INTELLECTUAL PERSPECTIVES..........................................................................................

5
NEOCLASSICAL ECONOMIC ANALYSIS (LAW OF ECONOMICS).....................................................5
BEHAVIOURAL FINANCE..................................................................................................................6
SOCIO-LEGAL PERSPECTIVE...........................................................................................................6
SOURCES OF LAW.................................................................................................................... 7
HISTORICAL AND CONSTITUTIONAL ISSUES.................................................................. 7
HISTORY...........................................................................................................................................7
CONSTITUTIONAL ISSUES: DIVISION OF POWERS .........................................................................8
OVERVIEW OF REGULATORS AND MARKETS.............................................................. 10
PURPOSES OF SECURITIES REGULATION .....................................................................................10
SECURITIES MARKETS...................................................................................................................10
TORONTO STOCK EXCHANGE (TSX) AND TSX VENTURE .............................................................11
ELECTRONIC TRADING SYSTEMS.....................................................................................................11
REGULATORY STRUCTURE............................................................................................................11
GLOBAL SECURITIES REGULATION: IOSCO...................................................................................11
PROVINCIAL/TERRITORIAL REGULATION (PRIMARY REGULATORS)...............................................12
Ontario Securities Commission (OSC).........................................................................................12
Judicial Review of Regulators Decisions ....................................................................................12
CRITICISMS OF PROVINCIAL/TERRITORIAL REGULATION AND RESPONSES....................................13
OTHER SELF REGULATING ORGANIZATIONS ..................................................................................14
DEFINITIONS ........................................................................................................................... 14
SECURITY........................................................................................................................................15
LEGISLATIVE DEFINITION................................................................................................................15
OPTIONS/FUTURES/DERIVATIVE SECURITIES..................................................................................16
INVESTMENT CONTRACT ................................................................................................................17
VIATICAL SETTLEMENTS.................................................................................................................18
RE WORLD STOCK EXCHANGE ......................................................................................................20
REPORTING ISSUER........................................................................................................................21
THE PROSPECTUS................................................................................................................... 22
ADVANTAGES AND DISADVANTAGES OF A PUBLIC OFFERING ...................................................22
ADVANTAGES .................................................................................................................................22
DISADVANTAGES.............................................................................................................................23
OVERVIEW OF PROCESS................................................................................................................23
UNDERWRITING .............................................................................................................................24
DEFINITION AND PURPOSE..............................................................................................................24

TYPES OF UNDERWRITER ISSUER RELATIONSHIPS ......................................................................25

CONFLICT OF INTEREST ISSUES.......................................................................................................26
PRELIMINARY PROSPECTUS..........................................................................................................26
WAITING PERIOD AND AMENDMENT ...........................................................................................27
REVIEW PROCESS: RISK-BASED APPROACH...................................................................................27
ISSUER ACTIVITY DURING WAITING PERIOD..................................................................................28
LONG-FORM PROSPECTUS - CONTENT.........................................................................................30
FINANCIAL STATEMENTS.................................................................................................................30
CERTIFICATES: NI 41-101, PART 5..................................................................................................31
AMENDMENTS TO PROSPECTUS.......................................................................................................31
DOCUMENTS TO BE FILED WITH PROSPECTUS.................................................................................32
FORM 41-101FI: GENERAL INFORMATION REQUIREMENTS............................................................32
DEFINITION OF MATERIAL FACT.....................................................................................................33
FUTURE ORIENTED FINANCIAL INFORMATION (FOFI)..........................................................34
ISSUING A RECEIPT FOR A PROSPECTUS......................................................................................35
DUE PROCESS REQUIREMENTS IN REFUSAL....................................................................................36
COOLING-OFF PERIOD ..................................................................................................................37
FAILURE TO DELIVER PROSPECTUS ............................................................................................38
FAILURE TO FILE PROSPECTUS ....................................................................................................38
MODIFICATIONS TO PROSPECTUS REQUIREMENTS.....................................................................39
SHORT-FORM PROSPECTUS.............................................................................................................39
Eligibility Requirements ..............................................................................................................40
Content/Disclosure........................................................................................................................40
Review of SFP..............................................................................................................................40
SHELF-PROSPECTUS.........................................................................................................................41
POST-RECEIPT PRICING PROSPECTUS..............................................................................................41
MULTI-JURISDICTIONAL DISCLOSURE SYSTEM...............................................................................41
CAPITAL POOL COMPANIES.............................................................................................................42
CIVIL LIABILITY AND DUE DILIGENCE........................................................................................42
WHO IS LIABLE OSA - S.130 (1)..................................................................................................42
WHAT DOES PLAINTIFF HAVE TO PROVE........................................................................................43
Misrepresentation .........................................................................................................................43
REMEDIES .......................................................................................................................................44
LIMITATION PERIODS S.138..........................................................................................................44
STATUTORY DEFENCES TO S.130(1)................................................................................................44
Issuer defences .............................................................................................................................44
Additional defences for directors/officers/underwriters................................................................44
Additional Defences for Experts...................................................................................................45
Due Diligence Defence.................................................................................................................45
CONTINUOUS DISCLOSURE................................................................................................. 47
POLICY RATIONALES.....................................................................................................................47
CONTINUOUS DISCLOSURE OBLIGATIONS ON OTHER PARTIES.................................................48
PERIODIC DISCLOSURE REQUIREMENTS: NI 51-102...................................................................48
ANNUAL FINANCIAL STATEMENTS: NI 51-102 - PART 4................................................................48
INTERIM FINANCIAL STATEMENTS: NI 51-102 PART 4..................................................................48
MANAGEMENT DISCUSSION AND ANALYSIS (MD&A): NI 51-102 PART 5.................................49
OSC STAFF REVIEW OF MD&A (2004) CONSOLIDATION..............................................................50
ANNUAL INFORMATION FORMS: NI 51-102 PART 6....................................................................50

RECENT CONTINUOUS DISCLOSURE REFORMS (CAN SOX INITIATIVES)...................................51

NI 52-108: AUDITOR OVERSIGHT...................................................................................................51
NI 52-109: CERTIFICATION OF ANNUAL AND INTERIM FILINGS.....................................................51
AUDIT COMMITTEES: MI 52-110....................................................................................................52
Characteristics of Non-Venture Issuer Audit Committee- Part 3..................................................52
Responsibilities Part 2................................................................................................................52
NI 58-101/NP 58-201: DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES...........................53
TIMELY AND SELECTIVE DISCLOSURE (MATERIAL CHANGE REPORTING)................................54
DEFINITION OF MATERIAL CHANGE: OSA, S.1(1) AND NI 51-102, S.1.1.......................................54
FORM OF DISCLOSURE.....................................................................................................................56
TIMING OF DISCLSOURE..................................................................................................................57
SELECTIVE DISCLOSURE..................................................................................................................58
CIVIL LIABILITY FOR BREACH OF DISCLOSURE PROVISIONS ...................................................59
NEW STATUTORY REMEDY - OSA..................................................................................................59
Who has a cause of action?...........................................................................................................59
What does plaintiff have to prove?...............................................................................................59
Who is liable?...............................................................................................................................60
Defences.......................................................................................................................................60
Limits on Liability .......................................................................................................................61
Settlements and Costs Rules.........................................................................................................62
INSIDER REPORTING AND INSIDER TRADING ............................................................. 62
DEFINITION OF INSIDER OSA - S.1 (1).......................................................................................62
REPORTING REQUIREMENTS.........................................................................................................63
INSIDER TRADING REPORTS: OSA REQUIREMENTS .......................................................................63
SYSTEM FOR ELECTRONIC DISCLOSURE BY INSIDERS (SEDI): NI 55-102.....................................63
EXEMPTIONS FROM REPORTING REQUIREMENTS: NI 55-101.........................................................63
ILLEGAL TRADING ........................................................................................................................64
ILLEGAL INSIDER TRADING.............................................................................................................64
TIPPING ...........................................................................................................................................67
DEFENCES.......................................................................................................................................68
REASONABLE BELIEF THAT INFORMATION GENERALLY DISCLOSED OSA S.76(4)..................68
NECESSARY COURSE OF BUSINESS DEFENCE FOR TIPPING OSA - S.76(2)..................................69
FIREWALL/CHINESE WALL DEFENCE REG. 175(1) AND (3).........................................................70
UNSOLICITED ORDERS OSA - REG. 175(2)..................................................................................71
OTHER PARTY HAD KNOWLEDGE OSA REG.175(5).................................................................71
REASONABLE MISTAKE OF FACT....................................................................................................71
SANCTIONS FOR INSIDER TRADING/TIPPING...............................................................................72
CIVIL OSA....................................................................................................................................72
ADMINISTRATIVE OSA.................................................................................................................72
NEW CRIMINAL CODE OFFENCE S.382.1....................................................................................73
PROSPECTUS EXEMPTIONS................................................................................................. 73
SOURCES OF LAW..........................................................................................................................74
EXEMPTIONS FOR SMALL AND MEDIUM-SIZED ENTERPRISES OR START-UP ISSUERS.............74
PRIVATE ISSUER EXEMPTION: NI 45-106........................................................................................74
FOUNDER, CONTROL PERSONS, AND FAMILY EXEMPTION: NI 45-106, S.2.7.................................76

GOVERNMENT INCENTIVE SECURITY EXEMPTION: OSC RULE 45-501..........................................77

WEALTHY/SOPHISTICATED INVESTOR EXEMPTION....................................................................78
ACCREDITED INVESTOR EXEMPTION: NI 45-106 S.2.3................................................................78
MINIMUM INVESTMENT EXEMPTION: NI 45-106 S.2.10..............................................................80
PRE-EXISTING RELATIONSHIP EXEMPTIONS................................................................................80
STOCK DIVIDENDS: NI 45-106 SS.2.31 AND 2.2..........................................................................80
REORGANIZATIONS: NI 45-106 - S.2.11..........................................................................................81
CONVERSION, EXCHANGE, OR EXERCISE: NI 45-106 - S.2.42.........................................................81
RIGHTS OFFERINGS: NI 45-106 - S.2.1............................................................................................81
TRADES TO EMPLOYEES, OFFICERS, DIRECTORS: NI 45-106 - DIVISION 4....................................82
OFFERING MEMORANDA (OM).....................................................................................................82
DEFINITION .....................................................................................................................................82
CONTENTS.......................................................................................................................................82
OM STATUTORY RIGHT OF ACTION S.130.1................................................................................83
FILING REQUIREMENTS....................................................................................................................83
DISCRETIONARY EXEMPTIONS .....................................................................................................83
CONSEQUENCES OF INCORRECTLY RELYING ON EXEMPTION ..................................................83
RESALE RULES AND CONTROL DISTRIBUTIONS.......................................................... 84
POLICY OBJECTIVES......................................................................................................................84
CHOOSING THE APPLICABLE RESALE RULE................................................................................84
SUBSTANTIVE RULES.....................................................................................................................85
RESTRICTED PERIOD RESALE RULE: NI 45-102 S.2.5(2).............................................................85
SEASONING PERIOD RESALE RULE: NI 45-102 - S.2.6(3)...............................................................87
TRADES BY CONTROL PERSONS ...................................................................................................88
ALTERNATIVES AVAILABLE TO CONTROL PERSONS DISTRIBUTING SECURITIES...........................88
SUBSTANTIVE RULE NI 45-102 - S.2.8.........................................................................................88
FILING REQUIREMENTS NI 45-102 ..............................................................................................89
TAKEOVER BIDS..................................................................................................................... 89
MOTIVATIONS FOR LAUNCHING TAKEOVER................................................................................90
REGULATORY OBJECTIVES...........................................................................................................90
EARLY WARNING RULES ..............................................................................................................90
WHEN IS A TB TAKING PLACE?....................................................................................................92
DEFINITIONS S.89(1).....................................................................................................................92
Person or company acting jointly or in concert with an offeror.................................................92
COUNTING RULES IN MEETING 20% THRESHOLD .........................................................................93
HOW TO CONDUCT A TB...............................................................................................................93
TB CIRCULAR..................................................................................................................................93
DIRECTORS CIRCULAR...................................................................................................................95
TIME PERIODS & TAKE-UP ISSUES..................................................................................................95
WITHDRAWAL.................................................................................................................................96
BID CONDITIONS.............................................................................................................................96
EQUAL TREATMENT........................................................................................................................97
EXEMPTIONS FROM TB RULES.....................................................................................................97
NORMAL COURSE PURCHASES EXEMPTION S.100........................................................................97
PRIVATE AGREEMENT EXEMPTION S.100.1(1)............................................................................97

NON-REPORTING ISSUER EXEMPTION S100.2...............................................................................98

DE MINIMIS EXEMPTION - S.100.4...................................................................................................98
FOREIGN TARGET EXEMPTION 100.3 ..........................................................................................98
DEFENSIVE TACTICS......................................................................................................................98
TYPES OF DEFENSIVE TACTICS.......................................................................................................98
White Knight................................................................................................................................98
Poison Pills or SH Rights Agreement...........................................................................................99
Sale of Crown Jewel ....................................................................................................................99
Litigation......................................................................................................................................99
Break Fee......................................................................................................................................99
GUIDELINES FOR TARGETS USE OF DEFENSIVE TACTICS: NP 62-202 (NOT MANDATORY).........99
FIDUCIARY DUTIES OF THE TARGET BOD....................................................................................100
WHO IS THE APPROPRIATE DECISION MAKER?............................................................................102
Poison Pills.................................................................................................................................102
Sale of Crown Jewel...................................................................................................................103
Break Fees..................................................................................................................................103
ISSUER BIDS AND GOING PRIVATE TRANSACTIONS................................................. 104
POLICY CONSIDERATIONS...........................................................................................................104
DEFINITIONS ................................................................................................................................104
SUBSTANTIVE REQUIREMENTS....................................................................................................105
INSIDER BIDS.................................................................................................................................105
ISSUER BIDS..................................................................................................................................106
RELATED PARTY TRANSACTIONS..................................................................................................106
ENFORCEMENT AND PUBLIC INTEREST CONSIDERATIONS.................................. 108
INVESTIGATION AND EXAMINATION POWERS OSA PART V1...............................................108
EXAMINATION OF DOCUMENTS.....................................................................................................108
POWER TO COMPEL TESTIMONY ..................................................................................................109
CRIMINAL ENFORCEMENT .........................................................................................................109
CRIMINAL CODE: SS.380-384, S.400.............................................................................................109
QUASI-CRIMINAL POWERS IN OSA...............................................................................................110
CIVIL ENFORCEMENT: OSA S.128.................................................................................................111
PUBLIC INTEREST ENFORCEMENT POWERS .............................................................................111
IS A BREACH OF THE OSA REQUIRED? .........................................................................................111
ENFORCEMENT ACTION AGAINST LAWYERS.................................................................................112
PHILOSOPHIES OF SANCTIONING................................................................................................112

Intellectual Perspectives
Neoclassical Economic Analysis (law of economics)
Voluntary exchanges over collective decisions: individuals should be free to make
own choices because they are capable of acting rationally to maximize their own
welfare (i.e. in best place to determine what is in their interest and maximize utility)
Goal: efficiency - exchanges where the result of the exchange is that at least one
person is made better of by the exchange and neither person is made worse off
5

Minimal role of regulation/law in achieving efficiency

o To address market failure to the extent that it fails provide sufficient
information on which to base investment decisions
o To reduce transaction costs [i.e. disclosure requirements/standard K terms]
Two types of analysis:
o Positive Economics (descriptive or predictive analysis): predicts outcomes
of policies on assumption that individuals are motivated by rational selfinterest to maximize individual utilities
o Normative Economics (prescriptive or judgmental analysis): asks whether
a policy will make individuals affected by it better off in terms of how
they perceive their own welfare
Pareto Efficiency: will this change make someone better off while
making no one worse off?
Kaldore Hicks Efficiency: would this collective decision
generate sufficient gains to the beneficiaries that they could
compensate the losers from the change so as to render the latter
fully indifferent to it but still have gains left over for themselves?

Behavioural Finance
Examines decision making and factors that influence it
Empirical findings: people make decisions that are not rational
o Disposition Effect: avoiding regret and seeking pride causes investors to
be pre-disposed to selling winners to early and riding losers for too long
o House-Money Effect: After people experience a gain or profit, they are
willing to take more risk
o Risk-Aversion (snake-bite) Effect: after experiencing financial loss, people
become less willing to take a risk
o Endowment (or status quo bias) Effect: people are more protective of
things they already own rather than things they want to acquire (i.e.
tendency to hold the investments they already have; demand more to sell
an object than they would be willing to pay)
o Cognitive Dissonance and Investing: investors seek to reduce
psychological pain by filtering out negative information and fixating on
positive
o Mental Accounting: decision makers tend to place each investment into a
separate mental account (investors bundle the sale of losers and separate
the sale of winners over several days to prolong favourable feeling)
Socio-Legal Perspective
Examines behaviour of regulatory agencies
What factors influence rule making (i.e. social, economic, political, etc.)? Who
benefits from the rules? How do regulatory authorities use their enforcement power?

ice theory resources are allocated by regulators to those recipients who seek them
most forcefully usually relative small and well organized grounds that have a high per
capita stake in the regulations
Condon focus on the role of interests is problematic
o Interest tends to be treated as easily discoverable
o Confusion between regulatory effects and causation (i.e. if new regulatory
practice benefit some identifiable constituents, it is assumed that the
practice was put into place to benefit them)

Sources of Law

NO NATIONAL SYSTEM OF SECURITIES REGULATION

Provincial Securities Statues and Regulators
National Instruments and Multilateral Instruments: attempt to promote harmonization
by the Canadian Securities Administrators (umbrella org. of provincial regulators)
o National Instruments: agreed to by all the provinces
o Multilateral Instruments: rules agreed to by some of the provinces
o Note: intended to be binding on market participants in the province and
territories that have implemented them (note: no legal fore on their own so
must be implemented by rule in each participating province)
Local policies and national policies (not binding)
Self-regulatory Organization Rules or Policies
o Mutual Fund Dealers Association, Investment Dealers Association ,
exchanges
Appellant Court Decisions and Regulatory orders and rulings
Regulatory Decisions, Orders, and Rulings
International Organization of Securities Commissions
o Source of justification for domestic regulatory activity [Ontario a member]

Note: common approach to numbering NI, NP and CSA notices [SEE pg.20]

Historical and Constitutional Issues

History
Shifting Focus: disclosure quality assurance rigorous fraud enforcement more
enhanced disclosure
Disclosure: English and Canadian Companies Acts
Principle of full disclosure: freedom to sell anything provided that the whole truth
was provided (small modification to caveat emptor)
Directors Liability Acts of England and Canada: for untrue statements in prospectus
English Companies Act and Ontario Companies Act: prospectus content requirements
Blue Sky Laws: The Sale of Shares Act, 1912-1926

Legislation should do more than require disclosure

Regulator should determine something about quality of these investments: introduced
comprehensive licensing requirement
Basic structure: issuer required to obtain permit from bank commissioner before
offering or selling securities to anyone in Kansas. To retain right to offer securities
issuer required to file semi-annual reports and maintain various business records

Securities Frauds Prevention Acts, 1928-1945

Adopted in Ontario in 1929: aimed at controlling traders rather than issuers
Anti-fraud provisions + requirement that brokers and salesman were registered
The Securities Acts, 1945 1960
Move back to the idea of disclosure: regulatory sanctions for fraud not sufficient
More detailed approach to disclosure
Ontario Securities Act, 1966
Influenced heavily by Kimber report and formed basis of modern day legislation
Favoured disclosure as way to protect investors and encourage efficiency
Commitment to ongoing disclosure requirements beyond the point of sale
Constitutional Issues: Division of Powers
Federal power to regulate - s.91: trade and commerce, POGG, and criminal law
Provincial power to regulate - s.92: property and civil rights
SUM: If pith and substance of the challenged legislation is within provinces
competence, then incidental effects on extra provincial rights will not render the
legislation ultra vires
Mayland and Mercury Oils v. Lymburn [1932/Alta.JCPC] provincial regulator can
regulate federal company whose actions extend beyond province

Facts: federally incorporated company investigated by provincial regulator argues that

ultra vires of province to regulate federal company based on encroachment in criminal
law and made it impossible for company to operate
Analysis:
Provincial regulator competent to enforce its own laws on federally incorporated
company no reason to exclude from powers of AG to investigate
Legislation invalid if Dominion company is sterilized in all its functions and activities
or its status and essential capacities are impaired in a substantial degree (not here)
R v. Smith [1960/SCC] federal and provincial law can operate concurrently if there is no conflict
Facts: accused charged w/ offences under OSA argues overreaching because Criminal
Code deals with same issue

Analysis:
Quasi-criminal offence is necessary to enforce substantive provisions and bolster
behaviour of issuers
If there is conflict between provincial and federal, provincial enactment is inoperative
Both can operate concurrently because there is no conflict in the sense that
compliance with one law involves a breach of the other
R v. McKenzie Securities [1966/Man.CA] harm to residents is sufficient connection to province
to engage provincial securities regulators

Facts: broker in Ontario sells securities by mail and telephone to investor in Manitoba
Analysis:
Non-resident of Manitoba can become liable under Manitoba statute if activities can
be construed as trading within the province
Brokers were trading in Manitoba (broad approach to what it means to trade in
particular province)
Condon: if residents of the province are harmed by the activities of those registered
elsewhere, it will be an acceptable connection to engage the jurisdiction of the
provincial regulator
Multiple Access v. McCutcheon [1982/SCC] provinces can regulate in area where federal
government has already regulated if no conflict

Expansive approach to competence of the provinces: nothing that prevents provinces

from regulating in an area in which the federal govt has already regulated
Provincial legislation is not inoperative because it merely duplicates the federal
legislation: only problem if actual conflict or contradiction between federal and
provincial law (upheld insider trading provisions)

Quebec v. OSC [1992/Ont.CA] when province enters into the capital markets of another province,
must abide by that provinces securities law

Issue: Can OSC use its regulatory power against Quebec Crown Corporation?
Analysis:
Because Quebec corporation has entered into Ontario securities market by selling to
ON investors it is brought under umbrella of ONT securities legislation
Quebec would have reasonable expectations that any other province, when entering
Quebecs capital markets, would abide by Quebecs regulatory laws
Global Securities Corp. V. BC [2000/SCC] provincial power can extend to assisting foreign
jurisdictions b/c main purpose is to enforce BC law (get reciprocal help)

Global challenged the authority of the BC Securities Commission to order Global to

produce documents

in pith and substance the provision was the enforcement of BC securities law by
obtaining reciprocal assistance from foreign regulators and by discovering foreign
securities law violations by domestic registrants

Wise Persons Committee: Recommended a single regulator in which both the

federal and provincial government have significant roles
NOTE: fear that national regulation would be Ontario regulation in disguise

Overview of Regulators and Markets

Purposes of Securities Regulation
OSA - s.1.1: (a) to protect investors from unfair, improper, or fraudulent practices (b)
fostering fair and efficient capital markets and confidence in capital markets
Limited attention to the goal of a fair and efficient capital market (Abestos)
Aided by principles listed in s.2.1
Securities Markets
NOTE: capital markets can be global, national, or regional
Local Infrastructures for capital raising (LICR) exist for certain industries and levels
of market capitalization (i.e. Ontario financial services and Alberta oil and gas)
Distinction between primary and secondary markets:
Primary: market for securities that have not been previously issued (sold) by issuer
o Private Placement: sale of securities by issuer directly to investors,
frequently institutional investors, using specific exemption from securities
regulatory requirements
o Initial public offering (IPO): first distribution of securities to the public
o Key players: issuer of securities, investors, and intermediaries (i.e.
underwriter to assist issuers in preparing securities to be sold)
Secondary: market for trading securities that have already been issued by an issuer
(sold amount investors)
Note: distinction between issued security (sold) and listed security (listed on
organized venues for trading)
Markets: venues where trades can be executed
Broker: intermediary who assist you in that process
Full services broker: provide investment advice
Discount brokers: use to access market to initialize their trade (no advice and will not
incur liability for bad trades)
Registration requirement

10

Themes: increased competition in venues for trading securities, consolidating

markets, and issuers listed in various markets
NOTE: previously each province had own exchange for trading securities, but there has
been a consolidation of markets driven by the global nature of securities trading
Toronto Stock Exchange (TSX) and TSX Venture
TSX: exchange through which shares of the largest issuers are traded (senior equities,
companies with large capitalization)
o Demutualized: became for-profit
o Regulation delegated to Market Regulation Services (part owned by TSX)
TSX Venture: exchange for junior equities
Guarantees liquidity
Electronic trading systems
Can be developed to compete with TSX and TSX venture (response to concerns re
cost of trading) (e.g. Bloq book, Alpha)
Considered market places but not exchanges
o Exchange guarantees the execution of a sale and has a listing process
o To made good on guarantee: act as principle to buy or sell securities
themselves if they cant find a buyer or seller on the other side [note: on
TSX specific dealer will take responsibility to be buyer or seller of last
resort if no one willing to buy at that price]
Other Markets:
Bourse de Montreal: trading of derivative securities
o Derivatives: derive their value from the claim they give their owners to
some other financial asset or security
o Option contract: allows holder to buy or sell a specified underlying
asset/instrument by a specified date at a specified price
o Futures Contract: requires seller to deliver a specific asset to the buyer on
a specified date for a pre-determined price
o Buyer and seller assume counter party risk
Canadian Trading and Quotation System (CNQ) : trades securities of emerging
companies using innovative technology (competitor to TSX venture)
Quotation and Trade Reporting Systems: dissemination of price quotation for the
purchase and sale of securities and reports of completed transactions
Regulatory Structure
Global Securities Regulation: IOSCO
IOSCO: worldwide association of regulatory bodies to establish disclosure
obligations (tries to bring consistency to market)

11

Provincial/Territorial Regulation (Primary Regulators)

Pearson v. Boliden [2002/BC CA] province in whose territory securities are distributed is the
province that regulates the manner distribution is carried out

Facts: P in BC and wants to be eligible to sue under the OSA b/c longer limitation period
Analysis:
Illustrates practical problems that arise when a scheme of provincial securities
regulation is not the same as other provincial securities regulation
Not open to the plaintiff to choose which Act applies
If securities are distributed is province under that provinces securities legation, that
provinces legislation governs opportunities to sue
Ontario Securities Commission (OSC)

KEY ROLE: investigation and enforcement

o Criticisms that regulators are not exercising their enforcement powers
rigorously enough [i.e. use soft form of compliance such as warning
letters as opposed to more hard edge sanctions]
o Arguments that enforcement arm of the regulator is not sufficiently
independent from adjudicative arm

Judicial Review of Regulators Decisions

Standard of Judiical Review: REASONABLENESS

Committee for the equal Treatment of Asbestos Minority SH v. OSC [2001/SCC] standard
of reasonableness high degree of deference due to expertise of OSC

Facts: review of OSC decision with respect to applying Ontario securities law or not
applying it to transactions entered into in Quebec which adversely affected Ontario
minority SH
Analysis:
Two goals: protection of investors and the efficiency of and public confidence in
capital markets
High degree of defence to OSC decisions given its expertise
Court applies a standard of reasonableness to find that the OSC appropriately
exercised discretion (i.e. found insufficient connection with Ontario to justify
intervening in order to avoid policing out of province transactions)
Re Cartaway Resources Crop. [2004/SCJ] can use sanctions to deter
Can use sanction to deter
Motivation was not punishing but to protect capital markets
can use sanctions to deter future behaviour, it is in their power to do so
Condon: these individuals are getting punished in order to deter

