Securities Regulation Course Summary 2008

Table of Contents

SECURITIES REGULATION COURSE SUMMARY 2008........................................................................................1

TABLE OF CONTENTS.................................................................................................................................................1
THE BATTLE FOR PROVINCIAL REGULATION.....................................................................................................................2
SECURITIES REGULATORS REGULATE SECURITIES TRADES THAT AMOUNT A DISTRIBUTION OR OFFERING......................2
THE LAW HAS A PURPOSIVE APPROACH TO DEFINING SECURITIES....................................................................................2
DETERMINING IF A DISTRIBUTION HAS OCCURRED...........................................................................................................3
DETERMINING IF A DISTRIBUTION HAS OCCURRED...........................................................................................................3
A REPORTING ISSUER.........................................................................................................................................................4
THE PROSPECTUS..............................................................................................................................................................4
UNDERWRITERS: DEFINITION.............................................................................................................................................4
THE PROSPECTUS PROCESS (S. 127 SANCTIONS APPLY)....................................................................................................5
COOLING OFF PERIOD........................................................................................................................................................6
CONTENTS OF A PROSPECTUS...........................................................................................................................................6
TRICOR: THE DIFFICULTIES OF GETTING MEANINGFUL COMPLIANCE W/ PROSPECTUS
REQUIREMENTS...........................................................................................................................................................9
REFUSING TO ISSUE A RECEIPT.........................................................................................................................................9
MATERIAL FACT................................................................................................................................................................9
MATERIAL CHANGE..........................................................................................................................................................9
THE DIFFERENCE BETWEEN A MATERIAL CHANGE AND A MATERIAL FACT....................................................................10
ISSUERS ARE NOT REQUIRED, BUT CAN CHOOSE TO INCLUDE FOFI...............................................................................10
SANCTIONS FOR FAILING TO DISCLOSE IN FOFI AND DISTRIBUTION ............................................................................10
SANCTIONS FOR FAILURE TO DELIVER A PROSPECTUS....................................................................................................10
ALTERNATIVES TO THE PROSPECTUS..............................................................................................................................11
MISREPRESENTATIONS IN A PROSPECTUS.......................................................................................................................12
CONTINUOUS AND PERIODIC DISCLOSURE REQUIREMENTS...........................................................................................13
CANSOX: RECENT CANADIAN REFORMS........................................................................................................................14
CONTINUOUS DISCLOSURE: CERTIFICATION...................................................................................................................15
CONTINUOUS DISCLOSURE: MATERIAL CHANGES..........................................................................................................16
INSIDER TRADING............................................................................................................................................................20
PROSPECTUS EXEMPTIONS: ISSUERS AND INVESTORS....................................................................................................23
PROSPECTUS EXEMPTIONS: PRE-EXISTING R/SHIP BETWEEN ISSUER AND INVESTOR.....................................................24
OFFERING MEMORANDA REQUIREMENTS RE: EXEMPTIONS...........................................................................................25
RESALE RULES / CONTROL DISTRIBUTIONS....................................................................................................................26
CONTROL BLOCK HOLDERS CAN SELL OFF THEIR SECURITIES IN THE FOLLOWING FASHION..........................................27
TAKEOVER BIDS..............................................................................................................................................................27
EXEMPTIONS FROM TAKEOVER BID REQUIREMENTS: S. 93 SA......................................................................................29
TAKEOVER BIDS: DEFENSIVE TACTICS (NP 62-202)......................................................................................................30
TAKEOVER CASELAW......................................................................................................................................................30
ISSUER BIDS: GOING PRIVATE........................................................................................................................................31
ENFORCEMENT AND PUBLIC INTEREST CONSIDERATIONS..............................................................................................35
122. (1) EVERY PERSON OR COMPANY THAT,...............................................................................................................40
S APPLICATIONS TO COURT.............................................................................................................................................42
INTERIM ORDERS.............................................................................................................................................................43
LIABILITY FOR MISREPRESENTATION IN CIRCULAR.........................................................................................................43

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The battle for provincial regulation

Ontario gets its ability to control securities from s. 92
If the feds were to get it, they would do so under s. 91

Mayland v. Lymburn (32) Prov. sec. reg. does not encroach on federal leg. law w/ respect to crim lawfed companies
inc. under fed law can be subjected to prov. law
R v. Smith (66) Crim. powers ok in prov. sec. even if it covers the same ground as crim codeprovided that the two
are not irreconcilable
R v. McKenzie Securities (66) People can be subjected to laws of non-residential prov where they are violating the
laws of that prov. (the guys selling to Manitoba)
Multiple Access v. McCutcheon (82) Both provs and feds have right to regulate insider trading (both laws are intra
vires); where both laws can be followed; paramountcy cannot be invoked
Quebec v. OSC(92) By entering the capital mrkts of another prov, Q subjects itself to their rules
Global Securities v. BCSC (00) Regulators are allowed to assist foreign agencies under 92(13); this assists future
regulation efforts

Securities regulators regulate securities trades that amount a distribution or offering

The law has a purposive approach to defining securities
1.
2.

3.
4.

Start w/ the statute (likely going to go w/ s. 1(1)(n):

s. 1(1) SA employs a broad and open-ended definition:
a. any document, instrument or writing commonly known as a security
b. Any document constituting evidence of title to or interest in the capital, assets, property profits, earnings or
royalties of any person or company
c. Document constituting evidence of an interest of legatees or heirs (historical)
d. Any document constituting evidence of an option, subscription or other interest in or to a security (options are
themselves securities)
e. Any bond, debenture, note or other evidence of indebtedness, share, stock, unit, certificate, participation
certificate, certificate of share or interest, pre-organization certificate or subscription other than a K of insurance
evidence of deposit issued by a bank
f. Any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by
reference to the value of a proportionate interest in a specified portfolio of assets
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
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 K not issued by an insurance company
n. Any investment K (this is what the courts use by looking at purposive approach to transaction)
o. Any document constituting evidence of an interest in a scholarship or educational plan or trust (RESPs for
instance)
p. Any commodity futures K or any commodity futures option that is not traded on a commodity futures exchange
registered w/ or recognized by the Commission under the Commodity Futures Act
NOTE: derivatives are not specifically listed; nonetheless, they qualify as options, futures or
combinations of both
The court considers the following factors in deciding this:
Factors the court considers:
(1) Investor Protection:
Is the investor protected by other laws?
Does the investor otherwise need protection here?
(2) Expectation of profit:
Why give the money, expecting a profit?
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5.

6.

7.

8.

Particularly where the idea is to get more than before

(3) Risk factor:
Any risk is enough; increased risk, increased intention
(4) Purchasers degree of control:
Where the investor has minimal control, need for protection
(5) Independent value:
Does the tradable item have independent value aside from acting as a security (think gold coins)?
(6) Substance over form:
Is this a security pretending to be otherwise?
(7) Overlap in definition:
Look for tradables that meet more than one def in s. 1(1)
(8) U.S. caselaw: U.S. cases are usefully cited.
See Howey and Hawaii (both below)
(9) Explicit exclusions:
insurance contracts and banking slips (o/w would qualify)f
To fight the definition, use Howeys bright-line test:
1. Investing money
2. Common enterprise
3. On expectation of profits
4. Solely from the efforts of the promoter/third party
b. SEC v. Howey facts: H sold interests in plots of lands which grew orange groves. Purchasers could then buy a
service contract from H to farm the land. Ps could not farm land themselves and in some cases were restricted
from accessing it. Each lot could be individually quite small. Note that some people did actually hire other party
than H.
For a more purposive definition, use Hawaiis risk-capital test
1. Is there an investment in a
2. Common enterprise w/ is
3. Subject to the risks of the enterprise but is
4. Expected to generate a profit
For a more flexible Howey, use Pacific Coast Coin Exchange v. OSC
1. Investing money
2. Common enterprise
a. Amended to mean common among investors and promoters, not simply among
investors
3. On expectation of profits
4. undeniably significantly from the efforts of the promoter/third party
a. Will have to be undeniably significant factors to success/failure of the enterprise
For an example of how difficult these are to define, consider Albinothree decisionstwo agreeing to regulate; one
because he felt phantom stock options were securities; the other because he felt that it was in the public interest to regulate
these things

Determining if a distribution has occurred

1.

S. 1(1) SA says that a trade has five characteristicsif any qualify, regulation
a. Sale for valuable consideration (whether on margin, installment or otherwise)
i. Note that this covers sale but not purchases as there is an asymmetry between purchasers and buyers
b. Trades by professionals
c. Any receipt by a registrant of an order to buy or sell securities
d. Trades by control persons
i. Pledging by non control shareholders are excluded because c/hs are assumed to have greater access to
info
e. Acts in furtherance of a sale
i. Providing a list of names of prospective securities purchasers or advertising an IPO

Determining if a Distribution has occurred

1.

This step is essential as distributions call for prospectus requirements; section 1(1) says:
a. Securities not previously issued
i. Not previously issued in Ontario
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b.
c.

d.
e.
f.

Reissue of securities
i. Corp. cannot reissue securities in Ontario as per corp. law
Sale of securities by control persons
i. Rationale has three points:
1. C/P may have effective control over mgmt (better access to info)
2. Large sale could alter the companys mrkt pstn
3. C/P could be a significant factor in comp.s success; investors would want to know if leaving
IGNORE
IGNORE
Resale of securities
i. Only triggered where securities originally issued under an exemption

A reporting issuer
1.

A reporting issuer is (1(1) SA):

a. Has issued voting securities on or after May 67 w/ a prospectus has been filed
b. Has filed a prospectus w/ the Director issuing a receipt
c. Has had securities listed on a recognized stock exchange in Ontario recognized by the OSC (need not have been a
trade)
d. CBCA applies
e. Blah blahnot relevant

The Prospectus
1.

Definition:
a. A detailed circular setting info underpinning the issuers distribution of the securities to the public
i. S. 53 SA requires a prospectus filing (both prelim and full) w/ the OSC before the distribution of a
securityIPOs, primary offerings, and secondary offerings by c/h

Underwriters: definition
(1) S. 1(1) SA: An underwriter means a person or company who, as principal, agrees to purchase securities w/ a view to
distribution or who, as agent, offers for sale or sells securities in connection w/ a distribution and includes a person or
company who has a direct or indirect participation in any such distribution, but does not includesMost are investment
banks
a. Underwriters role:
i. Offer credibility to issuers
ii. Determine price and terms of offering
iii. Give governance & compliance advice
iv. Meet public obligations to protect mrkt integrity
v. Sign prosectus as to validity knowledge, information and belief
b. Underwriters will employ one of the following
i. Direct offering: google-no underwriting
ii. Agency: use best efforts to place securities and take a commission on sale (typically 7 percent)
iii. Firm commitment: underwriter agrees to purchase all securities and profit on the spread
iv. Bought deal: Occurs where the underwriter makes a firm commitment to purchase a large block of shares
within 2 days prior to the preliminary prospectus
c. Underwriters w/ generally employ a m/out or a d/out clause:
i. Market-out underwriter can terminate where securities for reasons of present market cannot marketed
profitably
ii. Disaster-out underwriter can terminate where the mrkt as a whole is in the dumps
1. Retrieve Resources v. Canaccord Capital and CLD Financial Underwriters can only rely on
market out-clauses where there complaint specifically applies to their mrkt
d. Underwriters have a duty of care: must take a adversarial role: must play devils advocate (YBM)
i. YBM: The phrase to the best of our knowledge, information and belief carries w/ it a requirement to
obtain information before an underwriter can make that affirmation. An underwriter must go beyond
the statements of the issuers directors, officers and counsel and must avoid automatic reliance.
e. S. 2.1(2) 31-105CP (to NI 33-105) outlines three conflicts of interest that an underwriter may face
i. Underwriter as issuer: underwriter cannot act as underwriter in this capacity
4 / 43

ii. Related issuer: either issuer or underwriter is an influential shareholder of the other; underwriter cannot
act as direct underwriter in this instance
iii. Connected issuer: issuer has r/s w/ underwriter w/ casts doubt on registrant
1. YBM Magnex Underwriters face a lower requirement for disclosure and certification only
to the best of our knowledge, information and belief; h/w cannot accept issuer stmts as true
2. Kerr v. Danier Bought deals render rescission against the issuer impossible; however, not so
against the underwriter

The Prospectus Process (s. 127 sanctions apply)

Period

Activities of the Period

Pre-Filing Period

Secure services of
underwriter, gather
documents needed for
prospectus, develop PP,
file PP and obtain
receipt form Regulator,
organizational
meetings, collection of
corporate documents,
minutes of board
meetings

Waiting Period
(time between PP
receipt and FP
receipt)

Once receipt is issued

for PP, issuer can get
interest from investors
(s. 65(2) SA). Also
revisions to PP are
ongoing, as are
distributions of
commercial copies of
PP, road shows and
negotiations w/ OSC
Filing of final
prospectus and issuance
of a receipt

Filing of final
prospectus

Pre-closing Stage

Cooling-off period

Commercial copies of
FP are delivered to
investors, receipt for FP
received from OSC,
commercial copies of
FP printed and
distributed, cooling-off
period begins to run
Investors have 2 days to
opt out of promise to
buy after delivery of FP
or amended FP (s. 71

Documents
Included
PP (preliminary
prospectus)

Contents of Documents

Notes

Assumed by regulator
that documents are near
completion (except
security price, class):
resolution of board
authorizing filing, UW
agreement, financial
statements,
certification note by
officers, caution that
PP is not final

Final Prospectus
(FP)

