretionary Rulings s. that would violate the rule of the law because I would be soliciting 85 people for the government-incentive exemption. If I then told them to walk over to the other room. 2(3) of NI 45-106: You don‟t need a prospectus for an isolated trade  If a trade is an isolated trade and is NOT in the course of continued / successive transactions. This is never used.000 exemption. and $5 million from 50 purchasers under the government-incentive exemption.  Lastman: The legislation is so annoying because you want to take advantage of these exemptions. o Example: It would be wrong if I went to the 75 people in this room under the government-incentive securities exemption.

even though you are not required to provide it.  However.OFFERING MEMORANDUM Introduction  Many of the exemptions don‟t require an offering memorandum. but business practice dictated that a document that fits the definition may have to have been provided to satisfy the buyer of securities. o Misrepresentation constitutes an untrue statement of fact or an omission of a statement of fact  Thus. that is not an offering memorandum. you must give the lowlights. for delivery to and review by a prospective purchaser. But once you go beyond that and describe your business and affairs. Voluntary: for business practices. 1. Doesn‟t matter what you call it. Tell them everything or tell them nothing  Government-incentive securities exemption is the only one that we‟ve discussed that requires you to deliver an offering memorandum. and they‟re very concerned about people giving a modest amount of information and not being able to deal with it. whether you call it an offering memorandum or not. the rule says that that document you have delivered IS an offering memorandum  Rule 45-501: If all you deliver is a term sheet that sets out the terms of the deal. once you have delivered this OM. Definition  s. or current financial information. and the statutory right of action attaches 46 . But all of the other exemptions we‟ve covered basically say that you don‟t have to deliver one. Obligation: like in government incentive securities exemption (requires an OM) 2. to assist investors in making an informed decision o includes a “statutory right of action” –if there‟s a misrepresentation in this document. you must file a copy with the OSC within 10 days of the date of the trade. an OM carries the same implications as a prospectus.1(2) of Rule 14-501: A document purporting to describe the business affairs. In either case. you can sue me. without regulatory review o Level of required disclosure is unknowndoes not explicitly say it must not contain a material misrepresentation of fact o Policy: This reflects the fact that once you give the highlights. Requirements  Can be as long or short as the company wants  Can‟t contain untrue information  Can‟t be ambiguous  Document must describe contractual right of action  Document must in some way deal with the business and affairs of the company Two types of Offering Memorandum 1. then you have delivered an offering memorandum and you‟re subject to the statutory right of action. and therefore you may have voluntarily delivered an offering memorandum. if the document includes a description of the business then it meets the definition of an OM. if you deliver a document that describes the business and affairs of the company as part and parcel of what you must do to convince a buyer to buy.

So it‟s never been challenged. 130. and as far as anybody knows this is the law! Registration  Recall that no person shall trade in a security unless they are registered (s. OR o The purchaser can elect to rescind the purchase. Satisfy a private placement exemption 3. and realizes that Deacon sold him securities 4 years ago with no prospectus and no proper reliance on a PPE. A year later J is in Australia. and is always voidable at the instance of the purchaser. and must register in the OSA.a sale in contravention of the prospectus of PPE requirements is voidable at the instance of the purchaser (always. without proper reliance on a prospectus or on a private placement exemption  Everything we have done played off of this NI 31-103: Business Trigger Test  TEST: If for a living you buy/sell or assist/advise people on whether or not they should trade in securities. Every securities lawyer wanted DH to appeal that decision. The requirement that people sell securities this way is so fundamental to the integrity of our capital markets that if you don‟t comply. and if such a trade is a distribution. and in 1986 J‟s still in prison. Lastman: This case says it is NEVER put to bed. Court: DH did sell these securities without a prospectus or proper reliance on a private placement exemption. In December 1980 they set up a private company to invest in an oil expiration and sold shares to J in 1982. the transaction is NEVER statute-barred. but anybody else involved in the process would be caught by this test. and all of the Ds are jointly and severally liable for the damages against the contributions of each other Until now. Deacon Hodgeson (1986. J goes to prison. never statute-barred. Do a prospectus 2. Discretionary Rule (which you‟ll never get) We haven’t considered what happens if you sell securities to the public without a prospectus and without proper compliance with the private-placement exemptions.Statutory Right of Action  S. Deacon Hodgson. So you must ensure that whoever you‟re using to sell the securities (i. and gets charged with fraud on an unrelated matter. we‟ve talked about three ways to issue securities to the public 1.e. 138 of OSA which says that there‟s a 3-year statute of limitations. as there is no limitation period on the sale of securities without a prospectus/PPE. agent). statute of limitations does NOT apply) Facts: DH was an investment bank in Canada. but they also didn‟t want a CA to affirm this. is called to Australia to testify in that matter (he knew him). ON) . there‟s an exemption for the company. so J can‟t sue. o Policy: The purpose of this is so you‟re registered under the Act (to maintain and increase public confidence in the capital markets). this investment he made a year before in this oil expiration company goes bad. Deacon relies on s.25). Meanwhile. the damages are limited to the price of the securities so there is no opportunity cost. So when you do a private placement. Deacon. From prison in Australia he sues Deacon to get his money back. chairman of DH. no one really knew. and therefore they‟d be registered under the OSA. Jones v. and if they license you they can police you. and are therefore in the business of trading securities. Until Jones v. you have triggered this test. is registered = would enter into an “agency agreement” as opposed to an underwriting agreement 47 .1 of OSA: If there is a misrepresentation: o The purchaser has a right of action for damages against the company and the selling securities holder.

I go to 30 people and offer to sell them $5. you become a reporting issuer in Ontario.g.000 exemption. o But now we have a problem – I buy $150. and expense of protecting themselves.000 worth of securities each. Now I want to resell them. you will insist on having some mechanism to resell them you will only buy them if the company agrees that within a reasonable period of time the company will file a prospectus so eventually I can resell the securities…… make them put a CONTRACTUAL obligation in the agreement to issue prospectus within certain time period. and the 30 people wouldn‟t.000 to protect myself. under a PPE .000 buying securities. so there‟s no need to prevent resale. otherwise big penalties Technically. how do you stop someone from reselling securities?  Recall the rule that no trade in a security that amounts to a distribution without a prospectus  Definition of Distribution: o A sale of securities that had not been previously issued o It is a distribution to resell securities that you acquired pursuant to a PPE unless you satisfy the resale rules  So the way you stop the sale of securities is always through the definition of distribution Resale rules are broken down into 2 categories (A) Every PPE covered but the private issuer exemption (B) Private issuer exemption 48 . for $5000. If I can‟t find someone who will buy it for $150. because it reflected this trade off between investor-protection and efficient capital markets o E.000 worth of securities pursuant to the $150. we‟ve just run around the whole OSA.if somebody will spend $150. and they don‟t need a prospectus. Limit who the people with exemptions can sell to 2. the company must file a prospectus o So before you buy securities. if a Bank buys pursuant to the exemption. another Bank will do the same) 3. How do you solve this? 1.e. which subjects you to the continuous disclosure regime  so the sale of shares in this case are freely tradeable in the open market  But recall that you can sell securities without a prospectus and without being a reporting issuer. and expense of protecting themselves. o With securities sold pursuant to a prospectus there is no problem with those securities being resold because the company has an obligation of continuous disclosure so all the information is readily available to the public. Find someone else that will buy pursuant to a PPE (i. go to the time. trouble. trouble. If the OSA allows me to sell these to you.RESALE RULES FOCUS ON THE POLICY BEHIND THE RULES Recall First Principles  Open market in capital serves 2 purposes o Sale of securities from the company to investors o Sale of securities among investors  When you issue a prospectus re securities.000. o What‟s the problem? The whole rationale which allowed me to buy the securities without a prospectus was that I was spending the $150. they‟ll go to the time.