12

Criticisms of Provincial/Territorial Regulation and Responses

Inefficiency: costly to meet legal requirements and get approval of each province
Inconsistency: inconsistent standards, enforcement, available sanctions
Difficulties in enforcement:
o Compliance reviews can be slowed because of co-ordination difficulties
o when offender is banned from participating in a capital market of one
jurisdiction, can often move to another
o potential for multiple investigations and enforcement proceeds by different
regulators in respect of the same case
Mutual Reliance Review System
Developed by Canadian Securities Administrators
Allows a securities regulator to rely on the review and analysis of a regulator from a
different jurisdiction in respect of prospectus review, exemptive relief applications,
pre-filing, annual information forms, and waiver applications
One regulator as the principle regulator which then provides comments and a decision
on behalf of all the other regulators
Depends on regulators in each province being willing to trust other regulators
Regulators retain statutory jurisdiction to opt of the process at any time
System does not seek to harmonize standards
Uniform Securities Legislation Project
Goal: develop a uniform securities act and rules for adoption by each jurisdiction of
Canada
Where harmonized approach would not to appropriate, local differences would be set
out by way of exception
Local rules reviewed regularly to ensure that they reflect obvious local needs rather
Wise Persons Committee: Proposal for National Securities Act and Regulator
Single national regulator (with commissioners drawn by region) administering a
single administrative code
Body independent from commission would undertake adjudication
Amendments to legislation would not be implemented if a majority of provinces
representing a majority of Canadian population objected
Advantages of the structure (that the WPC argues is not achieved by passport
system):
o Effective enforcement
o Policy innovation and development: facilitates more timely policy making
(passport system not as effective because requires consensus amount
multiple regulators with differing priorities and approaches)
o Cost-effectiveness: efficient allocation of resources and avoids
unnecessary duplication (passport system does not eliminate duplication of
resources and contemplates continued payment of multiple fees)
o Responsiveness to the needs of emerging companies: less costs
13

o International perspectives: consistent with securities regulatory structure

of every other industrialized country (passport system is not)
o Stability: jurisdictions cant opt out as they could under passport system
o Accountability and governance: single point of accountability
Note: public pushback from provinces (Quebec and BC) BUT on table as a possibility

Passport System: allows jurisdictions to enter into agreements whereby one jurisdiction
would recognize decision made by another on the basis of the rules applicable in that
other jurisdiction
MI11-101
Principle regulator for every issuer of securities (note: principle regulator determined
by location of issuers head office)
o Principle regulator grants approval for distribution of securities qualified
by a prospectus and all other provinces that were signatories to this
instrument will defer to the principles judgment
o Need approval of principle regular + Ontario
o If principle office is in Ontario, there will be another principal regulator
(next biggest province in which you are distributing securities)
New development: other provinces are defaulting to Ontario if Ontario is the province
with the closest connection [i.e. will only need to get approval from Ontario]
Other Self Regulating Organizations
Market Regulation Services Inc. (RS): responsible for market surveillance,
investigation, and enforcemen
o Real-time monitoring: protects investors by monitoring every single
equities trade as it occurs (i.e. computerized system flags deviations from
normal patterns of trading)
o Introduced Universal Market Integrity Rules (UMIR)
Investment Dealers Association (IDA): regulation of brokers (registration, reporting
and enforcement of professional standards of and business conduc)
o also operates as lobby group for industry (conflict of interest?)
o Note: plan for IDA and RS to merge into one body
Mutual Fund Dealers Association: regulates mutual fund dealers
Canadian Public Accountability Board: oversee the auditors of public companies
TSX and TSX venture listing requirements

Definitions
Tiered analysis:
Is item being bought or sold a security? If no, securities law N/A
Is security being traded? If no, no registration/disclosure requirements
Does trade amount to a distribution of offering of securities? If no, no prospectus
requirements

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Security
Legislative Definition
OSA s.1(1): A security includes,

(a) any document, instrument or writing commonly known as a security,

o Refers to commonly known by members of the investment community

(not commonly known by average citizen) [CM Joinder Leasing Corp.]
o Note: open ended definition allows for the nature of things to change over
time (i.e. viatical settlements)
(b) any document constituting evidence of title to or interest in the capital, assets,
property, profits, earnings or royalties of any person or company,

o Broad - could mean any commodity you buy courts engage in policy
oriented analysis
o Distinction made by courts/regulators: when person bought this did they
think they were buying a commodity or did they think that they were
buying an investment
(c) any document constituting evidence of interest in an association of legatees or heirs,

o Historical interest: fraudsters inviting investors to pay up front on notion

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

o Bond: Debt security issued by a business where there is an obligation to

re-pay the face amount of the instrument + interest
o Note: exclusions refer to types of financial instruments otherwise
regulated (insurance contracts, evidences of deposits in bank account, etc.)
(f) any agreement under which interest of purchaser is valued for purposes of
conversion or surrender by reference to the value of a proportionate interest in a
specified portfolio of assets, except a contract issued by an insurance company licensed
under the Insurance Act which provides for payment at maturity of an amount not less
than three quarters of the premiums paid by the purchaser,

o Key example: mutual funds

o Purpose of mutual funds: diversify risk (couldnt diversify with own
money) and expertise of mutual fund manager pooling money on your
behalf
(g) any agreement providing that money received will be repaid or treated as a subscription to
shares, stock, units or interests at the option of the recipient or of any person or company,
(h) any certificate of share or interest in a trust, estate or association,
(i) any profit-sharing agreement or certificate,
(j) any certificate of interest in an oil, natural gas or mining lease, claim or royalty
voting trust certificate,

15

o Certificate that investors get from person called promoter (i.e. person
responsible for organizing business.)
o Considered as security b/c investing money is being used to engage in
profit making activity
(k) any oil or natural gas royalties or leases or fractional or other interest therein,
(l) any collateral trust certificate,
(m) any income or annuity contract not issued by an insurance company,
(n) any investment contract,
(o) any document constituting evidence of an interest in a scholarship or educational plan or
trust, 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

Definition of security is broad and regulators narrow down scope using policy-based
interpretation
Options/Futures/Derivative Securities
Option: instrument that gives the holder the right to buy or sell an underlying interest
(shares) in respect of a named issuer at an agreed price, on or before an agreed date
o Two key types issued by corporations
Option issued to existing SH (option to acquire additional SH at a
specified price at future point in time)
Option issued to executives as a form of compensation
o Note: inverse relationship between options trading and market stability
(b/c because you lock in price and reduce effect of volatility)
o Note: persons other than corporations can issue options (call options and
put options)
Call options: option writer (i.e. seller) sells option to purchaser for a price (known as
the option premium) which entitles the purchaser to force the writer to sell an
outstanding share of a 3rd party corporation at a specified price on or before a
specified date
Put options: purchaser of the option acquires the right to require the writer to
purchase a corporate share from him or her at a stated price on or before a certain date
Futures: contracts to sell a specified asset on a stated date in the future at a stated
price (Note: commodity futures contracts that are publicly traded on a commodity
futures exchange are excluded)
Derivative Securities: value of a derivative security derives from the value of
another security, financial asset, or other reference value (underlying interest)
o characterized as option or futures contract or a combination of the two
Buy options on value of stock index and exercise option if price you agreed to is
lower than the value of the instrument at the time you are entitled to exercise it

16

Investment Contract
Securities and Exchange Commission v. W.J. Howey [1946/US] 4 indicators of IC: (1)
investment of $ (2) common enterprise (3) expectation of profit (4) profits solely from efforts of others

Facts: sold pieces of land and offered service contract to cultivate and sell oranges on
behalf of the people that bought the land and is conveyed by warranty deed
Issue: Is this a real estate transaction or an investment
Analysis:
Definition of Investment 4 part TEST:
o (1) Investment of money
o (2) Common enterprise: investors pooling sources together in a common
enterprise (i.e. not a one-on-one transaction)
o (3) Expectation of profits
o (4) Profits expected come solely from the efforts of others
Form is immaterial transfer of property was incidental
Court focuses on fact that purchasers attracted by expectation of substantial profits
and that those profits accrued solely from the efforts of others
Common enterprise: commonality of interest profit would be derived from purchase
of fractional interest in orange grove
State of Hawaii v. Hawaii Market Centre [1971/Haw.Sup.Ct.]
Facts: retail co. raised capital by recruiting founding members to purchase merchandise
and then could earn money/compensation for referring and establishing new members
Analysis:
Broadens Howey Test (based on too narrow a concept of investor participation
necessary to revise because investors did have some participation here)
4-part Risk capital test: investment contract is created when
o Offeree furnishes initial value to the offeror
o A portion of this initial value is subjected to the risks of the enterprise
o Furnishing of the initial value is induced by offerors promises or
representations which give rise to a reasonable understanding that a
valuable benefit of some kind will accrue
o Offeree does not receive the right to exercise practical and actual
control over the managerial decisions of the enterprise
o Note: part 2 and 4 are the key changes
All parts of the test are met
o Security is inseparable from risks of the enterprise [ability to earn money
is dependant on success of the enterprise]
Court focused on fact that paid more than asset was worth
overcharges were the investments and subject to the risks
o Irrelevant that inducements leading investor to risk are founded on
promises of fixed returns rather than a share in profits (note: key

17

difference from Howey not as open-ended investors knew what they

could be expected to make in commissions)
o Irrelevant that investor participates in a minor way [members still have no
power to influence utilization of capital or operational decisions]
o Note: could be characterized as asset transaction but court focused on fact
that paid more than asset was worth
Pacific Coast Coin Exchange of Canada v. OSC [1978/SCC] policy oriented analysis
Facts: bags of silver bought on margin PC to deliver silver if and when customer pays
balance (purchasing futures contracts and maintaining small inventory of coins)
Analysis:
Applies Howey Test:
Profits coming solely from efforts of others: depending on pacific coast to properly
invest to ensure that the money was there to pay investors may only look to Pacific
for performance of the contract (note: accepts Hawaii refinement)
Common enterprise: met when undertaken for benefit of supplier of capital and those
who solicit capital
o shift: commonality is not commonality among the investors but
commonality of interest between buyers and seller if buyer and seller
have same goals (i.e. make money), that is sufficient)
Condon: see watering down of many aspects of the test
Policy-oriented approach: If policy objectives of security act are triggered by a
transaction (i.e. protection of investors), law applies even if 4-part tests cant be met
Dissent:
o No reliance on PC merely an issue of insolvency
o Pacific Coast itself is vulnerable to price fluctuations in the market
o Managerial efforts dont determine profitability so PC is not a source of
the risk the market determines profitability
o Distinguishes from Howey and Hawaii (no substantial reliance on the
market outside of promoters control is those cases)
Viatical Settlements
Owner of life insurance policy (viator) sells policy to someone for something less
than the value of the life insurance policy
Note: popular in US when people w/ AIDS needed money to pay for drugs
In the matter of Universal Settlements International [2006/OSC]
Facts: Universal acted as intermediary in context of viatical settlements matched up
investors with policies, pricing, and engaged medical experts to get life expectancies
Analysis:
Applies Howey test

18

Whether there was a common enterprise and profits were derived solely from
significant efforts of persons other than investors was most contentious issuee
US case which found that sales of viatical was not a sale of a security [Life Partners]
OSC focused on when the promoter was engaging in investment related activities
o LP: investment effort (finding viator, engaging medical experts and
figuring out life expectancy) was done before investors came up
o Universal: activities done once investors had been located - more like a
common enterprise because these investors were heavily dependant on
Universal to make this work and were obtaining fractional interests
Note: buyers and sellers of securities sellers have power because they have the
knowledge BUT in this example have the reverse (the seller is the vulnerable party)

Albino [1991/OSC]
Facts: phantom stock options [incentive plan to senior officials - paid the difference
between the price at which the stock was traded at a certain point of time (award date)
and the price at which they were trading on the exercise date) insider trading
allegations (when Albino exercised his option, knew some material undisclosed info)
Analysis:
Security regulators did not agree 3 conclusions
o Not a security: not commonly known in the business world as securities
form of executive compensation
o Is a security: should be considered the same as any other derivative
securities, which draw their value form the underlying securities
Should be treated as trading securities even though no stock
exchanging hands because the award is substantially the same as
trading stock
o Couldnt decide: OSC should exercise discretionary power to sanction in
the public interest because behaviour was seriously prejudicial to public
confidence in capital markets
Trade
Significance: If there is a trade, the trader had to be registered [s.25]
ENTITY BEING REGULATED IS THE SELLER OF SECURITIES: want to
equalize position of sellers and buyers by making definition of trade broad
OSA s.1(1): A trade or trading includes,

(a) any sale/disposition of a security for valuable consideration, whether payment be on

margin, installment etc., but does not include a purchase of a security or, except as
provided in (d), a transfer, 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,

19

(c) any receipt by a registrant of an order to buy or sell a security,

o (b) and (c) expand definition of trading to include regulation of persons

involved in carrying out trades on behalf of others (i.e. brokers)
o Policy concern: registrants may cheat investors by misquoting price, etc.
(d) transfer, pledge or encumbrance of securities by control person for purpose of giving
collateral for debt

o Policy concern: control persons using ownership strategic for the purposes
of personal gain to them at the expense of other investors
(e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in
furtherance of any trade/sale of a security

Re World Stock Exchange

Issue: Can Alberta Securities Commission sanction promoters of an internet stock
exchange who solicited a number of Alberta residents and companies to raise money on
the stock exchange despite not being registered?
Analysis:
Fundamental principles of security regulation do not change based on the medium
Where person/company solicits posts document on internet offering or soliciting
trades of security and that document is accessible to people in a local jurisdiction,
local law (Alberta) will apply [also reflected in NP 47-201] ULESS you have taken
some steps to ensure that people outside the jurisdiction will not be misguided
o NP 47-201: will not be considered a trade (or distribution if applicable) if:
(a) document contains prominently displayed disclaimer that identifies
local jurisdiction/foreign jurisdiction in which offering is qualified to be
bad in AND (b) reasonable precautions are taken not to sell to any
residents of the local jurisdiction
Distribution
Significance: If there is a distribution, prospectus is required [s.53(1)]
Note: issue means to offer of securities for sale

OSA s.1(1): distribution means:

(a) A trade in securities of an issuer that have not been previously issued,

o Applies to first time issuers and long-lived issuers issuing new securities
(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 issue ( moot cant redeem/re-issue)
(c) A trade in previously issued securities of an issuer from the holdings of any control
person,

o Justification: control person has better knowledge of issuer and may be in

position to take advantage of material information; have ability to alter
value of issuer and may be important factor in success of enterprise
o Definition of control person s.1(1):

(a) Holds sufficient number of voting rights to affect materially the

control of the issuer [e.g. voting agreement with other person and each

20

hold 18% is evidence that person is in position to materially affect

control]
If holds more than 20% of voting rights, deemed control person
in absence of evidence to contrary [e.g. evidence to the contrary
another person holds 80%]
(b) If person or company acting in concert holds sufficient number of
voting rights to affect materially the control or if that combination holds
more than 20%
(d) a trade by or on behalf of an underwriter in securities which were acquired by that
underwriter, acting as underwriter, prior to the 15th day of September, 1979 if those
securities continued on that date to be owned by or for that underwriter, so acting,
(e) a trade by or on behalf of an underwriter in securities which were acquired by that
underwriter, acting as underwriter, within eighteen months after the 15th day of September,
1979, if the trade took place during that eighteen months, and
(f) any trade that is a distribution under the regulations,
and on and after the 15th day of March, 1981, includes a distribution as referred to in
subsections 72 (4), (5), (6) and (7), and also includes any transaction or series of transactions
involving a purchase and sale or a repurchase and resale in the course of or incidental to a
distribution

o Where a resale is deemed a distribution when the original issuance was

under a prospectus exemption.
Reporting Issuer
Significance: continuous disclosure obligations
Two stage analysis re securities law requirements:
Issuers: initial distribution requirements [Long-Form Prospectus]
Reporting issuer: continuous disclosure requirements BUT even well established
issuers already operating in market, are still considered to be distributing when they
sell new securities [dont need to provide same prospectus SHORT FORM]
OSA s.1(1): Reporting issuer means an issuer,

(a) Securities Issued under predecessor Act: corporations that issued VOTING securities
prior to the coming into force of the current act and obtained a prospectus receipt for them
(b) Filed Prospectus for which Director issued a receipt for under this Act
(b.1) that has filed a securities exchange take-over bid circular under this Act before
December 14, 1999

o Historical significance: strategy issuers used (take over shell company and
issued securities out of them)
(c) Listing on recognized stock exchange: since the 15th day of September, 1979 listed and
posted for trading on any stock exchange in Ontario recognized by the Commission,
regardless of when such listing and posting for trading commenced
o Historical interest: issuers on exchanges used to transfer to TSX and be able to
sell securities in Ontario w/out prospectus filed in Ontario
(d) to which the Business Corporations Act applies and which, for the purposes of that Act,
is offering its securities to the public,

21

(e) that is the company whose existence continues following the exchange of securities of a
company by or for the account of such company with another company or the holders of the
securities of that other company in connection with,
o (i) a statutory amalgamation or arrangement, or
o (ii) a statutory procedure under which one company takes title to the assets of the
other company that in turn loses its existence by operation of law, or under which
the existing companies merge into a new company, where one of the
amalgamating or merged companies or the continuing company has been a
reporting issuer for at least twelve months, or

o i.e. if company is formed by amalgamating two companies and one is a

reporting issuer, the new company will be a reporting issuer
(f) Regulatory power to deem issuer to be reporting issuers: that is designated as a
reporting issuer in an order made under subsection 1 (11)

The Prospectus

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

Prospectus required for initial public offering (IPO) and a primary offering of
securities
o IPO: first offering of securities by an issuer entering the market
o Primary offering: first offering of a particular set of securities my an issuer
already in the market (reporting issuer)
Prospectus also required in limited instance of secondary offer (i.e. resale of securities
by a control block holder)

Advantages and Disadvantages of a Public Offering

Advantages
Huge market for capital
Dont have to satisfy bank requirements as debtor and more flexibility than entering
into long-term commitment with bank
Creates base of interest for future capital needs (i.e. sell additional securities when
need more capital)
Liquidity for investors: develops secondary market so that the securities can be traded
back and forth among investors
Established method of valuing shares: in determining fair value of business, look to
value of shares
Flexibility re employee compensation
Ease of doing business (e.g. offer owners of assets securities of the business instead
of cash for consideration of the acquisition)
Prestige and enhanced visibility
Pre-existing owners can diversity their wealth and minimize risk

22

Note Alternative: Private Placement [sell to institutional investors privately]

If can find people who qualify as private placement exemption, can avoid prospectus
requirements
Disadvantages: price will reflect enhanced risk, investors suffer liquidity
disadvantage, private placement restrictions on when you can sell
Disadvantages
High costs and time (i.e. prospectus, continuous disclosure requirements, meeting
regulatory requirements in general)
Reduced flexibility re communication with SH (i.e AGM, proxy circulars, proxy
contest where SH dissatisfied)
Lose confidentiality, especially with respect to competitive advantages
o Increased scrutiny and anyone can access SEDAR electronic database of
information
Increased focus on short-term results
Double taxation profits of corporation are taxed and dividends paid to SH are taxed
Changes in control of voting shares by virtue of fact that SH are being traded on
secondary market
o Someone may be accumulating control position that may not want
o Note: control person subject to takeover bid regime, but may not hold
sufficient shares to be subject to that regime and will still have influence
Overview of Process
1. Pre-filing
Engage an underwriter and lawyer
Collection of corporate documents to be included in prospectus (i.e. 3 years worth of
financial statements)
Develop preliminary prospectus
File preliminary prospectus and obtain receipt
2. Waiting Period:
Distribution of commercial copies of preliminary prospectus, road shows,
negotiations with regulators
o Road show: underwriter and senior officials of issuer have meetings with
potential investors and shows them plans for expansion as a result of
financing and benefits of investors
o Note: if regulators have problems with preliminary prospectus, will issue
comment and then negotiate on how to respond appropriately to the
comment (rather than refusing to issue receipt)
Formal due diligence: going through prospectus to ensure nothing gives investors
ability to sue under s.130 for misrepresentation
Final pricing

23

3. Pre-closing:
Receipt for final prospectus obtained, commercial copes of final printed and
distributed, cooling off period beings to run
4. Post-closing
Money and securities change hands, underwriter advices issuer when issuer is out of
distribution and how much sold in various jurisdictions
Underwriting
Definition and Purpose
Three main parties is offering process: issuer, underwriter, investor
Underwriter - s.1(1): person or company who, as principal, agrees to purchase securities
with a view to distribution or who, as agent, offers for sale or sells securities in connection
with a distribution and includes a person or company who has a direct or indirect
participation in any such distribution, but does not include,
o (a) a person or company whose interest in the transaction is limited to receiving
the usual and customary distributors or sellers commission payable by an
underwriter or issuer,
o (b) a mutual fund that, under the laws of the jurisdiction to which it is subject,
accepts its shares or units for surrender and resells them,
o (c) a company that, under the laws of the jurisdiction to which it is subject,
purchases its shares and resells them, or
o (d) a bank listed in Schedule I, II or III to the Bank Act (Canada) with respect to
securities described in paragraph 1 of subsection 35 (2) or to such banking
transactions as are designated by the regulations;

Business Purpose: understand market for securities (often determine terms and price
of offering given market demand), find investors, offers credibility to issuers (i.e. well
known investment banking firms)
Legal Purpose: gatekeeper to the capital markets
o Can be sued by investors for failing to ensure that the prospectus is free of
misrepresentations [130(1)(b)]
o Acts as 3rd party evaluating the issuers securities and evaluating
disclosure provided in prospectus
o Relationship between the underwriter and issuer is somewhat adversarial
Certificate of Underwriter s.59(1): subject to subsection 63(2), where there is an
underwriter, a prospectus shall contain a certificate in the following form, signed by the
underwriter : To the best of our knowledge, information and belief, the foregoing constitutes
full, true and plain disclosure of all material facts relating to the securities offered by this
prospectus as required by Part XV of the Securities Act and the regulations thereunder (note:
proposed amendment note in effect)

YBM Magnex International [2003/OSCB] high degree of care expected of underwriters in

questioning disclosure

Underwriter is a gatekeeper to the market stands between issuer and pubic as an

independent 3rd party

24

Must play devils advocate, going beyond statements of director and challenge
disclosure issuer proposes to make to the investing public (cant be automatic
reliance)
Must seek out and question all relevant and material facts to reasonably ensure
himself that facts are full and true
Note: argument that this adversarial role is unrealistic in the business climate
(underwriters want to earn money)

Types of Underwriter Issuer Relationships

Direct Issue
No underwriter - Act does not require underwriter (problem w/ underwriter being
gatekeeper)
Difficult for issuers to make contact directly w/ investors, but more feasible with
internet
Best Efforts Underwriting
Agency agreement in which the underwriter aggress to use its best efforts to sell
securities as agent of the issuer [No agreement to purchase as principle]
Underwriter takes commission for securities it is able to sell
Distribution Period - NI 41-101 - Part 8 s.8.2(1): distribution must cease within 90
days after the date of the receipt for the final prospectus [s.8.2(1)] or within 90 days
after the receipt for the amendment to the final prospectus [s.8.2(2)]
Firm commitment underwriting
Underwriter makes agreement to purchase entire issue and re-sell them
Risk on underwriter only entered into when underwriter is confident of success
Compensation underwriters spread difference between what the underwriter pays
(issue price) and what the underwriter receives (sale price)
Clauses in underwriting agreements to address risk:
o Market-out clauses: allows underwriter to terminate agreement if it
reasonably determines that securities cant be marketing profitably due to
poor conditions in the market
Phrase state of financial markets in the market out clause must
be interpreted to refer specifically to the market for that issuers
shares rather than general market downturn [Retrieve Resources v.
Canaccord Capital Corp.]
o Disaster-out clauses: allows underwriter to terminate agreement if a
significant event affects the issuers business or the capital markets
o Indemnity clause: issuer indemnifies the underwriter
Note: not clear if would be upheld and undermines the policy of
securities legislation that says underwriters are suppose to be held
liable (note: not liable to same degree as issuers as per s.130]
Enhanced version of firm commitment underwriter: bought deal agreements

25

o Underwritings agreement made earlier in the process than traditional firm

commitment before preliminary prospectus is filed
o Preliminary short-form prospectus must be filed within 2 days of signing
the agreement, accompanied by a media release announcing transaction
o Underwriter then has 2 days to solicit expressions of interest prior to filing
the preliminary prospectus
o Pro: acceleration and predictability (underwriters have enhanced market
knowledge that allows them to make calls before they get the final
prospectus)
o Con: underwriter is compensated for increased risk
Conflict of Interest Issues
Problem: underwriters doing quality control, but may not be effective due to
relationships with issuer
Example: where underwriter is a subsidiary of a bank and one of the purpose to the
issuers offering is to enable it to pay down debt to the bank
CP 33-105 to NI 33-105 Underwriting Conflicts
Identifies three levels of conflicted relationships
o The underwriter as issuer or security holder
o Related Issuer (cross-ownership): either the issuer or selling securityholder
and the underwriter is an influential securityholder of the other
o Connected Issuer: issuer or selling security holder has some relationship
with registrant (underwriter) which would cause a reasonable prospective
purchaser to question if the registrant and issuer are independent of each
other
Requires non-independent underwriters to make disclosures of relationship under a
prospectus and in some instances, requires involvement of an independent
underwriter
s.2.1(2): registrant may not act as underwriter if the registrant is the issuer or selling
security holder or as a direct underwriter if a related issuer of the registrant is the
issuer or selling security holder BUT
o s.2.1(3): 2.1(2) does not apply if certain disclosure is made and there is an
independent underwriter
o Independent underwriter requirement is satisfied if at least one
independent underwriter participates in the offering
Preliminary Prospectus
Preliminary Prospectus - s.54: must substantially comply with the requirements of Ontario
securities law except that the report of the auditor or accountant need not be included

o NOT a DRAFT still a high degree of formality (near-final form)

o Can exclude detailed pricing information [s.54(2)]
Receipt s.55: The Director SHALL issue a receipt for a preliminary prospectus forthwith
upon the filing thereof [[key difference from final prospectus]

26

Material Adverse Change - 57(1): where a material adverse change occurs after a receipt is
obtained for a preliminary prospectus and before the receipt for the prospectus is obtained or,
where a material change occurs after the receipt for the prospectus is obtained but prior to the
completion of the distribution, an amendment to such preliminary prospectus or prospectus
shall be filed as soon as practicable and in any event within ten days after the change occurs

o KEY: if material adverse change, have to amend preliminary prospectus

(practical implication is that you should keep track of how you send
preliminary prospectus to)
Waiting Period and Amendment

Waiting Period - 65(1): interval of at least ten days, between the issuance by the Director of

a receipt for a preliminary prospectus and the issuance by the Director of a receipt for the
prospectus
Proposed Amendment 65(1): period prescribed by regulation or, if no period is
prescribed, the period between the Directors issuance of a receipt for a preliminary
prospectus and the Directors issuance of a receipt for the prospectus.