Business plan, financial

statements for last three
years (balance sheet,
cash flow, income)
(OSC 41-501), capital
structure, estimated
proceeds of distr.,
purpose for capital,
underwriter agreement,
list of factors making
security risky

PP is not a draft (s. 54)

Regulators can refuse to issue a
receipt if not in the public interest
(unconscionable) (SA s. 61(2)) but
rarely happens (Tricorp)
Due process protection for issuer (s.
61(4) SA)
Regulator can prohibit PP
distribution if there is a PP defect
(s. 68 SA)
Shall issue receipt (s. 55)
Where adverse material change
after receipt, must file amendment
must be filed ASAP or in 10 days
(s. 57)
Waiting period minimum 10 days
for long-form prospectuses (s. 65(1)
SA)
Distribution of PP can be (un)
solicited, but advertising can only
alert to availability of PP (re
Cambior)
Must maintain distribution list (s.
67) and provide PP to each prosp.
Purchaser who requests it (s. 66)
Overriding Principle
Certification required by CEO,
CFO and 2 directors that prospectus
contains full, true and plain
disclosure of all material facts
Note Lapse date:
Distribution cannot continue 12
months after FP receipt (s. 62 SA)

Investors cannot actually buy

securities until after receipt for FP
is received (s. 53(1) SA)

Deals w/interaction w/ material

change reporting (s. 57 SA)
See cooling off period examples
below
5 / 43

Post-closing stage

SA)
Distribution of
securities (note receipt
from regulator for FP
needed

Underwriters advise issuers that

securities are out of distribution

Cooling off period

Governed by the interaction between s. 71(2) and s. 57

Where the purchaser informs the dealer in writing or telegraphic notice of an intent to w/draw, not later than midnight on
the second business day, after receipt by the purchaser of the latest prospectus and any amendment (s. 71(2))
In effect, the cooling off period kicks w/ the delivery of the final prospectus
Filing an amendment pauses the cooling off period until the amendment is delivered

Example 1
Day 1: final prospectus received
Day 2: agreement to buy
Day 5: prospectus amendment filed
Day 6: investor wants out. Can they?

Example 2
Day 1: agree to buy
Day 4: receive FP
Day 5: Prospectus amendment
filed
Day 8: Amendment delivered
Day 9: Want out. Can they?

Example 3
Day 1: receive prospectus
Day 4: agree to buy
Day 5: prospectus filed. Entitled to receive?

No. They made a binding agreement, and

the cooling-off period ended on day 3.
Investor wouldnt receive amendment that
would trigger a new cooling-off period

Yes. An investor is entitled to

get an amendment if it is filed
during the cooling-off period
and receipt on day 8 triggers a
new cooling-off period
The cooling off period began on
Day 4, but restarted on Day 5
and remains paused until day 8,
thus day 9 is within the two
days

No. If the investor is beyond the cooling off

period when he agrees to buy, the cooling off
period does not run.

Contents of a Prospectus
1.

General compliance standard

a. SA 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 w/ the requirements of Ontario securities law
i. Break this into two points:
1. Full, true and plain disclosure of all material facts
2. Comply w/ the requirements of Ontario securities law
b. Failure to comply w/ s. 56, the OSC rule, or section 57 can lead to sanction under s. 130, as per YBM Magnex (they
ought to have disclosed the material fact re: FBI investigation)
c. 41-101 General Prospectus Requirements
d. A prospectus is to include:
i. Description of offering (i.e. securities characteristics) (NI 41-101 item 10)
ii. Financial statements (part IV of NI 41-101; NI 41-101F1 Item 32)
1. Must include three years worth, including interim financial statements (NI 41-101F1 32.1) for the
most recently completed interim statement (released more than 60 days prior to the prospectus
release). To include (as per NI 41-101 32.2(1)):
a. An income statement, a statement of retained earnings, and a 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, or
ii. 120 days before the date of the prospectus, if the issuer is a venture issuer
2. Comparative interim financial statements of the issuer for the most recent interim period, if any,
ended (a) after the companys most recent financial yearly report (NI 41-101F1 32.3(1)). To include
(NI 41-101F1 32.4(2)):
a. Balance sheet at end of interim period and balance sheet at end of preceding financial year
b. An income statement, statement of retained earnings and a cash flow statement all for year6 / 43

to-date interim period and comparative financial info for the corresponding interim period
For interim periods other than the firm interim period in a current financial year, an income
statement and a cash flow statement, for the three month period ending on the last day of
the interim period and comparative financial info for the corresponding period in the
preceding financial year, and
d. Notes to the financial statements
Description of business and business history (3 years) (NI 41-101F1 item 5(5.1 (describe the business) and
5.2(describe 3 year history)))
1. Include market trends, significant acquisitions. Note that the material information includes that w/
can have an impact on the market (qualitative approach)
2. Section 6 is a narrative of main business events, milestones, principle products and services, markets,
etc.
Disclosure of risk factors (NI 41-101F1 item 21)
1. Risk can be internal business risk but can also relate to general economy, political environment, etc.
Subsection 2 of 20 requires disclosure of risk to the security holder for the issuers liability
Principle shareholders (identities) to be disclosed (item 15)
Executive compensation disclosure (item 17)
Audit committees and corporate governance (item 19)
Use of proceeds (item 6)
MD&A (item 8)
Any legal proceedings (item 23)
R/ship w/ underwriter (item 25)
Material contracts (item 27; NI 41-101 s. 9.3)
c.

iii.

iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
APPENDIX B
Schedule 2

FORM 41-101F1
INFORMATION REQUIRED IN A PROSPECTUS

5.1
5.2
5.3
5.4
5.5

Describe the business

Three-year history
Issuers with asset-backed securities outstanding
Issuers with mineral projects
Issuers with oil and gas operations

TABLE OF CONTENTS
GENERAL INSTRUCTIONS
ITEM 1 Cover Page Disclosure
1.1 Required statement
1.2 Preliminary prospectus disclosure
1.3 Basic disclosure about the distribution
1.4 Distribution
1.5 Offering price in currency other than Canadian dollar
1.6 Non-fixed price distributions
1.7 Pricing disclosure
1.8 Reduced price distributions
1.9 Market for securities
1.10 Risk factors
1.11 Underwriter(s)
1.12 International issuers
1.13 Restricted securities
1.14 Earnings coverage
ITEM 2 Table of Contents
2.1 Table of contents
ITEM 3 Summary of Prospectus
3.1 General
3.2 Cautionary language
ITEM 4 Corporate Structure
4.1 Name, address and incorporation
4.2 Intercorporate relationships

ITEM 6 Use of Proceeds

6.1 Proceeds
6.2 Junior issuers
6.3 Principal purposes generally
6.4 Principal purposes indebtedness
6.5 Principal purposes asset acquisition
6.6 Principal purposes insiders, etc.
6.7 Principal purposes research and development
6.8 Business objectives and milestones
6.9 Unallocated funds in trust or escrow
6.10 Other sources of funding
6.11 Financing by special warrants, etc.
ITEM 7 Dividends or Distributions
7.1 Dividends or distributions
ITEM 8 Managements Discussion and Analysis
8.1 Interpretation
8.2 MD&A
8.3 SEC issuers
8.4 Disclosure of outstanding security data
8.5 More recent financial information
8.6 Additional disclosure for venture issuers or IPO venture
issuers without significant revenue
8.7 Additional disclosure for junior issuers
8.8 Additional disclosure for issuers with significant equity
investees
ITEM 9 Earnings Coverage Ratios
9.1 Earnings coverage ratios

ITEM 5 Describe the Business

7 / 43

ITEM 10 Description of the Securities Distributed

10.1 Equity securities
10.2 Debt securities
10.3 Asset-backed securities
10.4 Derivatives
10.5 Special warrants, etc.
10.6 Restricted securities
10.7 Other securities
10.8 Modification of terms
10.9 Ratings
10.10 Other attributes

20.13 Special warrants acquired by underwriters or agents

ITEM 11 Consolidated Capitalization

11.1 Consolidated capitalization

ITEM 24 Interests of Management and Others in Material

Transactions
24.1 Interests of management and others in material
transactions
24.2 Underwriting discounts

ITEM 12 Options to Purchase Securities

12.1 Options to purchase securities
ITEM 13 Prior Sales
13.1 Prior sales
13.2 Trading price and volume
ITEM 14 Escrowed Securities and Securities Subject to
Contractual Restriction on Transfer
14.1 Escrowed securities and securities subject to contractual
restriction on transfer
ITEM 15 Principal Securityholders and Selling
Securityholders
15.1 Principal securityholders and selling securityholders
ITEM 16 Directors and Executive Officers
16.1 Name, occupation and security holding
16.2 Cease trade orders, bankruptcies, penalties or sanctions
16.3 Conflicts of interest
16.4 Management of junior issuers
ITEM 17 Executive Compensation
17.1 Disclosure
ITEM 18 Indebtedness of Directors and Executive Officers
18.1 Aggregate indebtedness
18.2 Indebtedness of directors and executive officers under
securities purchase and other programs
ITEM 19 Audit Committees and Corporate Governance
19.1 Audit committees
19.2 Corporate governance
ITEM 20 Plan of Distribution
20.1 Name of underwriters
20.2 Disclosure of conditions to underwriters obligations
20.3 Best efforts offering
20.4 Minimum distribution
20.5 Determination of price
20.6 Stabilization
20.7 Approvals
20.8 Reduced price distributions
20.9 Listing application
20.10 Conditional listing approval
20.11 IPO venture issuers
20.12 Constraints

ITEM 21 Risk Factors

21.1 Risk factors
ITEM 22 Promoters
22.1 Promoters
ITEM 23 Legal Proceedings and Regulatory Actions
23.1 Legal proceedings
23.2 Regulatory actions

ITEM 25 Relationship Between Issuer or Selling

Securityholder and Underwriter
25.1 Relationship between issuer or selling securityholder
and underwriter
ITEM 26 Auditors, Transfer Agents and Registrars
26.1 Auditors
26.2 Transfer agents, registrars, trustees or other agents
ITEM 27 Material Contracts
27.1 Material contracts
ITEM 28 Experts
28.1 Names of experts
28.2 Interest of experts
ITEM 29 Other Material Facts
29.1 Other material facts
ITEM 30 Rights of Withdrawal and Rescission
30.1 General
30.2 Non-fixed price offerings
ITEM 31 List of Exemptions from Instrument
31.1 List of exemptions from Instrument
ITEM 32 Financial Statement Disclosure for Issuers
32.1 Interpretation of issuer
32.2 Annual financial statements
32.3 Interim financial statements
32.4 Exceptions to financial statement requirements
32.5 Exceptions to audit requirement
32.6 Additional financial statements or financial information
filed or released
ITEM 33 Credit Supporter Disclosure, Including Financial
Statements
33.1 Credit supporter disclosure, including financial
statements
ITEM 34 Exemptions for Certain Issues of Guaranteed
Securities
34.1 Definitions and interpretation
34.2 Issuer is wholly-owned subsidiary of parent credit
8 / 43

supporter
34.3 Issuer is wholly-owned subsidiary of, and one or more
subsidiary credit supporters controlled by, parent credit
supporter
34.4 One or more credit supporters controlled by issuer
ITEM 35 Significant Acquisitions
35.1 Application and definitions
35.2 Completed acquisitions for which issuer has filed
business acquisition report
35.3 Completed acquisitions for which issuer has not filed
business acquisition report because issuer was not
reporting issuer on date of acquisition
35.4 Results consolidated in financial statements of issuer
35.5 Recently completed acquisitions

35.6 Probable acquisitions

35.7 Pro forma financial statements for multiple acquisitions
35.8 Additional financial statements or financial information
of the business filed or released
ITEM 36 Probable Reverse Takeovers
36.1 Probable reverse takeovers
ITEM 37 Certificates
37.1 Certificates
37.2 Issuer certificate form
37.3 Underwriter certificate form
37.4 Amendments
37.5 Non-offering prospectuses

Tricor: The difficulties of getting meaningful compliance w/ prospectus requirements

The Commissioner was reasonably sure that Irving Kotta convicted felonwas truly the head of Tricor and refused granting a
receipt for the prospectus. OSC upheld the right of the Commissioner to refuse certification where the person does not meet the
standard of honest and of good repute. CDS was listed as only registered owner of more than 10 percent; IK really controlled
via son.

Refusing to Issue a Receipt

1.
2.

The OSC can refuse to issue a final receipt if it is not in the public interest to do so (s. 61(1))
Director can refuse where it appears that (s. 61(2):
a. The prospectus/connected documents:
i. Do not comply w/ the act in any substantial respect
ii. Contains any statement, promise, estimate or FOFI that is misleading, false or deceptive
iii. Contains a misrep
b. An unconscionable consideration has been paid or give or is intended to be paid or given for any services or
promotional purposees or for the acquisition of property;
c. Where the money to be acquired would be insufficient for the purpose stated

Material Fact
1.

Section 1(1) material fact is a fact that would reasonably be expected to have a significant effect on the market price or
value of the securities
a. Includes internal (inner mgmt issues) and external (general market issues) factors
b. Canada uses a market impact test:
i. What is the likelihood this will occur?
ii. What will be the impact on the market
c. US uses a reasonable investor test (would this fact affect the thinking of reasonable investor in deciding whether
to purchase or sell this security?)

Material Change
1.

2.