for whatever reason. is selling their shares. and can only resell them under these 5 conditions to ensure that the marketplace is aware of the fact that the person.GENERAL RULES 1. (b/c they want the public to have time to digest the information). ANALYSIS: Any time you look to an issue regarding the resale of securities.000 2 months in. If I resell them to someone else for $150. If the company WAS a reporting issuer at the time you bought through the PPE  you can resell those securities 4 months after you bought them. you must ask 2 questions: (1) WHO are you? a. is making you wait 4 months. Additional Conditions: o The share certificate you get must have a legend that says there is a holding period. but the securities regulators have decided that the price you pay for buying securities through a PPE even if the company is a public company. (2) HOW did you acquire the securities? a. it begins counting the 4 months from when YOU purchased the securities. If the company was NOT a reporting issuer at the time you bought through the PPE you can‟t resell the securities until the later of 4 months from the date of the trade and the date the company becomes a reporting issuer o If the company never becomes a reporting issuer. By way of PPE– must satisfy the resale rules or resell by way of another PPE 49 . Non-control person move on to Q2 b. o Policy: You have to take a leap of faith – there‟s no good rationale for making you wait 4 months. By way of prospectus – the securities are freely tradeable (can immediately resell them) b. In this case (when you‟ve resold to someone through a PPE). 2. the OSA says that that next purchaser only has to hold them for 2 months. you can never resell them (unless pursuant to another PPE because a prospectus wouldn‟t have been issued yet to give investors the info) 3. It‟s not a new 4-month period in the hands of the next purchaser. o The trade cannot be from a control person o There‟s no extraordinary commission o There‟s no reason to believe that the company is in default of its obligations Example: If I buy shares pursuant to a PPE and the company is already a reporting issuer I have 4 months to hold these securities. Control person no need to ask Q2.

the Act has to regulate the second trade in such securities until such time as the protections afforded by a prospectus are available. Manitoba.  However.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. Policy: Don‟t want to have the resale take place in a private company context. Quebec or Saskatchewan. to ensure that there are not subsequent sales of securities to persons who need the protection offered by a prospectus.  However. Ontario. for the GIS exemption. (d) The trade is not a control distribution 50 . The Act permits these transactions because either: . Resale Rules for All Exemptions EXCEPT the Private Issuer Exemption (NI 45-102) (a) The issuer is and has been a reporting issuer in a jurisdiction of Canada (Ontario) for the 4 months immediately preceding the date of the resale (Seasoning Period = date of the trade). or o 4) The resale rules referred to below are satisfied (NI 45-102)  PPEs permit the issuance of securities without the accompanying obligation to provide complete disclosure to investors and without the continuous disclosure obligations. most people can‟t get a company to sell its securities pursuant to a prospectus. so the public has all the needed information to make an informed decision my making the seller be a reporting issuer. (b) At least 4monthshave elapsed from the distribution date (Restricted Period).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. The issuer became a reporting issuer after the date of the original private placement (distribution date) by filing a prospectus in Alberta.  (2) If securities are acquired pursuant to a PPE. This condition does not apply if a. and b. or . BC. Policy: Want time for market to digest the information before they can re-dump securities into the market (c) The share certificate of the resale securities must include the prescribed legend setting out the restriction on transfer. the sale is to a member of the original 50 purchasers o 3) An exemption order is obtained from the OSC (won‟t get this!).The legislators are trying to address some more important policy objective. a. as the selling security holder has strict liability for a misrepresentation in a prospectus  This would happen only if there was a contract when securities were first sold that the company would file the prospectus with respect to my securities (ensure when you buy that there is a mechanism for you to resell your securities)  Selling security holder (the owner of the specific shares who acquired those shares pursuant to a PPE) will be subject to strict liability with respect to a misrepresentation – only defence is that the Purchaser knew of the misrepresentation when they purchased o 2) Seller relies on another PPE or. Other policy considerations prevent control persons from selling securities even if acquired pursuant to a prospectus. the seller cannot resell them unless 1 of 4 conditions are met: o 1) Get the issuing company to file a prospectus and include the specific securities that want to be resold in that prospectus.#1) RESALE RULES FOR NON-CONTROL PERSONS  (1) Securities acquired pursuant to a prospectus are freely tradable unless the seller is a “control person” o Rationale . Nova Scotia. is a reporting issuer in a jurisdiction of Canada at the time of the trade c.

BC. AND (c) The trade is not a control distribution. (i.e. and  is a reporting issuer in a jurisdiction of Canada at the time of the trade i. Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade. AND (d) No market manipulation. BC. there‟s no need for at least 4 months to have elapsed.e. This condition does not apply if  The issuer became a reporting issuer after the date of the original private placement (distribution date) by filing a prospectus in Alberta. nobody prepared the market for this event) (f) No extraordinary commission or consideration is paid in respect of the trade (g) No grounds to believe issuer is in default. Policy: Don‟t want to have the resale take place in a private company context. Manitoba. But for all other PPEs. No Matter How a Control Person Acquires Securities. AND (e) No extraordinary commission or consideration is paid in respect of the trade.(e) No market manipulation. They Cannot Be Resold Unless These Rules Are Met 51 . (b) The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta. Ontario. you need that condition. Nova Scotia. As long as the issuer has now become a reporting issuer. Manitoba. becomes a reporting issuer) you can never resell the securities! Resale Rules for the Private Issuer Exemption (a) The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately preceding the date of the resale (Seasoning Period = date of the trade). What this says is you can resell securities on the LATER of 4 months have passed since you purchased the securities through a PPE AND the issuer has become a reporting issuer Note: If the issuing company (the company you initially got the securities from) never files a prospectus (i. AND (f) No grounds to believe issuer is in default. Ontario. Quebec or Saskatchewan. Nova Scotia.

