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ALLARD SCHOOL OF LAW


UNIVERSITY OF BRITISH COLUMBIA

FINAL EXAMINATION — APRIL 13, 2018

LAW 463.002

SECURITIES REGULATION

Gary Sollis and Michael Waters

TOTAL MARKS: 100

TIME ALLOWED: 2 HOURS

and 15 minutes reading time

NOTES: 1. This is an open book examination. Students are permitted to bring excerpts
from the Securities Act (British Columbia), the Johnston, Rockwell and
Ford, Canadian Securities Regulation textbook, and any personal notes. No
other texts are permitted.

2. THIS EXAMINATION CONSISTS OF 4 PARTS.

ANSWER ALL PARTS.

3. Each question is given an approximate time. STUDENTS ARE


CAUTIONED TO ALLOCATE THEIR TIME ACCORDINGLY.

4. All references to the Securities Act mean the Securities Act (British
Columbia).
LAW 463.002 Page 2 of 8

PART ONE

(20 Marks Total — 1 Mark Each) (approximately 24 minutes)

TRUE OR FALSE QUESTIONS: Please answer the following questions TRUE or FALSE. Please
only indicate an answer of TRUE or FALSE for each question in this Part 1.

1. A company issuing shares from treasury is not required to file a prospectus unless the
shares are offered or sold to the public.

TRUE or FALSE?

2. A shareholder holding 25% of the issued and outstanding common shares of a reporting
issuer can purchase up to an additional 5% of the common shares of the issuer through the
facilities of the Toronto Stock Exchange in any 12 month period, provided that the value
of the consideration paid for any of the purchased shares does not exceed 115% of the
market price of the common shares, including brokerage fees and commissions actually
paid.

TRUE or FALSE?

3. A reporting issuer listed on the TSX Venture Exchange and NASDAQ is not a “venture
issuer”, as defined in NI 5 1-102.

TRUE or FALSE?

4. The commission or the executive director has no authority to make an order under section
161 of the Securities Act unless there has been a breach of the Securities Act.

TRUE or FALSE?

5. Shares issued by a private issuer pursuant to the accredited investor exemption will become
freely tradable four months and a day after they are issued.

TRUE or FALSE?

6. A Toronto Stock Exchange listed issuer must file annual financial statements, MD&A
relating to its annual financial statements and an annual information form no later than the
th
90
day after the end of its most recently completed financial year.

TRUE or FALSE?
LAW 463.002 Page 3 of 8

7. A purchase of a preferred share of a private company is not a trade.

TRUE or FALSE?

8. If management of a reporting issuer gives notice of a meeting to its registered holders of


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

TRUE or FALSE?

9. An issuer is required to file an amendment to its prospectus if a material change occurs


after the filing of the prospectus and before the completion of the distribution thereunder.

TRUE orFALSE?

10. An investigator appointed under section 142 of the Securities Act has the power to compel
witnesses to give evidence on oath.

TRUE or FALSE?

11. A short form prospectus can only be filed by a reporting issuer which has filed an annual
information form.

TRUE or FALSE?

12. In connection with an annual general meeting, a reporting issuer listed on the Toronto Stock
Exchange must disclose whether or not a majority of its directors are independent.

TRUE or FALSE?

13. Shares issued to an employee of a reporting issuer pursuant to a prospectus exemption are
subject to a 4-month hold period commencing on the date when the shares are issued.

TRUE or FALSE?

14. It is an offence to fraudulently manipulate stock exchange transactions by engaging in


various strategies to create the false or misleading appearance of active public trading and
the maximum term of imprisonment for this offence is three years.

TRUE or FALSE?
LAW 463.002 Page 4 of 8

15. The solicitation of an expression of interest in a bought deal financing is permitted as soon
as a binding agreement has been entered into and a news release has been issued in
accordance with Part 7 of NI 44-101.

TRUE or FALSE?

16. If management of a reporting issuer gives notice of a meeting to its registered holders of
voting securities, management is only required to arrange delivery of an information
circular to registered holders of voting securities.

TRUE or FALSE?

17. Securities held by a control person are freely tradable if they were acquired pursuant to a
prospectus.

TRUE or FALSE?