Material change defined as (s. 1(1) SA):

a. (i) A change in the business, operations or capital of the issuer that would reasonably be expected to have a
significant effect on the market price or value of any of the securities of the issuer, or (ii) a decision to implement a
change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by
senior management
NI 51-102 defines material change as 1.1(1):
a. A change in the business, operations or capital of the reporting issuer that would reasonably be expected to have a
significant effect on the market price or value of any of the securities of the reporting issuer; or
b. A decision to implement a change referred to in paragraph (a) made by the board of directors or other persons acting
9 / 43

3.

4.

in a similar capacity or by senior management of the reporting issuer who believe that confirmation of the decision by
the board of directors or any other persons acting in a similar capacity is probable
s. 57 SA Where a material change occurs during the waiting or distribution period, an issuer has an obligation to:
1. Subject to subsection (2), where a material adverse change occurs after a receipt is obtained for a
preliminary prospectus filed in accordance w/ subsection 53(1) and before the receipt for the
prospectus is obtained or, where a material change occurs after the receipt for the prospectus is
obtained but prior to the completion of the distribution under such prospectus, an amendment to
such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as is
practicable and in any event within 10 days after the change occurs
2. Where an amendment to a prospectus is filed under subsection (1) additional distribution shall not
be proceeded w/ for a period of ten days after the amendment is filed, or if the Commission
objects to the further distribution, until such time as a receipt for the amended prospectus is
obtained from the Director
3. An amendment to a preliminary prospectus shall be forwarded to each of recipient of the
preliminary prospectus according to the record maintained under s. 67
An issuer has further obligations under s. 75 SA:
a. (1) Issue a news release and (2) file a report w/ the OSC of the change

The difference between a material change and a material fact

1.
2.
3.

Pezim v. BC went far in distinguishing these issues:

Material facts include all risks (even external factors) that could reasonably be expected to significantly affect the
securitys value
Material changes only concern changes in the business, operation, assets or ownership of the issuer

Issuers are not required, but can choose to include FOFI

1.
2.
3.
4.
5.
6.

7.
8.

FOFIfuture oriented financial information can be included in a prospectus

Companies should do their best so that FOFI reflects a companys judgment based on the most probable set of economic
conditions applicable to its forecast
Opinions have to be based on evidence and reasonable conclusions
FOFI are only to be included where the issuer has existed for more than 2 years
If less, can only make projections (essentially, to include a hypothesis about plausible circumstances rather than most
probable economic conditions)
FOFI must include:
a. A cautionary note that results may vary widely from forecast
b. No forecasts beyond two years
c. Information material to the issuers circumstances (material being defined as info that would change or
significantly affect a purchasers decision to buy or not
FOFI must be updated where there is a change in the events or assumptions used to prepare the FOFI that materially affects
the FOFI
As per NP 48, issuers need to compare FOFI w/ actual results

Sanctions for failing to disclose in FOFI and Distribution

s. 130?
See Kerr v. Danier
See Weinstein

Sanctions for failure to deliver a prospectus

1.

2.

s. 71 defines the requirements for delivering prospectuses: A dealer not acting as agent of the purchaser who receives an
order or subscription for a security offered in a distribution to which subsection 53(1) or section 62 is applicable shall,
unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any
amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order
or subscription
Where this has been finalized, three possibilities:
a. Penal Sanction
10 / 43

b.

c.

i. S. 122(1)(c): distributing without a prospectus or by incorrectly using an exemption will results in an

order preventing further distribution and being found liable under s. 122
Administrative order for compliance
i. S. 127(1) (5) empowers the OSC to issue an Order that a release, report, preliminary prospectus,
prospectus, return, financial statement, information circular, takeover bid circular, issuer bid circular,
offering memorandum, proxy solicitation or other document:
i. Be provided by a market participant
ii. Not be provided
iii. Be amendedto the extent that amendment is practicable
Civil sanction
i. S. 133: A purchaser who should have received a prospectus, a takeover bid circular, issuer circular, etc.
but did not in violation of s. 95 or s. 98 has a right of action for rescission or damages against the dealer
or offeror who failed to comply w/ the applicable requirement
ii. Apply under s. 128?
iii. CL
1. Jones and Deacon Hodgson An agreement is void if there was a failure to meet prospectus
requirements
2. More specifically, Deacon Hodgson distinguishes between failing to file a prospectus and failing
to deliver one
a. A failure to file a prospectus renders a K void

Alternatives to the prospectus

Alternative
SFP (short
form
prospectus)

Governing
instrument
NI 44-101 (all
other rules
that govern a
prospectus
also apply to
SFP)

Description

Eligibility

Contents

Allows large, repeat

issuers to make timely
and cost-efficient public
offerings. Due to recentlyenhanced eligibility, longform prospectus will now
only be used for IPOs

debt securities must be rated

by a rating agency (2.3(e));
44-101 2.2: (a) be SEDAR
filer, (b) be an RI in a CDN
jurisdiction, (c) have filed all
periodic and timely
disclosure documents, (d)
has in at least one
jurisdiction current annual
financial statements and a
current AIF, and (e) is listed
on a short form eligible
exchange (TSX, TSX
Venture, etc.) and is not an
issuer whose operations
have ceased or has cash as
its principle assets
Available to any issuer that
qualifies for an SFP
When it is time to distribute,
only a supplement to
update info is required

Initial and current AIF

SFP requirements on form 44101F
Distribution Plan
Intended Market
Use of proceeds
Rights attaching to securities
Continuous disclosure filed during
year (thus, misreps are actionable
under s. 130)
Summary statement can also be
filed that can be used to sell instead
of a prospectus
See item 11 (1194) for list of docs
to be included
Note requirement for active, brief
writing style 44-101CP part 4
NI 44-102s. 5.6 (1229) itemizes
info that can be omitted from a
base shelf prospectus (info re:
securities, price, info re:
underwriter,etc.) This info is
provided later, when security is to
be issued
Basically same contents as SFP
Two step filing process (file base P
(which has 90 day life) but can only
be used for a single-type of security
NOT rights offering

MRRS rules
under NP 43201 govern the
review
timelines

Shelf
Prospectus

NI 44-102

Post-receipt
pricing
prospectus
(PREP)

NI 44-103

MJDS
Prospectus

NI 71-101

A shelf-prospectus allows
an issuer to file an SFP in
advance, and shelve it
until use (max. 25
months)
Securities can be
distributed at any time
Main difference between a
PREP and an Shelf P. is
that the post-receipt
period is much shorter
(90 days on the shelf; not
2 years)
Enables prospectus
offerings for
distributions in CAN and
US or distributions by
US issuers in Canada

PREP is available to all

issuers, not just those who
qualify for SFP

Issuer must have a sufficient

reporting history or be of
sufficient mrkt size, etc.
based on type of security
RI in CDA for 1 year

Major benefits to CDN issuers who

want to access US capital markets
(and vice versa).
Facilitates the extension to CDN
investors in US issuers of to bids,
11 / 43

Capital pool
companies

OSC 41-601
and reqs for
listing on
exchange
CDNX Policy
2.4

(provided compliance w/
NI 71-101
Special arrangement for
comp.s that have no assets
other than cash and have
not commenced business
activity

Public float of $75m

issuer bids, etc.

CPC will submit PP and

FP and after the
distribution closes the CPC
has 18 months to complete
a qualifying transaction

Highly scrutinized by regulators

due to increased risks. Popular form
for small mining companies
needing funds for explorations

Misrepresentations in a Prospectus
1.

2.

3.

4.

5.

Limitation Period (s. 138)

a. Rescission: 180 days after the date of the transaction that gave rise to cause of action or
b. Any other action: earlier of
i. 180 days after the plaintiff had knowledge of facts giving rise to cause of action
ii. three years after the date of the transaction that gave rise ot the cause of action
A plaintiff must first meet the following test:
a. Purchase securities offered under the prospectus
b. Buy said securities during distribution period
c. Be able to prove a misrepresentation existed in the prospectus
i. NOTE: no need for reliance via s. 130 (deemed reliance)
S. 130(1) allows investors to pursue either damages or rescission where an issuer has a misrepresentation (and by
implication omission) in their prospectus
a. For damages or rescission: An investor can pursue
i. 130(1)(a) the issuer or
ii. 130(1)(b) the underwriter who signed the certificate required by s. 59
b. For damages only: An investor can pursue action against
i. (c) Every director at the time of the prospectus/amendment was filed,
ii. (d) (Experts) every person or company whose consent has been filed pursuant to a requirement of the
regulations but only with respect to reports, opinions or statements that have been made by them
iii. (e) every person or company who signed the prospectus/amendment other than the persons or companies
mentioned in (a)-(d) (i.e. CFOs)
c. Misrepresentation can also be pursued:
i. Where it occurs in offering memoranda and takeover bid circulars
ii. And against those in a special r/ship w/ the RI, who purchase or sell based on insider info
d. Pursuing under s. 130 does bar further legal action (s. 130(10)) in addition and without any derogation from any
other right the purchaser may have at law
A plaintiff is limited in terms of recovery by s. 130(6)-(9)
a. (6) Underwriters can only be liable for portion they underwrote
b. (7) Where a liable party can show that other causes explain the depreciation in stock price, the court can lower the
damages award
c. (8) Joint and several liability
i. Not really a limit on recoverymerely empowers a liable party to indemnify other liable actors
d. (9) In no case shall the recoverable amount exceed the price at which the securities were offered
i. No opportunity costs are recoverable
A liable party can cite one of the following statutory defences to avoid liability (this is to ensure g/f transactions do not get
pulled by the sharp teeth of s.130
i. NOTE on expected stndrd of bhvr: reasonable is defined for the following sections as : The standard of
reasonableness shall be that required of a prudent person in the circumstances of the particular case
(mixed obj/subj stndrd for reasonable investigation / grounds for belief)
b. The decrease in stock value can be explained by other innocent factors (s. 130(7))
c. A purchaser who knows about the misrep cannot recover (s. 130(2))
i. Onus on D
ii. Complete defence
d. The prospectus was filed without Ds knowledge and/or approval (s. 130(3)(a))
i. Onus on D
ii. Could show lack of due diligence on Ds part
iii. May be difficult to prove
e. D withdrew his consent to the filing of the prospectus (s. 130(3)(b))
i. Onus on D
ii. Valid, but if D followed all of the steps it is hard to see how the prospectus would have gotten out in the
12 / 43

f.

g.

h.

i.

j.
k.
l.

first place
iii. D needs to know that he:
a. Withdrew after the issue of the receipt and before a purchase of securities
b. Withdrew as soon as the misrepresentation became apparent
c. Provided reasonable general notice of his withdrawal (to the public)
D was not negligent because he relied on an expert (s. 130(3)(c))
i. Onus on D
ii. D must prove:
1. Expert gave this advice
2. D had reasonable grounds to be believe in and did not think it wrong
3. D did not misrepresent or unfairly mischaracterize experts advice
Where D is an expert, D can show that his report was mischaracterized or that he withdrew (however, use d.
above) (s. 130(3)(d)
i. Onus on D
1. D must prove that his expert report was:
a. Not fairly characterized
Due Diligence: Experts can use the due diligence defence to escape liability in good faith (s. 130(4))
i. O Onus on P to show that (a) he did not conduct reasonable investigation or (b) believed that there was a
misrepresentation
1. D must show that he
a. Conducted a reasonable investigation, which
b. Gave him reasonable grounds for the belief that there was no misrepresentation
Due Diligence: Non-experts, such as directors, can show that they used due diligence and that the
misrepresentation was not apparent to them (s. 130(5))
i. Onus on P to show that (a) he did not conduct reasonable investigation or (b) believed that there was a
misrepresentation
1. D must show that he
a. Conducted a reasonable investigation, which
b. Gave him reasonable grounds for the belief that there was no misrepresentation
Escott v. BarChris US case (note that in US Ds have onus of showing D/D). The court considered D/D of each
D (holding a lawyer to a higher stnrd based on his unique experience and skills). This case puts forth a tough
objective stndrd, relaxed by YBM
YBM Magnex OSC applies an obj/subj stndrd. Follows BarChris in considering liability of each director.
Degree of conflict and degree of experience were applicable factors.
Kerr v. Danier Court considers D/D, but applies business judgment rule, thus linking BJR to s. 132 of SA.

Continuous and Periodic Disclosure Requirements

(1) CHECK defines a RI as an I w/ securities trading in the public domain through a previous prospectus, merger,
amalgamation or arrangement or when so deemed by the regulator
(2) This area is governed by several MIs, Nis, and rules:
a. NI 51-102 general c/d requirements for Canada
b. NI 71-101 Multi-jurisdictional disclosure system
c. NI 51-101 and NI 53-101 sector-specific requirements for oil and gas and minerals, respectively
d. MI 55-103 Insider reporting for certain derivative transactions has CD requirements
(3) Other involved parties face CD requirements as well:
a. Insiders must report status to OSC (s. 107)
i. As per s. 107(1), must do so within 10 days!
ii. SEDI allows for Electronic Disclosure by Insiders
b. Shareholders or takeover bidders must disclose intention to takeover via the early warning system (s. 101(1)
i. After 10 percent, release (a) press release and (b) within two days file a report containing info re: news
release
(4) RIs have to have ensure that they meet disclosure requirements for the following:
a. Financial Statements: NI 51-102 Part 4
i. Must file quarterly and annual financial statements, including
1. Income statement, statement of retained earnings, cash flow statement, balance sheet, which are
to be comparative to previous years filings (s. 4.1)
2. Certification by board and officers (s. 4.5)
3. Auditor committee review report (s. 4.1(2) and s. 4.3)
a. 4.3 includes provisions for disclosure of the auditors review of annual statements
13 / 43

b.

c.