o Policy: 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.1(1)Control person: Person who alone or in combination w/ others holds sufficient shares to effect materially the control of the company. so the person I‟m selling to is going to have a hold period of 4 months.#2) RESALE RULES FOR CONTROL PERSONS  A completely different set of rules apply if you are a control person. not freely tradeable and thus there is a discount and is therefore less attractive. The public must know that the person they‟re buying securities from is the control person. because this is subject to the resale rules.  RULE: No matter how a control person acquires securities. (d) The control person sells to another control person (which gives rise to the resale rules). So this isn‟t very attractive. (e) The control person sells pursuant to the “advance notice route” discussed below. to any purchaser in any denomination you want. This has nothing to do with HOW they bought their securities. they cannot be resold UNLESS: (a) The control person qualifies a prospectus for the sale of the subject securities (as a selling security holder) o Get the company to prepare a prospectus to sell my securities. o If you give advance notice to the market that you‟re a control person. you deem the transaction a “distribution” unless certain conditions are met  Third branch of “distribution” says a control person cannot resell securities unless he satisfies the resale rules. (b) An exemption order is obtained from the OSC (Lastman: this will not happen!) (c) The control person sells pursuant to another PPE (which gives rise to the resale rules) o i. ADVANCE NOTICE ROUTE o o Advantage: Control persons can sell securities in any denominations to any persons without subjecting the purchaser to resale rules (i. there is a rebuttable presumption that you are a control person if you hold more than 20% of the shares. for very different reasons. o S. o Problem with this is the same. o The advantage is I can sell them to anyone I want in the open market.e. and may thus take advantage of the market.e. law will let you sell shares within a 30-day period which is renewable. 52 . the purchaser receives freely tradable shares). so I now have liability as a selling security-holder. but there is a rebuttable presumption at 20%. in which case. Pure question of fact. Regulators are worried about these people in control of public companies having better access to information. deemed to control a public company  In absence of evidence to the contrary. and I won‟t take the discount because there‟s no hold period on those shares in the hands of the buyer. but WHO they are.. so she won‟t pay me the same price as if I could sell her freely tradeable shares. o You should be allowed to do this because the goal is to get the buyers to know you‟re a control person who wants to sell your securities. If you give notice to the market that you are a control person then you will be allowed to sell shares within a 30 day period (which is renewable) to any person in any denomination. they want to control your ability to resell securities. find an accredited investor or a $150.000 purchaser o Problem with relying on the PPE is that it gives rise to the resale rules.  If you want to stop the sale by a control person. because she‟ll be at risk for 4 months.

2.. 1. (d) No extraordinary commission or consideration is paid in respect of the trade. 2009: B sells the securities to M pursuant to the accredited investor exemption. the holding period is the later of 4 months and the date the company became the reporting issuer. in which case the 4 month seasoning period does NOT apply. (b) If it‟s not a reporting issuer.e. Manitoba. 2009: Private issuer becomes reporting issuer by filing a prospectus in Ontario  Purchaser can sell 4 months after the private placement (as this is not the private issuer exemption) Scenario 4 Jan.  The issuer is and has been a reporting issuer in Alberta. 2009: Private placement of securities of a reporting issuer pursuant to an accredited investor exemption to B April 1. you can sell on Feb. in which case you must have held the securities for 4 months. 2009: Private Issuer becomes a reporting issuer by filing a prospectus in Ontario. Nova Scotia. Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade. 2009 (4 months) Scenario 2 Jan.  If you buy pursuant to a private issuer. Scenario 3 Jan.e. 2009 (can sell the day after they become a reporting issuer). 1. the date of the original private placement) by filing a prospectus in Alberta. 2009: Private placement of securities of a reporting issuer. Manitoba. 1.o Conditions for the Advance Notice Route (a) Issuing company was a reporting issuer at the time of the original purchase. 2009: Private placement of securities of a private issuer pursuant to the accredited investor exemption Feb.  You can tag on the time can resell 4 months after the original private placement (tack on the 3 months that B held them) 53 . BC. Resale Rules Examples Scenario 1 Jan. 1. Nova Scotia. the date of the resale of the security) unless the issuer became a reporting issuer after the distribution date (i. Ontario. 1.. 1. and (e) No grounds to believe issuer is in default. Ontario. (c) No market manipulation. 2009: Private placement of securities of a private issuer pursuant to the private issuer exemption Feb. British Columbia. pursuant to the accredited investor exemption  Can resell May 1. Quebec or Saskatchewan for the 4 months immediately preceding the trade (i.

be making a takeover bid if he buys .99% of the common shares of a company will. When people can put assets together that make sense together. o As soon as you buy 1 share that. but the premium you are going to get to sell the control belongs to all shareholders equally. All shareholders helped create the value. Moves assets to their most desired uses 2. BUT if you are a public company.  Relevant regulations: 182-203  Relevant Sections: 89-105. B owns 49%. The stock is under-valued – someone takes undervalued asset for themselves a. people will put a premium towards assets because: i. and we have to see the legislature‟s position on takeover bids Socially useful reasons for takeover bids 1. OR as soon as you propose to. A has full control over the company and its decisions. therefore the premium paid to control the company must be distributed amongst all the shareholders.01% or more shares o OSA doesn‟t care how you obtain shares up to 19. Premium attached to sale of control belongs to all shareholders  Under the Takeover Bid rules. They‟ll be more synergistic iii. A‟s shares are worth more than B‟s shares.  Control only belongs to you when you own it. “control” is defined as 20% (Bright Line Test) What is a takeover bid?  Takeover bid: The acquisition of shares of a target company which. synergies are created and assets are put to their most effective use. there are perceived to be socially useful/not useful reasons for takeover bids.9%. Forces management to be efficient – if they aren‟t. Reasons for takeover bids From a policy perspective.useful reasons for takeover bids 1.  Note: If 3 people each own 7%. when you want to sell control. Although there is only a 2% difference. together with the shares already owned by the purchaser. stock price is suppressed. Someone sees an opportunity to gain an advantage and they secure it only for themselves 54 .SECTION 4 – TAKEOVER BIDS Fundamental Concepts  If A owns 51% of the shares of a public company. that premium you get for control doesn‟t belong to you alone. you cannot do that transaction without doing a takeover bid circular offering to buy the same % of shares from all shareholders on the same basis. They‟ll be put to better use ii. UNLESS it is an exempt takeover bid. but it belongs to all shareholders of the company. It doesn‟t belong to you when you sell it. It is the control associated with A‟s shares that is worth a lot of money. As a result. subject to certain exemptions. will put the purchaser‟s shareholdings in the target to/over 20% o A person owning 19. if they get together it is NOT a takeover bid if they are not offering to acquire any shares. You don‟t have to share control while you own it. vulnerable to takeover Socially non. Example: Toronto Star take over Sunmedia – Toronto Star and Toronto Sun are more efficient together 3. together with what you already own (or anyone acting jointly in concert with you) puts you to/over 20%. and people are prepared to pay a premium for control  Policy: OSA says that someone who owns control can do what he wants.