Two things re waiting period

o Regulators have opportunity to consider filed preliminary prospectus and
determine whether it complies with all statutory and regulatory
requirements
o Activities of issuer are restricted in terms of communication with potential
investors

Review Process: Risk-Based Approach

Selective review system: detailed review is targeted towards activities and market
participates where problems are more likely to arise
Three types of reviews:
o Basic review: applies to ALL long form and short form prospectus
o Full review: constitutes complete review of entire prospectus and any
documents incorporate by reference subject to this if certain risk-based
criteria are met
o Issue-oriented review: constitutes a review of a specific legal or
accounting issue identified by initial screeners and does not cover the
balance of the prospectus only undertake this when criteria for full
review are not met
Criteria include [p.248]:
o Issuers corporate structure and underlying Business:

Issue appears to have little or no active business; issue proposes to use

proceeds to change fundamental business purpose; issuer has complex
corporate structure

o Issuers financial condition or results:

27

Issuer had experienced significant changes in financial condition; issuer

has not provided all required audited financial statements; issuer is
experiencing financial difficulty as indicated by going concern not
disclosure, debt defaults, negative cash flow, etc.; issuer disclosure
significant or unusual law suit

o Nature of the offering:

Expected size of offering is unusually low; significant portion of
proceeds of offering are unallocated; expenses of offering are unusually
high;

o Matters relating to advisors or corporate governance:

Issuer itself or directors, officers, promoters warrants additional scrutiny;

issuer had not engaged an underwriter; issuer proposes to issue
significant stock options to management, insiders, or advisers;
underwriter plans to maintain significant ongoing equity position or
management role with issuer; issuer plans to use significant portion of
proceeds to reduce debt to underwriter; issuer discloses significant recent
related party transactions

Once review process is complete, regulator sends comment letter to issuer advising of
any required revisions or additional information - issuer revises accordingly and
submits final prospectus to the commission
Statistics: 32% of prospectus reviewed were long form; 65% were short form; of long
form, 69% got basic review and only 15% got full review

Issuer Activity during Waiting Period

Permitted distribution during waiting period s.65(2): Despite section 53, but subject to

Part XIII, it is permissible during the waiting period

o (a) to distribute a notice, circular, advertisement or letter to or otherwise
communicate with any person or company identifying the security proposed to be
issued, stating the price thereof, if then determined, the name and address of a
person or company from whom purchases of the security may be made and
containing such further information as may be permitted or required by the
regulations, if every such notice, circular, advertisement, letter or other
communication states the name and address of a person or company from whom
a preliminary prospectus may be obtained;
o (b) to distribute a preliminary prospectus; and
o (c) to solicit expressions of interest from a prospective purchaser if, prior to such
solicitation or forthwith after the prospective purchaser indicates an interest in
purchasing the security, a copy of the preliminary prospectus is forwarded to
him, her or it
Distribution of Preliminary Prospectus s.66: Any dealer distributing a security to which
section 65 applies shall send a copy of the preliminary prospectus to each prospective
purchaser who, without solicitation, indicates an interest in purchasing the security and
requests a copy of such preliminary prospectus
Distribution List s.67: Any dealer distributing a security to which section 65 applies shall
maintain a record of the names and addresses of all persons and companies to whom the
preliminary prospectus has been forwarded

28

KEY: Issuer/underwriter are able to solicit expressions of interest BUT not allowed to
engage in advertising that is not directly connected with the availability of the
prospectus
o Policy: that public might take info in preliminary prospectus as final
representation of the accuracy of information underpinning the offer
o Problem: fine line between testing the market for expressions of interest
and advertising during the waiting period

Notice Re Camboir Inc. [1986/OSC]

TEST: whether the advertising can reasonably be considered to be in furtherance of a
trade so has to be prohibited until a receipt for final prospectus has been issued as per
s.53(1)
Note: advertisements permitted during waiting period is limited to: alerting public of
the availability of the preliminary prospectus, advising as to where to find prospectus
information and the soliciting of expressions of interest
Advertising campaign in violation of securities legislation can be grounds for the
issue of a cease trade order under s.127(1) and for the refusal of director to issue a
receipt for a final prospectus
Advertisements which specially identify a security proposed to be qualified by a
prospectus are subject to these rules
Note: OSC agreed to take no further action against Cambior on agreement that
parties: case advertisement campaign, not take further steps to market issue until June
15, 1986, counsel would be reprimanded for failing to advise as to impropriety of
advertising campaign
41-101, Part 13, s.13.1(1): A notice, circular, advertisement, letter, or other communication used
in connection with a prospectus offering during the waiting periods, must state specific things
preliminary prospectus has been filed; subject to completion or amendment; where copies can
be obtained from; will not be any sale or acceptance of offer to buy until receipt for final is
issued]
See p.102

41-101CP, Part 6, especially s.6.5(1)

The prospectus requirement s.6.2(1): Securities legislation generally provides that no one
may trade in a security where that trade would be a distribution unless the prospectus
requirement has been satisfied, or an exemption is available.
6.2(2): The analysis of whether any particular advertising or marketing activities is prohibited
by virtue of the prospectus requirement turns largely on whether the activities constitute a
trade and, if so, whether such a trade would constitute a distribution.
Permissible Advertising/marketing during the waiting period - 6.5(1): it is permissible
during the waiting period between the issuance of the receipt for t he preliminary prospectus
and the receipt for the final prospectus to:
o (a) distribute notices, circulars, advertisements, letters or other communications
that
identify the securities proposed to be issued,
state the price of such securities, if then determined, and

29

state the name and address of a person or company from whom

purchases of securities may be made, provided that any such notice,
circular, advertisement, letter or other communication states the name
and address of a person or company from whom a preliminary
prospectus may be obtained,
o (b) distribute the preliminary prospectus, and
o (c) Solicit expressions of interest from a prospective purchaser, if prior to such
solicitation or forthwith after the prospective purchaser indicates an interest in
purchasing the securities, a copy of the preliminary prospectus is forwarded to
the prospective purchaser.
s..6.5(2): The use of any other marketing information or materials during the waiting period
would result in the violation of the prospectus requirement.
s.6.5(3): The identification of the security does not permit an issuer or dealer to include a
summary of the commercial features of the issue. These details are set out in the preliminary
prospectus which is intended as the main disclosure vehicle pending the issuance of the final
receipt. The purpose of the permitted advertising or marketing activities during the waiting
period is essentially to alert the public to the availability of the preliminary prospectus.
S.6.5(4): For purpose of identifying security, the advertising or marketing material may only
o indicate whether a security represents debt or a share in a company or an interest
in a non-corporate entity (e.g. a unit of undivided ownership in a film property)
or a partnership interest,
o name the issuer if the issuer is a reporting issuer, or name and describe briefly the
business of the issuer if the issuer is not already a reporting issuer (the
description of the business should be cast in general terms and should not attempt
to summarize the proposed use of proceeds),
o indicate, without giving details, whether the security qualifies the holder for
special tax treatment, and
o Indicate how many securities will be made available.

Long-Form Prospectus - Content

Standard of Disclosure s.56(1): A prospectus shall provide full, 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.

Two requirements: (1) full, true, plain disclosure of all material facts and (2)
compliance with securities law [key rule is NI 41-101]
Financial Statements
NI 41-101, part 4 [p.86]
An issuer, other than investment fund, that files a long form prospectus must include
in it the financial statements and the managements discussion and analysis [MDNA]
required by this Instrument [s.4.1(1)]
Requirement for audit of financial statements included in prospectus [s.4.2(1)]
Each financial statement and MDNA included in or incorporated by reference into the
long form prospectus must be approval by board of directors before filing [s.4.4(1)]

30

Form 41-101FI, Item 32 [p.162]

Annual financial statements - s.32.2(1): prospectus must include the following:
o (a) income statement, statement of retained earnings, and cash flow
statement for each of the three most recently completed financial years
ended more than
(i) 90 days before the date of the prospectus
(ii) 120 days before the date of the prospectus if the issuer is a
venture issuer
o (b) balance sheet as at the end of the two most recently completed
financial years
o (c) Notes to the financial statements
Definitions:
Income statement: statement of revenue and losses of business [NOTE: can include
non-cash items such as depreciation expenses]
Cash flow statements: exclusive attention to cash flowing in and out of the business
[NOTE: deals only with sources of cash and the uses of case investors pay most
attention]
Balance sheet: account of assets on one side and liabilities on the other
Statement of retained earnings: explains changes int eh companies retained earnings
over the reporting periods breaks down changes affecting the account such as
dividends, special projects, etc.
o Retained earnings = net income which is retained by the corporation rather
than distributed to its owners as dividends
Certificates: NI 41-101, part 5
Number of entitles required to give signed certificate in prospectus:
o Issuer [s.5.3(1)] [OSA s.58(1)]
(a) CEO and CFO
(b) on behalf of the BOD by (i) any two directors of the issuer
other than the CEO and CFO OR if the issuer only has three
directors, two of whom are the CEO and CFO, all of the directors
of the issuer
o Underwriter [s.5.9(1)] [OSA s.59(1)]
o Promoter [s.5.11(1)] [OSA s.58(1)]
Note: defined term in OSA founder/organizer of company
Part 5 specifically states Except in Ontario because OSA refers to the same thing
Amendments to Prospectus
Material Changes - s.57(1): where a material adverse change occurs after a receipt is
obtained for a preliminary prospectus and before the receipt for the prospectus is obtained OR
where a material change occurs after the receipt for the prospectus is obtained but prior to the
completion of the distribution under such prospectus, an amendment to such preliminary

31

prospectus or prospectus shall be filed as soon as practicable and in any event within ten days
after the change occurs

Disclosure is a continuing obligation

Material Change s.1(1)(a): when used in relation to an issuer other than an investment
fund, means,
o (i) a change in the business, operations or capital of the issuer that would
reasonably be expected to have a significant effect on the market price or value
of any of the securities of the issuer, or
o (ii) a decision to implement a change referred to in subclause (i) made by the
board of directors or other persons acting in a similar capacity or by senior
management of the issuer who believe that confirmation of the decision by the
board of directors or such other persons acting in a similar capacity is probable

Documents to be filed with prospectus

NI 41-101, Part 9 [see p.95]
s.9.1(a) - must file the following with a preliminary prospectus:
o (i) signed copy of the preliminary long form prospectus
o (ii) documents affecting rights of security holders
Articles of incorporation
By-laws
Security holder agreements that can reasonably be regarded as
material to an investor in securities of the issuer
Any securityholders rights plans or similar plans
Any other contract of the issuer or subsidiary of the issuer that
creates or can be reasonably regarded as materially affecting the
rights/oblations of issuers securityholders generally
o (iii) material contracts
o (iv) investment fund documents if the issuer is an investment fund
o (v) mining reports if applicable
o (vi) copies of reports or valuations referred to in the preliminary long form
prospectus for which consent is required to be filed under s.10.1
Form 41-101FI: General Information Requirements
General instructions as to what information is required in a prospectus [37 Items]
Item 3: summary of prospectus
Item 4; corporate structure
Item 5: describe business
Item 6: use of proceeds
o Describe each of the principle purpose for which the net proceeds will be
used by the issuer [s.6.3(1)]
o If you are going to use more than 10% to retire indebtness, must indicate
what proceeds of debt were used for [s.6.4(1)]
o If more than 10% of net proceeds are to be used to acquire assets, describe
assets [s.6.5(1)]
Item 8: MD&A
32

Item 10: description of securities distributed

Item 15: principal security holders and selling securities
Item 19: audit committees and corporate governance must disclose who is on
audit committee and their qualifications
Item 21: Risk Factors: cash flow and liquidity problems, experience of
management, general risk inherent in business carried on my issuer, environmental
and health risks, reliance on key personnel, regulatory constraints, economic or
political conditions, financial history, and any other matter likely to influence an
investors decision [s.21.1(1)]
Item 23: legal proceedings and regulatory actions - must disclose legal
proceedings that the issuer is or was a party to [s.23.1(1)] and legal proceedings the
issuer knows to be contemplated [s.23.1(2)] and must disclose penalties/sanctions
imposed by court relating to securities regulation and any settlement agreements
[s.23.2]
Item 25: Relationship with Underwriter must disclose relationships which give
rise to potential for conflict of interest (i.e. connected/related issuer/issuer is
underwriter) [s.25.1(5)]
Item 27: Material Contracts and NI 41-101 s.9.3 disclosure material contracts
required to be filed under s.9.3 [27.1] conflict of interest transactions

SEE P.127 for full list of items

Definition of Material Fact
A prospectus shall provide full, true and plain disclosure of all material facts
[s.56(1)]
o If something is not included in NI 41-101 BUT is a material fact, have to
include
Material Fact s.1(1): fact that would reasonably be expected to have a significant
effect on the market price or value of securities
o Market impact test
o This can be ANY fact that has an effect on price or value no matter how
external on the issuer could be things such as a general decline in
interest rates, decline in Canadian dollar
o Note: different than material change which is a more confined threshold
YBM Magnex International Inc. [2003/OSCB]
Facts: company being investigated for illegal activity special committee to investigate
concluded no disclosure required AIF contained some general disclosure of special
committee and mentioned company was subject to risks generally associated with
companies doing business in Eastern Europe
Issue: did the YBM prospectus provide disclosure of all materials facts?
Analysis:

33

Test for materiality is objective market impact test investor wants to know facts
that would reasonably be expected to significantly affect the market price or value of
securities
Did not contain full, true, and plain disclosure of all material facts
Unique risks (intermingling of business with business in Eastern Europe that were
known to be money launders) was not disclosed
Did not tell investors precisely what YBM knew about the investigation or the
purpose of the special committee
Note courts concern that lead underwriter sat on special committee if the
independence of ones mandate is threatened then the reasonableness of ones
judgment becomes questionable (Condon: if underwriters suppose to be a neutral
third party, this shouldnt happen)

Future Oriented Financial Information (FOFI)

Repeal of NP 48 combination of NI 41-101 and NI 51-102
Definition - NI 51-102 s.1.1(1): forward looking info about prospective result of
operations, financial position or cash flows that is based on assumptions about future
economic conditions and courses of action, and presented in the format of a historical balance
sheet, income statement or cash flow statement

See Form 41-101FI General Instruction 15: forward looking info included in a
prospectus must comply with ss.4A.2 and 4A.3. FOFI must comply with Part 4B
o Note: NI 51 - 102 only refers to reporting issuers BUT Form 41-101FI
deems these sections to apply as if the issuer were a reporting issuer in at
least one jurisdiction

Forward Looking Information NI 51-102, Part 4A

Reasonable Basis - 4A.2: reporting issuer must not disclose forward looking information

unless the issuer had a reasonable basis for the forward looking information
Disclosure 4A.3: reporting issuer disclosing material forward looking information must
include disclosure that:
o (a) identifies forward looking information as such
o (b) cautions users that actual results may vary and identifies material risk factors
that could cause actual results to differ materially
o (c) states material factors or assumptions used to develop forward looking
information
o (d) describes reporting issuers policy for updating the information if it includes
procedures in addition to those listed in s.5.8(2)

FOFI and Financial Outlooks NI 51-102 Part4B

Assumptions 4B.2(1): reporting issuer must not disclose FOFI or financial outlook unless

the FOFI or financial outlook is based on assumptions that are reasonable in the
circumstances.
4B.2(2): FOFI or Financial Outlook that is based on assumptions that are reasonable in the
circumstances, must, without limitation:
o (a) be limited to a period for which the information in the FOFI or financial
outlook can be reasonably estimated and

34

o (b) Use accounting policies that the reporting issuer expects to use to prepare its

historical and financial statements for the period covered by the FOFI or the
financial outlook
Additional Disclosure 4B.3: In addition to disclosure required by s.4A3, if reporting
issuer disclosure FOFI must include disclosure that states:
o (a) the date management approved
o (b) explains the purpose of the FOFI and cautions readers that the information
may not be appropriate for other purposes

Note: various disclosure obligations in s.5.8

Kerr v. Danier Leather Inc. [2004/Ont. SC]
A forecast can be a fact and it can also be material
Factual assertions implied in a forecast:
o Forecast represents the forecasters best judgment of the most probable set
of economic conditions and the companys planned course of action
o Forecast is sound and reliable in the sense that the forecaster made it with
reasonable care and skill
o Forecaster generally believes the forecast and the forecasters belief is
reasonable and the forecaster is not aware of any undisclosed facts tending
to seriously undermine the accuracy of the forecast
A forecast is not an untrue statement of material fact if the results are not achieved
Forecast is an untrue statement of material fact if the factual assertions implied are
untrue in that it does not represent managements best judgment b/c:
o Forecast was not made with reasonable care and skill
o Management does not generally believe the forecast
o Managements belief in the forecast is unreasonable
o Management is aware of undisclosed facts that would seriously undermine
the forecast
Because the market had an expectation as to the companys results due to the
statement, the facts are material
Court finds untrue statement of material fact based on idea that they failed to act with
reasonable care and skill and that any belief in the forecast was unreasonable (i.e. not
adequate analysis, failure to consult with professionals regarding impact of this
information on the forecast and impact on the share price, etc.)
Issuing a Receipt for a Prospectus
Discretionary refusal where it is not in public interest to issue a receipt [61(1)] and
mandated refusal in certain circumstances [61(2)]
Issuance of receipt - 61(1): Subject to (2) and 63(4), 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
Residual discretion residing to refuse to issue a receipt for a prospectus
35

Merit jurisdiction regulators can say they dont think that it is a good investment
for anyone to make BUT
Note: language in bold saying no securities commission has passed on merits (i.e.
cant say where regulator has issued a receipt the regulator is saying there is worth the
investment)

Reasons for Refusal of Receipt 61(2):

(a) the prospectus or any document required filed with it (i) does not comply with in any
substantial respect with any of the requirement of the Act/regulations or (ii) contains a
statement, promise, estimate or forecast that is misleading, false or deceptive, or (iii) contains
a misrepresentation
(b) an unconscionable consideration has been paid or given or is intended to be paid or given
for any services or promotional purposes or for the acquisition of property;
(c) the proceeds from the sale of the securities under the prospectus and other resources of the
issuer are insufficient to accomplish the purpose of the issue stated in the prospectus

o Comment: underlying reasoning is that they havent made business plan

that will allow success of this venture
o Example: Loki Resources Ltd
(d) issuer cannot reasonably be expected to be financially responsible in the conduct of its
business because of the financial condition of (i) the issuer, (ii) an of issuers officers,
directors, promoters, or control persons, or (iii) the investment fund manager of the issuer
(e) the business of the issuer may not be conducted with integrity and in the best interests of
the security holders of the issuer because of the past conduct of (i) issuer, (ii) any of the
issuers officers, directors, promoters or control persons, or (iii) the investment fund manager
of the issuer

o Example: Tricor Holdings

(f) a person or company that has prepared or certified any part of the prospectus, or that is
named as having prepared or certified a report or valuation used in connection with the
prospectus, is not acceptable;
(g) an escrow or pooling agreement in the form that the Director considers necessary or
advisable with respect to the securities has not been entered into; or
(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.

Due Process Requirements in Refusal

Hearing - 61(3): Director shall not refuse to issue a receipt without giving the person or

company who filed the prospectus an opportunity to be heard

Referral to Commission - 61(4): Where it appears to the Director that a preliminary
prospectus, pro forma prospectus, or prospectus raises a material question involving the
public interest under subsection (1) or a novel question of interpretation under subsection (2)
that might result in the Director refusing to issue a receipt, can refer the question to the
Commission for determination
Hearing by Commission 61(7): Commission, after giving the parties an opportunity to be
heard, shall consider and determine the question and refer the matter back to the Director for
final consideration under subsections (1) and (2).

Decision of Commission 61(8): binding on director

36

Tricor Holdings [1998/OSCB]

Refused to issue receipt for prospectus based on evidence that issuer had previously
been controlled by individual convicted of securities related offences and only
circumstantial evidence that the convicted individual continued to have close relations
(i.e. son was still a substantial SH)
Canadian Depository for securities was named as only registered owner of more than
10% of shares [i.e. clearing house for all securities traded on stock exchange]
o Couldnt get independent verification of beneficial owners refused to
issue receipt based on suspicion of unsavory character associated with the
company
Note: this discretion is rarely exercised
YBM Magnex International [2003/OSCB]
Regulators required YBM to engage an auditor from one of big six accounting
firms to approve of financial statements
During course of review opened investigation file on YBM staff requested source
documentation underlying YBMs disclosure record in connection with the 1996
statements final prospectus disclosed most but not all of the recommendations
Commission issues receipt following 5 months of review
Why didnt OSC refuse to issue a receipt?
o Condon: financial pressure on YBM would not be able to pay off debts
if didnt get capital and would have gone bankrupt caused regulators to
gave Right to Withdraw or Rescission
o Court: fundamental concern in refusing to issue a receipt for a prospectus
is one of fairness substantial fairness to the company which may be
accomplished by providing as much information as possible without
necessarily disclosing the precise information or sources
Cooling-off Period
Investors have a cooling-off period to consider the final prospectus once a receipt is
issued and the prospectus has been delivered to them
Withdrawal from purchase s.71(2): An agreement of purchase and sale is not binding
upon the purchaser, if the dealer from whom the purchaser purchases the security receives
written or telegraphic notice evidencing the intention of the purchaser not to be bound by the
agreement of purchase and sale not later than midnight on the second day, exclusive of
Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus
and any amendment to the prospectus
o Note: close interaction with s.57(1) - obligation to report material changes see
p.34
Example 1
Day 1: receives final
prospectus
Day 2: agree to buy
Day 5: prospectus amendment

Example 2
Day 1: agree to buy
Day 4: receive final
prospectus
Day 5 prospectus amendment

Example 3
Day 1: receive final prospectus
Day 4: agree to buy
Day 5 prospectus amendment
filed

37

filed
Day 6: wants out
Cooling off period starts on
day 1 cant get out of the
agreement b/c amendment was
not filed until after this
purchasers cooling off period
was over

filed
Day 8: amendment delivered
Day 9: want out
Fact that amendment filed
before cooling off period
ended triggers obligation to
receive the amendment
cooling off period re-starts on
date the amendment is
received

Entitled to re-start cooling off

period on receiving
amendment? NO
Cooling off period started on
day 1 cooling off period
ended before agreement to buy
and cant re-start because
amendment filed after cooling
off period ended

SUM:
Not bound by agreement during cooling off period
Cooling off period runs from the date purchaser receives latest prospectus (date of
agreement is irrelevant)
If an amendment is filed during cooling off period, period will re-start on date
amendment is received
If an amendment filed after cooling off period, does not re-start the period
Failure to Deliver Prospectus
Penal Sanction s.122(1)(c): everyone who contravenes Ontario securities law, is guilty of

an offence and on conviction is liable to a fine of not more than $5 million or to

imprisonment for a term of not more than five years less a day, or to both
Administrative orders s.127(1): Commission may make one or more of the following
orders if in its opinion it is in the public interest to make the order or orders
o Para. 5. If the Commission is satisfied that Ontario securities law has not

been complied with, an order that a release, report, preliminary prospectus,

prospectus be provided by a market participant to a person or company
Civil Sanction s.133: purchaser of a security to whom a prospectus was required to be
sent/delivered but was not sent/delivered in compliance with subsection 71 (1) has a right of
action for rescission or damages against the dealer or offeror who failed to comply with the
applicable requirement

o Note: can sue both underwriter and issuer

o Note: slightly different treatment associated with failure to deliver
prospectus than with respect to failure to file
Failure to File Prospectus
Penal Sanction s.122:
Administrative Orders s.127: cease trade order [para.2]
Civil sanction s.128(1): Commission may apply to the Superior Court of Justice for a
declaration that a person or company has not complied with or is not complying with Ontario
securities law
o Note: very rarely used argument that if the commission went to court more
frequently, judges would take infractions of securities law more seriously

38

o More outcome would relief through the opportunity at common law for
SH to sue for breach of contract where a prospectus should have been
provided and was not
o Jones v. Deacon Hodgson: failure to file prospectus renders contract of
purchase and sale void and there is no limitation period for a remedy to be
available (unlike misrepresentation)
Lapse and Refiling of Prospectus (note: not covered in class)
Lapse Date s.62(1): 12 months after the date of the most recent prospectus relating to the
security

No distribution s.62(1.1): No distribution of a security to which subsection 53(1) applies

shall continue after the lapse date unless a new prospectus is filed and a receipt for the new
prospectus is obtained from the Director
Continued Distribution s.62(2): A distribution may be continued for a further 12 months
after a lapse date if:
o (a) a pro forma prospectus prepared in accordance with the regulations is filed
not less than 30 days prior to the lapse date of the previous prospectus;
o (b) a prospectus is filed not later than 10 days following the lapse date of the
previous prospectus; and
o (c) a receipt for the prospectus is obtained from the Director within the 20 days
following the lapse date of the previous prospectus

Prospectus Requirements in a Secondary Offering (note: not covered in class)

Control persons distributing previously issued securities need to file a prospectus
Prospectus is required where there is a sale of previously issued securities by a person
distributing within the meaning of securities legislation where the person has not
received an exemption (includes control persons)
Rationale:
o Information possessed by control person
o Control persons ability to influence the issuer
o Control person can affect the market price
Orders to furnish information re distribution to the public s.64(1): Issuer and its

directors and officers must supplying information and certificates that allow the holder to sell
the securities in that if the issuer doesnt co-operate the regulator has authority to order the
issuer to furnish such information OR
Waiver s.64(2): Director can waive statutory requirements if satisfied that all reasonable
efforts have been made to comply with this Part and the regulations and that no person or
company is likely to be prejudicially affected by such failure to comply

Modifications to Prospectus Requirements

Response to problems re time and cost with the long-form prospectus
Short-Form Prospectus
Governing law: 44-101

39

Underlying policy: these issuers are already in the market, listed on exchanges, and
have widely disseminated information about them
OSA s.63(1): permits SF prospectus and deems it to provide sufficient disclosure of all
material facts for purposes of s.56 if it complies with regulations

Trend: move towards SFP rather than LFP [2005 51% were SFP; 2007 65% were
SFP]

Eligibility Requirements

Expanded in NI 44-101: initially confined to a small area of senior issuers focus

now on being listed on an approved exchange
Basic Qualification criteria NI 44-101 Part 4.4 s.2.2:
o (a) Electronic filer (CDAR)
o (b) Reporting issuer in at least one jurisdiction in Canada (NO IPOs)
o (c) Filed all periodic and timely disclosure documents that you are
required to have filed (i.e. met continuous disclosure requirements)
o (d) Has (i) current annual financial statements and (ii) current AIF in at
least one jurisdiction
o (e) Equity securities are listed on short form eligible exchange and is not
an issuer (i) whose operations have ceased or (ii) whose principle assert is
cash, cash equivalent, or its exchange listing
Short form eligible exchange s.1.1: ALL organized exchanges
[TSX, Tier 1 and Tier 2 TSX Venture exchange, and CNQ]
Note: different eligibility requirements re debt securities

Content/Disclosure

Form 44-101FI [p.1176]

o Item 7: Characteristics of securities being distributed (this is the focus)
o Item 11: Documents incorporated by reference must incorporate by
reference your continuous disclosure record (i.e. current AIF, current
financial statements, interim financial statements most recently filed,
content of any news release re financial information, any material change
report filed since last AIF)
Note: any misrepresentations in these documents will be
considered part of the SF prospectus and thus be subject to liability
for misrepresentation
o Item 17: Risk factors [may cross reference to other documents already
filed with regulators i.e. risk factors discussed in current AIF]
44-101 CP, part 4 [p.1212]

Review of SFP

Much shorter review period for SF prospectus under MRRS

NP 43-201 s.5.3: principal regulator will use its best efforts to issue a comment
letter on preliminary SF prospectus within three working days of the issuance of the
preliminary MRRS decision doc (i.e. receipt)

40

Note: enhanced passport system ONT had undertaken to review SFP within two
days of receiving

Shelf-Prospectus
Governing law: 44-102
Eligibility: issuers eligible for SFP [s.2.2]
Self-prospectus can qualify a series of distributions over a 2 year period [i.e. file and
the same document can qualify a number of subsequent distributions as long as they
occur within a two year period of getting the receipt for the shelf prospectus]
44-101CP s.1.6: Issuers qualified under NI 44-101 to file SFP using the self
distribution procedures are governed by requirements and procedures of NI 44-101
[should have regard to NI 44-101 then refer to NI 22-102 and any accompanying
policy for additional requirements]
NI 44-102 s.5.6: Information that may be omitted from shelf-prospectus if not
known by the issuer at the time it is filed
o Terms of the securities that may be distributed
o Dollar amount, size, and other specific terms of each
o Terms of plans of distribution
o Information about underwriter
Post-receipt Pricing Prospectus
Governed law: 44-103
Eligibility: available to ALL ISSUERS
Similar to shelf-prospectus in that you can distribute securities and decide pricing
after you receive receipt for prospectus as long as they are distributed within 90 days
o Often used in situations where need additional financing but are still
deciding on kind of security
o Receipt expires after 90 days [s.3.5]
Can only be used to qualify a specific transaction and a single type of security
o not including a rights offering [s.2.1]
Two-step filing process:
o Based prospectus document filed plus
o Supplement (one page document) dealing with the actual securities [s.4.1]
Does not need further regulatory approval
Multi-Jurisdictional Disclosure System
Governing law: NI 71-101 (governs application of MJDS rules to US issuers wishing
to issue securities in Canada)
Underlying principle of mutual recognition: allows US issuers to distribute securities
to Canadian investors using US disclosure documents
Eligibility requirements for Canadian issuers wishing to issue securities in US:
o Reporting issuer in Canada for one year
o Public float of US 75 million