(required) and also interim statements (optional but if engaged and then unable to
complete or there were reservations, must be disclosed)
b. For info on what needs to be disclosed, see (s. 4.3(3))
c. Goals: enhancing investor confidence and reducing risk of auditor capture
4. Filing deadlines for interim statements (s. 4.4)
a. RI 45 days; VI 60 days
5. Filing deadlines for annual statements (s. 4.2)
a. RI 90 days; VI 120 days
6. Delivery Requirements (51-102 s. 4.6)
a. As per the access equals delivery concept, RIs need only send a form to shareholders
enabling them to request copies (otherwise, look online)
7. Continuous disclosure for SEC issuers (s. 4.3(4))
a. Reconciliation requirements for converting between US and CDN GAAP
8. Change of auditor (s. 4.11)
a. Where an RI changes auditors for any reason, the RI must disclose the change,
including the previous auditors review in certain cases
b. However, a right to apply for an exemption exists
Management Discussion and Analysis (MD&A): NI 51-102 Part 5
i. DEF: Narrative interpretation of issuers current fin. Position and future prospects. Whereas fin.
Statements describe what happened, MD&A describe why it happened (and can make future predictions)
ii. All CDN RIs must include MD&A
iii. Content defined by NI 51-102F1
1. Material Information
a. Defined by NI 51-102F1 Part 1: Would a reasonable investors decision whether or
not to buy, sell or hold securities in your company likely be influenced or changed if
the information in question was omitted or misstated?
i. If yes, then material
2. Capital Structure
a. Designation and number and classes of shares (NI 51-102 s. 5.4)
3. Forward-looking information (part 1)
4. Off-balance sheet arrangements (51-102F1 Item 1.8
5. Approval requirements
a. By the board or audit committee for interim MD&A s. 5.5
6. Filing requirements (s. 5.1(2))
7. Delivery requirements (s. 5.6)
iv. Note that OSC Staff Notice 51-713, the OSC found that 72 percent of reviewed MD&As contained one
or more of the following deficiencies:
1. Omit info material to investors
2. Disclose an excessive amount of immaterial info
3. Disclose good news but not bad news
4. Tend not to have a forward-looking orientation to their MD&A
5. Lack adequate internal policies and procedures for preparing, reviewing and approving MD&A
Annual Information Form (AIF) NI 51-102 Part 6
i. Similar to prospectus
ii. Requires detailed info re: history, operations, and financial affairs
iii. Still used by large issuers to communicate extensive info in order to qualify for SFP
iv. Now all non-venture issuers must file (s. 6.1)
v. Content: prescribed by NI 51-102F2
1. Definition of materiality same as above
2. 51-102F2 items 5.1(4), 5.2 (risk factors): a new explicit requirement is social and environmental
policy information for policies fundamental to operations
vi. Filing requirement (NI 51-102 s. 6.2)
1. Must be filed within 90 days after the end of issuers financial year
2. No delivery requirement
3. However, must file w/ SEDAR

CanSox: Recent Canadian Reforms

NI 52-108 (auditor oversight)

o Role of Canadian Public Accountability Board (CPAB)
14 / 43

o Participation Agreement
NI 52-109 (certification of annual and interim filings)
o What are CEO and CFO required to certify?
Form 52-109F1
o Liability issues: NI 52-109 CP, Part 12
MI 52-110 (audit committees)
o Characteristics of non-venture issuer audit committees (see parts 3&6 of MI 52-110)
Three members
Independence (ss. 1.4 & 1.5)
Literacy (MI 52-110CP)
o Responsibilities of audit committee
MI 52-110 Part 2
o AIF disclosure re audit committee (MI52-110F1)
o Audit committee compliance reviews by CSA staff (CSA Staff Notice 52-312)
NI 58-101 / NP 58-201 (disclosure of corporate governance practices)
o Disclose and explain approach to corporate governance practices
o NI 58-101F1
o NP 58-201 corporate governance guidelines

Continuous Disclosure: Certification

Name
Certification
of disclosure
in issuers
annual and
interim filings

Rule
MI 52-109

Fair
Presentation

MI 52-109 CP

Internal
Control over
Financial
Reporting
Audit
Committees

Proposed MI
52-111
(DBLCHKI
dont exist)
MI 52-110
(BC not
included)

Purpose
Meet a standard of overall material
accuracy and completeness that is broader
than financial reporting requirements under
GAAP (applies to all non-foreign, noninvestment fund issuers)
Liability: subject to quasi-criminal, or civil
proceedings. Subject to private actions for
damages either at CL, civil law (Qu.) or
statute (SA)
Broader than GAAP: fairly present defined
as a materially accurate and complete
picture of the issuers financial
condition. Financial condition includes
qualitative and quantitative factors
(CICA). There is deference to GAAP, but
not if the standard fails to meet an obvious
and reasonable standard of fair
presentation readily apparent to the trier of
fact (Kripps v. Touche BCCA)
Enhanced audit control rules are a direct
transplant of SOX Rule 404 (delayed due to
RI concerns), h/ever RIs say too costly
Note: applies to non-venture issuers
An audit committee is a board committee
responsible for oversight of financial
reporting process. Rules in place to
prevent auditor capture, to enhance
independence and financial literacy of
committee, and improve transparency
(disclosure)
Responsibilities include (MI 52-110 2.3):
helping directors meet their responsibilities;
enhancing communication between directors
and external auditors; enhancing
independence of external auditor; increasing
the credibility and objectivity of financial

Requirements
CEO and CFO must personally certify that
there is nothing misleading and that there is no
misrepresentation in issuers annual and
interim financial statements
Must certify the establishment of disclosure
controls for auditing
Each certificate filed in SEDAR separately

Fair presentation includes disclosure of

accounting policies, proper application of
those policies, informative financial info, and
additional disclosure to provide materially
accurate picture of RI

Similar to 52-109, except that not only have

audit control procedures been put in place, but
that they are evaluated annually in comparison
to a suitable control framework
Must contain at least 3 directors of issuer
(3.1(1))
F. literacy, education, and experience of
members is to be disclosed in AIF
Whether audit committees exemption utilized
(tbd)
Must be independent (1.4, 1.5) cannot have
material relationship w/ issuer (past officer,
partner of firm providing legal or accounting,
cannot have received more than 75k annual pay
from issuer)
Must have ability to read broad and complex
financial statements (GAAP knowledge
optional)
15 / 43

reports; strengthening the role of directors;

must have Charter (2.3(7)); must establish
procedures for dealing w/ complaints
(whistleblower function); pre-approval of
non-audit services provided by the external
auditor
Mrkt-based apprch: the best practices
in NP 58-201, but the mrkt should know if
they are not being followed and be able to
decide accordingly

Disclosure of
corporate
governance
practices

NI 58-101

Disclosure of
corp
governance
practices

NP 58-201

Adopts a disclose and explain approach

to corp. governance
Describes best practices

Canadian
public
accountability
board (CPAB)

NI 42-108

Sets out stndrd for accountants and auditors

Disclosure of governance practices and the

extent to which these best meet best practice
guidelines (Form 58-101F). If they are not
being followed, the directors are to explain
why
Best practices include:
Maj. of board independent (3.1)
Chair independent (3.2)
Independent mbrs meeting sprtly (s. 3.3)
Board following a business mandate, code (s.
3.4; 3.8-9)
Other: orientation, education, compensation

Continuous Disclosure: Material Changes

(1) Defining material change:
a. S. 1(1) SA: 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 and/or a decision to
implement a change referred to in sub-clause (i) made by the board of directors or other persons acting in a similar
capacity or by senior mgmt of the issuer
(2) The law requires that material changes be disclosed in the following fashion:
a. S. 75(1) subject to 75(3), where a material change occurs in the affairs of a RI, RIs must issue and file a news
release authorized by a senior officer disclosing the nature and substance of a material change
b. (2), subject to (3), RIs must file a report of such material change in accordance w/ regulations as soon as
practicable and in any event, within 10 days of the date the change occurred
c. (3) Confidential Disclosure: RIs who think revealing the m/change would unduly detrimental or a decision is
pending approval of the board may file w/ OSC the confidential report and the reasons for the confidentiality
i. (4) Where RI wants to maintain confidentiality, must advise OSC in writing every 10 days
ii. (5) Where it becomes apparent that trading is occurring based on conf. info, the OSC will release it
d. Issuers are to use the form in NI 51-102F3
i. Note on NI 51-102
1. (substantially the) Same def as s. 1(1)
2. NI 51-102 7.1 requires news release to be filed and material change report filed as soon as
practicable and in any event within 10 days
e. Best practices are outlined in NI 51-201
i. Elements:
1. Establish corporate disclosure policy
2. Review by board/audit committee
3. Designate authorized spokespersons
4. Establish policy re: analyst conference calls and reports
5. Establish policy re: quiet periods and insider trading monitoring
6. Establish policy re: electronic communication
ii. S. 2.2: issuers may w/hold public disclosure if it is unduly detrimental, but must still make a confidential
filing w/ reg.
iii. S. 2.3: If rumours leak or impact stock price then must make full disclosure
iv. Part 3 Selective disclosure see below
v. Section 4.2: Examples of material change information: changes of structure financial & corporation,
changes of financial operations
1. So regulators have made distinction between operations and structure, material facts and
changes are both included in this policy
vi. Section 6.14: guidance re: handling rumours: should adopt a no-comment policy
16 / 43

vii. Section 75(3) SA & NP 51-202 s. 7.1(2)confidential disclosure

1. AdviceDisclose to regulators but not to investors
2. Where an issuer arrives at a decision to keep matters confidential in good faith, they can rely on
this section to avoid liability
viii. NP 51-201 Part IIIselective disclosure
1. Anti-tipping provisions
2. AdviceEstablish corporate disclosure policies and clearly define who within the company has
responsibility for corporate communications (51-201 Part VI)
a. Establish corporate disclosure policy
b. Review by board/audit committee
c. Designate authorized spokespersons
d. Establish policy re: analyst conference calls and reports
e. Establish policy re: quiet periods and insider trading monitoring
f. Establish policy re: electronic communications
3. General Principle knowledge of not generally disclosed material facts or changes should not
be traded on
a. Selective disclosure of material corporate information to analysts, institutional
investors or other market professionals not necessary course of buseinss (51-201 s.
3.3(5))
b. Disclosures to credit rating agencies is normal course of business; to analysts is not (
(7))
c. OSC will consider the following in a selective disclosure proceeding (51-201 s. 3.7)
a. If and to what extent a company has adopted / maintained /
followed a reasonable policies and procedures to prevent
contraventions of the tipping provisions
b. Whether any selective disclosure was unintentional
c. What steps were taken to disseminate information that had
been unintentionally disclosed (and the speed w/ which this
was done)
d. While it is fine for analysts to call officers and review earnings estimate, a company
takes on a high degree of risk where it selectively confirms that estimates are on
target, too high or too low (51-201 s. 5.2(1)) and if companies are truly worried
about analyst reports, then they should release info to the market more regularly ((3))
e. Confidentiality agreements are good business but are not protections against tipping
(51-201 s. 5.3)
ix. NI 51-102 s. 8.3 Disclosure of significant acquisition
1. Where an RI completes a significant acquisition of a business or related business, said RI must
file a BAR (business acquisition report, including balance sheet of RI) within 75 days of
acquisition.
2. Significant is defined by s. 8.2:
a. Asset, investment or income testIf any exceed 20 percent of buyers assets, assets or
income (respectively) then BAR must be filed
3. VIs face a different test
(3) Violating disclosure obligations leads to sanctioning:
a. Under the SA
i. S. 122(1)(b) [making statements or failing to make statements], (c) [contravenes Ontario Securities Law]
(general offences provision)
1. Consider s. 122(3) director and officer liability
ii. s. 127[orders in the public interest
1. OSC conducts continuous disclosure review in conjunction w/ insider trading
iii.
b. Under the CSA
i. CSA staff notice 57-301 Where an RI fails to file in a timely manner, it is possible to order a mgmt
cease-trade
c. Under OSC regulation
i. OSC policy 57-603 as s. 2.1, the commission will, generally, respond to a Financial Statement Filing
Requirement default by issuing a Management and Insider Cease Trade Order
d. Civil Action
i. Tort claim for fraudulent/negligent misrepresentation
ii. S. 138.3(1)
iii. Where a responsible issuer or a person or company w/ actual, implied or apparent authority to act on
17 / 43

behalf of a responsible issuer releases a document that contains a misrepresentation, a person or company
who acquires or disposes of the issuers security during the period between the time when the document
was released and the time when the misrepresentation contained in the document was publicly correct
has, without regard to whether the person or company relied on the misrepresentation, a right of action
for damages against,
a. the responsible issuer
b. each director (at the time of misrep)
c. each officer who authorized, permitted, acquiesced in the release
d. each influential person (and director/officer of the same) who knowingly influenced
i. the RI to release the document
ii. A director/officer of the RI to release the document
1. Influential persons include control person (>=20 percent or
materially affect the control of RI), promoters and insiders (>=10
percent)
e. Each expert where
i. The misrep is also contained in expert report
ii. The document summarizes exp. rpt and
iii. If the doc. was released by a person other than expert, the expert consented in
writing to the use of the report in the doc.
2. Break the above apart:
a. Releases a doc that contains a misrepresentation
b. The person who acquires or disposes of security
c. During the period between the time when the doc was released and the time when the
misrepwas publicly corrected
d. Deemed reliance
e. Has a right of action
(4) Can pursue action where:
i. Document contains misrep s. 138.3 (1) [RIs],(3) [Inf. Prsn]
1. Core documents are:
a. For directors/influential persons: prospectuses, takeover bid circulars, MD&A, AIF,
annual financial statements and interim financial statements
b. For issuers/officers: all of the above + material change reports
2. Released by issuer or about issuer by a comp/person w/ actual, implied or apparent authority to
act on b/half of RI
a. For core doc, P must prove:
i. Acquisition/disposition at relevant time
ii. Existence of misrep
b. For non-core doc, P must additionally prove:
i. D knew there was a misrep OR
ii. Deliberately avoided knowing OR
iii. D was guilty of gross misconduct in connection w/ doc/sttmnt
ii. Public oral statements carry misrep 138.3 (2) [RI],(3) [inf. Prsn]
1. Made by RI or person w/ actual, implied or apparent authority to speak on b/half of RI
a. For core doc, P must prove:
i. Acquisition/disposition at relevant time
ii. Existence of misrep
b. For non-core doc, P must additionally prove:
i. D knew there was a misrep OR
ii. Deliberately avoided knowing OR
iii. D was guilty of gross misconduct in connection w/ doc/sttmnt
iii. Documents or statements by influential persons (s. 138.3(3)
1. Where inf prns make statements or produce documents w/ misrep, the same people as above are
liable, but the influential person can be liable without having to show that person knowingly
influenced issuer
a. For core doc, P must prove:
i. Acquisition/disposition at relevant time
ii. Existence of misrep
b. For non-core doc, P must additionally prove:
i. D knew there was a misrep OR
ii. Deliberately avoided knowing OR
iii. D was guilty of gross misconduct in connection w/ doc/sttmnt
iv. Failure to make timely disclosure (138.3(4))
18 / 43

1.