You can‟t treat big shareholders better than little shareholders. and this is simply “see who has the most toys”…… owning many assets with NO synergies! Lastman says “stick to your knittings!” 3. So. they are a good thing. constitute in the aggregate 20% or more of the outstanding securities of that class o This is a bright line test and is problematic because it‟s not always sufficient  Example: If I own 60% of the shares and you own 30%. to the extent possible. If money is being paid to company. TIME: No point giving shareholders information if you don‟t give them sufficient time to assess that information and digest it! o Time allows management of the target company to assess the bid and give their recommendation to their shareholders as to whether it‟s good or bad. 3. you cannot buy those shares without complying with takeover rules (think of the 20% as 50%). because they eliminate competition. don‟t use them effectively a. TAKEOVER BID LEGISLATION – PROVISIONS  S. Therefore. in a widely held company the 20% threshold makes more sense o 20% REPRESENTS CONTROL AND YOU CANT ACQUIRE CONTROL WITHOUT MAKING THE SAME OFFER TO ALL SHAREHOLDERS o Outstanding v.2. treasury shares don‟t count as a takeover bid. They must be 55 . so we are going to let them happen! Policy objectives behind takeover bid legislation Object of takeover bid legislation is to ensure. value. 89(1)Takeover Bid: an offer to acquire outstanding voting or equity securities of a class. if what you are going to buy together with what you already own is 20% or more of the outstanding voting or equity securities of that class. so that the shareholders of the target company will be able to get the highest price at the auction. Tax reasons to do takeover bids that only benefit the person paying less tax On a balance. Monopolies are not perceived to be good. which eliminates control on pricing. INFORMATION: The legislation is designed to give the target shareholders sufficient information to make a reasoned decision as to whether or not they want to sell their shares to the bidder. that shareholders and the investing public receive sufficient information about the terms of the bid and that all shareholders are treated alike. No inherent value or utility to society. conversely. This is to protect the bona fide interests of the target shareholders – so they make informed decisions as to whether they want to tender their shares to the takeover bidder. Inform investment decisions! 2. etc. These rules only apply to outstanding shares. 4. Seen as “Empire building” – people just want bigger toys. which together with the offeror‟s securities. there‟s no premium for control going to any individual because all shareholders are sharing equally anyway. o The best result from the legislator‟s perspective is that an outcome of a takeover bid will be that other bidders come in and keep bidding up the price in an auction. All the rules come down to dealing with 1 of 3 things – SO TIE IN THE RULES TO THESE POINTS!!! 1. Creation of monopolies a. Echoed in Kimber Report . Treasury shares: A company has shares that they issue to others (outstanding) and those it keeps to itself to issue at some other time (treasury). you can‟t sell your 30% without satisfying the takeover provisions. EQUALITY: Fundamental to our legislation is that all shareholders of the target company be treated equally.

B. whether or not the offer has been solicited.92 Application to direct and indirect offers: a reference to an offer to acquire. includes a direct or indirect offer to acquire or the direct or indirect acquisition of securities.e.C each have 5%.g. 90(1) to be beneficially owned by an offeror or persons acting jointly or in concert with the offeror o Example: A. “Offer to acquire”: an offer to purchase. you will be deemed to have those shares and when you go to buy your next shares you will be caught . beneficially owned. Implications of Russell Holdings (tried to take over a private company to access a public company): OSC was purposive and saw through this. an acceptance of an offer to sell securities.     outstanding shares. 90(1) = you‟re deemed to own any shares you have a right to acquire within 60 days of any given event. or any combination of the two  The passage of time is not an offer to acquire Indirect Acquisition: A direct or indirect offer to acquire or the direct or indirect acquisition of securities Offeror‟s securities: Securities controlled. or the direct or indirect control or direction over securities. Since it was not in the public interest.e. 89(5) & s. so reaching above 20% because of exercising a stock option is not a takeover bid. then when calculating how many shares you own. securities.  Lastman: this provision is stupid!  This says that you can‟t buy a holding company that owns e. or a solicitation of an offer to sell. or to the acquisition or ownership of securities or to control direction over securities. or the security is convertible within 60 days into the underlying security – You‟re deemed to own securities you have a “right to acquire” (i. so if you have shares that are convertible into shares of a class within 60 days.90(3)Unissued securities deemed outstanding: When deemed to be the beneficial owner of unissued securities. options) within 60 Days of the date of the transaction (i. the transaction that puts you over 20%) – Policy: Legislation is trying to say you cannot buy shares that put you over 20% without complying with the takeover bid rules. 90(1)Deemed beneficial ownership: Where the person has the right to acquire those securities within 60 days. 60% of a company you want control over without offering the same premium to the minority 40% 56 .it is 20% on a class by class  S. and each want to buy 14% so they can each be under 20%. This is forbidden!  S. the OSC enacted the following section: o s. or deemed by s. the securities shall be deemed to be outstanding for the purpose of calculating the number of outstanding securities of that class in respect of that offeror‟s offer to acquire s. and then pool them together to have 60%.

because it is not exercisable for 6 months. that will be put at 21%. it is only an option so I would have to actually buy the shares.but the passage of time does not constitute an offer to acquire. it is only what puts you over 20 that matters – it doesn‟t matter whether the option is from the individual or the company. not just that person selling you the 9%. and on day 4 I have the right to purchase 9% (so I am deemed to own 19%). 57 . Question 2: Day 1: own 10% of common shares Day 2: option from individual to purchase 9% of common shares exercisable at any time Day 4: consider buying 2% of common shares in open market The acquisition of 2% is a takeover bid. you are deemed to have the options because you are buying the 2% . So 2% more would put it to 12% -. it is what puts you over 20 because until you have the 20. the individual would get the premium so have to have the offer to every shareholder in the company. you are not considered to have control. so I couldn‟t do it unless follow the takeover rules.SAMPLE PROBLEMS: Question 1: Day 1: own 10% of common shares Day 2: option from company to purchase 9% of common shares exercisable at any time Day 4: consider buying 2% of common shares in open market The acquisition of 2% is a takeover bid. Also. Again. why is it not automatically a takeover bid when that option is 60 days away? Because the option is not being exercised. I would then be able to make every single decision so I would pay more than I would for just any other share and if there was not a takeover bid. I own 10%.but in the above examples. is it a takeover bid? (A) The acquisition of 2% is not a takeover bid. I would be getting the 9% from an individual who would be getting the benefit of my paying a premium for control. just having the option doesn‟t make it a takeover and until I exercises the option . So on day 4 when I want to buy 2%. I am not deemed to own the 9% option on day 6. the same logic applies – on day 4 I am deemed to own 19%. (B) When exercise the option for 9% it is a takeover bid because I own 12 and if have the 9 it would be more than 20.not a takeover. so on day 6 I will own 21%. Question 3: Day 1: own 10% of common shares Day 2: option from individual to purchase 9% of common shares exercisable in 6 months Day 6: consider buying 2% of common shares in open market (A) Is the acquisition of 2% a takeover bid? (B) When exercise option for 9%. Note: if I own 12 and I have an option in 6 months to buy 9 more. This is exactly the same as 1 – it doesn‟t matter how you get to 20.

Question 4: Day 1: own 10% of common shares Day 2: option from company to purchase 9% of common shares exercisable in 6 months Day 4: consider buying 2% of common shares in open market (a) Is the acquisition of 2% a takeover bid? (b) When exercise option for 9%, is it a takeover bid? (A) The acquisition of 2% is not a takeover bid. (B) Buying shares directly from company treasury. Not a takeover bid – money goes back to the company directly, so premium will be shared by all shareholders. You have 12% when the option is exercised, so the premium to push you over the 20% is going directly back to the company! This is precisely what TOB legislation is designed to do, so this is not a takeover bid. Note: If he then purchases another 1% on the open market, this would be a takeover bid. “Outstanding” means must be shares that have previously been issued (eg. not from treasury). TOB rules do NOT apply to the purchase of treasury shares (have not yet been issued by the company but are approved in the articles of incorporation).