41

o Canadian prospectus + relevant US form (usually form F-10)

o Financial statement reconciled to US GAAP (this is key thing)
Note: under major reconsideration at the moment
o International financial reporting standards [IFRS] push to harmonize
reporting standards across the globe
o Canada will come on board with this in 2011
Continuous disclosure requirements (Canadian disclosure + Form 40F)

Capital Pool Companies

Capital Pool Companies: no assets other than cash and have not commenced business
activity
Capital Pool Companies (OPC) operating Agreement with TSX Venture (approved by
security regulators in Ontario, Alberta, BC, Saskatchewan, and Manitoba): allows
CPC to be listed on TSX Venture
OSC Policy 41-601
o Key Requirement - CPC prospectus in each jurisdiction proposed
distribution will be made + TSX Venture listing
o Qualifying transaction has to be completed within 18 months
o Once CPC has reached an agreement in principle to a proposed qualifying
transaction must issue news release and get approval of CDNX and
majority of minority SH
o If prior to completion of IPO, an agreement in principle is reached, the
program will not be available and should prepare a regular prospectus
Civil Liability and Due Diligence
Two choices wrt enforcing good behaviour:
1. Regulators
2. Private enforcement
Policy
La Porta research: Capital markets that have most growth had securities law that
emphasized lots of disclosure and also had an investor friendly enforcement regime
Contributes to investor confidence and enables them to get their money back
Public enforcement had a modest role in stock market size
NOTE: availability of CL remedies for misrepresentations [OSA - s.130(10)]
Who is Liable OSA - s.130 (1)
(a) Issuer or selling SH on whose behalf the distribution is made
o Note: only control SH selling meets defn of distribution and is liable
(b) Each underwriter required to sign certificate
o Note: Certifying to their belief that the prospectus contains full, true, and
plain disclosure of all material facts as required by s.59(1)
(c) Every director of issuer at time of prospectus filing or amendment
42

(d) Every expert in relation to: reports, opinions, statements made by them
(e) Every other signer of prospectus or amendment to the prospectus (i.e. CFO)

What does Plaintiff have to Prove

OSA s.130(1)
1. Purchase of securities offered under the prospectus
2. Purchase was made during period of distribution
3. Misrepresentation in the prospectus
Misrepresentation

Definition of misrepresentation - s.1(1): (a) untrue statement or material fact or (b)

omission to state a material fact that is required to be stated or that is necessary to
make a statement not misleading in the light of the circumstances in which it was made
o Note: broader than CL rules cant necessarily sue for omissions
Material Fact s.1(1): fact that would reasonably be expected to have a significant
effect on the market price or value of the securities
DEMEED RELIANCE: without regard to whether P relied on misrepresentation

Kerr v. Danier [2007/SCC] no liability for non-disclosure of material facts arising after receipt
Facts:
May 6: receipt obtained for final prospectus forecast of Q4 financial results
May 16-19: Q4 results lagging behind due to unseasonably warm weather
May 20: distribution closed
June 4: issues revised forecast and material change report; share price drops
June 27: Q4 ends; original forecast substantially achieved
Analysis:
Inconsistency in wording of s.57 and s.130
o If material change occurs after receipt and prior to end distribution, have
to file an amendment [s.57]
o Right of action for misrep (misrep. defined as a material fact) [s.130]
Cant read s.130 as a self-standing provision only
Only positive obligation to disclosure material changes after receipt no liability
under s.130 for failing to disclosure material facts that dont amount to material
changes after receipt
Material change s.1(1): change in the business, operations or capital of the issuer that
would reasonably be expected to have a significant effect on the market price or value of any
of the securities of the issuer

Changes here was a material fact not change because the financial downturn was a
results of a change in weather (external to issuer)
Earnings (results of operations) not read into provision
Condon: doesnt accord w/ what investors want to know earnings affect price a lot

43

Remedies
Rescission [only if defendant is issuer/selling SH (130(1)(a) or underwriter (130(1)
(b)] or damages

Limitation re underwriters s.130(6): not liable for more than they underwrote
Non-liability for damages - s.130(7): not liable for damages that the D proves do not
represent depreciation in value of the security as a result of the misrepresentation
Joint and several liability s.130(8): can choose D - subject to court discretion if
satisfied that to permit recovery of such contribution would not be just and equitable
Limitation re amount recoverable s.130(9): damages limited to price at which the
securities were offered to the public (no opportunity $ - i.e. would have bought
something else)

Kerr v. Danier: Prima facie measure of damages is difference between price paid and
post-misrepresentation price (dont have to crystallize loss can still hold securities)
Limitation Periods s.138
Cant bring action for rescission more than 180 days after the date of the transaction
that gave rise to the cause of action; or
Cant bring any other action more than 180 days after P first had knowledge of the
facts giving rise to cause of action or 3 years after date of transaction (earlier of)
Statutory Defences to s.130(1)
Issuer defences

Purchaser knowledge of misrepresentation OSA - s.130(2): when purchased

Depreciation not caused by misrepresentation OSA s.130(7): not liable for that
portion of damages

o Condon: if market wide loss accounted for some of loss, may be off the hook for
that portion BUT there are few opportunities for this
NOTE: ONUS ON DEFENDANT
Additional defences for directors/officers/underwriters

No knowledge or consent of filing OSA - s.130(3)(a): prospectus or the amendment

to the prospectus was filed without knowledge or consent, and on becoming aware of its
filing, he, she or it forthwith gave reasonable general notice that it was so filed

Withdrawal of consent OSA - s.130(3)(b): on becoming aware of

misrepresentation after the issue of a receipt and before the purchase of the securities by the
purchaser, withdrew consent, gave reasonable general notice of withdrawal and reason for it
Reliance on Expert Statement - s.130(3)(c): wrt any part of prospectus made on the
authority of an expert or purporting to be a copy/extract from a report, opinion or statement
of an expert, he, she or it had no reasonable grounds to believe and did not believe that
there had been a misrepresentation or that it did not fairly represent the report, opinion or

44

statement of the expert or was not a fair copy of or extract from the report, opinion or
statement of the expert

NOTE: These defences do not apply to issuer OR selling security holder

NOTE: ONUS ON DEFENDANT
Additional Defences for Experts

Expert Defence OSA - s.130(d):

o
o

(i) After reasonable investigation, had reasonable grounds to believe that such
part of the prospectus/amendment fairly represented report, opinion or statement
(ii) on becoming aware of misrepresentation advised the Commission and gave
reasonable general notice that such use had been made and that he, she or it
would not be responsible for that part

No knowledge or consent of filing OSA - s.130(3)(a)

o Condon: more likely to work if prepared report and gave to issuer for
some other purpose

Due Diligence Defence

Key requirements:
Actual belief that there is no misrepresentation
Reasonable investigation to provide reasonable grounds for that belief
*Issuer and Selling SH do NOT have due diligence defence*
Due Diligence Defence OSA- s.130(4)(5): No person or company, other than the issuer or
selling security holder UNLESS:
(a) Filed to conduct reasonable investigation as to provide reasonable grounds for a belief that
there had been no misrepresentation; or
(b) Believed there had been a misrepresentation.

Note: (4) refers to experts; (5) refers to main body of prospectus

Note: ONUS ON PLAINTIFF
Statutory Standard of Reasonableness OSA - s.132: that required of a prudent person in
the circumstances of the particular case (objective-subjective)
Most securities firms have a due diligence checklist
Escott et al.v. BarChris Construction Corp. [1968/US]
Facts: Didnt disclose financial difficulties (building for cosuteromes that werent paying
entire costs) signers of document were the 9 directors
Issue: Did the defendants prove their due diligence defences?
Analysis:
Key: each defendant is considered separately
Insider directors/Officers: could not have believed no untrue statements
o CEO: knew all the relevant facts and even if not able to show that they
didnt believe, could show there was no reasonable grounds for this
45

o Similar results for two VPs: court makes mention of fact that they were
relatively uneducated, but there was nothing to show that they made
reasonable investigation to provide reasonable grounds for belief that there
is no misrepresentation (didnt matter that they couldnt read)
Lawyer/outside directors
o Outside director who participated as lawyer in preparation of prospectus
held to higher standard than other outside directors (should have known
obligations under statute)
o Condon: Those who sit on board who have particular set of expertise and
experience will be assessed in connection whether they acted in
accordance with the appropriate standard for that profession or for that
skill set
Outside Directors and underwriters: need to make some effort to verify info given by
officers/inside directors
NOTE: burden of proof falls on defence in US

Re YBM Magnex International [2003/OSCB] approach to due diligence look at individual

directors in terms of skill, experience, participation, and access to info

Facts: investigated for illegal activity (money laundering and organized crime) shortform prospectus offering special committee said no disclosure AIF only said
subject to risks generally associated with companies doing business in Eastern Europe
Analysis:
Issue 1: Definition of materiality
Reinforces statutory standard: whether undisclosed facts would have revealed that
YBM was exposed to risks that would have significant effect on value of shares if
disclosed
Some facts may be material on their own while other facts may be material in
accordance with other facts (must be assed contextually)
Common sense must prevail
Condon: compare to Kerr big difference in SCC approach to material and OSC
(SCC never references broader factual context)
Issue 2: role of OSC re assessing due diligence
Jurisdiction to make sanctions is independent of whether or not they would have met
their due diligence defence under s.130
Even if due diligence defence is made out, can still mark order in public interest
Issue 3: Approach to due diligence
Look at individual directors in terms of skills and experience and whether they
exercised an appropriate level of due diligence
Members of Committee:
o Mitchell: belief not reasonable given that he was an experienced
director/underwriter, had considerable skill, access to most information,
and extensive participation (focused on potential conflict of interest acting
as director and underwriter)

46

o Davies: belief not reasonable given his skill and business experience he
didnt act prudently after personal visit from FBI (didnt ask questions)
o Schmidt: age, inexperience, and lack of information reasonable to rely
on advice from experienced counsel and advisors
Outside Directors:
o Peterson: lawyer - Due diligence available but barely given professional
reputation
o Antes and Greenwald: adverse comments about being more appreciative
of muddy disclosure, but pass (no material role/participation)
o Condon: OSC more generous to outside directors (but more expectations
since Enron scandals)
Underwriter: defence not available as it was a sophisticated and experienced
underwriting firm, had more knowledge than typical underwriter

Kerr v. Danier [2007/SCC]

After receiving report of Q4 results, must have known wouldnt achieve forecast
Fact that management may have believed that by the end of the quarter the forecast
will be achieved does not relieve them of their obligation to disclose material
information that would reasonably be expected to have a significant effect on the
market price or value of the shares

Continuous Disclosure
ALL REPORTING ISSUERS are subject to periodic and timely disclosure obligations
Policy Rationales
Up to date disclosure assists in valuing securities (EMH efficient market means
information reflect in price in fasted way)
Reduces possibilities for fraud (insiders of issuers cant take advantage of position)
Assists w/ achieving corporate governance goals (i.e. managerial accountability)
Equality of opportunity as between all investors
Increases investor confidence
Facilitates the issuance of new securities b/c can use publicly available info to gain
timely access to financing through SF, shelf, post-receipt pricing, multijurisidctional
disclosure system prospectuses
Arguments against mandatory disclosure regime:
Market is better regulator of info than regulator rules
o Rules fossilized dont meet future needs
o Flexible Market issuers respond to signals from investors re info needed
o Too onerous and costly keeps companies private
Issuers have incentives to voluntary disclose
Role of gatekeepers in disclosure system
Costs of mandatory disclosure lowers value of issuer

47

 Info overload problem

NOTE: 94% of capital market activity takes place in secondary market
Continuous Disclosure Obligations on Other Parties
Insider reporting requirements - OSA - s.107
Early warning system re TB- OSA s.101
Periodic Disclosure Requirements: NI 51-102
*OSC Rule 51-801 implements NI 51-102 and indicates that it supersedes certain provisions of OSA*

Annual Financial Statements: NI 51-102 - Part 4

Statements Required s.4.1(1):
Income, retained earnings, cash flow
Balance sheet
Notes to financial statements
Comparative: most recently completed financial year and preceding year
NOTE:
MUST be audited [s.4.1(2)]
Approval by BOD before filed with regulators [s.4.5(1)]
Auditors report required: financial statements are fair representation of the reporting
issuer [auditors as gatekeepers]
Filing Requirements - s.4.2 (different from OSA):
Non-venture: 90 days after end of most recently completed financial year or date of
filing in foreign jurisdiction (earliest of)
o Policy: venture issuers get more time b/c will have fewer resources
Venture: 120 days after end of most recently completed financial year or date of filing
in a foreign jurisdiction (earliest of)
Delivery Requirements s.4.6
Send request form to registered and beneficial security holders to allow them to
request copies of statements [s.4.6(1)]
if copy is requested must send the later of 10 calendar days after filing deadline and
10 days after request [s.4.6(3)]
Interim Financial Statements: NI 51-102 Part 4
Statements Required s.4.1(1): same as AFS [see s.4.3(2)]
Approval by board can be delegated to audit committee [s.4.5(3)]
KEY DISTINCTION B/W INTERMIN AND ANNUAL: Auditor report is not
required for interim, but must disclose the fact that they are not audited [s.4.3(3)]
o Disclose if auditor was unable to complete review and give explanation
and must include review report from auditor if expressed reservations

48

Filing requirements s.4.4

Non-venture: 45 days after end of quarter or date of filing in foreign jurisdiction
Venture: 60 days after end of quarter or date of filing in a foreign jurisdiction
Delivery Requirement 4.6: same procedure as annual statements
Management Discussion and Analysis (MD&A): NI 51-102 Part 5
Reporting Issuer must file MD&A re annual and interim financial statements [s.5.1]
Definition: narrative explanation of how company performed in period covered by
financial statements (reasons for financial results), financial condition, and future
prospectus
Content: NI 51-102, s.5.4 and Form 51-102FI
Definition of Materiality Form 51-102FI Part 1: if reasonable investors decision
whether or not to buy, sell, or hold securities in your company would likely be
influenced or changed if the information if the information was omitted or misstated
Content of Annual MD&A Form 51-102F1 Part 2 [see p.1635]
o
o
o
o
o
o
o
o
o
o
o

Content of Interim MD&A Form 51-102F1- Part 2 [see p.1647]

o
o
o

Overall performance
Selected Annual Information
Results of operations
Summary of quarterly results
Liquidity (i.e. how much cash company has to meet its obligations)
Capital Resources
Off-Balance Sheet arrangements (that are reasonably likely to have an effect on
current or future operations of financial condition)
Transactions with related parties
Proposed Transactions
Critical accounting estimates
Changes in accounting policies

Update companys annual MD&A

Discuss current quarter results and compare results of operations and cash flows
with previous years
Changes in operations or elements of income or loss that are not related to
ongoing business enterprises
Seasonal aspects of company that may affects its financial condition

Must disclose info number of outstanding shares have in market place [s.5.4]
o Policy: tells how many SH have claim on the assets of the issuers
FOFI NI 51-102 - s.5.8(3):
o If previously FOFI is no longer accurate, but disclose this in MD&A
o

Discuss events/circumstances that are reasonably likely to cause actual results

that differ material from FOFI and expected differences

o Exceptions: if already disclosed in news released and filed and identifies

the news release (its date and where it is available) in the MD&A
49

Approval Requirements - s.5.5

Annual: approved by BOD
Interim: BOD or approval can be delegated to audit committee
Filing Requirements s.5.1 (2): same as for financial statements
Delivery Requirements s.5.6: if security holder requests, must send copy by delivery
deadline for annual or interim financial statements
OSC Staff Review of MD&A (2004) Consolidation
Arguably the regulators track this more closely than financial statements as they are a
more novel form of disclosure and is a specific securities requirement
General observations: omit information that may be material, disclose of excessive
amount of immaterial information, disclose good news not bad, lack adequate internal
policies and procedures for preparing, reviewing, and approving
Annual Information Forms: NI 51-102 Part 6
Reporting issuers that are not venture issuers must file AIF [6.1]
Content NI 51-102F2
Definition: document to provide material info about company and its business at a point in
time in the context of its historical and possible future developments describes company,
operations and prospects, risks, and other external factors that impact company specifically

Materiality Part 1: Reasonable investor definition (same as MD&A standard)

Items 5.1(4), 5.2, & 10
o Item 5.1(4): social or environmental polices

If company implemented polices that are fundamental to operations,

describe them and the implementation steps

o Item 5.2: risk factors

cash flow and liquidity problems, general risks inherent in business,

environmental/health risks, regulatory constraints, economic or political
conditions and other matters likely to influence investors decision to
purchase

o Item 10: directors/officers

Identify, personal info, security holdings, members of each committee

10.2: cease trade orders against directors/officers within last 10 yrs

10.2(1.2): bankruptcy proceedings or sanctions against
directors/officers or SH holding a sufficient number of SH to affect
materially the control of the company within last 10 yrs

NOTE: doc most like prospectus (description of business, directors, major business
contracts, legal liabilities, etc.)
Filing Requirement s.6.2:

50

90 days after end of most recently completed financial year

NOTE: There is nothing in rule that says anything about having to deliver the AIF
Access electronically on SEDAR provided by Canadian securities Regulators

Recent Continuous Disclosure Reforms (Can Sox Initiatives)

Response to concern over Enron in US and Nortel in Canada: misleading financial
disclosure and directors engaging in fraudulent activity
Canada Can Sox Initiatives Following Sarbanes Oxley in US
NI 52-108: Auditor Oversight
Canadian Public Accountability Board (CPAB): responsible for governing auditors
who are responsible for auditing financial statements of reporting issuers
Oversees credentials of auditors
Public accounting firms have to sign participation agreement w/ CPAB to be in good
standing
Policy: addresses deficiencies wrt to auditor accountability (auditors lost sight of
gatekeeper role concerned re other roles such as business advice/tax consulting)
Kripps v. Touche Ross and Co.
Auditors are retained to form an opinion on the fairness of financial statements not
merely on their conformity with GAAP
It is not appropriate for auditors to sign an unqualified auditor report because the
financial statements are prepared in accordance with GAAP if the auditors know or
ought to know that the financial statements are misleading
NI 52-109: Certification of Annual and Interim Filings
Certification by CEO and CFO (or persons who perform similar functions) [2.1
annual; 3.1 interim]
Exemption if comply with certification requirements of Sarbanes Oxley and signed
certificates are filed on SEDAR [s.4.1]
Content of Certification - Form 52-109FI:
o
o
o
o

Reviewed filings
No misrepresentation (no untrue statement of material fact or omission of
material fact)
Fairly represent financial condition, results of operations, and cash flow
Responsible for establishing and maintaining disclosure procedures and control
over internal financial reporting for the issuer and that you have designed such
disclosure procedures to provide that reasonable assurance re reliably of financial
reporting and evaluated effectiveness
Caused issuer to disclose in MD&A any material change in internal control over
financial reporting

Liability NI 52-109CP- Part 12: quasi-criminal (122), administrative(127), or civil

proceedings under securities law for providing false certification

51

NOTE: internal control over financial reporting (reporting financial info across all
segments of business and operating divisions) is controversial
Compliance costly in US
Canada: rejected proposal to require internal controls audited (just have to certify that
these are in place and working to the best of their knowledge)
Audit Committees: MI 52-110
Venture issuers are exempt from composition requirements in Part 3 and reporting
obligations in Part 5 [s.6.1]
Characteristics of Non-Venture Issuer Audit Committee- Part 3

Three Key Requirements 3.1:

o
o
o
o

(1) Three members

(2) Every member must be a director of the issuer
(3) Every member must be independent
(4) Must be financially literate

Meaning of Independence

Meaning of Independence - s.1.4(1): no direct/indirect material relationship w/ issuer.

Material Relationship - s.1.4(2): relationship which could, in the view of the issuers
board of directors, reasonably interfere with the exercise of a members independent
judgment.
List of individuals deemed to have material relationship - s.1.4(3):
o
o
o
o
o

Employee/executive officer of the issuer within last three years

Immediate family member an executive officer of the issuer within last 3 yrs
partner or employee of firm that is issuers internal or external auditor within last
3 yrs (or whose spouse or child living in home is)
individual who is financially compensated for advisory role
See p.1961 for additional material relationships

Meaning of Financial Literacy

Definition s.1.5: ability to read and understand financial statements that present a
level of complexity of accounting issues that can reasonably be expected to be raised
NOT necessary to have comprehensive knowledge of GAAP or GAAS [52-110CP
s.4.1]
NOTE: can be appoint member who is not financially literate if member becomes
financially literate within a reasonable time [s.3.8]
Responsibilities Part 2

Relationship with External Auditors s.2.2: external auditor must report directly to
audit committee
Mandated Audit Committee Responsibilities s.2.3:
o
o
o
o

(1) Must have written charter that sets out mandate and responsibilities.
(2) recommend external auditor and compensation to BOD
(3) Directly responsible for overseeing the work of the external auditor
(4) Pre-approve all non-audit services provided by the issuers external auditor.

52

o
o
o
o

(5) Review financial statements, MD&A and annual and interim earnings press
releases before disclosure
(6) Be satisfied that adequate procedures are in place for review public disclosure
of financial information and assess the adequacy of those procedures.
(7) Establish procedures for receipt, retention and treatment of complaints
received re accounting, internal accounting controls, or auditing matters
(8) Review and approve hiring policies of issue regarding former or present
partners and employees of external auditor of the issuer.

Disclosure MI 52-110FI:

must disclose all information re audit committee in AIF,

including: composition, education and experience, reliance on exemption, audit
committee oversight, pre-approval policies and procedures, external auditor fees
Audit committee Compliance reviews by CSA staff (CSA Staff Notice 52-312)
64% overall compliance level CSA says inadequate
Area of non compliance most commonly for establishing procedures for complaints
about auditing and responsibility to review and approve issuers hiring practices for
partners and employees of issuers current and former auditors
Good compliance w/ independent requirements (92%)
NI 58-101/NP 58-201: Disclosure of Corporate Governance Practices

Disclose and Explain Approach to Corporate Governance

Non-venture issuers required to disclose and explain approach to corporate
governance practices in management information circular

NI 58-101F1- Disclosure:

BOD: identity and whether they are independent, whether the majority of directors are
independent (if not describe what BOD does it facilitate its exercise of independent
judgment), whether chair is independent
BOD mandate
Whether BOD has written position descriptions
Training and continuing education for new directors
Whether BOD has adopted a written code of conduct and any other steps taken to ensure
exercise of independent judgment and encourage ethical business conduct
Process for nomination of directors
Compensation (how it is determined whether there is an independent compensation
committee, etc)
Other Board Committees
Assessments (whether committees and individual directors are regularly assessed)

NP 58-201 - Corporate Governance Guidelines: best practices re

Composition of BOD
Meetings of Independent Directors
BOD mandate
Position Descriptions
Training and Education

53

Code of Business Ethics

Compensation
Nomination of Directors

Policy: Should securities regulators be involved in corporate governance matters when

there goal to ensure integrity of capital markets?
NOTE: problem of accelerate revenue recognition
Nortel Example: recognizing revenue before its been earned (i.e. stating entire
amount of revenue from some service you are providing but havent completed)
Corporate Finance Branch 2006 Report consolidation p.1864 and especially
pp.1873ff
o Review of issuers that have come up review by regulators
o Not adequate accounting policy disclosure, esp. wrt revenue recognition
o Multiple deliverables each separate element should be accounted for I
individually because could affect timing of revenue recognition
Timely and Selective Disclosure (material change reporting)
Definition of Material Change: OSA, s.1(1) and NI 51-102, s.1.1
Definition material change s.1.1:
Change in the business, operations or capital of the reporting issuer that would
reasonably be expected to have a significant effect on the market price or value of
any of the securities of the reporting issuer; or

Decision to implement a such a change where it is believed that confirmation of the decision
by BOD or any other persons acting in a similar capacity is probable

Pezim v. BC [1994/SCC]
Drilling Results: material change and should be disclosed in a timely way
o Contextual analysis: BC Act referred to as a change in business,
operations, assets or ownership that is reasonably expected to
significantly affect market price of value of securities of issuer in order
to give meanings to expression, necessary to read in value (of assets)
Problematic as per SCC that stock options were awarded to senior mangers a day or
two before disclosure of results
o Senior management/directors have a positive duty to inquire as to all
material changes if issuer wants to engage in securities transactions BUT
if disclosed prior to transaction wont be possibility of insider trading
o Duty to disclose before reporting issuer engages in a securities transaction
Private Placement of Shares: material change if potential to have significant effect on
material ownership of issuer
o Material change - put a significant SH in position to block transactions
Break down in contract for sale of new securities for over 4M: material change

54

YBM Magnex International Inc. [2003/OSCB] material change where implication of even is a
material change - when it is uncertain if change will occur, apply probability/magnitude test

Facts: audit suspension Apr19 due to concerns wrt to validity of transactions, whether
counterparties to YBM were legal entities, organized crime money laundering auditing
deadline mid-may lawyer said didnt need to disclose
Analysis:
Implication of audit suspension: YBM missing filing deadline and having securities
subject to cease trade order
Implications of the audit suspension constituted a material change
Materiality is a question of mixed law and fact
Supercritical interpretations of meaning of material change doesnt support goal of
promoting disclosure or protecting investing public
Material change is not certain to occur
Probability/magnitude test: significance of information as it affects the price of
securities discounted by the changes of it occurring
Affect on price of securities would be significant (cease trade order) and it was
probably to occur given extraordinary nature of concerns and D&Ts request for
forensic investigation, after which it would decide whether to continue audit
Kerr v. Danier [2007/SCC] material change does not include change in results of operations
caused by something external to the issuer

Facts: claim under s.130 for damages arising from alleged misreps contained in
prospectus wrt forecast (FOFI) fourth quarter results were lagging behind its forecast
due to unseasonably warm weather but didnt update info until 2 weeks after IPO
closed
Issue: whether intra-quarterly financial results amounted to a material change
Analysis:
Distinction b/w material fact and material change: material change is limited to
change in business, operations or capital
Literal/narrow reading of change in business, operations, or capital
Change in intra-quarterly financial results is not a change in issuers business,
operations, or capital
Not a change in operations was a change in result of operations caused by
something external to issuer
Poor intra-quarterly results may reflect a material change in business operations if
caused by something internal to the issuer (e.g. restructuring)
Condon: less expansive view than Pezim could be b/c Pezim originated as question
of JR while Kerr originative as action under s.130
NP 51-201 Examples of Material Information NOT MANDATORY - s.4.3:
Changes in corporate structure
o Reorg, amalgamations, mergers
55

o TB, issuer bids, insider bids, or changes in ownership

Changes in capital structure
o Sale of additional securities
o Changes in dividend payments
o Material modification to rights of security holders
Changes in financial results (conflicts w/ Kerr v. Danier)
o Significant increase/decrease in near term profits
o Changes in value or composition of companies assets (Pezim)
Changes in Business and operations
o Legal proceeds
o Labour disputes
o New contracts
o Changes to BOD
Acquisitions and Dispositions
Changes in Credit Arrangements
NOTE: similar to US model (qualitative test in Canada vs. itemized checklist in US)
Form of Disclosure
Two disclosure requirements where material change OSA s.75
1. Immediately issue press release
2. File material change report with regulators
o Also see NI 51-102 s.7.1
NI 51-102F3 Material Change Report:
o Date, news release and summary of material change
o Full description of material change
o If report is being filed on confidential basis, must state reasons and state
whether any info has been omitted on basis tat it is confidential
NP 51-201 - s.2.1: announcements should be factual and balanced Companies that
disclose positive news but not negative, will be subject to scrutiny
o NOTE: influenced decision in YBM that YMB was disclosing positive
changes at same time as withholding negative (shows aware of obligations
just not willing to disclose negative)
Confidential Disclosure OSA s.75:
Can disclose material change to regulator but not disclose to general market [s.75(3)]
o