How shareholders could have pursued YBM

a. P must prove:
i. D knew of material change OR
ii. D deliberately avoided knowing OR
iii. D guilty of gross misconduct in connection w/ failure to make timely
disclosure
(5) D has some defences available to him:
i. S. 138.4 provides statutory defences:
(5) P acquired/disposed w/ knowledge of misrep or w/ knowledge of material change. Onus on
D to prove
(6) D made reasonable investigation and had no reasonable grounds to believe that [onus on D]
a. There was a misrep
b. That the failure to make timely disclosure would occur
(7) Court will consider following factors as to reasonable investigations (due diligence)
c. All relevant circumstances, including nature of issuer, knowledge, office held,
existence of any system designed to ensure responsible issuer meet its continuous
disclosure obligations
(8) In defence of failure to make timely disclosure, D also has the defence of prior confidential
disclosure (as allowed under s. 75(3)
d. Must show reasonable basis for making disclosure on confidential basis
(9) Not liable for forward-looking misrep where (s. 138.4(9)):
e. (1) The document/public oral statement included (i) reasonable cautionary language
identifying the forward-looking info as such (results can differ) and (ii) a statement of
material factors or assumptions that were applied in reaching the conclusion/forecast
and (2) the person had a reasonable basis for drawing the conclusion that they did
(6) There are limits on Ds liability/Plaintiffs reward:
i. Actions can only be damages (rescission in not available)
ii. Proportionate liability (s. 138.6)
1. Prop to the extent of breach of each D
2. However, full amount where D other than issuer knowingly authorized or permitted misrep or
failure to disclose material change
3. S. 130 contemplate joint/several liability
iii. Damages are assessed as followed:
1. Securities sold on or before 10 trading day after the correction of the misrep, assessed damages
shall equal the dif between average price paid for those securities (including commissions) and
the price received upon the disposition of those securities (without deducting commission)
2. Securities disposed of after the 10 day, assessed damages to equal the lesser of:
i. An amount equal to the dif between average price paid (including
commission) and the price received upon disposition of those securities
(without deducting commission) AND
ii. An amount equal to the number of securities disposed multiplied by the dif
between average price paid and
a. If on a published mrkt, the trading price for the 10 trading
days following the public correction OR
b. If no published mrkt, amount deemed just by court
iv. Damages are assessed differently for dif. parties (s. 138.5)
1. Issuer limit: greater of 5 percent of market cap and $1 million
2. Individual limit: greater of 25k and 50 of aggregate annual compensation
v. However, law protects individuals from b/ruptcy under s. 138.7
1. D only pays the lesser of aggregate damages assed and liability limits
2. Limit does not apply to a D other than the RI if the plaintiff proves that the D authorized,
permitted or acquiesced in the making of the misrep or the failure to make timely disclosure
while knowing that it was a misrep or a failure to make a timely disclosure, or influenced the
making of the misrep or the failure to make timely disclosure while knowing that it was a misrep
or a failure to make timely disclosure
a. IN OTHER WORDS, no limit on fraud
b. HOWEVER, plaintiffs have to claim fraud from beginning
b. Procedural problems:
i. Plaintiffs must get leave of court s. 138.8
1. Must satisfy court that this action is brought in good faith and that there is a reasonable
possibility of winning
ii. Reliance is deemed s. 138.3(1)
19 / 43

iii. Cannot use s. 138.3(1) for purchases of shares during distribution period (s. 138.2(a)) or for purchases
during exempt distribution (s. 138.2(b))
iv. Plaintiffs must get approval of settlements by the court (s. 138.10)
v. loser pays cost rules apply (s. 138.11)
(7) Cases
a.

b.
c.

d.
e.

Pezim Discussed issue of material change

i. HELD: a change in the value of assets (i.e. mines) is a material change
1. Test:
2. Change must be in relation to the affairs of issuer
3. Change in the business, operations, assets or ownership of issuer
4. Material (would reasonably effect investor thinking)
ii. Also held that reasonableness is the stndrd of review
Kerr v. Danier
i. HELD: interim financial reports are not disclosable where differences are in regards to warm weather
(material factnot change)
YBM Magnex
i. Supports probability/magnitude test to determine whether future events are material. The test has two
prongs
1. Assessing the probability the event will occur
2. Assessing the magnitude of the change on reasonable investors
ii. Here the high likelihood that YBM would not be able to file its statements on time given that its auditor
withdrew services was definitely disclosable (especially given that YBM was releasing other statements)
Donnini
i. Uses probability / magnitude test to conclude that the party was liable for insider trading
AiT Technologies
i. Consider the timeline
1. Feb 17, 2002: 3M makes unsolicited bid
2. March 26-28: First due diligence visit
3. April 11-12: Meeting in St. Paul re: valuation
4. April 25: AiT board meeting and e-mail to CIBC
5. April 26: letter of intent signed
6. May 7-9: second due diligence visit
7. May 9: RS callsunusual trading of AiT
ii. Factors considered by the court:
1. No senior mgmt of 3M in on deal
2. Non-binding nature of LOI
3. Small company
4. Huge differences between what AiT wanted and what 3M was willing to pay
iii. Held: singing a non-binding LOI is not a material change

Insider Trading
1.

2.

3.

Must first determine if party in question qualifies as an insider using s. 1(1)s definition of insider/insider of RI:
a. Every director or senior officer of RI
b. Every director/senior officer of a company that is itself an insider/subsidiary of RI
c. Any person/comp who beneficiary owns, directly or indirectly, voting securities of a RI
or exercises control or direction over voting securities of a RI or a combination of both,
carrying more than 10 percent (shares w/ voting rights) (excludes underwriters)
d. An RI that has purchased, redeemed or otherwise acquired any of its securities
b. The law also deems retroactive insider status where:
i. An issuer becomes an insider of a RI, every director/senior officer of the RI shall be deemed to have been
an insider for the previous six months or for shorter (where director/officer was not such for past six
months) (s. 1(8))
ii. An RI becomes an insider of another RI, every director/senior officer of target RI shall be deemed to
have been an insider of bidder for the previous six months or shorter (s. 1(9))
Insiders can trade, provided that they comply w/ s. 107
a. S. 107(1) Insiders must file a report disclosing any direct or indirect beneficial ownership/control/direction of
shares within 10 days from the day they became insiders
b. S. 107(2) file a change in the report within 10 days of the change
c. S. 107(3) file a retrospective report (after merger)
Insiders are to use SEDIsystem for electronic disclosure by insiders
20 / 43

4.

5.

a. Insiders must file an insider profile (55-102 F1) and reports (55-102F2) on the internet form s. 107
There are some exemptions that allow insiders not to report:
a. Issuer changes the nature of all securities (i.e. splits them)
i. NI 55-101where there is a dividend or amalgamation that affects all, the RI has to inform the OSC
anyway (within 1 day)
b. Directors/officers of subsidiaries can apply for exemptions
i. NI 55-101Where D/Os can show that they dont have material knowledge of RI
c. Directors/officers of affiliates can apply for exemptions
i. NI 55-101Where D/Os can show that they dont have material knowledge of RI
d. OSA can allow exemption at its discretion
i. Interested persons can apply for an exemption or OSC can on its own motion where just and
convenient
ii. Test is whether party has access to material insider info
e. Eligible institutional investors can receive exemptions as well
i. Where institutional investors have filed an early warning report and do not have knowledge of any
material fact or change
ii. Essentially in situations where a fund may via its clients manage over 10 percent but really have no
takeover intentions
Failure to do this will violate securities law
a. Securities law can do the following:
i. Where A realizes a profit of $2m, he can be required to pay $6m (3X the amount) as sanction (s. 122, s.
122(4))
1. S. 122(4) says fine of greater of (a) $5m or (b) an amount equal to triple the profit realized
ii. Civil damages (s. 134(1),(4), and 135
1. S. 134(1) civil law damages
2. S. 134(4) must account to RI for benefit/advantage received unless RI can prove he thought
generally disclosed
3. S. 135 Order by the OSC
iii. Administrative (s. 127, 128)
1. S. 127 Orders in the public interest
2. S. 128 Several orders available upon applying to the court
b. Necessary to define special r/ship
i. S. 76(5) Person or company is in a special r/ship w/ a RI if
a. A person or company that is an insider, affiliate or associate of,
i. The RI
ii. A per/comp proposing a takeover bid of RI
iii. A person or company that is proposing to become a party to a reorganization,
amalgamation, merger, major asset purchase, w/ RI
b. A person/comp that is engaging in or proposes to engage in any business/professional
activity w/ or on b/half of RI w/ or on b/half of a person/comp described in (a)(ii),(iii)
c. A director/officer/employee of the RI or of a person listed in (a)(ii),(iii),(b)
d. A person/comp that learned of the material fact/change w/ respect of the RI while the
person/comp was a person or company described in (a), (b) or (c)
e. A person/comp that learns of a material fact/change w/ respect to the RI from any other
person/comp described in this subsectionincluding one listed in this clauseand
knows or ought reasonably to have known that the other person or company is a
person/comp in such a r/ship
c. Insider trading S. 76(1) No person or company in a special r/ship w/ a RI shall purchase or sell securities of
the RI w/ the knowledge of a material fact or material change w/ respect to the RI that has not been generally
disclosed.
i. Must prove:
1. A was in a special r/ship w/ RI
2. A purchased/sold RI securities
3. A made the purchase/sale w/ knowledge of material info (facts/changes), which had not been
generally disclosed
d. Tipping s. 76(2): No RI and no person or company in a special r/ship w/ a RI shall inform, other than in the
necessary course of business, another person or company of a material fact or material change w/ respect to the RI
before the material fact or material change has been generally disclosed
i. Must prove:
1. A was in a special r/ship w/ RI
2. A informed a 3rd party of material info other than in the normal course of business
3. A informed said 3rd party before the info was generally disclosed
21 / 43

6.