The difference between 3(b) and 4(b)- The transaction that gives me control in 3(b) is from an individual, and therefore I‟ll pay a big premium for control. This premium can‟t go to me, but must go to all shareholders. But if the option is from the company, as in 4(b), the money goes to the company, and therefore all shareholders share equally, and there‟s no reason to call this a takeover bid. That‟s why a takeover bid is an offer to acquire outstanding securities, because if you‟re buying treasury securities, the whole premise of the takeover legislation is irrelevant…The definition says “outstanding” shares, shares from inside the company are not outstanding. We want to make sure that any premium for control is shared among all shareholders. This can be done in 2 ways: 1. Give the money to the company that will by definition give it to all shareholders equally, or 2. Go through a takeover bid process which says you must make the same offer to all shareholders to treat them all the same. OVERVIEW OF LEGISLATION 1. Takeover Bid Circular: Details are communicated to shareholders by way of a takeover bid circular o Describes the offer (price, number of shares and any conditions), and is sent to all shareholders o Must contain information in Form 62-504F1  Sufficient information to make an informed decision 2. Minimum Period of Bid: Bid must be open for acceptance for at least 35 days – s. 98(1) o It may be open longer o Rationale: Provides time to:  Shareholders - to receive the circular, assess and review its merits, and decide whether to sell,  Management - to make recommendations and attract others, and  Other potential bidders - to create auctions o Bid may be commenced by delivery of a takeover bid circular to shareholders (bid is dated the date of the delivery) or by advertisement of a summary of the bid (bid is dated the date of first publication) 3. Pro Rata: Promotes equality to all shareholders - s. 97.2(1) o If offeror wants to buy a maximum number of shares and more than this number is tendered, then shares are taken up pro rata and not first come, first serve  Example: I make a takeover bid and want to buy 75% of the shares, and I make the same offer to all shareholders, and all shareholders want to tender their shares. I can‟t say “first 58





come, first serve”, because that will pressure the shareholders and violate the principle of “time”. If I pick and choose, that will violate “equity”. So if more shares are tendered than I intend to by, I must make everyone‟s shares pro-rate, i.e. take the same percentage of everyone‟s shares that accepted.  Rationale: Ensures that shareholders are not pressured to tender early (and can therefore review all pertinent information and are treated equally) o All shareholders of the same class must be offered the same consideration (or same choice of consideration) and no collateral agreements may be entered into, subject to limited exceptions  Rationale: Ensures that a higher price per share is not paid for larger blocks or for shares tendered early o If, after shares have been taken up, the offer price is increased, all shareholders, including those whose shares have already been taken up, are entitled to the higher price Payment for Securities: 98.3(1)&(2) o If all terms and conditions of the bid are satisfied, securities must be taken up within 10 days after expiry of the bid, and must be paid for as soon as possible, and in any event within 3 business days after the securities have been taken up Withdrawal: s.98.1(1) Depositing security holders will be able to withdraw their securities at any time, provided that: o (a) Where the securities have not been taken up  The offeror can‟t take up the tendered shares for 25 days, to allow shares which have been tendered to be withdrawn if the shareholder changes his mind, which usually occurs if a higher offer is made  Normally everyone tenders at the end, but if someone tenders early and then someone else makes a better offer, they want the early person to be able to get the high premium o (b) Until the expiration of 10 days from the date of a notice of change or variation in the terms of the bid o (c) If the offeror has not paid for the securities within 3 business days after having taken up the securities, or  Rationale: Prevent an offeror from holding on to shares for too long after taking them up. Variation of Bids: - s. 94.4(1) o If a term of the offer is changed (i.e. offer price increased), this must be communicated to all shareholders who are given an extra 10 days to tender their shares. Most changes (other than a price increase or the waiver of a condition) allow a shareholder to withdraw tendered shares for 10 days. o When there is a variation:  Offeror must issue and file a news release and deliver a notice of variation to every person to whom the circular is required to be delivered and whose securities have not yet been taken up  10 day withdrawal right  10 day extension deposit period, unless the change is the waiver of a condition and any extension of the bid resulting from such waiver in an all cash bid  Where a variation in the terms of a bid increases the value of the consideration offered, the offeror shall pay such increased consideration to each person whose securities were taken up whether or not such securities were taken up before the variation Change of Information: s.94.3(1) o If a change occurs in the information contained in a circular that would reasonably be expected to affect the decision of the security holders of the target company to accept or reject the bid, the offeror must issue and file a news release and send a notice of change to every person to whom the circular was required to be delivered, and whose securities have not yet been taken up o 10 day withdrawal right


8. Directors Circular– s. 95(1)(2)(3) o Directors must respond to bid within 15 days of date of bid and make a recommendation to accept or reject the bid OR make no recommendation together with reasons thereof, no later than 7 days before the expiry of the deposit period  Rationale: Helpful to shareholders in making their decision re whether or not to tender 9. Pre-bid Integration- s. 93.2(1) o Where a formal takeover bid is made, and within a period of 90 days prior to the bid, the offeror acquired beneficial ownership of securities of that class subject to the bid pursuant to a transaction not generally available on identical terms to the holders of that class of securities, the formal bid must provide for:  (1) The consideration for the securities under the bid must be at least equal to and in the same form as the highest consideration paid on a per-security basis under any of the prior transactions within the 90 day period, AND  (2) The bid is for at least as high a percentage of securities of the class as was purchased by the offeror from a seller in any other prior transaction within the period o In other words: 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. An offeror must offer to buy from the public the highest percentage of shares at the highest price acquired in the 90 day period before the formal takeover bid started.  Example: If offeror buys 50% of a shareholder‟s shares at $5/share 30 days before the offer, any takeover bid must be for at least 50% of the outstanding shares of all the shareholders, for at least $5/share o Exemption: If you buy on the open market (e.g. TSX) you‟re exempt buying them blind, not giving anyone a benefit. 10. Post-Bid Integration: s. 93.3(1) o An offeror may not acquire or offer to acquire beneficial ownership of securities of the class that was subject to the bid for a period of 20 business/trading days following the expiration of a bid by way of a transaction that is not generally available on identical terms to the holders of the class of securities in question  An offeror can‟t purchase target shares for 20 business days after the termination of a bid, except pursuant to another takeover circular bid 11. Consideration: s.97(1) all shareholders must get the same consideration for their shares. o Say you offer a director future benefits for recommending acceptance, that‟s not the same consideration to all shareholders because that director is a shareholder. o How do you know whether you can do this or not: What‟s your intention of doing this? Is it to protect a legit business interest or to get management to mislead shareholders? The OSC lets you go to them and if you can prove that doing this is designed to protect your investment then you‟re OK.