Must make articulated case that disclosure would be unduly detrimental to

reporting issuer or material change consists of a decision to implement a change
made by senior management of the issuer and no reason to believe that people
have made use of information in purchasing or selling

10 days must seek permission from commission to reactive [75(4)]

Must disclose on becoming aware or having reasonable grounds to believe that
persons or company are purchasing or selling securities w/ knowledge of material
change that has not been generally disclosed [75(5)]

56

Condon: once you make confidential disclosure, you acknowledge that a material
change has occurred (cant not disclose later and argue that it isnt material change)
NP 51-201 s.2.3: issuers must monitor trading in securities very closely. If unusual
market activity, may mean that info is leaked and full public disclosure must be made

Timing of Disclsoure
Timing OSA s.75(1): immediately issue press release and file report as soon as
practicable and within 10 days from date of change
Pezim v. BC
Threshold test for timing - probability/magnitude test disclose when significant
impact on price or value of securities and when it is probable to occur
Duty to disclose prior to engaging in self-dealing security transaction (i.e. awarding
stock options to senior management)
AIT Advanced Information Technologies [2007/OSC]
Facts:

Feb 17: unsolicited approach for 3M

April 11: meeting re valuation (AIT thought company was worth more than 3M)
April 25: lie to creditor in saying 3M has received approval of CEO and VP
April 26: Letter of intent signed, subject to 2nd due diligence and approval
May 7: second due diligence visit
May: call from market regulation services wrt rumours
May 14: Draft merger agreement delivered and board approves acquisition of AIT
May 22: AIT board approves final merger agreement
May 23: final agreement executed and press release issued by AIT

Analysis:
Discussion of probability/magnitude test
o Cautions that US doesnt have equivalent concept of material change
o May be useful for issue of materiality, but not useful in determining
whether a change has actually occurred
Meaning of implement
o Act specifies that there is material change when decision to implement
change made by BOD and it is believed that approval is probable
o TEST: in circumstances of merger and acquisition transaction, whether
there is sufficient commitment by both parties (commitment by one party
is insufficient)
o 3M not sufficiently committed to this at end of April
Role of LOI with respect to small public issuer, paras 246ff and para 255, 263
o Signing of LOI will trigger disclosure in some cases depending on content
o Did not trigger disclosure in this case: Non-binding, price not firm, and
most of conditions precedent were beyond ability of AIT to resolve

57

o Circumstances where signing of LOI might result trigger disclosure:

smaller less process driven acquirer, negotiations being lead by acquirers
CEO, previous board resolution setting out pre-authorized criteria for
approval
AIT not in breach of disclosure obligations

Rumours (that a particular change is about to occur company cant always contain
confidential info)
NP 51-201 - s.2.3: If a confidential material change has had leaked out or appears to
affect share price, company should take immediate steps to ensure full public
announcement and get exchange to halt trading until news release is issued
NP 51-201 s.6.13: adopt a no comment policy and ensure it is applied consistently
(inconsistent response may be interpreted as tipping)
Selective Disclosure
Reporting issuers or executives/officers within reporting issuers may make disclosure
to some subset of market participants but not to the market generally (e.g. info
preferentially distributed to analysts within brokerage firms)
o Condon: can lead to tipping allegations
NP 51-201 (NOT MANDATORY)
Dont privilege particular types of investors or particular types of market
participants
3.3(5): necessary course of business exception for tipping doesnt generally permit
company to make selective disclosure of material information to analyst, institutional
investor, or other market professional
3.3(7): distinction b/w disclosures to credit rating agencies (necessary course of
business) and disclosure to analysts (not necessary course of business)
3.7: mitigating factors considered in selective disclosure enforcement proceedings
o Implemented, maintained and followed policies to prevent tipping?
o Selective disclosure was unintentional?
o Steps taken to disseminate information unintentionally disclosed?
Part V Risks Involved with relations w/ analysts:
o 5.2: Analyst reports (analysts often ask companies to confirm)
o 5.3: Confidentiality Agreements w/ Analysts (no exception to tipping
provisions for this)
Part VI Best Disclosure Practices
o
o
o
o
o
o

Establish corporate disclosure policies

Review by BOD/audit committee
Designate authorized spokesperson (i.e. to media, analysts, and investors)
Establish policy re analyst conference calls and reports
Establish policy re quiet period and insider trading monitoring
Establish policy re electronic communications

58

Civil Liability for Breach of Disclosure Provisions

NOTE: Key DIFFICULTY w/ CL misrepresentation actions - reliance and duty of care
(i.e. need to show individual reliance in class action)
Efficient capital market hypothesis in US: if fraudulent disclosure is made, assume
this got impacted into the stock price (no need for investors to show reliance)
New Statutory Remedy - OSA
Arguments for:
La Porta Research: stock market growth is correlated with plaintiff friendly remedies
Consistency with the primary market (can sue for misrep. in prospectus)
Consistency with the US
Deterrence/compensation
Three possible actions that can be launched:
1. Documents that contain a misrepresentation [s.138.3(1) and (3)] (if made by a
person w/ actual, implied, or apparent authority to speak on behalf of issuer)
2. Public oral statements containing misrepresentation [s.138.3(2) and (3)] (if made
by a person w/ actual, implied, or apparent authority to speak on behalf of issuer)
3. Failure to make timely disclosure [s.138.3(4)]
Remedy NOT available for [s.138.2]:
Securities purchased under prospectus (covered under s.130)
Acquisition of securities privately under exemption from prospectus requirement
Acquisition or disposition of securities in connection with TB or issuer big
LEAVE OF COURT Required: grant only when satisfied that action is being brought in
good faith and reasonable possibility that action be resolved in favour of P [s.138.8]
Merit-based assessment to prevent US type frivolous litigation (gatekeeper)
Who has a cause of action?

Misrepresentation: person or company acquiring/disposing of security between the

time when document was released and time when misrep. was corrected
Public oral statements containing misrep: same as above
Failure to make timely disclosure: persons or company acquiring/disposing of
security between time material change was required to be disclosed and subsequent
disclosure of material change

What does plaintiff have to prove?

Acquisition or disposition of security at the relevant time

Existence of misrepresentation in document/public oral statement or failure to make
timely disclosure

59

Definition of misrepresentation: untrue statement of material fact or omission to

state a material fact that is required to be stated/necessary to make a statement
not misleading

DO NOT NEED TO SHOW RELIANCE

For non-core documents and public statements [138.4(1)]
o Person/company knew that there was a misrep.
o Person/company deliberately avoided acquiring such knowledge or
o Person/company was guilty of gross misconduct in connection with the
document/statement
For failure to make timely disclosure (directors and influential persons) [138.4(3)]
o Person/company knew of the material change
o Person/company deliberately avoided acquiring such knowledge or
o Person/company was guilty of gross misconduct in connection with failure
to make timely disclosure
Definitions
Core Documents:
o Directors/influential persons - includes prospectus, TB circulars, issuer bid
circular, directors circular, notice of change, MD&A, AIF, annual and
interim financial statements
o Issuers/officers same as above and material change reports
Influential Persons: control persons, insiders that are not directors, and officers
o Condon: major departure from understanding that you sue issuer of those
who are senior officers/directors (allows you to sue SH)
o Policy: Deterrence by targeting people that are responsible
Who is liable?

Documents containing a misrepresentation s.138.3(1):

Responsible issuer (reporting issuer and any other issuer with a real and substantial
connection to Ontario, of which are publicly traded)
Directors at the time the document was released
Officers who authorized, permitted or acquiesced in the release of the document;
Influential persons who knowingly influenced
Experts where: misrep. is also contained in a report, statement or opinion made by the
expert, document includes, document summarizes or quotes it, and expert consented
in writing to the use of the report, statement or opinion in the document
Public oral statements- s.138.3(2): same + person who made a public oral statement
Failure to make timely disclosure, - s.138.3(4): responsible issuer, directors and officers
of responsible issuer, influential persons who knowingly influenced
Defences

Misrepresentations in Documents and Oral Public Statements

Plaintiff acquired or disposed of security w/ knowledge that the document or
statement contained a misrepresentation [s.138.4(5)(a)]
60

Made reasonable investigation and at time of release of document or statement had no

reasonable grounds to believe that it contained a misrepresentation [s.138.4(6)(a)]
o Due diligence defence is more viable (note: not available in primary
market under s.130)

NOTE: Available to responsible issuer itself and individual defendants

Failure to make Timely Disclosure
P acquired/disposed with knowledge of material change [s.138.4(5)(b)]
Made reasonable investigation and no reasonable grounds to believe that a failure to
make timely disclosure would occur [s.138.4(6)(b)]
Defence based on prior confidential disclosure [s.138.4(8)]
Safe harbour for forward looking information - s.138.4(9)
Document contained reasonable cautionary language identify information as forward
looking material factors that could cause actual results to differ materially from
forecast
Statement of material assumptions
Reasonable basis for drawing conclusions or making forecast
Factors considered in determining whether there was reasonable investigation or
person or company is guilty of gross misconduct s.138.4(7)

nature of the responsible issuer;

knowledge, experience and function of the person or company;
office held, if the person was an officer;
presence/absence of another relationship w/ issuer, if person was a director;
the existence and the nature of any system re continuous disclosure obligations;

reasonableness of reliance by the person or company on the responsible issuers disclosure

compliance system
period within which disclosure was required to be made under the applicable law;
any professional standards applicable to the expert;
extent to which the person or company knew, or should reasonably have known, the content
and medium of dissemination of the document or public oral statement;
role and responsibility of the person or company in the preparation and release of the
document or public oral statement or decision not to disclose material change

o Pezim: duty to inquire engage before self interested transaction

Limits on Liability

Damages only no recession

Proportionate liability s.138.6: for each defendant (cant look to deep pockets) BUT
not available where defendant other than issuer knowingly authorized or permitted
misrepresentation or failure to disclose material change
Assessment of damages s.138.5: calculation varies depending on whether P has
crystallized their losses and whether they have crystallized them in a 10 day period
after knowledge of misrepresentation
61

Maximum Damages s.138.7: lesser of aggregate damages and liability limit

Liability Limits - s.138.1:
o Responsible issuer or influential person: greater of 5% of market
capitalization & 1M
o Director or officer or influential person: greater of 25,000 and 50% of
aggregate compensation for that year
Exception to Limits s.138.7(2): if plaintiff proves person/company authorized, permitted
or acquiesced or influenced in the making of misrepresentation/failure to make timely
disclosure while knowing that it was a misrepresentation or a failure to make timely
disclosure

Settlements and Costs Rules

Court approval of settlements required - s.138.10: Policy concern re collusion b/w P

lawyer and defendants
Costs rule - s.138.11: court can award costs to winning party

Insider Reporting and Insider Trading

Insider Trading is permissible if insiders report trades within a certain time period
and such trades are not based on undisclosed material information
Definition of Insider OSA - s.1 (1)

(a) director/officer of a reporting issuer,

(b) director/officer of a person/company that is insider or subsidiary of reporting issuer,
o If reporting issuer own 50% or more of a company, that company is a subsidiary
(c) a person or company that has:
o (i) beneficial ownership, control, or direction over securities of a reporting issuer
carrying more than 10% voting rights attached to all the reporting issuers
outstanding voting securities

Hold more than 10% of the securities that carry a right to vote

(ii) if acting in combination w/ people or companies that hold more than 10% of
the voting rights
(d) a reporting issuer that has purchased, redeemed or otherwise acquired a security of its
own issue, for so long as it continues to hold that security,
(e) person or company designated as an insider in an order made under s.1(11),
o PUBLIC INTEREST STANDARD
o

o s.1(11): If in public interest, discretion to designate someone as an insider

if they are reasonably expected to have in the ordinary course access to
material info about the business, operations, revenue or assets of the issuer
o Example: professionals having ongoing relationship w/ issuer
o s.1(10): discretion to make order that a person is not an insider if not
prejudicial to public interest
(f) a person or company that is in a class of persons or companies designated under
subparagraph 40 v of subsection 143 (1)

62

Commission can designate classes of persons/companies as insider if

person/company would reasonably be expected to have, in the ordinary course,
access to material info about business, operations, assets, revenues of issuer

Note: retrospective aspects of definition (proposed REPEAL)

Issuer as Insider of Reporting Issuer - s.1(8): where issuer becomes an insider of
reporting issuer, every director or senior officer of issuer is deemed to have been an
insider for previous 6 months or for such shorter period than he or she was director or
senior officer of the issuer
Rationale: unfair informational advantages [i.e. officer of company privy to
companys plan to buy another company, could buy stock in the other company and
make large windfall]
Same for when a reporting issuer become insider of any other reporting issuer [s.1(9)]
Reporting Requirements
Insider Trading Reports: OSA Requirements
Insider Report s.107(1): Person or company must file report within 10 days of becoming
an insider disclosing beneficial ownership/control/direction over securities of the issuer

Change of Insider Holdings s.107(2): must file report within 10 days

Retrospective Reports s.107(3) [Proposed REPEAL]: must file report within 10
days after becoming an insider under 1(8) or 1(9)

Note: Proposed expansion of reporting requirements under s.107 (not proclaimed

yet)
Requires insiders to report ownership and change in related financial instruments
Related financial instruments includes derivatives, options, futures contracts, etc.
Policy: recognition that people trade options (whose value is based on the value of the
securities)
System for Electronic Disclosure by Insiders (SEDI): NI 55-102
Requires insiders to file Insider profile [55-102F1] and reports required by s.107(2)
[55-102F2] on the internet
Reports are available through SEDAR instead of only through commission and
business publications.
Exemptions from Reporting Requirements: NI 55-101
Directors/Senior Officers of Subsidiaries Part 2:
Director of a subsidiary of reporting issuer [s.2.1] and senior officers of reporting
issuer or subsidiary of reporting issuer in relation to trading securities of the reporting
issuer [s.2.2] If doesnt have access in the ordinary course to material information
before general disclosure
Must show you dont have access to certain info to be exempted
Directors/Senior Officers of Affiliates Part 3:
63

Directors/senior officers of an affiliate of an insider of a reporting issuer in relation to

trading securities of the reporting issuer [s.3.2] If doesnt have access in the ordinary
course to material information before general disclosure
Affiliate relationship: A and D are both significantly owned by company C - A and
D would be affiliates because they are both subsidiaries of C if director of A and
you hold securities of D, may be able to get exemption

NOTE: Exemptions by Order of Commission on Application OSA s.121(2):

(a) (i) requirement of this Part conflicts with a requirement of the laws of the
jurisdiction under which the reporting issuer is incorporated, organized or continued,
or (ii) if otherwise satisfied in the circumstances of the particular case that there is
adequate justification for so doing; or
(b) upon its own motion
Policy: Adequate enforcement for failure to file insider trading reports?
McNally and Smith study: only two cases where insiders found to have failed to
report trades (suggest lack of surveillance and enforcement)
Freeman settlement agreement: und to engage in 30 transactions without filing insider
reports - agreed to make insider report filings and pay costs of enforcement (7,000)
Policy: McNally and Smiths assessment of insider trading rules in Canada
Two obstacles (1) if illegal trades are not disclosed, their detection is difficult and (2)
if trades disclosed, proving made on the basis of undisclosed material information is
difficult
Lack of Insider trading convictions in Canada [15 from 80 to 2002]
Incidence of Insider trading in Canada [larger volume of shares sold before bad news
is released; larger volume of shares purchase before good news is released]
Illegal Trading
Illegal Insider Trading
Elements of Proof Required:
(1) Accused in a special relationship with reporting issuer (broader than insiders)
(2) Accused purchased or sold with knowledge of material fact or change (material
information)
(3) Material information not generally disclosed
Prohibition on Insider Trading OSA - s.76(1): No person or company in a special relationship
with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a
material fact or material change with respect to the reporting issuer that has not been generally disclosed

Special Relationship OSA s.76(5)

(a) a person or company that is an insider, affiliate or associate of (i) the reporting issuer, (ii)
a person or company that is proposing to make a take-over bid, or (iii) a person or
company that is proposing to become a party to a reorganization, amalgamation, merger or

64

arrangement or similar business combination with the reporting issuer or to acquire a

substantial portion of its property,
(b) a person or company that is engaging in or proposes to engage in any business or
professional activity with or on behalf of the reporting issuer or with or on behalf of a person
or company described in (a) (ii) or (iii),
(c) a person who is a director, officer or employee of the reporting issuer or of a person or
company described in subclause (a) (ii) or (iii) or (b),
(d) person or company that learned of material fact or material change wrt the reporting issuer
while the person or company was a person or company described in clause (a)(b) or (c),
o Employee learns of information and quits job (no longer in category when
purchase or sell) is still subject to prohibition
(e) a person or company that learns of a material fact or material change with respect to the
issuer from any other person or company described in this subsection, including a person or
company described in this clause, and knows or ought reasonably to have known that the
other person or company is a person or company in such a relationship

NOTE: Argument that Canadian prohibition in broader than US (limited to insiders)

What Does General Disclosure Require?

Re Harold P. Connor: must be disseminated to trading public and public must be

given sufficient amount of time to digest (OSC suggest 1 full day following release)
Dissemination + Analysis - NP 51-201 s.3.5: info is materially disclosed if:
o (a) Info has been disseminated in manner calculated to effectively reach
marketplace
o (b) Public investors have been given a reasonable time to analyze info
Pezim v. BC : insiders have a duty to inquire that there is no material information that
has not been disclosed prior to trade

Re Donnini [2002/OSCB] event not certain to occur at the time of trading (contingent event) can
still be material fact based on probability that it will occur and the magnitude of the event

Facts: D a trader w/ Yorkton Yorkton assisting KCA wrt second special warrants
financing Paterson made D aware of possibility of KCA financing that day and day
after D traded an unusual high volume of KCA stock (short trading i.e. selling SH dont
own to be bought back later in expectation of a decrease in price)
Issue: whether Donnini engaged in insider trading of shares of KCA in that he had
knowledge of a material fact even though the fact was not certain to occur at the time of
trading
Analysis:
D was in special relationship w/ KCA [s.76(5)(b)]
D purchased and sold securities of KCA
Argument: second financing not material info b/c nothing had crystallized - approval
required by both parties and approval did not occurs until after the change

65

Court applies probability/magnitude test: probability that event will occur and the
anticipated magnitude of the event (materiality is met where some level of both
probability and magnitude is reached)
o Highly probable that financing would occur: P wanted to do deal and
instructed Y to prepare engagement letter
o Significant effect on value of KCA SH (considers US test whether
reasonable investor considers fact to be important in investment decision)
o Proposed special second warrants financing, negotiations concerning it,
and the proposed price and size of it were all material facts
o Potential magnitude was high, so lower probability of occurrence than
found in this case would still lead to same conclusion
D had knowledge: director and 4th largest SH of Ys parent, colleague of Patterson
(akin to partnership), intimately involved with Ys exposure to KCA, three minute
meeting with P, Ds trading
Condon: case criticized b/c OSC sanctioned Donnini w/ 15 year ban on trading
securities (significantly more serious than sanction in past to send deterrent message)
Policy: is probability/magnitude test fair considering test is applied in hindsight after
contingent event occurs?

R v. Feldlerhof [2007] guilt does not depend on use of material info consider materiality of each
fact sepeartely

Facts:
Feldlerhof: VP of exploration and director of Bre-X
June 20/96-Feb17/97: good stock performance (270/SH) due to 4 press releases
Due diligence by company entering into joint venture w/ Bre-X revealed property had
virtually no gold
May 4/97: Bre-X confirmed results, issued press release, stock dropped to 0.90/SH
Insider trading allegations against F
Analysis:
Requirement #1: D must be in special relationship with the company - YES
Requirement #2: D must have purchased or sold securities
o Not necessary for D to personally give direction to purchase or sell
o What if broker exercises sale/purchase in discretionary client account
w/out receiving instructions? Defence of due diligence available if insider
took care to prevent purchase or sale
o Circumstantial evidence that F directed sale from Nesbitt Burns account
(faxes giving instructions/insider reports filed and signed by F)
Requirement#3: D must have knowledge of material information that is not generally
disclosed
o Whether the alleged information was (at time of trade) (1) a fact, (2)
known by F at the relevant time, (3) material, and (4) not generally
disclosed
o Irrelevant whether D makes use undisclosed material fact

66

o Must show that at least one particular was true, that the defendant had
knowledge of it at the time of the trade, that it was material, and that it was
undisclosed at the time of the trade
o Example:
Count 1: particular 1 and/or particular 2 and/or particular 3
Count 2: particular 1 and/or particular 2 and/or particular 3
Acquitted b/c prosecution failed to examine each fact (particular) individually when
assessing materiality (i.e. said facts as a whole were material)

Tipping
Key elements:
(1) Accused (tipper) in special relationship with reporting issuer
(2) Accused informs another person (tippee) of material information wrt
reporting issuer other than in the necessary course of business
(3) Accused informed of material information before it was generally disclosed
OSA Prohibition on Tipping s.76(2): No reporting issuer and no person or company in a special
relationship with a reporting issuer shall inform, other than in the necessary course of business, another
person or company of a material fact or material change with respect to the reporting issuer before the
material fact or material change has been generally disclosed

DOES NOT HAVE TO BE TRADING BY TIPPEE AND TIPPE DOES NOT

HAVE TO KNOW THAT TIPPER IS IN SPECIAL RELATIONSHIP*
R v. Rankin [2006/Superior Court]
Facts:
Rankin employed as investment banker @ RBC
Allegation that Rankin tipped close friend Duic
Duic made settlement w/ OSC allowing him to keep 1.2M in profits in return for
identification of source of insider info and testimony in future proceedings
Sought quasi-criminal sanction under s.122 of the OSA
Trial
Circumstantial evidence included: proximity b/w trading and deals worked on by D,
access to info, extensive contract between D and R
Evidentiary issues:
o Circumstantial case may not be enough but will be if accept Ds
testimony
o TJ accepts Ds evidence over Rs even though R of bad character (i.e. he
accepted that D cant recall how he got info for most of the deals, tailored
evidence to what OSC wanted, pushed envelope when he said R knew of
trading, and probably tried to hack into computer)
Guilty based on circumstantial evidence + Ds testimony 6 months imprisonment
Superior Court of Justice

67

R appeals conviction and sentence on basis that TJ: (1) placed too much confident in
Ds credibility and (2) paid insufficient attention to whether there was enogh evidence
for each count
No requirement that tipper know, or be reckless to whether, the person receiving the
information would use it (strict liability no mens rea due diligence defence)
TJ made improper inference wrt Rs credibility and flow of information
o Relied on other transaction which had no material relevance to this case
o concluded info wrt to transactions was free-flowing BUT all evidence on
issue was that deal specific information was not free-flowing
o most other reasons for rejecting based on fact that couldnt remember
things (but note that D couldnt either)
TJ made improper inferences wrt flow if information
Problematic nature of Ds motivation not sufficiently addressed by TJ strong
motivations to lie
TJ should have approached each count individually
o R only involved in 3 of the 10 transactions
Court finds problem in fact that rejects Rankins evidence as raising reasonable doubt
b/c he couldnt recall but accepts Duics as proving beyond a reasonable doubt when
he couldnt recall
Other rational conclusions other people who were privy to the info D had access
to Cs computer and admitted to trying to break into computer
New trial ordered
NOTE: early 2007, OSC decides to pursue s.127 hearing (permanently restrict from
being member of securities industry in ONT) in hopes of settlement
Condon: demonstrates difficulties of criminal proceedings higher burden of proof must have sufficient evidence for every count beyond a reasonable doubt
Condon: argument that OSC paid high price to get charges on Rankin

Defences
Statutory Defences
Reasonable Belief that Information Generally Disclosed OSA s.76(4)
s.76(4): No contravention of illegal insider trading OR tipping provisions if the person or
company proves that the person or company reasonably believed that the material fact or
material change had been generally disclosed

BURDEN ON DEFENCE
NOTE: insider trading applies to material changes AND material facts; thus,
continuous disclosure requirements that require only reports of changes dont protect
from insider trading contraventions

Green v. Charterhouse Group Can. Ltd. [1976/Ont.CA] disclosure of material change without
saying what it is not sufficient

68

Facts: Green agreed to offer to sell his shares to D before others D gained knowledge
of possible takeover (offer for shares at higher price) disclosed possibility of
possibility of TB and that there was info but cant disclose info
Conclusion: limited disclosure was not sufficient what letter is really saying is that
confidential info exists which might be of substantial significant to you but which I am
not at liberty to disclose
Re Harold P. Connor [1976/OSCB] insider cant trade immediately after disclosure
Facts: 3rd quarter showed unexpected loss decision made to issue press release on
June 25th usually sent out immediately, but here not until morning of June 26th D
sold SH on June 26th morning defence was that he believed the press release had been
sent and it was public knowledge
Analysis:
Insider is not free to trade immediately after press release is sent out
Appropriate standard is for press release to have been sent, received, and pubic given
time to process the information
Time will depend on specific circumstances, but safe working rule is insider should
wait at least one full trading day after info is released
Necessary Course of Business Defence for Tipping OSA - s.76(2)
NI 52-201 - s.3.3(2):
s.3.3(2): Necessary course of business will generally cover communications with
o
o
o

o
o
o
o

Vendors, suppliers, or strategic partners on issues such as research and

development, sales and marketing, and supply contracts
Employees, officers, and board members
Lenders, legal counsel, auditors, underwriters, and financial and other
professional advisors to the company
Parties to negotiations
Labour unions and industry associations
Government agencies and non-government regulators
Credit rating agencies

s.3.3(5): necessary course of business exception generally not permit company to

make selective disclosure of material information to an analyst, institutional investor,
or other market professional

Royal Trustco Ltd. v. OSC [1983/Ont. Gen. Div.] disclosing info in some SH and not others in
context of hostile TB is not disclosure in ordinary course of business cant tip a material fact or
change

Facts: hostile TB Directors told some SH of possibility of takeover and that bidder
would not win b/c reason to believe 60% wanted to prevent selling shares
Analysis:
Court recognized difference b/w material facts and material change

69

o Intentions of bidder not necessary be material change, but would

constitute a material fact
o Cant tip a material fact OR change
o Even though could not guarantee that SH of Trustco wouldnt tender
shares, still a material fact
Cant give informational advantage to SH and claim it is in the necessary course of
business

OSA Regulations
Firewall/Chinese Wall Defence Reg. 175(1) and (3)
NOTE: Corp. has knowledge when one of its officers, directors, employees or agents has
knowledge; thus, if trader for corp. w/out actual knowledge traded shares when an
officer/director/employee had knowledge, the corporation can be guilty of insider trading

s.175(1): A person or company that purchases or sells securities of a reporting issuer w/

knowledge of material fact or change that has not been generally disclosed, is exempt from
liability if can prove that no director, officer, partner, employee or agent of
person/company who made/participated in decision to purchase or sell had actual
knowledge of material fact or material change AND no advice was given to them by a
director, partner, officer, employee or agent of the person/company who had actual
knowledge of the material fact or the material change

Importance of keeping information confidential: consider extent to which company

has implemented and maintained policies to prevent insider trading and prevent the
transmission of information with respect to material changes and facts [Reg. 175(3)]
o i.e. Grey list/restricted lists
OSC policy 33-601 registrants should consider establishing written policies and
procedures in the following areas:
o Education of employees
o Containment of inside info
o Restriction of transactions
o Compliance
Purpose of erecting Chinese walls: (1) allows traders to continue to trade and (2)
enhances market confidence