18. Any person in a “special relationship” with a reporting issuer is a “reporting insider” of the
issuer.

TRUE or FALSE?

19. The “due diligence” defence is not available to directors and officers who sign a prospectus
which contains a misrepresentation.

TRUE or FALSE?

20. A director of a reporting issuer acquires 5% of the issued and outstanding securities of the
issuer. The director is required to immediately issue a press release containing particulars
of its holdings and intentions with respect to the further acquisitions, and within 2 business
days, file a report containing the same information as contained in the press release.

TRUE or FALSE?
LAW 463.002 Page 5 of 8

PART TWO

(20 Marks Total —2 Marks Each) (approximately 24 minutes)

SHORT ANSWER QUESTIONS: Please provide responses to each of the following questions.
Please explain your responses and provide regulatory citations where relevant.

1. Explain the difference between a material change and a material fact and the significance
of this difference in the context of an offering of securities under a prospectus.

2. A “material change” occurs for a reporting issuer. 20 days after the material change the
issuer discloses the material change by issuing a press release and filing a material change
report describing the material change in accordance with Form 51-102F3. An investor
purchases shares of the issuer through the facilities of the Toronto Stock Exchange 4 days
after the material change occurs and suffers a loss when the change is announced. Does
the investor have a right of action, and if so, what is the right of action and against who
does the investor have a right of action?

3. Identify three prospectus exemptions which can be used by a reporting issuer to raise funds
in a private placement and the most important conditions applicable to each exemption.

4. Why would our regulators be more likely to pursue an enforcement order under section
161 of the Securities Act rather than under section 155 of the Securities Act?

5. What is the difference between the “restricted period” and the “seasoning period”, as those
terms are used in NI 45-102?

6. Why might a shareholder of a reporting issuer subject to a hostile takeover bid feel pressure
to tender to the offer, even if they believe the offer price is too low, and what rules are
included in National Instrument 62-104 to help address this issue?

7. What is the “waiting period” in the context of a public offering of securities?

8. Explain the concept of a “control premium”. Under the Canadian statutory regime is the
control premium treated as an individual, corporate or shareholder asset? How is this
approach is reflected under Canadian takeover bid rules?

9. Identify three classes of persons who can be sued for statutory civil liability if a prospectus
contains a misrepresentation and at least one defence available to each class.

10. How does an issuer become a “reporting issuer”? Once an issuer has become a reporting
issuer, where would they be required to disclose information that is material that is not a
material change?
LAW 463.002 Page 6 of 8

PART THREE

(30 Marks Total) (approximately 36 minutes)

A partner in your firm has been retained by a couple of entrepreneurial real estate developers who
are looking to raise equity capital to develop and construct a new winery in the Okanagan. They
propose to raise the equity required for the project from friends, family and business associates, as
well as from wealthy investors who will be introduced to them by one or more financial advisors.
The partner has asked you to prepare a memo responding to the following questions from the
clients:

1. Can the equity financing be structured in such a way as to avoid the application of
securities regulations and, if so, how can this be achieved?

2. If the financing is properly characterized as an offering of securities, what things do your


clients need to do in order to ensure that the financing complies with applicable securities
regulations?

3. What, if anything, should your clients be concerned with, from a securities perspective,
when engaging financial advisors to assist them in raising the equity capital?

4. What steps can your clients take in the future to provide liquidity to the investors who
participate in the financing?

5. What would be involved if, instead of undertaking a private financing, your clients decide
to take the winery public through an P0?

6. What are the potential risks to your clients associated with each of the foregoing?
LAW 463.002 Page 7 of 8

PART FOUR

(30 Marks Total) (approximately 36 minutes)

You are a junior associate at a highly prestigious law firm in Vancouver. One of the firm’s clients,
Debra Bond (“Debra”), is a very wealthy investor based in Vancouver. Debra looks for
opportunities to take large positions in public companies and then generate returns on unusual
events, such as changes in management, mergers, or a sale of the company.