When you make the bid you have to offer the highest price you paid during that 90 day time period for the highest % (Example: if you bought 100% of someone‟s shares your bid needs to be for all 100% of shares outstanding). This is not allowed because it will violate all of the rules Post-bid integration says: you can‟t enter into an agreement to buy the shares that are subject to a bid for at least 20 business days following the expiry of the bid Policy Integration rulesall are designed to protect equality of shareholders. TSX) you‟re exempt buying them blind. you can‟t buy shares that are subject to the bid while the bid is in progress. knows the bidder won‟t pursue the target if she won‟t tender.The consideration for the securities under the bid must be at least equal to and in the same form as the highest consideration paid on a per-security basis under any of the prior transactions within the period. in which case I won‟t win.  Advantage to bidder can negotiate the terms  Advantage to shareholder can negotiate the terms.this would undermine equality. it‟s shared by all shareholders. . and . but this wasn‟t really a nice move to offer the big shareholder $50 and the rest $11. The next day. the premium offered to that shareholder must be the same as those offered to all shareholders in that class. and equality. 93. Example: I‟ve offered $15 / share. I make a bid for the company at $11.  Pre-bid Integrations. and the takeover bid circular will provide information achieve the objectives of information. I haven‟t crossed 20%.g.2(1): When the bid is made.The bid is for at least as high a percentage of securities of the class as was purchased by the offeror from a seller in any other prior transaction within the period Policy . this is all designed to ensure that if there‟s a premium for control.e. not giving anyone a benefit. however.  Exemption: If you buy on the open market (e. Example: 30 days before the takeover bid – private agreement to buy 50% of A‟s shares for $5/ share 15 days before the takeover bid – private agreement to buy 100% of B‟s shares for $3 / share Pre-bid integration says: my takeover bid must be for at least the highest price ($5/share) and the highest percentage (100%) made during the previous 90-day period. time. and Mr. OSC will look back at previous 90 day period. Was this wrong? Pre-Bid Integration says: if within the 90 period before the takeover bid was made you‟ve entered into a private agreement (i. your takeover bid must be for the highest price AND percentage you bought in that 90-day period.Again. I go to a 19% shareholder and offer to buy the 19% for $50. to purchase someone‟s shares to a certain price). also has a substantial interest in the company. That way Big will be the only shareholder left besides me. So I tell Big to wait until the takeover bid is over. o IF you have entered into a private agreement to buy shares that would be the subject of that bid. 61 . and I‟ll buy his shares for $25 / share. However you can enter into a tender agreement o Allows the bidder to lock up large shareholders. ensures she can get her premium.INTEGRATION / TENDER AGREEMENTS Example: I don‟t own any shares in a public company. Big isn‟t going to sell them.  Integration: When the bid is made.

100. but you want to own as many as possible by giving the least disclosure and without attributing takeover bid requirements. 100  A take-over bid is exempt from the formal bid requirements if you go into the market and buy up to 5% of the shares in a 12.  Lastman: o If you own no shares of a public company. If one guy who wants to control the company wants to sell it at a huge premium. No one is getting a premium for control that doesn't belong to them . he can‟t extract it for himself.Recall: Every rule has a series of exemptions. o (3) There is a published market for the class of securities that are the subject of the bid. C. we discussed how you must make the same offer to all shareholders if you want to buy more than 20% of the company.1(1) A takeover bid is exempt from the takeover bid requirements (rules) of the securities act provided that: o (1) Purchases are made in the aggregate of 5 or fewer people (including persons or companies outside of Ontario) o (2) Bid is not generally to security holder of the class of securities that is subject of the bid. D. o (2) Aggregate number of securities acquired in reliance on this exemption is within any 12 month period. as long as the total within the same 12 month period does not exceed 5% of the outstanding securities of that class. so long as there are more than give security holders of the class o (3) You paid consideration not exceeding 115% of the market price at the date of take-over bid  Market price = the 20 trading day closing average price (market driven test) o (4) If not published market for securities acquired..month period. and 5% is a de minimus amount and there is no premium paid  if not paying premium then no concern  Example: If you bought 19% 3 years ago. plus reasonable brokerage fees or commissions actually paid  Policy: Even if the 5% puts you over 20%. however. you can buy 5% more in the market without it triggering the formal takeover bid rules. EXEMPT TAKEOVER BIDS (1) Private agreement exemption  s. then the 15% is deemed to be a de minimis amount relative to the premium. this is called „preparing the seller” and you CANT do this! (2) Normal Course Purchase Exemption (de minimus exemption)  s. There are. you are buying from the public at large. and E each own 5% o You can buy shares from each of them but you can‟t combine A and B into one seller to meet the requirements of the Act………. which is the purpose for the takeover bid rules in the first place. buy 19. certain exemptions where takeover bid rules do not apply in the same way. o (4) The value of the consideration paid for any of the securities acquired is not in excess of the market price at the date of acquisition as determined in accordance with the regulations. there must be reasonable basis for determining consideration paid is not greater than 115% of value of the securities  Cannot get 5 people to sell to 1 in advance  Policy: They‟re trying to say that any premium attached to the sale of control belongs to all shareholders. In the context of takeover bids. B.  If all the shareholder is getting 115%. and there is no real premium for control and therefore no need for the takeover regime to kick in  Example: Shareholders A. so one shareholder can‟t take it for himself.this is what all the takeover regulation is aimed at preventing in the first place.9% in the open 62 . Broken down: o (1) Bid is for not more than 5% of the outstanding securities of a class of securities of the offeree issuer.

o Example: You own 19% of the shares. which are economically the same in every other respect. then you are not subject to the takeover bid legislation.Solutions: o Voting v. THEN BUY 5% FROM THE OPEN PUBLIC BECAUSE IT‟S A NORMAL COURSE PURCHASE EXEMPTION THEN ENTER INTO AN AGREEMENT WITH THE 5 PEOPLE TO GET ALL THEIR SHARES. .s. 100. What is a Coattail Provision? A provision is added to the Articles where in the event of a takeover bid the non-voting shares become voting shares so that the takeover bid will have to be offered to all of the shareholders 63 . (3) Non-Reporting Issuer Exemption . and you buy from 5 individuals 3% more – 22%. EXAMPLE: A 6%. and then we are in the same place. He goes public. needs the money to grow but DOES NOT WANT TO LOSE CONTROL. market. there are very few restricted voting share companies.Everything was great until a sickening thing happened in Canadian Tire. The concept behind dual class voting shares is that shareholders are buying part of the company for Sharp‟s expertise and belief that he will grow the company. if you are a private company the takeover rules do not apply o Rationale: Takeover bid rules do not apply to private companies – but problems arise when you buy a private company that owns other public companies! Dual Class Voting Shares . o Now.Example: Izzy Sharp runs Four Seasons Hotels. and invites you to participate. Non-Voting shares– you get non-voting shares. I will issue tons of shares to everyone and they will be exactly the same as the CEO‟s or founder but the only difference is that all of your shares will have 1 vote and the CEO‟s will have 10/share so the CEO/founder can control the votes.9% WITHOUT TRIGGERING THE TAKEOVER BID REQUIREMENTS. his shares will sell and automatically convert into another class . E10%. then buy from 5 purchasers and get to the highest number. Essentially. open public has 60% o REMEMBER YOU CAN BUY 19. and there are many rules dealing with this abuse. From now on. o Restricted voting shares: Allow companies to raise money without giving up control. AND YOU‟RE AT 64. But if you bought 5% that takes you to 24% and then the 3% by private agreement you can get to 27% (more shares depending on how you structure your affairs). our shares automatically become the same as your shares. D 10%.As a result of Canadian Tire. you can‟t do it UNLESS you (1) get the approval of minority shareholders and (2) you have to have what is known as a „coattail‟ provision – this says if someone makes an offer for your shares for more than 115% of market. if you want to create shares with different voting structures. because it doesn‟t trigger takeover bid.9% FROM THE PUBLIC FIRST WITHOUT TRIGGERING THE TAKEOVER BID REQUIREMENTS. . B 6%. C 8%. dual-voting share structure companies rarely exist anymore.2If you‟re not a reporting issuer. can only buy 2% more because the 3% you bought from individuals is included. in turn.Results from desire to raise capital without giving up control issue restricted voting shares/multiple voting shares . Advantage to Sharp is that he can issue more equity to you without losing decision making control. When the CEO leaves the business. Sharp.