GREY LISTS: OSC Policy 33-601

Grey List: list of issuers registrant has inside information on
o Should place on grey list when registrant is invited to manage/participate
in possible offering or act on M&A [s.2.5(1)]
o Should disseminate only to employees who require list to monitor unusual
principle or agent trading [s.2.5(3)]
Restricted List: list of issuers registrant may have inside information on

70

o Should move from grey list to restricted list when agree to act and the
transaction has generally been disclosed, but may get gain access to inside
information during course of transaction [s.2.6(1)]
Re Donnini
Defence doesnt apply because material information flowed from corporate finance to
trading department
Must have procedures to prevent confidential informationt to flow to those who trade
(Chinese walls, grey lists)
Unsolicited Orders OSA - Reg. 175(2)
Purchase or sale entered into as an agent of another person or company pursuant to a
specific unsolicited order (i.e. if a broker receives an order to execute a trade, can
execute and will not be guilty of insider trading)
Other Party had Knowledge OSA Reg.175(5)
(a) No liability for insider trading, if prove reasonable belief that other party to the
purchase or sale had knowledge of the material fact/change
(b) No liability for tipping, if prove reasonable belief that the person informed of the
material fact or material change already had knowledge of material fact/change
Common Law Defence
Reasonable Mistake of Fact
Not liable if mistaken wrt facts underlying the insider trading transaction (reasonable
belief that the information was not material)
Lewis v. Fingold [1999/Ont. Gen. Div] accused can escape liability if prove had a reasonable
belief that the fact is not material (i.e. would not have a significant effect on the share price)

Facts: director of movie company heard info @ BOD meeting (unexpected bad 4th quarter
results) and sold shares before disclosure of the info to the public Fingold argued that
he had a genuine reasonable belief that results were not a material fact
Analysis:
No liability if defendant can prove on balance of probabilities that he reasonably
believed in a mistaken set of facts which, if true, would render the act or omission
innocent
Note: prosecution must prove that the fact is reasonably expected to have an effect on
market security (thus success of defence is remote)
Fingold reasonably believed that the disappointing fourth quarter results would not
have a significant effect on the market price of the shares
Belief in the viability of ongoing projects was reasonable given his long involvement
with the company and confidence in it
R v. Harper [2000/Ont. CJ]
71

Facts: Sold 227,600 SH w/ knowledge of undisclosed material fact (soil sample results)
Analysis:
H argued that he reasonably believed test results were not material
Court did not accept because H disclosed positive results in same period
Reliance on expert finding that results not significant wasnt reasonable given his
experience
Argued that results were not reliable - again, he still reported the good results
Sanctions for Insider Trading/Tipping
Criminal - OSA
s.122(1): fine (5M max), imprisonment fine (5 years less a day max), or both
Enhanced financial penalty for violation of s.76- s.122(4): Minimum fine equal to
the profit made or the loss avoided and maximum is the greater of 5 M or triple profit
made or loss avoided
Civil OSA
s.134(1): Inside Trader liable to compensate anyone that sold or purchased securities
for damages that resulted from the trade UNLESS
o Inside trader proves that they reasonably believed that material
information was generally disclosed
o Material information was known or ought reasonably to have been known
by the seller or purchaser
o NOTE: difficult to find out who person on the other side of the transaction
is in the electronic era (no paper trail)
o Also applicable to tipping [see s.134(2)]
134(4): allows reporting issuer to sue insider trader/tipper for any advantage or
benefit received or receivable from purchase or sale UNLESS
o Proves that the person or company reasonably believed that the material
fact or material change had been generally disclosed
135: allows OSC to take civil action on behalf of the issuer if the issuer fails to
Administrative OSA
s.127: Orders in the public interest
s.128(1): OSC can apply to Superior Court for declaration that person or company is
not or has not complied w/ securities law
o if court makes declaration, court can may any order it considers
appropriate despite the imposition of any penalty under s.122 or order
given under s.127 [s.128(3)]
Rankin settlement: not guilty at criminal level, but OSC entered into settlement
agreement under power under s.127 to make orders in the public interest
Donnini: used s.127 power to ban trading for 15 years

72

NEW Criminal Code Offence s.382.1

Makes insider trading an indictable offence
Imprisonment for not more than 10 years
Categories of potential accused
o
o
o
o
o

(a) Shareholder of the issuer

(b) person in business or professional relationship with issuer
(c) Those involved w/ proposed takeover, reorganization, amalgamation, merger,
or similar combination with the issuer
(d) Employees/officers of issuer or person referred to in (a) or (c)
(e)Person who obtains information from person in (a) to (d)

Differences between offence in CC and criminal provisions in OSA s.122 :

Requirement for knowingly using inside information to buy or sell securities
o Condon: does this set the bar too high?
Applicable to issuers securities not just reporting issuers
Knowingly use inside information that you possess by virtue of being a shareholder
NOTE: criminal offence for tipping [s.382.1(2)]
Indictable offence punishable be imprisonment for not more than 5 years or summary
conviction
Requirement for knowingly conveys and knowing that there is a risk that the
person will use information to buy or sell

Prospectus Exemptions

Competing Policy Concerns: efficiency/cost reduction vs. investor protection (note:

minimal liability w/ no prospectus b/c cant sue for misrep.)
Prospectus Exemptions apply to both reporting issuers and non-reporting issuers
Closed system of regulation: all legal ways of distributing securities are considered
under existing laws - options include:
o Provide a prospectus
o Qualify for explicit exemption or apply for a discretionary exemption
(resale regulate when those securities originally issued under an
exemption are re-sold in the secondary market closes of back door
underwriting)

Policy Justifications
Easing the burden on small and medium sized business enterprises by allowing more
flexibility to generate initial working capital
Wealthy and/or sophisticated investors are capable of making investment decisions
without the information that a prospectus provides
Issuers are issuing securities to those with whom they have a pre-existing relationship
(assumption that investor has or has access to information about the issuer and its
financial prospects)
Some securities are considered extremely safe investment (i.e. government bonds)
73

Sources of Law
NI 45-106 (not all sections applicable in Ontario/proposed amendments published for
comment/replaces MI 45-103)
OSC Rule 45-501
OSA Part XVII (some parts not current law and inconsistent with NI 45-106)
o NOTE: OSC Rule 45-501 s.3.1: exemptions in OSA 72(1)(a)(c)(d)(l)(p)
and 73(1)(a) are not available
NI 45-102 (Re-sales)
Companion Policies helpful to provide guidance on way rules work
o 45-106 CP [see p.1399]
o 45-102 [see p.1318]
Exemptions for Small and Medium-Sized Enterprises or Start-up Issuers
Private Issuer Exemption [NI 45-106, s.2.4]
Founder Control Person and Family Exemption [NI 45-106, s.2.7]
Government Incentive Securities [OSC Rule 45-501, s.2.1]
Note: Ontario closely held issuer exemption REPEALED by 45-106
Private Issuer Exemption: NI 45-106
Prospectus requirement does not apply wrt trade in a security in circumstances
outlined in s.2.4(2) [s.2.4(3)]
Definition of Private Issuer s.2.4(1)
(a) Issuer that is NOT a reporting issuer or an investment fund
o Condon: accords with the goal to provide funds for start-up companies
(b)(i) Restrictions on transfer of securities contained in issuers constraining
documents (i.e. articles of incorporation) or SH agreements
(b)(ii) Cap on the number of security holders
o Securities not beneficially owned by more than 50 persons [NOT
including employees and former employees of the issuer or its affiliates]
o Each person is counted as one beneficial owner BUT
o Anti-avoidance provision: each person counted as one beneficial owner
UNLESS person is created or used solely to purchase/hold securities of in
each beneficiary must be counted as separate beneficial owner
Prevents issuers from setting up trusts/companies (where could be
many SH) to hold securities of the private issuer

Note: person includes individual, corporations,

partnership/trust/fund/association, and individuals in capacity as
trustee/executor/administrator/personal or legal representative

(c) Distributed securities only to persons described in this section

Substantive Requirements - s.2.4(2): Trade in securities of a private issuer to a person

who purchases the security as principle and is:

74

(a) Directors, officers, employees, founders or control persons of the issuer

(b) spouses, parents, grandparents, brothers/sisters or children of director, executive officer,
founder, or control person of the issuer
(c) spouses, parents, grandparents, brothers/sisters or children of the spouse of a director,
executive officer, founder, or control person of the issuer a director, executive officer,
founder, or control persons
(d) Close personal friends of directors/executive officers/founders/control persons
(e) Close business associates of directors/executive officers/founders/control persons
(f) Family members selling SH or selling SHs spouse
(g) SH of the issuer
(h) Accredited investor: sophisticated investors that are in the business of in vesting securities
(banks, mutual funds, financial institutions, etc.) and also includes high net worth individuals
(i) a person by which a majority of voting securities are beneficially owned by or a majority
of directors are persons described in para (a) to (h)
(k) trust or estate of which all beneficiaries or a majority of the trustees or executors are
persons described in para (a) to (h)
(k) Person who is not the public

Policy Question: is the list of people really targeted to types of people that should be
eligible to get this exemption?
Prohibition on commissions/finders fees paid to director/officer/founder/control person in
connection with a trade, except for trade to an accredited investor [NI 45-106, s.2.4(4)]
o

Note: this does not prohibit use of registrants, finders or advertising in any form
to solicit purchasers under exemptions BUT use of these means may give rise to
the presumption that relationship required for use of these exemptions is not
present (i.e. if paying someone to find investors, precondition of close
relationship is likely not present) [NI 45-106 CP, s.3.1]

Meaning of persons or companies that are not public:

SEC v. Ralston Purina [US] need to know test low level employees need to know
TEST: Whether persons who are offered the security need to know the kind of
information that a prospectus would provide
o If investor needs to now info that a prospectus would provided, they are a
member of the public and not eligible for this exemption
Low levels employees of the company should be considered members of the public in
terms of their investor sophistication and are therefore not eligible for the exemption
(i.e. likely to have little knowledge of security markets or investment activity)
R v. Piepgrass [CAN] common bonds test
TEST: Whether the purchasers are friends or associates or persons who have
common bonds of interest or association
Sought capital from farmers, most of whom were known by the promoter from
previous business dealings CA held that the farmers were not in any sense friends
or associates of the accused or persons having common bonds or interests

75

Didnt expand on reasoning for the test likely justification is that one is not likely
to take advantage of friends/associates w/ common bonds of interest and persons
having common bonds may have access to type of info that would appear in
prospectus

CP 45-106 close personal friend - s.2.7: individual who knows director/executive

officer/founder or control person well enough and for a sufficient period of time to be
able to assess their capabilities and trustworthiness
Applies to private issuer exemption and family, friends, business associates
exemption
Term close personal friend can include family member who is not already
specifically identified in the exemption if family member satisfies this criteria
Individual is NOT a close personal friend solely b/c individual is:
o A relative
o Member of the same organization association or religious group
o A client, customer, former client, or former customer
Reporting requirements: NONE
Prevents cost-burden on small business trying to grow
Condon: may be some role for minimum report to indicate use of private issuer
exemption so that commission could investigate if it wanted to inquire whether
exemption appropriately
Founder, Control Persons, and Family Exemption: NI 45-106, s.2.7
Prospectus requirement doesnt apply wrt distribution of security in circumstances
outlined in s.2.7(2) [s.2.7(3)]
Definitions of Founder, Affiliate, Control Person s.1.1
Founder: person who: (a) acting alone, in conjunction, or in concert with one or more

persons, directly or indirectly, takes the initiative in founding, organizing or substantially

reorganizing the business of the issuer AND (b) at the time of the trade is actively involved in
the business of the issuer
Affiliate s.1.2: issuer is an affiliate of another issuer if: (a) one of them is the subsidiary
of the other, or (b) each of them is controlled by the same person.

o Control s.1.3: Persons controls another person if

(a) first person beneficially owns or exercises control over securities of

the second person carrying votes which, if exercised, would entitle the
first person to elect a majority of the directors of the second person,
unless that first person holds the voting securities only to secure an
obligation
(b) second person is a partnership, other than a limited partnership, and
the first person holds more than 50% of the interests of the partnership
(c) Second person is a limited partnership and the general partner of the
limited partnership is the first person.

76

Control Person: A person who (a) holds a sufficient number of any of the securities of an
issuer so as to affect materially the control of the issuer, or (b) more than 20% of the
outstanding voting securities of an issuer except where there is evidence showing that the
holding of those securities does not affect materially the control of the issuer

Substantive Requirements s.2.7(2): Trade in a security to a person who purchases the

security as principal (i.e. for themselves rather than on behalf of someone else) and is:
(a) founder of the issuer
(b) affiliate of the founder of the issuer
(c) spouse, parent, brother, sister, grandparent, or child of an executive officer,
director, or founder of the issuer or
(d) A person that is a control person of the issue
Note: no limit on value of offering or number of investors [built in cap]
Reporting Requirements: NONE
Government Incentive Security Exemption: OSC Rule 45-501
Definition s.1.1:
Investment in a security to fund activities of junior exploration issuers in the resource
sector and northern communities for which a tax shelter is offered
Income Tax Act allows expenses to flow to investors as opposed to being taken by
business entity itself
Substantive Requirements s.2.1(1):
Maximum of 75 investors may be solicited
Maximum of 50 investors may purchase the GIS
o Note: Anti-avoidance rule s.2.1(2)
Each investor must have access to substantially the same info as a prospectus
Investor must:
o Be in position to evaluate investment because of net worth and investment
experience or consultation with an investment advisor (not promoter) OR
o Be executive officer/director of the issuer or affiliate of the issuer or their
spouse or child
o Note: position to evaluate is not something usually required in IPO
No publicity or advertising
Promoters limited to using once every calendar year
Condon: Substantive Requirements make the exemption impractical
Disclosure and Reporting Requirements:
Investors must be supplied with offering memorandum [s.2.1(1)(b)]
o Identify every officer and director of the issuer
o Identify every promoter of the issuer

77

o Giving particulars of professional qualifications and associations during

lat 5 years of every officer, director, promoter related to the offering
o Indicating each director that will be devoting full time to the affairs of the
issuer
o Civil remedies
o Note: not reviewed by regulators but gives investors some right of action
for misrepresentation
A report is required within 10 days of the trade [s.7.1, Form 45-501FI]
o To inform regulator that GIS exemption is being used and could use this to
investigate the content of this prospectus-like info [not reviewed often in
practice]

Wealthy/Sophisticated Investor Exemption

Accredited Investor Exemption: NI 45-106 s.2.3
Prospectus requirement does not apply if purchaser purchases security as principle
and is an accredited investor [s.2.3(2)]
Accredited Investor Definition s.1.1:
Institutions

(a) Canadian financial institutions [banks, trust companies, insurance companies]

(b) Business Development Bank of Canada [bank operated by federal govt w/ objective to
assist start up business enterprises under fairly stringent conditions]
(c) Subsidiary of any Person referred to in (a) or (b) if person owns all voting securities of
the subsidiary except that required to be by law to be owned by directors of subsidiary
(d) Person registered under securities registration as advisor or dealer [investment
banking/brokerage divisions of major Canadian banks]
(e) Individual registered or formerly registered under SA as rep of person in (d)
(f) Government of Canada or crown corporation
(g) Municipalities, Public boards, Commissions, school boards
(h) any national or federal state, provincial, territorial govt of foreign jurisdiction
(i) Pension funds operated by financial institutions or provincial
o i.e. pension whose business it is to invest assets of employees
(n) Investment funds [captures mutual funds]
(p) Trust companies
(q) Persons acting on behalf of fully managed account if they are registered to carry on
business as advisor
(r) Registered charity under Income Tax Act that has obtained advice from eligible advisor
(s) entity organized in foreign jurisdiction analogous to entities in para (a)-(d)

Individuals
(1) Financial Asset Test Branch (j): Individual (alone or with spouse) beneficially
owns financially assets net valued at 1M [before taxes but net of related liabilities to
ensure you are targeting high net worth individuals]
78

Financial assets s.1.1: cash, securities, or any contract of insurance or deposit that
is not a security for the purpose of this act
Related Liabilities s.1.1: (a) liabilities incurred or assumed for the purpose of
financing acquisition/ownership of financial assets or (b) liabilities that are secured
by financial assets
Factors indicative of beneficial ownership Rule 45-106CP s.3.5(3):
o Physical or constructive possession of evidence of ownership of financial
assets
o Entitlement to receipt of any income generated from asset
o Risk of loss of value of the asset
o Ability to dispose of financial asset or otherwise deal with it as the
individual sees fit

(2) Income Test Branch (k): net income before taxes exceeds 200,000 in two most
recent calendar years OR combined income with spouse exceeds 300,000 in each of those
years AND reasonably expects to exceed that net income in the current calendar year
Condon: reasonably expect to exceed BUT only seems necessary to show
maintaining current income levels
Condon: Is 200,000 is the right threshold to put in category of sophisticated investors
(3) Net Asset Test Branch (l): Individual who, alone or w/ spouse, has net assets of at
least 5M
Substantive Requirements:
REQUIREMENT: PURCHASER MUST BE ACCREDITED INVESTOR
Anti-avoidance Rule s.2.3(6): exemption doesnt apply to trade in security to
person if person is created or used solely to purchase or hold securities as an
accredited investor
Focus on purchaser NOT issuer!
Seller to accredited investor does NOT have to be issuer provides flexibility in
allowing accredited investors to sell to each other
Reporting Requirements:
Report of Exempt distribution s.6.1: If ISSUER distributes security of its own issuer
under accredited investor exemption, must file report no later than 10 days after the
distribution BUT
No report required s.6.2(1): if making trade of debt security of its own issue OR
concurrently with distribution of debt security, an equity security of its own issue to
Canadian financial institution or bank
NOTE: If dont qualify as an accredited investor, could make large investment and
qualify for minimum investment exemption

79

Minimum Investment Exemption: NI 45-106 s.2.10

Prospectus requirement doesnt apply to distribution in circumstances in s.2.10(1)
[s.2.10(2)]
Substantive Requirements s.2.10(1):
Person purchases as a principal
Security costs at least $150,000 paid in cash at the time of the trade
Trade is in a security of a SINGLE ISSUER
o Anti-avoidance Rule s.2.10(3): exemption doesnt apply to trade in
security to person if that person is created or used solely to purchase or
hold securities in reliance on this exemption
Reporting Requirements:
Report of Exempt distribution - s.6.1: must file report within 10 days after
distribution under minimum amount investment
Exception s.6.2(2): investment fund if files report not later than 30 days after
financial year end of the investment fund
Policy Issues:
OSC Rule previously appealed this and introduced accredited investor exemption
instead, BUT other provinces were keen so it was brought back in with NI 45-106
Problem: distorting type of transaction going on in the market forcing issuers to sell
securities in groups worth more than 150,000 to get access to exemption causing
people to take more risk
Study of the Economic Impact of OSC Rule 45-501 Exempt Distributions: taking
away 150,000 threshold, results in more variety in types of transactions and more
high net worth individuals
Pre-existing Relationship Exemptions
Stock Dividends: NI 45-106 ss.2.31 and 2.2
Dividends Security as Payment - s.2.31:
No prospectus required where new securities are issued to pay dividends
Trade by issuer in securities of (1) its own issue or (2) security of a reporting issuer
to a security holder of the issuer as a dividend
Condon: requiring prospectus would undercut dividend payout
Dividend Re-Investment Plans s.2.2:
No prospectus required when dividends, interest, or cash payments paid to SH of
issuer are applied to acquire additional securities of the issuer
Instead of giving stock as dividend, give cash and option to roll cash into new stock
Limitations:
80

o Security holders must purchase securities of same class to which the

dividends or distributions are attributable to (Ontario???)
o Must not exceed 2% of issued/outstanding shares of the class to which the
plan relates
Reorganizations: NI 45-106 - s.2.11
Amalgamation, merger, re-organization under statutory procedure
Dissolution or winding up of the issuer
Conversion, exchange, or exercise: NI 45-106 - s.2.42
No prospectus when issuer trades its securities to a security holder of the issuer in
accordance with terms and conditions of a security previously issued
Examples: options, convertible debt securities (can be converted to equity securities
under certain conditions), convertible preferred shares (can be converted to common
under certain conditions)
Would technically be a new distribution when exercise conversion option
Policy Justification: dealing with limited group of security holders and people that
already have an investment in that issuer (thus access to info)
Rights Offerings: NI 45-106 - s.2.1
No prospectus requirement wrt granting of existing security holders right to
purchase securities and the issue of securities pursuant to that right [s.2.1(2)]
Substantive Requirements:
KEY Limitation: Must comply with requirements in NI 45-101 [s.2.1(1)(c)]
Rights Offering Exemption Not Available - NI 45-101 - s.2.2:
o If exercise of rights will result in an increase of more than 25% in the
number of outstanding securities of the class to be issued
o See p.1285 for additional restrictions in NI 45-101 Rights Offerings
Can only trade under exemption if regulator as not objected to trade within 10 days of
receipt of notice OR if there is an objection, the issuer has delivered information that
is satisfactory and acceptable to the regulator [s.2.1(1)(b)]
Reporting and Disclosure Requirements:
Notice to Regulator s.2.1(1)(a): Must provide written notice to regulator of date,
amount, nature, and conditions of the trade, including approximate net proceeds to be
derived from issuer
o REGULATOR HAS 10 DAYS TO REVIEW
Rights Offering Circular NI 45-101 Part 3): Must send a rights offering circular
prepared in accordance with Form 45-101F to regulator [s.3.1(1)] AND each security
entitled to security holder entitled to receive rights under the offering [s.3.2]
o Policy: still want some kind of protection for existing security holders
o Condon: why are we giving existing security holders protection in some
contexts but not others?
81

Purchasing here rather than receiving as payment of dividend

Information Required in Rights Offering Circular - Form 45-101F [p.1289] includes:
o Item 2 Summary of Offering
o Item 4 Brief description of business of the issuer
o Item 5 Details of rights and securities Offered
o Item 8 How to exercise rights
o Condon: not as detailed as prospectus, mostly about how to exercise rights

Trades to Employees, Officers, Directors: NI 45-106 - Division 4

No prospectus for distribution to employees of issuer or a related entity
Substantive Requirements:
Key Requirements s.2.24(1): Distribution to employee, executive officer, director,
or consultant of the issuer or of a related entity of the issuer and participation in
trade is VOLUNARY
Condon: short-term contractual relations are contemplated under exemption [i.e.
choosing to compensate consultant or short-term service w/ stocks can come within
exemption]
Voluntariness s.2.23(2): Participation is voluntary if not induced to participate by
expectation of employment or continued employment with issuer or related entity
o Condon: difficult to ascertain
o 45-106 CP specifically indicates that where expectation of continued
employment hinges on acceptance of stock as a form of compensation,
voluntary requirement not met
Note: related entity means a person that controls or is controlled by the issuer or that is
controlled by the same person as the issuer
Offering Memoranda (OM)
Exemption if issuer provides OM BUT Ontario is NOT included [NI 45-106 s.2.9]
ONTARIO: GIS exemption requires OM to be distributed [OSC Rule 45-501 s.2.1(1)]
Definition
OSC Rule 14-501 s.1.1; OSA s.1(1): document purporting to describe business and
affairs of issuer that has been prepared primarily for deliver to and review by prospective
purchaser to assist purchaser in making investment decision for a security being sold in
distribution to which s.53 would apply but for availability of exemption but does NOT
include document setting out current information on issuer for prospective purchaser familiar
w/issuer through prior investment or business contracts

Contents
OSC Rule 45-501 s.2.1(1):
o
o

Identify every officer and director of the issuer

Identify every promoter of the issuer

82

o
o
o

Giving particulars of professional qualifications and associations during lat 5

years of every officer, director, promoter related to the offering
Indicating each director that will be devoting full time to the affairs of the issuer
Civil remedies

OSC Rule 45-501 Part 6 6.3: must inform prospective purchaser of rights under
s.130.1 of the OSA [civil liability provision which gives purchaser ability to sue for
misrepresentation]
o See OSC Rule 45-501CP Part 5
Condon: Not reviewed by regulator in the same way prospectus is and very little
prescribed content, but can sue if there is a misrep.