7.

ii. Further considerations:

1. Tippee does not have to trade for there to be an offence
2. T/ee does not have to know that A is in a special r/ship (except where a charge is being made
against T/ee)
iii. Where a t/ee does know of special r/ship, he can be found liable as an inside trader or as a tipper
(essentially falling into s. 76(5)(e)
e. Criminal code provisions Max Term 14 years (aggravating circumstances can increase the harshness of the
penalty)
i. Insider trading:
1. S. 382.1(1) CC: indictable offence to directly or indirectly buy or sell a security knowingly
using insider information by virtue of various r/ships w/ issuer
ii. Tipping
1. S. 382.1(2) CC: Indictable offence to knowingly engage in tipping
iii. Note that these provisions apply to all issuers, not just RIs
iv. Note that knowingly is emphasized in both provisions
Caselaw on insider trading
a. Re Donnini
i. D was a financier of KCA, shorted KCA stocks to hedge against risk based on info not publicly released.
D had special r/ship, sold securities, based on material info (while info not confirmed info, court used
prob/mag test to determine material fact) and material info not yet public.
b. Re Harold P Connor
i. Held that general disclosure is a two-pronged test:
1. Info has to be disclosed to market
2. Market needs time to digest info
ii. One full trading day was deemed sufficient time to wait after info disclosed before insiders can trade
iii. Test is now contained in NP 51-201 3.5(2)
c. Pezim v. BC
i. Insiders have a duty to inquire about material changes/facts at the RI before making insider trading
transactions (even where Chinese walls are being used)
d. R. v. Rankin
i. First tipping prosecution under s. 76 (brought under s. 122)
ii. Rankin was an I-banker
iii. Circumstantial evidence that Rankin was tipping his friend
iv. Friend testified against Rankin
Available defences:
a. Reasonable belief that info had been generally disclosed
i. SA s. 76(4)
ii. Green v. Charterhouse Group Hinting at existence of material info in a letter is not significant enough
to court as disclosure of material info
iii. Re Harold Connor Disclosure must be completely honest and forthright w/ adequate time for market
to absorb data (1 trading day) for defence to be allowed
b. Best Practices:
i. Chinese wall
1. SA Regulations 175
a. There must be reasonable policies and procedures in place to prevent info sharing
b. Person will achieve exemption from s. 76 only if the trader did not have knowledge of
the material info from other business partner
c. Note that Donnini supports Chinese walls; Rankin is entirely skeptical
ii. Guidelines for preventing info from disseminating
1. OSC Policy 33-601
a. Education of employees (re: insider rules, ethical standards) and containment of insider
info (codenames for files, grey lists, restricted lists)
c. Reasonable mistake of fact
i. Only available for constitutional reasons (must have as this is otherwise strict liability)
ii. Lewis v. Fingold (under s. 122)
1. F violated it in every way, save that that his limited experience reasonably led him to believe
that this information was not such that would affect stock values
2. In a strict liability offence, the D can avoid liability by establishing that on a balance of
probabilities that he reasonably believed in a mistaken set of facts, which if true, would render
the prohibited act an innocent one.
a. To help understand this as a defence, D is not arguing that he did not rely on a material
22 / 43

fact in making a trade; rather, D is arguing that he reasonably believed that X was not a
material fact

8.

iii. R. v. Harper
1. H mistaken belief that negative result was not material was deemed not to be reasonable given
his level of experience
2. TEST: Has [D] demonstrated on a balance of probabilities an honest and reasonable mistaken
belief to refute his knowledge of facts which the Court finds to be material and which D admits
to being in possession
3. The soil samples were held to be material facts, notes that he traded based on that info and
rejects that he did not know these to be material facts
d. Necessary course of business
i. NP 51-201: necessary course of business would not permit selective disclosure of material info to an
analyist, institutional investor or other market professional
1. Royal Trustco v. OSC
2. Disclosing info to a shareholder (that a dividend would be paid) as part of a defence against a
takeover was deemed not to be in the necessary course of business
3. Qualified as tipping
Investigations suggest that insider trading is alive and well in Canada
a. CSA established independent task force to assess enforcement of illegal insider trading in CD
b. McNally and Smith did a study that suggests insiders do not avoid trading prior to the announcement of material
information and that violations are infrequently enforced
c. Recommendations as follow:
i. Allow snitchers to keep a portion of fine levied
ii. Harmonize TSX and OSC Rules
iii. Require insider trades be reported sooner than 10 day period
iv. Insiders should be restricted from trading in a period just prior to pre-planned announcements (for
instance, prior to earning releases)

Prospectus Exemptions: Issuers and Investors

Jones v. FH Deacon Hodgson Where an issuer relies inappropriately on an exemption and should have provided a prospectus,
those who purchased the securities are not-timed limited in seeking a remedy under s. 53 (including rescission).
s. 74(1) The OSC can upon application rule that any trade, intended trade, security, person or company is not subject to s. 25 or s. 53
(requirement for prospectus) where it is satisfied that to do so would not be prejudicial to the public interest, and may impose such
terms and conditions as are considered necessary.
1.

2.

3.

Policy objectives:
a. Concerns for start-ups / smaller issuers
b. Prospectus unnecessary for wealthy / sophisticated investors
c. Pre-existing r/ship between issuer and buyer of securities
d. Some types of securities are extremely safe investments
Government Incentive Security (OSC Rule 45-501; NI 45-106 s. 2.13)
a. Allows business entities to be established for tax purposes (mainly junior exploration issuers in the resource
sector)
b. Rules:
i. Max 75 investors solicited (2.1(1)(a)
ii. Max 50 can purchase (anti-avoidance rules apply) (2.1(1)(a)
iii. Investors must receive substantially the same info as a prospectus (s. 2.1(1)(c))
iv. Cannot advertise offering (s. 2.1(1)(d)
v. GIS can only be used once per annum
vi. Investors must receive offering memorandum (s. 2.1(1)(b)
vii. Report must be filed within 10 days of trade using form 45-501F (s. 7.1, 7.2)
c. Qualified Investors:
i. Must be able to valuate security (or able to consult an independent evaluator) (s. 2.1(c)(i))
ii. Officer/director of Issuer ((i))
iii. Spouse / child of such ((i))
Private Issuer Exemption (NI 45-106 s. 2.4)
a. Applies to private issuers who are not also RIs
b. Rules:
23 / 43

4.

5.

6.

i. Securities must not be bonds or debentures

ii. Securities must have restrictions on transfer in articles of incorporation (or via trust agreement)
iii. Securities cannot be owned by more than 50 people
iv. No cap on capitalization
v. Distributions do not need to be reported to regulators
c. Qualified Investors:
i. Director/officer/founder/employee/control person (s. 2.4(2)(a)
ii. Spouse, parents, grandparents, children, close personal friend, close business associate of directors,
officers, founders or control persons (or their spouses ((b)-(f))
iii. Other people in exempt class (resale rule) ((g))
iv. Accredited investors ((h))
v. Persons not the public ((k))
1. Employees are the public (Ralston Purina)
Founder/Control Person/Family Exemption (NI 45-106 s. 2.7)
a. Only available in Ontario, this exemption targets first-generation financing
b. Rules:
i. No limits on financing available
ii. No reporting requirements
c. Qualified Investors:
i. Founders (45-106 s. 2.7(1)(a))
ii. Affiliate Founder ((b))
iii. Spouse, parent, sibling, grandparent, or child of officer, director or founder ((c))
iv. Control person ((d))
Accredited Investor Exemption (NI 45-106 s. 2.3)
a. 2.3(1) The dealer registration requirement does not apply in respect of a trade in a security if the purchaser
purchases the security as principle and is an accredited investor
b. Essentially available where financial institutions purchase securities through private placements
c. In fact, seller is not defined
d. Rules:
e. Qualified Investors:
i. Accredited Investor: (NI 45-106 s. 1.1)
1. (a) CDN financial institution
2. (b) Business development bank of Canada
3. (f) Government of Canada (and prov/mun gvrmnts)
4. (i) Pension fund / (q) mutual fund / (p) trust companies, etc.
5. (j-l) Individuals who:
j. Financial assets test: liquid financial assets (w/ or w/o spouse) exceed $1m net of any related
liabilities
k. Income test: Net income before taxes (w/o spouse) exceeds 200k or (w/ spouse) 300k for past
two years and expect to qualify again this current year (law allows for a reasonable expectation
of exceeding same net income level each year)
l. Net asset test: not necessarily financial assets, but investor must have assets generally worth
more than $5m (including properties)
Minimum Investment Exemption (NI 45-106 s. 2.10)
a. Exemption kicks in where investor invests 150k in cash at time of trade for a single transaction
b. Anti-avoidance rule (6.1)
c. Still face reporting requirements as above

Prospectus Exemptions: Pre-existing R/ship between issuer and investor

1.

2.

Securities as Part of Dividend Payment (NI 45-106 s. 2.31)

a. Applies when new securities are used to pay dividends to security holders
b. Rules:
i. Must be in respect of a trade by an issuer in a security of its own issue to a security holder of the issuer as
a dividend, OR
ii. In respect of a trade by an issuer in a security of a reporting issuer as a dividend
Options of converting cash dividends in stock dividends (NI 45-106, s. 2.2)
a. Applies where dividends/interest/cash payments can be used to acquire additional securities
b. Cash options are allowed to be converted into stock-dividend reinvestment plan
c. Limitation:
i. Shares issued in this fashion not to exceed 2 percent of issued/outstanding shares of a class
24 / 43

3.

4.

5.

6.

Reorganizations (NI 45-106 s. 2.11)

a. Two types are considered:
i. Amalgamation / merger w/ another business involving a share exchange
ii. Reorganization of issuer due to insolvency where debt is exchanged for equity
Conversion / Exchange / Exercise (NI 45-106 s. 2.42)
a. Applies to securities w/ a previous right of conversion, exchange or purchase
b. Technically, exercising this right creates new securities, but this exemption prevents that from requiring
prospectus
c. This includes: warrants (options to acquire additional shares for cash), options, convertible debt, convertible
preferred shares
Rights Offering (NI 45-106 2.1; 45-101CP)
a. Allows existing shareholders to acquire additional securities
b. The exemption applies to both the granting of right and issuing of securities pursuant to that right
c. Constrains on this exemption as investors may be tempted to use it exclusively
d. It will not be available where:
i. Increase of <25 percent of outstanding securities of class, to finance reactivation of dormant issuer, to
finance a major new undertaking, where securities issued can be exercised into a new class (45-101 s.
2.2(1))
ii. Reviewing authority can also prevent it where: (a) where the rights offering is for financing the
reactivation of a dormant/inactive issuer, financing a material undertaking that would constitute a
material change in the business, (c) excessive consideration going to managing dealer, soliciting dealer,
and (d) the reviewing authority thinks it otherwise inappropriate (45-101CP s. 1.2)
e. There is an obligation to inform regulators of the intention to use this exemption:
i. Advance notice to regulators via rights offering circular (45-106 s. 2.1(1)(a)
ii. Regulator has the right to object in 10 days (45-106 s. 2.1(1)(b) says no objection within 10 days)
Employee Distributions (NI 45-106 s. 2.23-25)
a. Allows for distribution of securities to employees without triggering a prospectus
b. Rules:
i. Only past performance, not inducement of future employment, is acceptable as consideration (s. 2.23(2))
ii. Participation must be voluntary (s. 2.24)
iii. If the issuer is unlisted, there is a limit to the #/% of securities that can be distributed unless security
holder appeals

Offering Memoranda Requirements re: Exemptions

1.

2.

3.

4.

5.

Definition of offering memoranda (SA s. 1.1 and OSC Rule 14-501):

a. A document that provides info about securities being sold used in conjunction w/ an exemption from the
prospectus requirement
b. Rule 14-501: offering memorandum means a document purporting to describe the business and affairs of an
issuer that has been prepared primarily for delivery to and review by a prospective purchaser so as to assist the
prospective purchaser to make an investment decision for a security being sold in a distribution to which section
53 of the Act would apply but for the availability of one or more of the exemptions contained in Ontario securities
law but does not include a document setting out current information about an issuer for the benefit of a
prospective purchaser familiar w/ the issuer through prior investment or business contacts
In Ontario, the following rules apply:
a. When using an exemption, generally must given an OM
b. When relying on accredited investor exemption, can voluntarily give OM (this is common business practice)
i. Voluntary OMs are still subject to liability for misrepresentation (OSC Rule 45-501 CP Part 5)
c. The OSC files OM but will not review them nor file them on SEDAR
OMs are to include (OSC Rule 45-501):
a. GIS (government incentive security) to include info re: officers, directors and promoters (s. 2.1(1))
b. Otherwise, little prescribed content beyond description of rights available to buyer under s. 130(1) (45-501 s. 6.2;
45-501CP 5.4)
Where there is a misrepresentation, investors have a cause of action under SA s. 130.1 and Rule 45-501 s. 6.2
a. Section 130.1(1): Where an offering memorandum contains a misrepresentation, a purchaser who purchases a
security offered by the offering memorandum during the period of distribution has, without regard to whether the
purchaser relied on the misrepresentation, the following rights: [damages] or [rescission]
i. Note that this is similar to s. 130 for prospectuses
ii. Further note that CDN financial institutions cannot make use of s. 130.1
Issuers have some defences:
a. Purchaser knew about the misrep when they purchased
25 / 43

b.

Issuer did not receive the proceeds from the purchase (because a control person was selling)

Resale Rules / Control Distributions

1.
2.
3.
4.

Goal: protect investors and prevent backdoor underwriting

The carrot of qualifying: be able to sell without triggering a distribution (and accompanying prospectus requirements)
Where there are convertible/underlying securities, dates are determined from date of purchase of original form, not date of
conversion (45-102CP s. 1.10)
Begin w/ the realization that resale has two forms
a. The purchaser wants to transfer to someone w/ the same qualifications
i. Resale rules are not triggered
b. The purchaser wants to release on the general market
i. There are two categories: the strict requirements of NI 45-102 s. 2.5 (appendix D) and 45-102 s. 2.6
(appendix E)
ii. NI 45-102 s. 2.5 (appendix D) conditions on reseller and issuer
1. Deals w/:
a. Government Incentive Security
i. Dealer registration rule does not apply to a tarde that was previously traded
under 2.1 if each of the parties to the trade is one of the not more than 50
purchasers (45-501 s. 2.2(1))
b. Founder/control person/family exemption
c. Accredited investor protection
d. Minimum investment exemption
e. Conversion/exchange/exercise exemption
f. Control person exemption, but only if control person is not selling through an
exemption
2. Condition 1: Seasoning Requirement (45-102 s. 2.5(2)(1) [w/ voidable where I becomes an RI,
note that 3 is not voidable]
a. Issuer is and has been an RI in CDA for 4 months preceding the trade
3. Condition 2: Restricted / Hold Period Requirement ((2))
a. Initial purchaser cannot resell within 4 months of security being issued
b. 1.11CP 4month period applies even after I has met RI status
c. 1.8CP Hold period only applies onceafter it has been satisfied, subsequent
purchasers need not follow it
d. NI 45-102 s. 2.5(3) and 1.10CP: Time period calculated from distribution date of
original convertible security, not date of conversion to new type of security
4. Condition 3: Legending Requirement ((3)(a))
a. Issuers and resellers must disclose to other purchasers of their obligations to comply
w/ the resale requirements under the exemption
b. Legending is not required where four months have passed since the original convertible
security was issued
5. Condition 4: Trade is not a Control Distribution ((4))
a. Control block distributions are dealt w/ by s. 2.8
6. Condition 5: No Unusual Effort ((5))
a. Activities banned include disseminating soliciting material, formation of selling
grounds, sales to non-arms length purchases
7. Condition 6: No Extraordinary Commissions ((6))
a. Compensation cannot be for more than is expected for other reselling of similar
amounts
8. Condition 7: Selling Security Holder is an Insider / Officer ((7))
a. Selling in a non-control context, a seller must verify that they have no reasonable
belief that the issuer is in default of securities rules
iii. 45-102 s. 2.6 (appendix E) conditions on reseller alone
1. Deals w/:
a. Private issuer exemption
b. Stock Dividend exemption
c. Re-organization exemption
d. Rights offering exemption
e. Employees/officers/directors/consultants exemptions
f. Control persons, only if they are selling through an exemption
2. Four-part requirement to avoid being a distribution:
26 / 43

a.

c.