Lastman: This is a perfect example of the elegance of securities law. As protection and as part of an enticement. They caught it under the umbrella of “public interest”/“protecting the integrity of the capital markets. Held: OSC will not allow the transaction to proceed (even though there are no reasonable grounds to support their decision!) o Even though there was nothing in the articles of the company. but those that do have coat-tails have incredibly complex ones (indirect / direct acquisitions).. the dealers gave the family an irrevocable $30M deposit. o It didn‟t satisfy the public interest test. case law.. the family only had one class of shares. the family introduced a “Coattail” protection (a provision is added to the Articles where in the event of a takeover bid the non-voting shares become voting shares so that the takeover bid will have to be offered to all of the shareholders. The offer revealed that the Billis family entered into a “lock up agreement” with dealers to irrevocably tender their shares to the bid (so they‟ll get paid the premium). o Note: This is not a collateral agreement because if there is no takeover bid... Who knows if they did it because it stunk or because in 1983 when the coat-tail was entered into the minority shareholders entered a different bargain than they actually received. will stop it under public interest jurisdiction Facts: In 1986. Lastman wonders what it would have been if they only put up 38%.”  Why wasn‟t the $30M a collateral agreement? Collateral agreements only apply to takeover bids but this was NOT a takeover bid says the OSC. reflecting the need for equality). This is legitimate because there is no obligation to offer the same bid price to the non-voting shares of a different class. Canadian Tire dealers offered to buy 49% of outstanding voting shares of CT at $160/share (shares were trading at about $18……an 800% premium!). The dealers already owned 17. BUT!! The dealers had a scheme – they felt that they could not pay $160 for all shares so they were careful not to trigger the coat tail (ie. bidding for 49% so as to NOT trigger the coat tail provision). Billis family owned 60.. takeover bid rules do not apply. In 1983 (3 years before). If there is a takeover bid. If an action violates the spirit of the coat tail or the statute. “there is no honour among thieves. Important: The dealers were guaranteed to be successful and gain control over the company with majority control.” o The OSC even denied the dealers from getting their $30M back and the Billis family kept the $30M. precedent transactions.). Collateral benefit can‟t exist without a takeover bid.4% of the voting shares. because they won‟t allow a transaction to occur that doesn‟t satisfy the smell test.9% of the voting shares... Securities Act. If the takeover bid occurred the money would have been applied to the price and they wouldn‟t be getting a premium over everyone else it would have been applied to the price. o Dealers argued certainty of contract. As a protection to the minority shareholders. then the Commission will find a way to stop it – if action has a tendency to bring the capital markets into disrepute. 64 .Canadian Tire (1986)Cannot violate the spirit of Coat Tail agreements. Non-voting shareholders were apocalyptic. The Billis introduced two classes of shares: voting (for themselves) and non-voting (everyone else).” o It seems stupid to go for 49%– no chance that they are going to get was just meant as a deposit for the total amount. etc. the OSC did not allow it. the $30M is just applied to the proceeds and spread evenly to the voting shareholders. The Billis family (owned Canadian Tire) had voting and non-voting shares. The coattail agreement specifically said that the triggering event that turns non-voting to voting is when an offer is made for a majority of voting shares (51%) and a majority of shares are taken up (thus premium would be shared amongst voting and non-voting shareholders. commission said forget it! “there is no honour among thieves. Very few companies have dual class voting shares today.

Union Enterprise Utility Co. Labatts had a long time to prepare. it‟s a balancing act between whether board is acting in best interest of shareholders in pursuit of higher bid (appropriate) or acting in their own interest to defeat a bid and take vote away (absolutely inappropriate). etc. 65 . The agreement stated that the farm owner was not permitted to tender to a Unicorp bid.  Labatts created a $150MM tax liability (by changing TSN corporation into a partnership) that could only be triggered due to a change in control.DEFENSIVE TACTICS  Common occurrence: Directors of flashy companies do not want to lose their spot on the Board. TSN was regulated and had to be owned by a Canadian company.  Before Unicorp. then you‟re not worth a damn! EXAMPLES Unicorp v. thus ensuring that a significant number of shares were held in friendly hands to block Unicorp. he may want to stop the bid (for selfish reasons). but Unicorp was so egregious that something had to be done.  If Labatt doesn‟t have any leverage. there is an opportunity for a conflict. Labatts at the time had 2 assets: beer and the TSN and Blue Jays. get a higher price. but the director knows that he is going to get thrown out. There has to policy that protects companies from boards behaving badly. Their board is a who‟s who in Toronto. buy time. but may control the destiny of the decision making. Union management bought a pig farm by issuing 20% of new shares of Union Enterprises to the farm owner. Onex bid for Labatts  Onex was rumoured to be making a takeover bid for Labatts for a long time. It was a tax liability that could only be fixed pre-takeover – thus guaranteeing a friendly takeover. In response to this. If Air Canada gets an offer in the form of a takeover bid with big premium to shareholders.  There is legitimate interest that the board has to protect. Unicorp buys Union Enterprise anyway – it costs them a lot more to buy and they were stuck with a pig farm. Problem with Boards in Canada Policy: company is run by Boards that have no economic interest in the enterprise. F: Union Enterprises is a gigantic utility company. I: Is this type of action permissible to block a takeover bid? H: At the time. there were no policy protections. o The fascinating part of securities is striking the balance – take that initiative to create an opportunity for your shareholders without denying them the right to decide  Lastman: If you‟re a director and so worried about protecting yourself that you don‟t go out on a limb in a fair way to create leverage to get a better deal for shareholders. Even though he has a fiduciary duty to shareholders. this action was permissible Note: OSC since has come out w/ a policy on defensive tactics as a result of the Unicorp and Union Enterprise takeover bid. Unicorp (a nobody company) comes along and makes a hostile takeover bid. they can try and find a white knight.