OM Statutory Right of Action s.130.1

Grounds of Liability:
o Misrepresentation [s.130(1)]
o Note: Deemed reliance
Defences:
o Purchaser knowledge [s.130.1(2)]
o Depreciation not due to misrepresentation [s.130.1(3)]
o Not receiving proceeds and the misrepresentation was not based on
information provided by the issuer [s.130.1(5)]

Remedies:
o Damages
o Recession

Filing requirements
Delivery s.6.4: Copies of OM to be filed with OSC within 10 days of the date of
distribution
NOTE: No review of OMs and OMs not made public (SEDAR)
Discretionary Exemptions
If dont qualify for specified exemption, can apply for discretionary exemption

Application for Exemption - OSA s.74: on application of interested person or

company, Commission may rule that trade is not subject to a registration or
prospectus requirements where to do so wouldnt be contrary to public interest and
can impose any terms as necessary
Condon: since the national instrument 45-106, regulators more reluctant to grant
exemptions b/c not happy about expanding the boundaries even further

Consequences of Incorrectly Relying on Exemption

Jones v. Deacon Hodgson [1989/Ont. SC HCJ] incorrect reliance on exemption renders K void
no limitation period for failure to file prospectus

Failure to file prospectus renders contract void [recession under s.53]

83

Where issuer sells securities on an incorrect reliance private issuer exemption, K is

void and purchaser should be entitled to $ back
Distinction between failure to file prospectus and failure to deliver one
o Statutory right of action for failure to delver prospectus has limitation
period of 3 years
o NO limitation period for failure to file a prospectus b/c rule is so
fundamental to the statutory scheme serious infraction
Note: not high level court, but not superseded or overturned

NOTE: Responsibility for Compliance - NI 45-106 CP s.1.10: Can rely on factual

reps by purchaser provided that there are no reasonable grounds to believe they are false;
however, person trading in securities is responsible for determining, whether given the facts
available, the exemption is available. Generally should retain all necessary documents that show
the person properly relied on exemption

Resale Rules and Control Distributions

Policy Objectives
Disclosure
o Subsequent purchasers may not be well positioned to buy w/out info
Preventing Backdoor Underwriting
o Prevent abuse [i.e. use of exemptions to do large scale public offering]]
o Initial distribution to an exempt purchaser who then resells to the broader
market (avoiding regulation)
Pricing
o Incentives for issuers to become reporting issuers and for transactions to
occur on the secondary market by way of giving purchasers more
advantageous pricing when purchasing from issuers on the exempt market
Control Distributions
o Definition of distribution includes sales by control persons in OSA
requiring control persons to provide prospectus
o Resale rules allow for sale from control block holders under similar
conditions imposed by other resale rules and expands range of alternatives
NOTE: Removal of OSA RR (NI 45-102, s.2.2 and Appendix C)
NI 45-106 does not restrict repeated use of prospectus exemptions beyond the first
distribution w/out triggering re-sale rules [NI 45-102CP s.1.2(3)]
Choosing the Applicable Resale Rule
Exemption under NI 45-106
Government Incentive Security (GIS) Exemption

Applicable NI 45-102 Resale Rule

s.2.5 (NI 45-102, s.2.3 and App D)
NOTE: RR 2.5 only when one of the initial

84

purchasers wants to sell outside initial

parameters i.e. if trade is amount group of
original 50 purchasers, continued exemption
under OSC Rule 45-501, s.2.2

Private Issuer Exemption

Founder, Control Person and Family Exemption
Accredited Investor Exemption
Minimum Investment Exemption
Stock Dividend Exemption
Re-organization Exemption
Conversion. Exchange, Exercise Exemption

2.6 NI 45-102 s.2.4 and App.E)

2.5 (NI 45-102, s.2.3 and App.D)
2.5 (NI 45-102, s.2.3 and App.D)
2.5 (NI 45-102, s.2.3 and App.D)
2.6 (NI 45-102 s.2.4 and App.E)
2.6 (NI 45-102 s.2.4 and App.E)
2.5 OR 2.6, depending exemption under
which previously issued security was
first acquired

Rights Offering Exemption

Employees / Officers / Directors / Consultants
Resale Rules for Control Persons

Example: If previously issued (original)

security was issued to an accredited
investor, resale of underlying security
attracts RR 2.5 (RR applicable to
accredited investor)
Example: If original security was issued
by way of stock dividend, resale of
underlying securities attracts RR 2.6
Note: Underlying security means the
security issued on conversion or issued
on exchange [NI 45-102]

2.6 (NI 45-102 s.2.4 and App.E)

2.6 (NI 45-102 s.2.4 and App.E)
If the control person sells through an
exemption under NI 45-106, the
respective NI 45-102 resale rules apply

Substantive Rules
Restricted Period Resale Rule: NI 45-102 s.2.5(2)
NOTE: More stringent [conditions on issuer and re-seller] because the exemptions are
more likely to cause regulatory concern of lack of disclosure and back-door underwriting
Condition #1 Seasoning Requirement: issuer is or has been a reporting issuer for the
4 months immediately preceding the trade (resale)
Rationale: Have to provide docs to become a reporting issuer and within 4 months
will be at least one set of interim financial statements
Exception - NI 45-102 s.2.7: seasoning period doesnt apply if became a reporting
issuer after the distribution date by filing a prospectus
Distribution date = date securities originally issued in reliance on exemption

85

Condition #2 Restricted/Hold Period Requirement: at least 4 months have elapsed

since distribution date (purchasers must hold for 4 months)
Rationale: prevents back-door underwriting - circumventing quick turnaround and
avoids possibility of collusion between issuer and initial purchasers
o Some argue rationale is to push issuers into public market
NOTE: Purchasers will want discount in price to compensate for lack of liquidity
NI 45-102 CP - s.1.11: if issuer is not a reporting issuer at distribution date but
subsequently becomes a reporting issuer, seasoning requirement not longer applies
and can be re-sold provided that restricted period has expired [can decrease seasoning
period but not restricted period]
Calculation of restricted periods where more than one exempt purchaser NI 45-102
CP s.1.8: calculated from distribution date - date securities were distributed in
reliance on exemption from prospectus requirement by issuer or control person
Example under NI 45-102 CP s.1.8:
o Issuer distributes securities under exemption to purchaser in Saskatchewan
o Purchaser subsequently re-sells under an exemption during the restricted
period to purchaser in Alberta
o Alberta purchaser wants to sell
o Determine whether restricted period has expired from date the
issuer/control person distributed securities to Saskatchewan purchaser
Note: application of restricted/seasoning period rules to underlying securities
Underlying securities - NI 45-102 CP s.1.10: Restricted period or seasoning period
applicable to trades in underlying securities is calculated from the distribution date of
the original convertible or exchangeable security which entitled the holder to acquire
underlying security NOT date of the conversion to new type of security.
o

Example: if accredited investor held a convertible security for 6 months and upon
conversion wants to re-sell, there is no further restricted period as it expired
while the accredited investor held it as a convertible security

Condition #3: Legending

Certificate representing securities must carry a legend indicating the date on which
securities are eligible to be re-sold
Does not apply trade of underlying security if four months has passed since the
original convertible security was issued [NI 451-02, s.2.5(3)]
Rationale: Linked to hold period - prevent holders of from trying to resell at earlier
date to unwary investors not aware of requirements
Condition #4: not a control distribution: separate rules dealing with sales by control
block holder [RR s.2.8]
Condition #5: no unusual effort to prepare the market or create a demand for security
that was subject to the trade

86

Rationale: Prevents back door underwriting indication is engagement in fair amount

of marketing activities to get interest demonstrates wariness of regulators wrt to use
of exemptions dont want to make it more attractive to use exempt market
Legislation itself does not elaborate on unusual effort, but 45-102CP refers to ASC
Rules Section 4
o
o
o
o
o

Dissemination of soliciting material to prospective purchaser unless the material

consists only of a letter/communication identifying securities being sold and
advising that they are available
Formation of selling group to coordinate the efforts of more than one registrant to
effect the sale
Implementation of transaction or plan to adjust market price of securities
Sales effort that is illegal or improper by standards of market
Sale to non-arms length purchasers

Condition #6: no extraordinary commissions

Cant compensate person/company > than customary for transactions of a similar size
Rationale: Dont want to provide underwriters with incentives to sell securities for
you in context in which prospectus level disclosure has not been provided (see also
Condition 5 rationale)
Condition #7 : Selling security holder has no reasonable grounds to believe issuer in
default of securities legislation (if selling security holder is an insider or officer of the
issuer)
Rationale: decrease asymmetry of information
Seasoning Period Resale Rule: NI 45-102 - s.2.6(3)
ONLY DIFFERENCE: NO HOLD PERIOD ON PURCHASER
Conditions:
Seasoning Period: issuer reporting issuer in preceding 4 months before trade
o Seasoning period N/A where issuer becomes a reporting issuer after the
distribution date [NI 45-102 - s.2.7]
Not a control distribution
No unusual effort to prepare of market or to create a demand for the security that is
the subject of the trade
If selling security hold is insider or officer of the issuer, the selling security holder has
no reasonable grounds to be issuer is in default
Condon: s.2.6 is very easy to meet if you are already a reporting issuer and in good
standing with continuous disclosure requirements
Policy Questions:
Is 4 month seasoning requirement enough to provide investors disclosure?
Is 4 month hold period enough to prevent backdoor underwriting?

87

EXAMPLE

Issuer XYZ qualifies to be a private issuer; Directors of XYZ are A, B, and C; XYZ has 20
security holders, including D and E; D is a close personal friend of A; E is a close personal
friend of B
Can XYZ issues securities to F who is a close personal friend of C?
o YES - F is eligible under private issuer exemption (close personal friend of
directors) and sale does not put private issuer over 50 person limit
Can D sell securities in XYZ to E?
o YES E is eligible under private issuer exemption (existing SH)
XYZ does an IPO on March 2006 and on April 1, 2006 E wants to sell his securities
o RR s.2.6 RR
o OK seasoning period met b/c issuer became reporting issuer after distribution
date

Trades by Control Persons

Alternatives Available to Control Persons Distributing Securities
Control person/issuer issues a prospectus
o Not feasible b/c of high $ but may tag along if issuer is filing prospectus
Discretionary exemption from OSC under s.74
o Not likely to get b/c will undercut goals and concern re asymmetry of info
o Could apply on basis that there has been recent prospectus by issuer and
make declaration that nothing has changed
Use of another prospectus exemption
o Sell to someone who qualifies for prospectus exemption (i.e. accredited
investor) BUT
o Buyer will suffer loss of liquidity b/c buying from a control block holder
RR applicable to subsequent sale to someone not qualifying under
exemption
RR in 45-102, s.2.8
Substantive Rule NI 45-102 - s.2.8
Prospectus requirement does not apply to a control distribution if conditions in
s.2.8(2) are satisfied [s.2.8(1)]
Condition #1: Seasoning Period Requirement (same as s.2.6)
o Issuer is or has been reporting issuer in jurisdiction of Canada for 4
months immediately preceding trade
o Seasoning period N/A where issuer becomes a reporting issuer after the
distribution date [s.2.7]
o Note: distribution date is date security that was subject of the trade was
acquired by selling security holder [s.1.1]
Condition #2: Restricted Period Requirement
o Selling security holder has held securities for at least 4 months
o Determination of time periods in context of convertible/exchangeable
securities: 4 months from the time original securities are first acquired
88

NOT 4 months for the date the security is converted into underlying
security [s.2.9(3)]
Condition #3: No unusual effort is made to prepare the market or to create
demand for the security that is subject of the trade
Condition #4: No extraordinary commission or consideration is paid to a person
or company in respect of the trade
Condition #5: Selling security holder has no reasonable grounds to believe that
issuer is in default of securities legislation

Filing Requirements NI 45-102

Filing Requirements - s.2.8(3): Selling security holder must
o (a) sign Form 45-102FI no earlier than one business day before form is
filed
o (b) File Form 45-102FI on SEDAR at least 7 days before first trade
o (c) File an insider report prepared under Form 55-102F6 or 55-102F6
within three days after completion of trade
Form expires 30 days from date filed [s.2.8(4)]
Terms of Form 45-102FI [see p.1316]
Name of reporting issuer
Info re selling security holder (name; positions held w/ reporting issuer; whether
selling as lender, pledge, mortgagee or other encumbrance; number and class of
securities beneficially owned)
Distribution (i.e. number/class of securities proposing to sell; whether selling
privately or on an exchange or market)
Warning (offence to submit info that is materially misleading or untrue)
Certification that have no knowledge of material fact or material change wrt issuer
and the information in form is true and complete
EXAMPLE:

B becomes control block holder of NYZ (a private issuer) in FEB 06

XYZ does IPO in MAR 06
B wants to sell securities in APR 06
Selling securities of a private issuer attracts 2.6 RR BUT this is a control block distribution
(Condon: thinks 2.8 trumps 2.6 but not case law)
B cannot sell, because the 4 month hold period is not met

Takeover Bids

Takeover bid: Bidder makes offer to purchase outstanding shares of another

corporation (the target)
Hostile: target management/BOD dont invite bid and arent in favour OR
Friendly: target management/BOD approve of bid and cooperate
TB v. other forms of control transactions: only change SH identitiy
Key consequence: replace existing management
89

Policy: Stakeholder v. Efficiency Debate

o Economic Efficiency Argument: If want to have thriving economy w/
assets used in most efficient way, should support TB and eliminate
regulatory concern for target SH (i.e. shut down unproductive plants)
o Stakeholder Argument: various stakeholders are adversely affected
(employees, communities, etc.)

Motivations for launching takeover

Replace insufficient management
Synergies [b/w assets and operations of the target and its own]
Desire to increase market power/empire building
Tax considerations
Undervaluation of shares
Regulatory Objectives
Disclosure of Information: bidder giving info to target (misplaced concern?)
Time to respond: time to target SH to respond and target management to give
recommendation
Equality of Treatment: equal consideration to target SH (compare to US where able
to offer incentives to SH who tender early i.e. better price for SH)
Early Warning Rules
EWR (news release, file report, & one day freeze) apply in two circumstances:
Purchase results in beneficial ownership of 10% of outstanding voting or equity
securities of any class [s.102.1(1)]
Every subsequent 2% increase after 10% threshold is met [s.102.1(2)]
Policy Objective: to provide warning of potential TB but argument that these rules make
TB more costly and results in not achieving optimal number of takeovers in the economy

10% Threshold s.102.1(1): Every acquiror who acquires beneficial ownership of, or
power to exercise control or direction over, 10% or more of outstanding voting or
equity securities of any class of securities (or securities convertible into voting or
equity securities) must disclose in two ways issue and file news release and file
report w/OSC containing info required in the news release
o NOTE: In determining whether 10% threshold is met, count acquirors
securities (definition s.102: securities of that class owned on the date of
an offer to acquire either by the acquiror or any person or company acting
jointly or in concert with the acquiror)
o News release must be issued promptly and report must be filed within 2
business days from the day of the acquisition [OSC Rule 62-504 s.7.1]
Content of news releases/reports NI 62-103, Part 3, s.3.1(1): info in Appendix E
Appendix E [see p.2327]:
o

Name and address of offeror

90

o
o
o
o

Principle amount of securities and security holding percentage in the class of

which the offeror has acquired ownership wrt the transaction giving rise to
reporting obligation
Information about any actor who is acting jointly with the offeror (i.e. names of
joint actors and ownership)
Name of market in which transaction giving rise to obligation took place
Purpose of offeror and any joint actors (i.e. signal intention to make any
further acquisitions) (Condon: rarely reported b/c price will increase)

Additional News Release/Reporting Requirement s.102.1(2):

o for EVERY subsequent acquisition of 2% by the acquirer (or by any
person acting jointly or in concert w/ acquirer) of securities of the class
for which disclosure under 102.1(1) was required or securities convertible
into that class
o for change in material fact in info contained in disclosure
o wait one business day from when report is filed to start acquiring
additional securities
Freeze Period s.102.1(3): acquiror (and persons acting jointly and in concert with
acquiror) must wait one business day from when report is filed to start acquiring
additional securities of the applicable class

LOWER THRESHOLDS IN CONTEXT OF FORMAL TB S.102.2

Policy: Inform SH of potential competing bids to assist in deciding whether to tender

5% Rule - s.102.2(1): Must issue and file news release if acquire beneficial ownership
of 5% or more of outstanding voting/equity securities of class subject TB
o Further news release/report for additional acquisitions of 2% [s.102.2(2)]
OSC Rule 62-504 s.7.2: must, before the opening of trading on the next business
day, issue and file a news release containing the following information:
o
o
o
o
o
o

Name of acquirer
Number of securities acquired in transaction that gave rise to the requirement to
issue news release
Beneficial ownership by acquiror and all persons and companies acting jointly or
in concert with the acquiror immediately after the acquisition
Number of securities beneficially acquired by acquiror and all persons/companies
acting jointly and in concert w/ acquiror since commencement of the bid
Name of market transaction took place in
Purpose of the acquirer and anyone acting jointly w/ them for acquiring the
securities

Alternative Reporting System for Eligible Institutional Investors: NI 62-103 Part 4

Condon: relatively low thresholds exempt entitles who acquire significant amounts
but dont intent to take over (i.e. mutual funds on behalf of a large number of
beneficial owners

91

S.4.1: early warning requirements dont apply to an eligible institutional investor if

intends to file monthly reports under this Part or is not in arrears of filing reports
under this Part
S.4.2: eligible institutional investors shall not file reports under this part if they intend
to make a formal bid
Eligible institutional investors: financial institution, pension fund, mutual fund that
is not a reporting issuer, investment manager in relation to securities it exercises
discretion to vote, acquire or dispose

When is a TB taking place?

Definitions s.89(1)
Takeover Bid: offer to acquire OUTSTANDING voting securities or equity securities of a
class made to one or more persons or companies where the securities subject to the offer to
acquire, together with the offerors securities, constitute 20% or more of the outstanding
securities of that class. Does not include an offer to acquire if the offer to acquire is a step in
an amalgamation, merger, reorganization or arrangement that requires approval in a vote of
security holders

o Relevance - voting securities: BOD election get rid of management

o Rules apply equally to offeror holding more than 20% (BUT likely
exemption for small purchases)
Equity Securities: Security of issuer that carries residual interest in earnings of issuer
and residual interest in the assets on liquidation or winding up
o Relevance: some are convertible into voting securities
Offer to acquire: (a) offer to purchase or a solicitation of an offer to sell (b) an
acceptance of an offer to sell, whether or not the offer had been solicited or (c) any
combination of the above
Offerors securities: securities beneficially owned, or over which control or
direction is exercised, on the date of an offer to acquire, by an offeror or by any
person or company acting jointly or in concert with the offeror (note: question of
fact)

Person or company acting jointly or in concert with an offeror

s.91(1)(a): following is deemed to be acting jointly or in concert with the offeror

o (i) As a result of any agreement, commitment or understanding with the
offeror or with any other person or company acting jointly or in concert
with the offeror, acquires or offers to acquire securities of the same class
as those subject to the offer to acquire, and
o

(ii) an affiliate of the offeror

S.91(1)(b): presumed to be acting jointly and in concert with offeror

o Person or company who, as a result of
agreement/commitment/understanding w/ offeror or anyone acting jointly
or in concert with the offeror, intends to exercise any voting rights jointly
or in concert with the offeror or anyone acting jointly or in concert with
offeror
92

o Condon: if want to make case, have to have some evidence of a formal or

informal agreement or commitment between the parties to exercise voting
rights jointly and in concert
Counting Rules in Meeting 20% Threshold
People acting acting jointly or in concert with offeror [see definition of offerors
securities]
Securities convertible into relevant class within 60 days [s.90(1)]
Securities that offeror may or must acquire within 60 days (i.e. by exercise of option,
right, etc) [s.90(1)]
NOTE: Anti-Avoidance Rule
Indirect Offers s.92: offer to acquire includes a direct or indirect offer to acquire
Example: if you make TB for Company A, it could be treated by regulators as
takeover for Company B if factual the only real asset of A is securities of B
How to Conduct a TB
Two means of commencing TB:
1. Delivering a TB circular to all SH of the target [s.94.1(b)] [used to be only option]
2. By advertisement i.e. publishing an announcement of the TB in major daily
newspaper [s.94.1(a)]
File and deliver bid/circular to target on or before date of advertisement [s.94.2(2)(a)]
Deliver bid and circular shareholders within 2 days of receiving shareholder list
[s.94.2(2)(c)]
Policy: advantage to bidder by making process quicker given that bid must remain
open for 35 days (can start open period up to 10 days earlier )
TB Circular
Policy: SH must have full info about bid and bidder so can make an informed decision
[Condon: Is putting too high of a burden on bidders problematic?]
Content: OSC Rule 62-504FI Part 2 (NOTE: similar to prospectus)

Item 1: Name/description of offeror

Item 2: Name of offeree issuer
Item 3: Description of securities subject to TB
Item 4: dates on which TB will begin and end
Item 5: consideration (i.e. cash/securities of the offeror) if offering securities of the offeror, must
disclose details of those securities particulars of rights, conditions and restrictions attaching to those
securities
Item 6: ownership of securities of offeree
Item 7: description of trading in securities of offeree issuer
Item 8: commitments to acquire securities of the offeree
Item 9: terms and conditions of bid
Item 10: particulars for payment for deposited securities

93

Item 11: description of right to withdraw deposited securities

Item 12: source of funds for payment
Item13. Trading in securities to be acquired
Item 14 and 15 and 16: arrangements between offeror and directors/officer of offeree and SH of
offeree and w/ offeree in general
Item 17: purpose of the bid includes proposals and future plans re
o subsequent transactions involving the offeree issuer such as a going private transaction
o material changes in business of target
Item 18: valuation
Item 19. Securities of an offeror or other issuer to be exchanged for securities of offeree issuer
(must provide additional info about offerors financial position as an issuer)
Item 20: Right of appraisal and acquisition
Item 21: Market purchases of securities (i.e. whether offeror intends to purchase in securities subject to
bid in market
Item 22: state that it has been approved by directors
Item 23: Other material facts (material facts re securities of offeree issuer and any other matter
that is not generally disclosed and known to the offeror and that would reasonably be expected to
affect decision of SH to accept or reject offer)
Item 24: disclose person/company retained by offeror to make solicitations and the compensation
Item 25: Statement of rights of securities of offeree issuer (i.e. recession or damage for misrep)
Item 26: Certificating statement no untrue statement of material fact or omission of material fact

NOTE: Civil liability for misrepresentation [s.131(1)] and directors [s.131(2)]

To whom should bid be delivered
Security Holders: of class subject to the bid who are in Ontario AND of convertible
securities that are convertible in the relevant class before expiry of bid [s.94]
Offeree: on day bid is sent or as soon as practicable [94.2(3)]
File with OSC [94.2(3)]
Variation in Terms of Bid/Material Information - s.94.3(1)
If change in information contained in bid circular that would reasonably be expected
to affect decision of security holders to accept or reject bid occurs before expiry of
bide or expiry of rights to withdraw securities deposited under bid, offeror MUST:
o Issue and file a news release
o Send notice to change to every person/company to whom circular was
required to be sent and whose securities were have not been taken up
Certificates Required - s.99(1) and Form 62-504FI, Item 26

contains no untrue statement of a material fact and does not omit to state a material fact required to be stated or
that is necessary to make a statement not misleading in the light of the circumstances in which it was made

Signed by: CEO or whoever performs functions of CEO, CFO or whoever performs
functions of CEO, 2 other directors OR offeror if offeror is an individual

RE Canfor Corp. [1995/OSCB]

Facts:
Canfor made bid for Slocan securities (forestry company)
94

Complicated bid structure - two stage transaction:

o Receive deposit receipts in consideration for depositing securities
o Entitled to receive common shares at date determined by Canfor
Reasons: need consent of forestry minister for a change in control of a company that
operates timber licenses
Allegations re adequacy of disclosure in Canfor circular
Inadequate description of consideration offered for S shares
Didnt disclose that method for avoiding change of control provisions of Forest Act
(i.e. deposit receipts) was untested and it might violate act
Canfor also had a substantial out-clause

Analysis:
Test of materiality OSC Rule 62-504 FI - Item 23: whether information would be
reasonably expected to affect decision of security holders in deciding whether to
accept or reject bid
Inadequately disclosure wrt: out clause, fact that method wasnt tested, complexity
and difficulty of approval process
Public interest power s.127 cease trade order (prevent TB from proceeding)
Directors Circular
Must send to all persons/companies the bid was required to be sent within 15 days
after date of bid [s.95(1)]
Policy: directs advise whether to accept or reject b/c in the best position to value
shares of the target and its going concern aspects AND gives directors opportunity to
shape response of SH and engage in defensive tactics
Duty to evaluate and advise s.95(2):
o (a) whether accept or reject bid and reasons for recommendation
o (b) state that it is unable or is not making a recommendation and reasons
o (c) state BOD is deciding and advise not to deposit securities until they
receive recommendation
o Also see OSC Rule 65-504F3, Item 15
OSC Rule 62-504F3:
o Item 7: Material relationship material w/ offeror or offerors officers or
directors
o Item 8: Arrangements between offeree issuer and officers and directors
o Item 9: Arrangements between the offeror and security holders of offeree
issuer
o Item 10: Interests of directors and officers of the offeree issuer in material
transactions with offeror
o Policy: concern that directors of target may want to act in their own
interest wrt bid rather than in interest in SH
Time Periods & Take-up Issues
Bid Period s.98(1): Bid must be open for 35 days
95

o May not extent formal bid period unless offeror first takes up securities
deposited under bid that have not been withdrawn [s.98.3(4)]
Prohibition on Take-up s.98(2): No securities to be taken up (accept for purchase)
until 35 day period expires
Take-up s.98.3(1): Offeror has to take up securities not later than 10 days after
expiry of bid
Payment s.98.3(2): Securities must be paid for not more than 3 days after take up

NOTE: Issues of take up/payment in Canfor - when are the Slocan securities taken up?
OSC held that take-up occurred when first stage of transaction was complete (deposit
receipts given to shareholders who tendered)
Taking up means communication by the offeror of its irrevocable decision to
complete the purchase of shares tendered under its offer
Withdrawal
Withdrawal s.98.1(1): can withdraw securities deposited under a formal bid:
o (a) any time before the securities have been taken up by the offeror (i.e.
any time before the end of the 35 day period);
o (b) at any time before end of 10 days after notice of change
o (c) if the securities are not paid for within 3 days of take-up
o Policy: want to allow SH opportunity to get out if discover unfavourable
info or a more favourable bid comes along
RE Canfor Corp. [1995/OSCB]
Facts: Canfor had at least 100 days before its shares would be exchanged for deposit
receipts, but Slocan shares irrevocably deposited Slocan argues that offended
withdrawal rights b/c bid could not be completed for an indeterminate period of time
Analysis:
Would have been fairer to Slocan SH to extend withdraw rights until deposit receipts
exchanged for Canfor shares or if Canfor provided a withdraw rate that would operate
if there was another bid made after 45 days of Canfor bid
Infringement wasnt serious enough to sue public interest power to cease trade
extended time period during which Slocan shares could be tendered
Bid Conditions
Bidders can have conditions on their takeover offer (fewer conditions make it easier
to persuade target shareholders to tender)
97.3(1): if consideration is to be paid in cash, offeror must make adequate financing
arrangements before bid to ensure that funds are available to make payment
97.3(1): financing arrangements may be subject to conditions if the offeror reasonably
believes that it is remote that offeror will be unable to pay if financing condition is
not satisfied
Note: in US cant be conditions re financing

96

Equal Treatment
Identical consideration OSA s.97(1): to all holders of the same class of securities
o Does not prohibit offering an identical choice of consideration (i.e. all
cash or part cash/securities) [97(2)]
o Policy: SH tendered initially will not deprived of change in offer price
Increase in Consideration - s.97(3): offeror must pay increase to each person or
company to whose securities were taken up
Prohibition on Collateral Agreements - s.97.1(1): If a person or company makes or
intends to make a formal bid, agreement has the effect of providing a security holder
of the offeree issuer with consideration of greater value than other security holders of
that class (i.e. cant offer inducements to large security holders)
o Exceptions - OSC Rule 62-504 s.4.1 - Employment compensation
arrangements
Pre-bid Integration Issues - s.93.2(1): If within 90 days preceding formal TB the
offeror acquired beneficial ownership of securities of class subject to bid in a
transaction not generally available to holders of that class of securities, the amount
offered in TB must be the same or higher
o Policy: prevent approaching SH prior to bid and giving more money
Lock up agreements - s.93.1(1): prohibited during the period of the bid
o lock-up agreement is permitted before (where whereby a security holder
and an offeror will contract to the effect that the security holder will tender
his shares to a formal TB) BUT cant give more consideration
Partial Bids Proportionate Take UP OSA s.97.2(1): where greater number of
securities is deposited under bid than offeror is bound or willing to acquire, must
take-up and pay for securities proportionately according to the number of securities
deposited by each security holder
Exemptions from TB Rules
Normal Course Purchases Exemption s.100
Bid is for not more than 5% of outstanding securities of a class
Not more than 5% are purchased in reliance exemption within a one year
o Anti-avoidance rule: cant use exemption to do creeping TB by
completing sequential 4.5% purchases in a closely related period of time
o Includes offeror or anyone acting jointly or in concert with offeror
There is a published market for the class of securities subject to the bid
o Make sure sellers of securities can find out if they are getting fair price
Purchase price does not exceed market price at the date of acquisition
Policy: Available to significant security holders to by small numbers of additional
securities as long as the above conditions are satisfied
Private Agreement Exemption s.100.1(1)
Purchases are made from 5 or less persons or companies (including persons or
companies outside of Ontario)
97

If there are more than 5 security holders of the class subject to the bid, it is not made
generally to all security holders
Cap on consideration:
o Published market: consideration <= 115% of market price @ date of bid
o No published market: reasonable basis for determining that consideration
is <= 115% of the value
o NOTE: Calculation of market price re 15% premium average of
closing price in the previous 20 business days [OSC Rule 62-504, s.1.3]
Policy: prevent strategic behaviour to increase market price

Non-reporting Issuer Exemption s100.2

Policy: While TB rules apply to all issuers, regulators are really interested in
enforcing good behaviour re timing and disclosure wrt reporting issuers b/c reporting
issuers likely to have more security holders
Additional Requirements - OSC Rule 62-504 - s.6.1:
o No published market for securities that are subject to the bid
o Number of security holders of class at commencement of bid is not more
than 50 (not including employees of offeree issuer of affiliate of offeree
issuer (or former employees who were security holders at time of
employment)
De minimis exemption - s.100.4
Small number of Ontario SH: Number of beneficial owners of class subject to bid in
Ontario is < 50 and securities held by them constitute less than 2% of that class
Equal participation: Ontario SH entitled to participate on same terms as rest of class
Foreign Target Exemption 100.3
Small number of SH in Canada: Bidder reasonably believes that registered and
beneficial security holders in Canada hold less than 10% of class subject to the bid
o Condon: bid is not primarily directed to Canadian security holders
Limited trading: Published market on which greatest dollar volume of trading
occurred during last 12 months was not in Canada
Equal participation: Ontario SH entitled to participate on same terms as rest of class
Defensive Tactics
NOTE: Conflict of Interest Position of Target Board - obligated to act in best interests of
company BUT stand to lose positions if the bid is successful
Types of Defensive Tactics
White Knight