Last Monday, Debra had lunch with an investment analyst friend from university who mentioned
that one of the companies he follows, Athabasca Basin Copper Corp. (“ABC”), was in undisclosed
private discussions regarding a takeover bid from a larger mining issuer, and would likely be the
subject of either a friendly or a hostile takeover bid in the coming weeks, depending on how
negotiations proceeded. Since that lunch Debra has been purchasing shares of ABC on the TSX
Venture Exchange (“TSX-V”).

Ideally, Debra would like to control more than 10% of the issued and outstanding shares of ABC,
but she recalled that there was some restriction around the 10% threshold. So on the Tuesday
following her lunch she reached out to another investor and an old friend, Edwin Rothschild
(“Edwin”). Edwin has had a great relationship with Debra over the years and has made money
working with Debra in the past. Debra stated that she had begun making purchase of ABC and
planned to buy up to 9% of the issued and outstanding shares of ABC. Beyond this, Debra did not
tell Edwin any of the background information she had received from her investment analyst friend.
She just said “buy 8% of ABC and trust me, it will work out”. Based on this, Edwin informally
agreed to cooperate in the plan to acquire up to 17% of the shares of ABC on a combined basis, to
tender those shares to the highest bid for ABC to emerge, and to vote his shares in ABC with Debra
as needed. Nothing was put in writing. Immediately after receiving this phone call on the Tuesday,
Edwin also started to make purchases on the TSX-V. Since that time Edwin has acquired 8% of
the issued and outstanding shares of ABC on the TSX-V and Debra has acquired 9% of the issued
and outstanding shares of ABC.

A week has past, and it is now the Monday after Debra’s lunch, and Debra is feeling quite pleased
— a hostile takeover bid was announced this morning before the market opened, and on market
opening the share price of ABC increased by 25%. The share price had been creeping up steadily
over the past week as a result of the market purchases being made by Debra and Edwin, but the
share price jump was significant over even this price.

It is now end of day Monday, and Debra was getting ready to head home to celebrate when she
received two further communications. First, both Debra and Edwin received an odd email from a
group called the Investment Industry Regulatory Organization of Canada (“IIROC”) asking for
details of all purchases made of ABC before the takeover bid announcement. Since both Debra
and Edwin had stayed under the 10% threshold, they assume everything is fine. The second
LAW 463.002 Page 8/8

communication was a telephone call that Debra received from a third investor, Frank Kennedy
(“Frank”). Frank is also an active investor. Frank informed Debra that based on his analysis of
the publicly available information, he thinks that there are a number of other potential strategic
bidders for ABC, and he thinks a higher bid from another “white knight” bidder may still be
possible. Talking with Frank, Debra and Edwin have agreed to work with Frank find another
bidder for the business, and the three of them have informally agreed to tender those shares to the
highest bid for ABC to emerge, and to vote their shares in ABC together as needed. Once again,
nothing was put in writing. Having secured an informal understanding with Debra and Edwin,
Frank is now planning to purchase a further 7% of ABC over the next two days to get a “toe-hold”
position himself before canvassing the market for other bidders for ABC but he has not made

any purchases as of yet. Frank approach Debra and Edwin with this plan without any prompting
from them, and Debra has not shared any of the background information she had received from
her investment analyst friend. If Franic is successful in persuading another bidder to launch a
competing takeover bid, this would drive share price even higher! Debra and Edwin can’t believe
their luck.

All three of Debra, Edwin and Frank have approached one of your firm’s senior partners for advice
on the Monday evening. The partner has a short dinner engagement, but plans to return to the
office in 36 minutes, and has asked you to prepare a memo summarizing the issues and the firm’s
advice for review on her return.

Your instructions are to prepare a short memo addressing the following:

1. How long would Frank have to find another bidder for ABC from the date that the hostile
takeover bid for ABC was commenced by a press release? Please explain your analysis
and provide statutory references, where appropriate, to support your analysis.

(3 points)

2. Please advise Debra, Edwin and Frank on any other issues under Canadian Securities Laws
arising from the facts described above, including any potential consequences for each of
(a) Debra, (b) Edwin, and (c) Frank arising from the facts above based on their conduct to
date and their proposed conduct. Please explain your analysis and provide statutory
references, where appropriate, to support your analysis.

(27 points)

— END OF EXAMINATION —