Sun Media goes to competition bureau and says that the advertising rates in Toronto are cheaper than in Saskatchewan because of competition. you can‟t change your mind later. Mac‟s merges with Beckers on the condition that they don‟t tender shares to Couche Tarde. Basically.If you are implementing this it is called a „rights plan‟ if you are fighting it it is called a „poison pill‟ . o Policy – OSC says that golden parachutes are acceptable because if an officer has a golden parachute. Before it got resolved. Mac’s Milk and Beckers. but if you go to a regulator. Bottom Line: If you are a target company you need to create an opportunity for negotiation and leverage.Creation of a large and unattractive corporate liability that the offeror would have to swallow along with the target. TorStar bids for Sun Media. and asked OSC to force Labatts to reverse the change to the structure of TSN. this bought Labatts more time to find a higher bidder. o This way. they should be paid out millions of dollars. 2) Poison Pills . Board‟s interests are being protected either way so they will have more incentive to fight for the best price for shareholders. BUYS TIME. and in the directors circular Labatts discloses that TSN was changed from a corporation into a partnership and discloses that this will trigger a $150MM tax liability upon change in control. Onex went to the OSC to complain. the issuance of preferred shares as a pro rata dividend to holders of the target‟s common. for example. Need time to do this! Defensive Tactics 1) Golden Parachutes  A special employment agreement with a target officer / manager affording certain financial assurance in the event of a change of control. Sun Media shareholders are furious – they want the deal. and TorStar went away. The day Couche Tarde makes its bid for Mac‟s Milk.LEVELS THE PLAYING FIELD. Couche Tarde in Quebec wants to make a bid for Silkcorp (Mac‟s Milk).   Onex makes a bid. They said that no local competition would result in skyrocketing ad rates and this would be anti-competitive. Sun Media found Quebecor who paid a lot more. CREATES LEVERAGE FOR NEGOTIATION 66 . o Board agrees with the company that in the event of a takeover. then they will act in the best interest of the shareholders because they will not be concerned about saving their own jobs and thus ruin a good deal. o Typically shares are convertible into common shares of the target or any company with which the target is merged .

. every single shareholder but that offeror can buy another share for a penny. . Note: National Policy 62-202 sets out the view of Canadian Securities Administrators on Take-Over Bid Defensive Tactics (Print off and Bring!!!!). o Mac’s Milk merging the two can be seen as synergistic (no competition issues.It‟s the purchase of a substantial block of target securities by an unfriendly suitor with the primary purpose of coercing the target into repurchasing the block at a premium.” This double the amount of shares and makes it impossible for the takeover to occur.- - Provision would say “if someone wants to make a takeover bid without meeting conditions and without the board‟s consent. which it sells in order to reduce its attractiveness 5) White Knight: A third company that the target persuades to merge with it or to make a competing offer that it hopes will lead to a combination more to its liking. an agreement for liquidated damages in the event of failure to consummate an acquisition. it‟s not in the best interests of the shareholders that I worry about myself. but an important concept to know. and o (3) the premium is not offered to all shareholders. ****Lastman says most important provision is 1. as I should be devoted to protecting them.1(5) on unrestricted auctions 67 . and then I won‟t worry about myself anymore. Company calls these a “rights plan” (every company has one) o Unicorpwould not be justified in 2009 o LabbattOK because the problem can go away. 3) Scorched Earth: No-holds barred defence tactics often involving the sale of desirable assets 4) Crown Jewels: The target‟s most valuable or significant assets. 7) Greenmail Not a defensive tactic. but they didn‟t. Gives the board an opportunity to stall for time and create an auction to try and get the best price for shareholders. more purchasing power and locations. it would have been different if they sold TSN and the Blue Jays. 6) Lock-up: Any aspect of an acquisition transaction that is designed to preclude or at least inhibit / deter competition by any third party. it would have been done anyway o TorStar really good example of the board taking a chance and doing a great defence. so although it was prompted by the takeover bid. o Golden ParachutesIf I‟m the CEO of a company and there‟s a hostile takeover bid. The best way to do this is for you to give me $10 million in the event of a hostile TB. For example.Greenmail is illegal in Canada b/c o (1) it precludes takeover bids o (2) it spends unnecessary resources. an option or agreement to buy unissued or treasury shares or the crown jewels. or an option or stock purchase agreement between a white knight and one or more principal shareholders. etc). and the concept of tax liability is a good form of leverage. No one has ever triggered a poison pill – they are just threats but no idea what would happen if it was ever triggered. a merger agreement.

THE RULES 1. Issuance or granting of an option on. b. Reallocating economic resources to their best uses. 6. Take action to maximize the return to shareholders including soliciting a higher bid from a 3rd party – i. It would be inappropriate to specify a code of conduct for the directors of the target company. c. allay such concerns (bless use of tactic). the interests of management of the target company may differ from the interest of the shareholders. c. Any fixed code of conduct runs the risk of containing rules that may be insufficient in some cases and excessive in others.  The rules of the legislation should favour neither party in a takeover bid situation. you will be useless and Shareholders will lose out. Ultimate test is “was it designed to create an auction or was it designed to protect the targeting company?”  If your actions are designed or intended to defeat the bid and deny the SH‟s the right to make the decision you are in deep trouble this does not mean the result is what they look for. OSC will give no advance rulings on defensive tactic. b. Attempt to persuade shareholders to reject the bid. This is because auctions ensure that the shareholders receive the maximum value for their shares. they look for the pig farm as the problem  Lastman: make sure your intentions are “right” from the beginning 7. immediately prior to a takeover bid or if it was believed that a takeover bid was imminent. (ii) The Ontario Securities Commission recognizes that in a takeover situation. The primary objective of the takeover bid provisions of Canadian Securities Legislation is the protection of the bona fide interests of the shareholders of the target company. c. b. The Ontario Securities Commission considers that creation of an auction environment the most desired result. Disciplining corporate management. 68 . the Ontario Securities Commission is prepared to examine the tactics employed by the directors of the target company to determine whether there has been an abuse of shareholder rights (in the case of inappropriate use of defensive tactic). The rules are aimed at leaving the shareholders to make a fully informed decision. any tactics employed by the target company that deprive the shareholders from making an informed decision will result in the Commission intervening. Entering into a contract other in the normal course of business or taking corporate action other that in the normal course of business. Must balance between respecting fiduciary duties to do the best for the SH and respecting fiduciary duties to not feather own nest (hard test to meet). However. Take other defensive measures to defeat the bid. 2. Creating synergies. 5. 3. if employed during a takeover bid. may come under scrutiny… a. then management of the target company may take one or more of the following actions as a response: a.  The secondary objective of the legislation is to provide a regulatory framework within which takeover bids may proceed in an open and even handed environment. If you‟re a director who wants to play it safe. in the appropriate cases. (iii)Where management is opposed to a proposed takeover bid. The following list (non-exhaustive) of defense tactics.  The Ontario Securities Commission is concerned with certain defensive measures that may have the effect of denying the shareholders the ability to make an informed decision and therefore frustrating the objective of “open environment” in a takeover situation. (i) Takeover bids play an important role in the economy as a means of: a. create an auction by finding a “white knight”.BEHAVIOUR WILL BE REVIEWED IN HINDSIGHT 4. Sale of the crown jewels.e. However. or purchase of securities representing a significant percentage of outstanding shares (issuance of securities to a third party or poison pill). Any prior shareholder approval of corporate action would.

G. 69 . IT‟S GOTTA BE IF THEY ACTED IN GOOD FAITH AND THEY MADE AN INFORMED DECISION. the best result is an unrestricted auction in which two companies compete for the wallets of shareholders. POLICY: LOOK AT THE INTENTIONS OF THE DIRECTORS TO DETERMINE IF/HOW TO DISCIPLINE. don‟t be a useless Director to protect yourself from being sued – you have an obligation as a good Director to help protect the little guys (the shareholders) and not just yourself From the view of the OSC. WERE THEY TRYING TO ENTRENCH THEMSELVES OR GET A HIGHER BIDDER OR WHAT? THE TEST CAN‟T BE THAT THE DIRECTORS GET IN TROUBLE IF THEY ACT IN GOOD FAITH BUT LOSE. E.