The issuer has been an RI for four months immediately preceding the trade (45-102 s.
2.6 (2)(1))
b. Trade is not a control distribution ((2))
c. No extraordinary commission / consideration is being paid in respect of the trade (
(3))
d. If an insider, seller has no reasonable grounds to believe that the issuer is in default of
securities legislation ((4))
iv. Resale rules for control persons (NI 45-102 s. 2.8)
1. Standard resale rules for control block persons
2. Still considered distributions (s. 1 of SA)
NOTE: where an I becomes an RI after distribution by filing a prospectus in jurisdiction listed in appendix B
(pretty much all of Canada) and is an RI at time of trade then above and below italicized letters do not apply

Control block holders can sell off their securities in the following fashion
1.
2.
3.

4.

Issue a prospectus
a. Too expensive
b. CHs will do this as a tag-on when issuers release a prospectus
Seek a discretionary exemption
a. Apply to OSC via s. 74
Use another prospectus exemption
a. Use any other prospectus exemption, such as listed in NI 45-106
b. Can be used to avoid s. 2.8s 4-month hold period
c. Seller needs a buyer who qualifies for an exemption (e.g. accredited investor)
d. Buyer will face restrictions based on corresponding resale rules (2.5/2.6)
Use specific control person/block exemption
a. Specific exemption for control block persons / block w/ does not trigger the resale rules
b. Buyer does not need to be an accredited investor and faces no further restriction in reselling
c. Five conditions:
1. Seasoning period issuer has been an RI in a jurisdiction of Canada for 4 months immediately
preceding the trade 45-102 s. 2.8(1)
2. Hold period Held for at least 4 months ((2))
3. No unusual effort to market ((3))
4. No extraordinary commission ((4))
5. Seller has no reasonable grounds to believe issuer in default of securities law ((5))
d. Seller must also comply w/ filing requirements in s. 2.8(3)
i. At least 7 days pre-trade, CH must file form 45-102F1 on SEDAR (certified/signed)
ii. Post-trade, ITR must be filed within 3 days

Takeover Bids
1.

2.

3.
4.
5.

Motivations:
a. Replace inefficient mgmt
b. Synergies
c. Desire to increase mrkt power/empire building
d. Tax considerations
e. Undervaluation of shares
Definition: An offer to acquire outstanding voting or equity securities of a class made to any person or company who is
in Ontario or to any security holder of the offeree issuer whose last address as shown on the books of the offeree issuer is in
Ontario, where the securities to the offer to acquire, together w/ the offerors securities, constitute in the aggregate 20
percent or more of the outstanding securities of that class of securities at the date of the offer to acquire (s. 89 SA)
a. Anti avoidance rules:
i. Two or more parties cannot work jointly to avoid triggering the act (s. 90(2))
ii. Where acting jointly or in concert then counted together (s. 91(1))
iii. Indirect offers are also preventedA owns B, C makes offer to acquire A, C is deemed to be making an
offer for B (s. 92)
Governed by: Part XX of SA, NP 62-202, fiduciary duties of directors and caselaw
Shareholders of target can expect (a) ample opportunity to change their minds, (b) equal treatment in terms of
consideration, and (0 ability to make fully informed decisions
Proper forum Where the matter concerns all shareholders and the general interests of the market, then OSC; where the
27 / 43

matter is personal between shareholders and bidder, then the courts (see Re CW Shareholdings v. WIC Western
International
6. To commence a bid, a bidder must:
a. Announce the bid by either:
i. Delivering a circular to all shareholders (s. 94.1(1)(b))
ii. Publishing an announcement of the takeover bid in a major daily newspaper (s. 94.1(1)(a))
b. Deliver an offerors circular (s. s. 94.1(1)(b); s. 94.2(1),(3))
i. Where information in the circular changes, an obligation (under s. 94.3(1)) exists to send a notice of
variation (no market impact, just reasonably be expected to affect)
ii. Bid must be delivered to OSC and to target mgmt (s. 94.2(3); s. 94)
7. Ensure that the bid is made to all holders of securities of the class that is subject to the bid in Ontario and delivered by the
offeror to all holders of securities of that class and holders of securities that are convertible into that class
8. NOTE: bid lasts 35 days once bid document mailed
9. Provisions guaranteeing fair treatment to shareholders:
a. Pro Rata Take-up:
i. Where bidder receives more tenders than he wants, he is to take-up shares in equal portions (s. 97.2(1)
SA)
b. Identical consideration
i. Cannot pay groups or individual shareholders more or provide additional consideration (s. 97(1))
ii. Where the offer increases later during the bid process, the issuer must increase what was to be paid to
earlier bidders (s. 97(3))
iii. Cannot set up collateral agreements to pay any shareholder more than the others (s. 97.1(1); OSC Rule
62-504 s. 4.1)
c. Withdrawal rights
i. Shareholders can w/draw in three situation (s. 98.1(1))
a. Withdrawal any time before 35 day period
b. Withdrawal before end of 10 days from date of notice of change
c. Withdrawal if securities are not paid for within three days of takeup
d. No special agreements prior to formerly launching a takeover (i.e. setting up agreement w/ CP to acquire at a
premium, then formally launch bid and pay lower bid to the rest)(s. 93.2(1))
10. Disclosure Obligations
a. All shareholders are to have equal access to:
i. Both target mgmt and bidders must issue circulars
1. Takeover bid circular Form 32 Regulations to the OSA
a. Bidders must be sent to shareholders when the bid is commenced OR as soon as a
shareholder list is available after the bid commended by advertisement
b. Where the bid is modified, a new circular must go out
c. Where part of bid is securities, must include prospectus-like info (item 15 Regulations
to OSA Form 32)
d. Disclosure of plans that would equal material changes in the affairs of the target (asset
sale, amalgamations, mgmt/personnel changes, etc.) (Item 18)
2. Directors Circular (response to takeover circular)
a. After bid is commenced, targets board have an obligation to either accept, reject or
remain undecided and to inform shareholders of that decision (Regulations to OSA,
Form 34; s. 95(2))
b. Must disclose r/ship w/ bidder (i.e. any compensation) (item 17), trading by
managers and directors (item 10), material changes in the report (item 12),
recommending acceptance/rejection of bid (item 14)
c. Must be delivered within 15 days after the bid is commenced
ii. Failure to comply w/ the above leads to liability:
1. Punishable under SA s. 122(1)
2. Liability for misrep (SA 131(1)) and for directors (s. 131(2))
3. Applies to both bidders and targets
4. If the contravention violates public interest, then admin action (s. 127) or court action (s. 128)
b. Early warning system kicks in at 10 percent
i. Any holder w/ control =>10 percent must disclose holding and file a press release (s. 102.1(1))
1. 101(1) Every offeror that acquires beneficial ownership of, or the power to exercise control or
direction over, or securities convertible into, voting or equity securities of any class of a RI that,
together w/ such offerors securities of that class, would constitute 10 percent or more of the
outstanding securities of that class
a. Shall issues and file forthwith a news release containing the information prescribed by
the regs and
28 / 43

i. NI 62-103, part 3 and appendix E set out requirements

Within two business days, shall file a report containing the same information as is
contained in the news release issued under (a)
i. NI 62-103 Part 3
Note that every further increase of 2 percent requires a press release s. 102.1(2)
Note that there are time restrictions on further acquisitionswhen disclosure required, must wait one
business day after the date of disclosure (s. 102.1(3)) unless acquiror who already has 20 percent (s.
102.1(4))
Where other parties are acquiring significant shares during a takeover, they have to report at 5 percent
mark (102.2(1)) and at further 2 percent (102.2(2))
1. The news release to contain: (a) acquirors name, (b) number of securities beneficially acquired,
and (c) acquirors intention (OSC Rule 62-504 s. 7.2)
NI 62-103 An exemption is available for mutual funds or eligible institutional investors, entitles whose
shares increased solely because of some action by the issuer, underwriters (but where they are holding
shares for purposes of underwriting)
1. However, where there is an intent to complete a takeover, these exemptions do not apply
b.

ii.
iii.
iv.

v.

11. Timing
a. Must remain open for 35 days (s. 98(1))
b. Not permitted to take-up or accept for purchase any shares deposited by tendering shareholders (s. 98(2)) and
where they have, shareholders are permitted to w/draw them or on their behalf of shareholders by the OSC (s.
98.1(4))
c. HOWEVER, on the third day following the bid, the bidder can still make market purchases of the securities (s.
98.3(2)), but only if
a. The intention to make such purchases is stated in the takeover bid circular
b. The aggregate number of securities acquired under this subsection does constitute
excess of 5 percent of the outstanding securities of that class as at date of bid, AND
c. The offeror issues and files a news release forthwith after the close of business of the
exchange on each day on which securities have been purchased disclosing information
prescribed by regulations
d. No later than 10 days after the expiry of the bid, must take up securities (s. 98.3(1))
e. Must pay within 3 days of taking up securities (s. 95(10)
f. If they do not get enough shares, they can extend the date on which the offer w/ expire but only if they take up the
securities already offered (s. 95(12) or extend the right of withdrawal (s. 95(12.1))
12. Bid Conditions
a. Bidders are permitted to add conditions to their takeover offers
i. However, no conditions re: financing (s. 97.3(1), (2))
1. OSC Rule 62-503: Must be reasonable belief by the bidder that the financing conditions will be
met and where that that belief exists, can have conditions re: financing
13. Re: Canfor Corp Canfor offered deposit receipts w/ would then be taken up within three day window. HOWEVER,
OSC found that Canfor had not adequately explained the nuts and bolts of this in their circular but that managements
circular corrected this problem. As this bid was not so abusive to investors or capital markets as to warrant intervention by
section 127(1) of the Act (withdrawal rights) or cease trade, but they did extend the time by 10 days

Exemptions from Takeover Bid Requirements: s. 93 SA

1.
2.

3.

4.

Stock exchange bids (s. 93(1)(a); s. 93(4))

a. Bids made through a stock exchange are generally exempt from securities rules but are subject to stock exchange
rules (which are comparable)
Normal course purchases (s. 100)
a. A holder w/ =>20 percent can make modest purchases if said purchases are in the normal course
i. Purchase price cannot (a) exceed mrkt price and (b) purchaser cannot acquire more than 5 percent in a
yearly period
Control block purchases under private agreement (s. 100.1(1))
a. Where there is a private agreement, a control block can be transferred, even if at a premium, as long as the
premium in not substantial and the offer is made to five or fewer persons
b. Where the premium is 15 percent above prevailing mrkt price, it is substantial (regulation 183) and the regulators
will ensure that efforts at artificially increasing market price are captured as well
Closely held companies (s. 100.2)
i. Where the number of security holders is less than 50,
ii. the bid is not for the shares of a RI and
iii. there is no published mrkt for the securities,
29 / 43

5.

6.

b. youve got an exemption!

Limited relevance to jurisdiction (s. 100.4)
a. Exception when takeover does not involve many Ontario residents
b. Requires:
i. Less than two percent of securities of class held in Ontario
ii. Fewer than 50 holders of the securities in the province
iii. Bid is made in compliance w/ laws of other jurisdiction
iv. Security holders in province still get material related to bid
Discretionary exemption application (s. 104(2)(c))
a. Allow for an application to the commission for an exemption from takeover bid regulations where an enumerated
exemption does not apply and such exemption would not be prejudicial to the public interest
i. Rarely, going to be used
ii. One example, 3 percent of securities are held in Ontario; would likely grant exemption

Takeover bids: Defensive Tactics (NP 62-202)

1.
2.
3.
4.
5.
6.
7.
8.
9.

NP 62-202 provides guidelines for defensive tactics, however, it is only a national policy, which is not binding
Will interfere under s. 127 of SA
General Principle: Targets may adopt defensive tactics but they must not deny shareholders choice and must not frustrate
the open-bidding process
White knight
a. Q: Is the board really acting in shareholder interests?
b. This question is particularly fitting where break fees are negotiated
Poison pill/SRPs (shareholder rights plan)
a. Q: Is an SRP plan legal/appropriate when it excludes a bidder from an SRP, even though they are already
shareholders?
Sale of Crown Jewel (asset option)
a. Q: If assets are sold off at less than fair market value to deter a bid, is this in the best interests of shareholders
(Western International v. WIC)?
Litigation
a. Both sides will go to court (bidder is violating competition act; target is acting oppressively)
Issuer bid
a. Enhanced disclosure requirements (NI 61-501)
Break fee
a. Typically 2-3 percent
b. Securities regulators only interfere if the break fee does not strike a reasonable balance between marketing
stimulator and market inhibiter and have never disallowed a break fee

Takeover caselaw
1.