Alternative bidder in the context of a hostile bid

98

BOD and white knight typically negotiate agreement that could contain other
defensive tactics (such as break free)
Policy: regulatory concern that value offered by white knight will be too low

Poison Pills or SH Rights Agreement

Agreement establishing rights for SH to acquire additional securities of the same class
Price at very uneconomical level (above market price) in normal course BUT drops to
very low price when triggering event occurs (TB or acquisition of 15% of shares)
Permitted bids: will not trigger SRA
Can be put in place when a hostile TB is made or well in advance of the possibility of
TB (i.e. agreement that is in effect for 5 years and comes up for renewal)
Purpose: dilute bidders holdings and puts target directors back in control
Policy concern: bidder is treated differently than other SH (divergence from
corporate law principle that you must treat all SH the same)
Danger signal if it is a tactical pill put in place with out SH approval (note: regulators
can use cease trade power under s.127)
Upheld if elements of the plan are appropriate and there is shareholder approval

Sale of Crown Jewel

Target enters into agreement w/ 3rd party to sell a significant asset (crown jewel) if
TB is successful
Purpose: to discourage initial bidder
Policy concern: whether the target board is appropriate value for asset (i.e. is this
something working to the benefit of the company as a whole)

Litigation

Applications to OSC on basis that bidder not acting in conformity with securities law
and applications to competition tribunal
Purpose: delay TB more time for SH to decide BOD to seek out alternative offers
Beware: can also work to prevent target BOD from using defensive tactics
Example stakeholders of target can use litigation to intervene: BCE decision
o Major group of bond holders sought corporate law remedies and argued
terms of merger were oppressive to them

Break Fee

Fee payable in the event that the 3rd party doesnt succeed (3-5% of value T)

Guidelines for Targets Use of Defensive Tactics: NP 62-202 (NOT mandatory)

Primary Policy Objective s1.1(2): to protect bona fide interests of target SH
o Tactics that are likely to deny of severely limit ability of SH to respond to
TB or competing bid may result in action by regulators (i.e. cease trade
power) [s.1.1(7)]

99

No fixed code of conduct in addition to fiduciary obligations required by corporate

law s.1.1(3): BUT regulators will examine tactics to determine whether they are
abusive to SH rights. Prior shareholder approval may ally such concerns.
Circumstances where DT might come under scrutiny s.1.1(4):
o Issuance, granting of an option on, or purchase of securities representing a
significant % of o/s securities of the target (i.e. board might offer to 3rd
party option to purchase another 20% of company)
o Sale of crown jewels
o Entering into K other than in normal course of business (tactical poison
pill or break fee)
Unrestricted Auctions s.1.1(5): produce most desirable results in TB
o Condon: increases price that bidders will to pay for target

Fiduciary Duties of the Target BOD

Re CW Shareholdings Inc. v. WIC Western International Communications Ltd
[1998/Gen.Div] duty is of target board to act in best interest of the shareholders as a whole and to
take active and reasonable steps to maximize shareholder value by conducting auction

Facts: CanWest made bid to acquire all o/s Class A and B shares of WIC BOD
thought inadequate initiated SRA break fee to Shaw and radio asset option which is
exercisable whether bid is successful or not application by CanWest to cease trade
Analysis:
In context of hostile TB where the corporation is in play, duty is of target board to
act in best interest of the shareholders as a whole and to take active and reasonable
steps to maximize shareholder value by conducting auction
o Auction: doing best to find alternative bidders who will maximize value
being offered for shares
o where corporation is in play: where it is apparent that there will be a sale
of equity (where there is at least one bid on the table)
Mapeleaf: uphold TJ statement that corporation not truly in play
because controlled by family who could decide whether or not to
sell shares (no public expectation of auction)
Not always apparent when put in play: BCE put into play when
teachers changed its investment intent from passive to active?
Directors obliged to carry out these duties in manner that minimizes, to the fullest
extent reasonably possible, their conflict of interest position
Producers Pipelines [Sask.CA]: onus on directors to show that their acts were
reasonable in relation to the threat posed and were directed to the benefit of the
corporation and its shareholders as a whole and not for an improper purpose (such as
the entrenchment of directors)
Blair: onus is too high should be more deference to decision of target BOD should
Business judgment rule: where business decisions are made honestly, prudently, in
good faith, and on reasonable and rational grounds, court will not interfere

100

Maple Leaf Foods Inc. v. Schneider Corporation [1998/Ont.CA] auction not always required
market canvass is acceptable where single offer and no means to assess adequacy

Facts: BOD rejected ML in favour of bid from another bidder preferred by targets
controlling SH (even though value of ML was higher) argument that unfairly
disregarded minority interest (non-family)
Analysis:
BOD to act in best interests of the corporation
Decision does not need to be perfect, just in range of reasonableness
Special Committees: If BOD has acted on advice of committee composed of persons
having no conflict of interest and the committee has acted independently, in good
faith, and made an informed recommendation, business judgment rule applies
o Application: composed of members of BOD at arms length from
controlling SH and did a reasonable job of canvassing alternatives
Condon: If controlling SH wont tender, little chance of succeeding
Distinction between duty to auction and duty to canvass the market
Auction not required in every change of control required where several bidders time
achieve the best value
Market canvass fine where single offer and BOD has no means to assess adequacy
Duty to set up committee who use reasonable efforts to canvass whether other bidders
are on horizon
Holds Farleys decision correction: corporation never truly in play because it was
known
BCE [Quebec Superior.Ct]
Facts: cash offer for shares of BCE by Ontario Teachers Pension Plan and US equity
firms financing for purchase from increasing debt load for which Bell (subsidiary of
BCE) is forced to guarantee argument that this unfairly disregarded interest of Bell and
BCE debenture holders and breached their reasonable expectations
Analysis:
Fiduciary duty to act in corporations best interest and maximize value of corporation
BUT when corporation is put in play there is an added burden of having to
maximize value of the corporations shares for the benefit of its shareholders
o Two objective are not necessarily incompatible or mutually exclusive
Revlon Duty: hold auction to maximize shareholder value and obtain highest value for
shares (US decision)
o In Revlon, no duty to debt holders because rights were already fixed by
contract that they dont need further protection
Revlon duty may have an appropriate place in Canadian corporate law exercise of
Revlon duty by BCE is not incompatible with fiduciary duties required by Peoples
(act in corporations best interest consider other stakeholders)
Sole fact that SH stand to benefit while debt holders are prejudiced does not give rise
to conclusion that directors have not performed their fiduciary duties
Appeal to CA
101

Condon: state of law is ambiguous

Who is the Appropriate Decision Maker?

Decision Maker
Approach
Regulator
SH autonomy: whether SH
Shareholder Rights
are able to make own
Analysis
decision on whether or not
to tender to bid
Courts
Fiduciary Analysis

Did BOD satisfy their

fiduciary duties?

Defensive Tactics
Poison Pills/SRA most
within securities mandate
(involve trading of
securities and bidder will
want cease trade re issuance
of new shares)
Poison pills, break fee, sale
of crown jewel

Poison Pills

Decision maker: courts and regulators

o Courts: Are directors exercising their business judgment appropriately?
o Regulators: Have directors of the target tried to achieve the proper balance
between enhancing value of bid and allowing SH to make their own
decisions about whether to tender or not?

Three Key Approaches:

Improper Purpose (Producer Pipelines) or business judgment (WIC) [Courts]
Checklist to structure regulatory discretion (Royal Host) [OSC]
347883 Alberta Ltd. v. Producers Pipelines Inc. [1991/Sask.CA]

TEST: whether directors, in adopting the defensive tactic, met the onus on them to
show that they acted in the best interest as a whole and whether their actions were
reasonable in relation to the threat posed (proportionality test)
Defensive action was neither reasonable in proportion to threat posed nor taken in
best interests of the company (i.e. improper purpose to entrench directors)
o BOD made no effort to show that TB by Saskoil would be harmful
o No effort to negotiate with Saskoil to increase bid amount
o Did not seek out competing bids
o No effort to establish that tender of shares to issuer bid would ultimately
result in better value to SH
o Would not permit bid under SRA unless 25% over appraised value
o Did not seek shareholder approval

Re Royal Host Real Estate Investment Trust [1999/OSCB]

Facts: adoption SRA w/out approval of holders offeror seeks order to cease trading
Analysis:

102

If rights plan is put in place in the face of TB w/out a vote of SH it is at least

necessary for target company to show that it was necessary to do so b/c of coercive
nature of bid or some other substantial unfairness or impropriety
Must determine an appropriate balance b/w permitting directors to fulfill their duty to
maximize shareholder value and protecting right of SH to decide whether to tender
Relevant factors:
o
o
o
o
o
o
o
o
o
o
o

Whether shareholder approval was obtained

When the plan was adopted (normal course or in the face of TB)
Whether there is broad SH support for the continued operation of the plan
i.e. whether approved by generous margin
Size and complexity of the target company
Any other defensive tactics implemented by the target company
Number of potential viable offers (that was the issue in ML directors concluded
there wasnt any other viable offers)
Steps taken by target company to find an alternative bid thats better for SH
Likelihood that, if given further time, target co. will be able to find a better bid
Note: regulators rely on information provided by target board
Nature of bid, including whether it is coercive or unfair to SH of target company
Where bid is issuer bid, it causes them to look more closely
Length of time since bed was announced and made
Likelihood that bid will not be extended if rights plan is not terminated

Condon: Regulators tend to make SRA time limited rather than completely eliminating
Sale of Crown Jewel

Re CW Shareholdings Inc. v. WIC Western International Communications Ltd

[1998/Gen.Div]
Note: Regulators decide was not the proper forum sent to court
Asset purchase options are acceptable where it strikes a reasonable commercial
balance between its potential negative effect as an auction inhibitor depressing SH
value and its potential positive effect as an auction stimulator enhancing SH value
having regard to various factors:
o Whether BOD complied with duties (i.e. obligation to max. SH value)
Special committee? Solicitation of valuations of asset? Did they
push third party to offer more beyond purchase price?
o Whether overall commercial balance and proportion between auction
inhibiting and auction stimulating effect has been struck
Whether it is likely to preclude further bidding that will deprive
SH of other future bidders with increase in value
o Price for asset is within range of reasonable value attributed to the asset
o Whether competing bid provides enough additional value to justify
granting option
Break Fees

Re CW Shareholdings Inc. v. WIC Western International Communications Ltd

[1998/Gen.Div]
103

Break fees have a role to play in inducing auctions inducing competing bids to
come forward (regulators and courts)
Break fees are appropriate in circumstances where: (1) they are necessary to induce a
competing bid to come forward (2) the bid represents a better value for the
shareholders, and (3) the break fee represents a reasonable commercial balance b/w
negative effect as an auction inhibitor and its potential positive effect as an auction
stimulator
Note: Regulators decide was not the proper forum sent to court

Issuer Bids and Going Private Transactions

Policy Considerations
Reasons why this is an important topic in Canada
o Flight from public markets: cost increase since Sarbanes Oxley
o Hollowing out thesis: publicly traded companies being bought by
international interests and run in overall business interest of that
international conglomerate rather local Canadian constituencies
(employees, communities, SH)
Key regulatory concern: Protection for minority SH
Definitions
Issuer bid - OSA s.89(1): issuer offers to acquire or redeem its securities except where:

No valuable consideration is offered or paid

step amalgamation, merger, reorganization or arrangement that requires approval of SH
Securities are non-convertible debt securities

Insider bid - MI 61-101 s.1.1: TB by issuer insider of offeree issuer, an associated or

affiliated entity of an issuer insider or offeree issuer, (ppl in above groups within 12
months before TB) or joint actor with any of those persons
Issuer Insider: directors or senior officers of the issuer, director or senior officer of a
person that is itself an issuer insider or a subsidiary of the issuer, or person that has
beneficial ownership of securities of the issuer carrying more than 10% of voting
rights (or holds 10% with people acting jointly and in concert)
o

affiliated entities if one is the subsidiary entity of the other or if both are subsidiary
entities of the same person

Related party transactions - MI 61 101- s.1.1: transaction between the issuer and related
party of the issuer at time the transaction is agreed to
Includes any ASSET transactions [see MI 61-101 for full list]
Related Parties:
o Control person of the issuer
o A person of which the issuer is a control person
o Person who has beneficial ownership or control and direction of securities
of issuer carrying more than 10% of voting rights
104

o Director or senior officer of the issuer or any other person described

o General partner or a limited partner
o Control Person: Person that beneficially owns more than 50% of securities
of any o/s class of equity securities of an affiliated entity
Going private transactions: forcing out minority SH to make issuer a private entity
Business combination - MI 61-101 - s.1.1: amalgamation, arrangement, consolidation,
amendment to the terms of a class of equity securities or any other transaction of the issuer, as a
consequence of which the interest of a holder of an equity security of the issuer may be
terminated without the holder's consent, regardless of whether the equity security is replaced with
another security

Substantive Requirements
Requirements: (1) Disclosure (2) Independent Valuation (3) Minority Approval
Insider Bids
Regulatory Concern: management in good position to know fair value of shares and
conflict of interest of (act in interest for SH but also want lowest price as bidder)
Disclosure MI 61-101
Disclosure of Offeror - s.2.2(1):

o
o
o
o

Background to insider bid

Previous valuations of made in last 24 months relating to issuers securities
Any formal valuation exemption offeror is relying on
Disclosure required by OSC Rule 62-504F2 Issuer Bid Circular

Directors Circular s.2.2(2):

o
o
o
o

Previous offers made in last 24 months relating to issuers securities

Background to insider bid to the extent background has not been disclosed in
disclosure document for insider bid
Discussion of review and approval process adopted by board and any special
committee, including any material disagreement between the board and the
special committee
Note may more relevant if insiders dont include directors

Valuation MI 61-101:
Formal valuation required [s.2.3(1)] of securities to be acquired and any non-cash
consideration [s.6.3(1)]
Valuator determined by independent committee [s.2.3(2)]
Valuator must be INDEPENDENT of any interested parties [s.6.1(1)]
Independence is a question of fact [s.6.1(2)] BUT express exclusions [s.6.1(3)]
o
o
o
o

(a) associated or affiliated entity or issuer insider of the interested party,

(b) advisors to the interested party wrt transaction
(c) compensation gives valuator a financial incentive for conclusion or outcome
in transaction
(d) manager for soliciting dealer group

105

(e) external auditor of the issuer or of an interested party, unless the valuator will
not upon completion of the transaction and that fact is publicly disclosed
(f) material financial interest in the completion of the transaction

Valuation contain opinion re value or range of values rep. fair market value [s.6.4(1)]
Valuator must be given access to relevant material information
Exemptions from formal valuation requirements Lack of Knowledge and
representation s.2.4: offeror (or joint actor w/ offeror) doesnt have board or
management representation of offeree within last 12 months and doesnt have any
knowledge of material info concerning issuer or its securities that has not been
generally disclosed

Issuer Bids
Disclosure MI 61-101 s.3.2:

Background
Prior valuation of securities that has been done in the last 24 months
Any other offers for the securities in the last 24 months
Discussion of review and approval process adopted by board and any special committee,
including any material disagreement between the board and the special committee
Statement of intention of every interested party to accept or not accept bid (if known after
reasonable inquiry)
Description of effect of bid on voting interest in the issuer of every interested party
Disclosure of reliance on any evaluation exemption

Interested Party: issuer and any control person of issuer or person reasonably expected to
be control person on successful completion of issuer bid
Valuation Requirement MI 61-101 s.3.3(2)
BOD or independent committee of the board shall determine valuator [s.3.3(2)]
Same requirements as insider bids [s.6.1]
Exemptions for valuation s.3.4:
o Bid for securities that arent equity securities and arent readily
convertible into equity securities
o Liquid market and reasonable to conclude that will be market for holders
who did not tender following bid that is not materially less liquid
Related Party Transactions
NOTE: Controversial - transactions dont relate to trading of securities
Disclosure MI 61-101
Material Change Report s.5.2:
o
o
o

Purpose and effect of transaction

Interests of every interested and related party and effect on their percentage of
securities
Discussion of review and approval process adopted by board and any special
committee, including any material disagreement between the board and the
special committee unless included in another document

106

o
o
o
o

Summary of any formal valuation obtained for transaction unless valuation is

included in its entirely in change report or other disclosure
Prior valuation wrt issuer that relates to subject matter of transaction within last
24 months
Material terms of agreements relating to transaction entered into by issuer or
related party of the issuer w/ any interested party
Formal valuation and minority approval exemptions

Interested party: party to the transaction (unless only party in capacity as security holder affected
security holders and is treated identical to other SH) OR someone entitled to receive a collateral benefit or
payment or distribution as a consequence of the transaction

Information Circular if Minority Approval Requirement s.5.3:

o
o
o
o
o
o
o

Description of background
Prior valuations within last 24 months
Other offers received within previous 24 months (whatever is the subject matter
of the transaction)
Discussion of review and approval process by BOD or any special committee and
any material disagreement between BOD and SC
Reliance on formal valuation exemption
Number of votes excluded for minority approval (b/c related parties) and
disclosure of those security holders and their holdings
Form 62-504F2 of OSC Rule 62-504 Issuer Bid Circular

Valuation - MI 65-101 - s.5.4:

Similar requirements as above
Exemptions for valuation requirement s.5.5:
o FMV of transaction is less than 25% of market capitalization
o Transaction in the ordinary course of business and approved by BOD
[note: hard to see if more than 25% will still be in ordinary course]
Minority Approval Requirement MI 65-101:
Obtained from all classes of affected securities, voting separately [s.8.1(1)]
Excluded votes: issuer, interested parties, related parties of interested parties, or joint
actors with above are excluded [s.8.1(2)]
Exemptions from minority approval requirement s.5.7: FMV of transaction not
more than 25% of market capitalization
Sears Canada [2006/OSC]
Facts: Sears Holdings offer to SH of Sears (insider bid) with view to taking Sears
private support agreements entered into w/ some minority SH in that they will support
a vote for going private transaction (requirement for majority of minority approval in
going private transaction) terms of bid changed to deal w/ tax concerns of specific SH
so they would enter into agreement
Issue 1: Did the support agreements constitute collateral benefits?
107

constituted a collateral benefit not made available to other minority shareholders

Support agreements will not necessarily constitute a collateral benefit what is
problematic is giving further inducements to enter into those agreements

Issue 2: Was there adequate disclosure of agreements?

Disclosure not made at the appropriate time (when the agreements were entered into)
Not adequate: didnt disclose who SH were and the nature of the tax savings these SH
would get in the restructuring of the bid
Re Sterling Centrecorp [2007/OSC]
Facts: Insider bid by management of Sterling entered into support agreements with
some minority SH to ensure 2nd step (going private transaction) would be successful
Issue: Did the existence of support agreements constitute a benefit to those SH and did it
turn those SH into joint actors with the insider?
Analysis:
Joint actors cant be included in majority of the minority approval
Signing support agreement does not necessarily change SH into joint actor
Must have role in planning, structuring or promoting transaction to be joint actor or
receiving of different consideration or interest
Only the CEO was considered joint actor

Enforcement and Public Interest Considerations

Investigation and Examination Powers OSA Part V1
Investigation Order s.11(1): may appoint one or more persons to make such
investigation as it considers expedient for:
Due administration of securities law regulation of capital markets in Ontario OR
To assist in regulation of capital markets in another jurisdiction
NOTE: Cross-border co-operation: not ultra vires the provinces - in order to have
jurisdictions help them enforce Ontario law, have to help them [Global Securities]
Examination of documents
Inspection s.13(3): Can enter business premises of any person/company named in
order during business hours and inspect any documents or other things used in the
business and relate to matters specified in order (except those maintained by a lawyer
in respect of his or her clients affairs)
Right to Examine s.11(4): person appointed to investigate may examine any
documents or other things, whether they are in possession or control of the person or
company being investigated or any other person or company

108

Deloitte & Touche LLP v. OSC [2003/SCC] can disclose documents collected by 3rd parties to
respondents in action if relevant to their defence

Issue: whether the OSC acted unlawfully in finding that it was in the public interest to
disclosure documents collected from Deloitte to respondent Philip
Deloitte argument: OSC should carefully examine docs and only give docs that were
necessary for the OSC to make its case instead of disclosing everything
o OSC rejects not reasonable to examine each of the documents dont
know which things respondent will consider useful in its defence
Documents might have considerable relevance to the defence of Philip
Power to Compel Testimony
Search Power s.13(1): power to compel testimony or the production of documents
o Search power doesnt extend to search of private residences [s.13(9)]
Disclosure to Police s.17(7): Cant disclose testimony compelled under s.13(1) to
police of person responsible for enforcement of criminal law in Canada or another
country
Testimony, documents, or reports produced under investigation or examination order
are for exclusive use of OSC and should not be disclosed in any other proceeding
[s.16(2)] EXCEPT where OSC concludes that disclosure is in the public interest
[s.17(1)]
R v. Jarvis [2002/SCC] where predominant purpose of investigation shifts into criminal realm,
compelled testimony predominate can no longer be used and no more investigation activities

Issue: To what extent can testimony be used in subsequent matter?

Where purpose of investigation has shifted from a general investigation of matter to
investigation that is specifically directed at laying criminal charges, compelled
testimony can no longer be used and there can be no more activities (no new
testimony and ceasing of documents)
Charter rights need to be considered
Criminal Enforcement
Criminal Code: ss.380-384, s.400
Note: almost no CC actions have been taken wrt securities issues, but indicators that feds
want to take initiative (i.e. IMETs and offence for insider trading)

380(1): indictable offence to defraud public or any person of property, money, or valuable
security, or any service 5,000
380(2): offence of affecting public market price of stocks/shares with an intent to defraud
382: offence to fraudulently manipulate stock exchange transactions by engaging in various
strategies to create a false or misleading appearance of active public trading
400: indictable offence to make, circulate, or publish a prospectusthat knows is false in a
material particular with intent to induce someone to become a shareholder or partner or to
deceive or defraud members, shareholders or creditors

109

382.1(1) indictable offence for insider trading

382.1(2) tipping treated less seriously

Aggravating circumstances re sentencing:

Value of fraud exceeded 1M
Offence has potential to adversely affect stability of Canadian economy
Offence involved large number of victims
Offender took advantage of high regard in community
Establishment of Integrated Market Enforcement Teams (IMETs):
Composition: RCMP officers who are more trained/specialized in area of securities
infractions, accountants and regulatory staff
o Shows federal govt wants to take initiative
Quasi-Criminal Powers in OSA
General Offences s.122: liable of max fine of 5 M and/or 5 years less a day for
o
o
o

Statements to regulatory authorities that are misleading or untrue or does not

state a fact that is required to be stated or that is necessary to make the statement
not misleading
statement in any application, release, report, preliminary prospectus, prospectus,
return, financial statement, information circular, take-over bid circular, issuer bid
circular or other document required to be filed
Contravention of securities law

Specific sanctions for breach of s.76 s.122(4): minimum fine equal to the profit made or
the loss avoided and a maximum of 5M or amount equal to triple profit made or loss
avoided
R. v. Harper [2003/Ont.CA]
TJ: in demonstrating sanction that should be imposed, prosecutors need to show how
failure to disclose and trading on this information had an effect on stock price
CA: Just need to show that profit was made/loss avoided because of insider trading
dont need to who how price itself was affect by failure to disclose of material
information
New OSA s.126.1
o Creates offence of engaging in fraud or market manipulation (this is in
addition to fraud in CC) so now lower burden but there is requirement
that person or company cant engage directly or indirectly . That
person or company knows or reasonably ought to know..
NOTE: Criminal burden of proof on OSC BUT strict liability (NO Mens Rea)
Rankin: courts are prepared to overturn convictions based on undue inferences being
made on evidence

110

Felderhof: inability of OSC to demonstrate that he was personally responsible for

decision to release misleading information and couldnt demonstrate that F had in his
possession material information when he engaged in the trading of securities
Challenge in proving actus reus of offence

Civil Enforcement: OSA s.128

Application to court s.128(1): Commission can apply to court for declaration that
person has not complied w/ securities law
Orders s.128(3): wide range of orders that court can make, including
o Order for compliance
o Order that person or company submit to review
o Order rescinding any transaction
o Order requiring person or company to company to make restitution
o Order prohibiting person from acting as directors/officer
Note: OSC uses s.128 to when there is non-compliance with an order of OSC
US Securities Commission often look for monetary penalties from the courts
Public Interest Enforcement Powers
Commission can make orders in the public interest under s.127(1)
Administrative hearing before tribunal
SPPA and OSC Rules of Practice
Civil burden of proof
Arguably becoming more like a court process b/c of procedural motions by lawyers
Is a breach of the OSA required?
Re Canadian Tire Corp. [1987/OSCB] securities commissions can exercise public interest powers
where there is no breach of securities law

Facts: TB Class A non-voting shares had attribute that where bid made for majority of
voting shares, entire class of non-voting shares would convert to voting (coat-tail
provision) structured bid to avoid triggering it - transaction b/w dealers and family for
49% of voting shares w/ consideration constitution a 400% premium over market price
Analysis:
Abusive transaction: within law but had effect of freezing class A SH out while they
provided most of the money
Transaction did not confirm to spirit of TB rules contrary to public interest
TEST for regulator interference in absence of breach:
o Clear abuse of the markets, not just unfairness & must raise public interest
issue
o Must raise public interest issue
Controversial uncertainty for market participants in how to conduct themselves

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MUST BE BREACH for certain orders if person or company has not complied
with Ontario securities law:
Administrative penalty of not more than $1 million for each failure to comply
Disgorge to the Commission any amounts obtained as a result of the non-compliance
Enforcement Action against Lawyers
Wilder v. OSC [2000/Div.Ct]
Facts: OSC sought to reprimand lawyer for making misleading statements to regulators
that YBM had obtained a series of favourable due diligence results
Analysis:
Some orders specific market participant while others specify person or company
Order that person or company can be reprimanded applies to lawyers acting in
professional capacity
Court rejects argument that s.127(1) should be interpreted not to apply to lawyers
acting in their professional capacity
Does not usurp jurisdiction of law society public interest being protected by
regulators is different from law society (maintain integrity of law profession v.
maintaining integrity of OSC procedures)
NOTE: CSA disclosure of enforcement activity majority of matters end in settlement
Philosophies of Sanctioning
Abestos [2001/SCC] error to focus only on fair treatment of investors (also mandate to promote
efficiency) sanctioning should be protective and preventative not punitive

Facts: TB structured so didnt have to make follow up offer to other shareholder (rule that
if paid more than 15% premium had to make follow up offer) minority sought cease
trade on basis that it was spirit of TB regime that they share in premium
Analysis:
OSC: not within purview of public interest they protect (public interest in integrity of
ON capital markets and protection of ON investors) insufficient connection to ON
SCC: error to focus only on fair treatment of investors - regulatory statutory mandate
is also promoting efficiency of capital markets
Implication: OSC intervenes not achieve efficiency (not efficient to intervene in
transaction largely taking place outside of Ontario)
Protective and preventive in making their decisions rather than being punitive OSC
decision was reasonable: took a range of factors in to account, gave weight to factors
appropriately, and reached correct conclusion
Re Cartaway Resources Corp. [2004/SCC] general deterrence is basis for making order
General deterrence is a basis for making an order
Bentham: achieve deterrence by being more punitive than you otherwise would be to
change cost-benefit calculation (assumption that market players are rational)
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Underlying assumption: market players are rational actors

Condon: doesnt like decision

Donnini v. OSC [2003/SCJ] JR - look to see reasonableness of OSC - deference

15-year restriction on trading reduced to 4 years but reinstated by Ontario CA
Worried that sanction was high b/c he refused to settle: everyone is entitled to have
case against them made out and shouldnt be penalized for choosing to defend
15 year penalty re-instated by CA
OSC decision making and factors that it considered was reasonable
Condon: can impose lengthier bank than deprivation of liberty in criminal
Compare above cases to Kerr v. Danier: bright line, literal approach to interpreting
statute and narrow view of need to achieve investor protection

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