2.

Re CW Shareholdings v. WIC Western International

a. Crown jewel sales and break fees are appropriate defensive tactics when they strike the balance between inhibiting
and stimulating and are in the best interests of the target shareholders
i. Break Fees are appropriate where:
1. Necessary in order to entice other bidders
2. The bid represents better shareholder value
3. Strikes a balance between auction and stimulator
ii. Crown jewel sales are appropriate where:
1. The decision to sell was made free of conflict of interest and in good faith
2. The overall commercial balance and proportion between auction inhibiting and stimulating has
been struck
3. Price asset sold for was reasonable and did not erode the value of the corporation
# Alberta Ltd. v. Producers Pipelines
a. Producers was a publicly traded company. # launched a hostile takeover for Producers. Producers board
employed several defensive tactics, including an SRP without shareholder approval and an issuer bid
i. # complained that it was unfair that an issuer bid could be launched and concluded while the SRP
remained in effect
ii. Two competing views on poison pills:
iii. Shareholder interest: stops shareholders from being compelled to take a low bid
iv. Management entrenchment: mgmt avoids takeover as they lose their jobs
30 / 43

3.

4.

b. Here the appeal was allowed and the SRP was set aside
Re Royal Host Real Estate Investment Trust
a. Factors to consider when determining validity of an SRP is contextual:
i. Nature of the bid (is it coercive and substantially unfair)
ii. Shareholders approved the rights plan
iii. Date plan adopted
iv. Shareholders broadly support the plans continuing operation
v. Size and complexity of target company
vi. Defensive tactics implemented by the target
vii. Number of potential viable offers for the target
viii. Steps taken by target to find alternative bidder
ix. Likelihood that w/ time a better bid can be found
x. Length of time since the was bid was announced
xi. Likelihood that the bid will not be extended if rights plan not terminated
b. Target directors have to show that they are acting in the best interests of the company (Teck v. Milar)
c. Peoples v. Wise says duty is not to individual shareholders but to corp as a whole
Maple Leaf v. Schneider
a. An auction may/may not be appropriate
b. If only one bidder, canvassing the market may be appropriate
c. Reaffirms business judgment rule
d. Company not really in play as controlling shareholder made clear he would not tender to bidder

Issuer Bids: Going Private

(1) Policy: why regulate?
a. Flight from public markets
b. Hollowing out thesis
c. Protecting minority shareholders
(2) Definition
a. Issuer Bid: An offer to acquire/redeem securities made by the issuer to one or more persons, any of who is in
Ontario, except where (s. 89(1)):
a. No consideration is offered/paid by the issuer
b. If this is part of a amalgamation, merger, reorganization or arrangement that requires
shareholder approval
c. If the securities are debt securities that are not convertible
b. Insider Bid: "insider bid" means a take-over bid made by (a) an issuer insider of the offeree issuer, (b) an
associated or affiliated entity of an issuer insider of the offeree issuer, (c) an associated or affiliated entity of the
offeree issuer, (d) a person described in paragraph (a), (b) or (c) at any time within 12 months preceding the
commencement of the bid, or (e) a joint actor with a person referred to in paragraph (a), (b), (c) or (d) (MI 61-101
s. 1.1)
c. Related Party Transactions: "related party transaction" means, for an issuer, a transaction between the issuer and a
person that is a related party of the issuer at the time the transaction is agreed to, whether or not there are also
other parties to the transaction, as a consequence of which, either through the transaction itself or together with
connected transactions, the issuer directly or indirectly
(a) purchases or acquires an asset from the related party for valuable consideration,
(b) purchases or acquires, as a joint actor with the related party, an asset from a third party if the
proportion of the asset acquired by the issuer is less than the proportion of the consideration paid by the
issuer,
(c) sells, transfers or disposes of an asset to the related party,
(d) sells, transfers or disposes of, as a joint actor with the related party, an asset to a third party if the
proportion of the consideration received by the issuer is less than the proportion of the asset sold,
transferred or disposed of by the issuer,
(e) leases property to or from the related party,
(f) acquires the related party, or combines with the related party, through an amalgamation, arrangement
or otherwise, whether alone or with joint actors,
(g) issues a security to the related party or subscribes for a security of the related party,
(h) amends the terms of a security of the issuer if the security is beneficially owned, or is one over which
control or direction is exercised, by the related party, or agrees to the amendment of the terms of a
security of the related party if the security is beneficially owned by the issuer or is one over which the
issuer exercises control or direction,
(i) assumes or otherwise becomes subject to a liability of the related party,
31 / 43

(j) borrows money from or lends money to the related party, or enters into a credit facility with the
related party,
(k) releases, cancels or forgives a debt or liability owed by the related party,
(l) materially amends the terms of an outstanding debt or liability owed by or to the related party, or the
terms of an outstanding credit facility with the related party, or
(m) provides a guarantee or collateral security for a debt or liability of the related party, or materially
amends the terms of the guarantee or security;
d. "business combination" means, for an issuer, an 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, but does not include
(a) an acquisition of an equity security of the issuer under a statutory right of compulsory acquisition or,
if the issuer is not a corporation, under provisions substantially equivalent to those comprising section
206 of the CBCA,
(b) a consolidation of securities that does not have the effect of terminating the interests of holders of
equity securities of the issuer in those securities without their consent, through the elimination of postconsolidated fractional interests or otherwise, except to an extent that is nominal in the circumstances,
(c) a termination of a holder's interest in a security, under the terms attached to the security, for the
purpose of enforcing an ownership or voting constraint that is necessary to enable the issuer to comply
with legislation, lawfully engage in a particular activity or have a specified level of Canadian ownership,
(d) a downstream transaction for the issuer, or
(e) a transaction in which no person that is a related party of the issuer at the time the transaction is
agreed to
(i) would, as a consequence of the transaction, directly or indirectly acquire the issuer or the
business of the issuer, or combine with the issuer, through an amalgamation, arrangement or
otherwise, whether alone or with joint actors,
(ii) is a party to any connected transaction to the transaction, or
(iii) is entitled to receive, directly or indirectly, as a consequence of the transaction
(A) consideration per equity security that is not identical in amount and form to the
entitlement of the general body of holders in Canada of securities of the same class,
(B) a collateral benefit, or
(C) consideration for securities of a class of equity securities of the issuer if the issuer
has more than one outstanding class of equity securities, unless that consideration is not
greater than the entitlement of the general body of holders in Canada of every other
class of equity securities of the issuer in relation to the voting and financial
participating interests in the issuer represented by the respective securities;
(3) Insider Bids
(4) Obligation on Corp. to disclose full info to shareholders:
a. MI 61-101 s. 2.2(1)
The offeror shall disclose in the disclosure document for an insider bid
1. (a) the background to the insider bid,
2. (b) in accordance with section 6.8, every prior valuation in respect of the offeree issuer that
has been
3. made in the 24 months before the date of the insider bid, and the existence of which is
known, after reasonable inquiry, to the offeror or any director or senior officer of the
offeror,
4. (c) the formal valuation exemption, if any, on which the offeror is relying under section 2.4
and the facts supporting that reliance, and
5. (d) the disclosure required by Form 62-104F2 Issuer Bid Circular of Multilateral
Instrument 62-104 Take-Over Bids and Issuer Bids, and in Ontario, Form 62-504F2 Issuer
Bid Circular of OSC Rule 62-504 Take-Over Bids and Issuer Bids, to the extent applicable
and with necessary modifications.
b. OSC Rule 62-504F2 Issuer Bid Circular
MI 61-101 2.2(2)
The board of directors of the offeree issuer shall include in the directors circular for an insider bid
i. (a) disclosure, in accordance with section 6.8, of every prior valuation in respect of the offeree
issuer not disclosed in the disclosure document for the insider bid
(i)
that has been made in the 24 months before the date of the insider bid, and
(ii)
the existence of which is known, after reasonable inquiry, to the offeree
issuer or to any director or senior officer of the offeree issuer,
ii. (b) a description of the background to the insider bid to the extent the background has not been
iii. disclosed in the disclosure document for the insider bid,
32 / 43

iv. (c) disclosure of any bona fide prior offer that relates to the offeree securities or is otherwise
relevant to the insider bid, which offer was received by the issuer during the 24 months before the
insider bid was publicly announced, and a description of the offer and the background to the offer,
and
v. (d) a discussion of the review and approval process adopted by the board of directors and the
special committee, if any, of the offeree issuer for the insider bid, including a discussion of any
materially contrary view or abstention by a director and any material disagreement between the
board and the special committee.
c. Directors Circular
i. Discussion of review and approval process adopted by board and special committee, including any
material disagreement between the board and the special committee
(5) Valuation
a. Valuation of securities to be acquired and any non-cash consideration offered
b. Valuator to be independent of all interested parties
i. Question of fact
ii. However, specific exemptions include:
1. As per s. 61.(3): A valuator is not independent of an interested party in connection with a
transaction if
a. (a) the valuator is an associated or affiliated entity or issuer insider of the
interested party,
b. (b) except in the circumstances described in paragraph (e), the valuator acts as an
adviser to the
c. interested party in respect of the transaction, but for this purpose, a valuator that is
retained by an
d. issuer to prepare a formal valuation for an issuer bid is not, for that reason alone,
considered to be
e. an adviser to the interested party in respect of the transaction,
f. (c) the compensation of the valuator depends in whole or in part on an agreement,
arrangement or
g. understanding that gives the valuator a financial incentive in respect of the
conclusion reached in the
h. formal valuation or the outcome of the transaction,
i. (d) the valuator is
j. (i) a manager or co-manager of a soliciting dealer group for the transaction, or
k. (ii) a member of a soliciting dealer group for the transaction, if the valuator, in its
capacity as a
l. soliciting dealer, performs services beyond the customary soliciting dealer's
function or
m. receives more than the per security or per security holder fees payable to other
members of
n. the group,
o. (e) the valuator is the external auditor of the issuer or of an interested party, unless
the valuator will not
p. be the external auditor of the issuer or of an interested party upon completion of
the transaction and
q. that fact is publicly disclosed at the time of or prior to the public disclosure of the
results of the
r. valuation, or
s. (f) the valuator has a material financial interest in the completion of the
transaction,
c. Valuator determined by independent committee
d. Valuation to contain valuators opinion as to value or range of values representing fair market value
e. Valuator must be given access to relevant material information
f. Exemptions from formal valuation requirement: MI 61-101 s. 2.4
i. February 1, 2008 (2008) 31 OSCB 1334
ii. 2.4 Exemptions from Formal Valuation Requirement
iii. (1) Section 2.3 does not apply to an offeror in connection with an insider bid in any of the following
circumstances:
iv. (a) Lack of Knowledge and Representation neither the offeror nor any joint actor with the offeror
has, or has had within the preceding 12 months, any board or management representation in respect
of the offeree issuer, or has knowledge of any material information concerning the offeree issuer or
its securities that has not been generally disclosed,
33 / 43

v. (b) Previous Arm's Length Negotiations - all of the following conditions are satisfied:
1. (i) the consideration per security under the insider bid is at least equal in value to and is in
the same form as the highest consideration agreed to with one or more selling security
holders of the offeree issuer in arms length negotiations in connection with
a. (A) the making of the insider bid, Rules and Policies February 1, 2008 (2008) 31
OSCB 1335
b. (B) one or more other transactions agreed to within 12 months before the date of
the first public announcement of the insider bid, or
c. (C) a combination of transactions referred to in clauses (A) and (B),
2. (ii) at least one of the selling security holders party to an agreement referred to in clause (i)
(A) or (B) beneficially owns or exercises control or direction over, or beneficially owned or
exercised control or direction over, and agreed to sell
a. (A) at least five per cent of the outstanding securities of the class of offeree
securities, as determined in accordance with subsection (2), if the person that
entered into the agreement with the selling security holder beneficially owned 80
per cent or more of the outstanding securities of the class of offeree securities, as
determined in accordance with subsection (2), or
b. (B) at least 10 per cent of the outstanding securities of the class of offeree
securities, as determined in accordance with subsection (2), if the person that
entered into the agreement with the selling security holder beneficially owned less
than 80 per cent of the outstanding securities of the class of offeree securities, as
determined in accordance with subsection (2),
3. (iii) one or more of the selling security holders party to any of the transactions referred to in
subparagraph (i) beneficially own or exercise control or direction over, or beneficially
owned or exercised control or direction over, and agreed to sell, in the aggregate, at least 20
per cent of the outstanding securities of the class of offeree securities, as determined in
accordance with subsection (3), beneficially owned, or over which control or direction
exercised, by persons other than the person, and joint actors with the person, that entered
into the agreements with the selling security holders,
4. (iv) the offeror reasonably believes, after reasonable inquiry, that at the time of each of the
agreements referred to in subparagraph (i)
a. (A) each selling security holder party to the agreement had full knowledge and
access to information concerning the offeree issuer and its securities, and
b. (B) any factors peculiar to a selling security holder party to the agreement,
including non-financial factors, that were considered relevant by that selling
security holder in assessing the consideration did not have the effect of reducing
the price that would otherwise have been considered acceptable by that selling
security holder,
5. (v) at the time of each of the agreements referred to in subparagraph (i), the offeror did not
know of any material information in respect of the offeree issuer or the offeree securities
that
a. (A) had not been generally disclosed, and
b. (B) if generally disclosed, could have reasonably been expected to increase the
agreed consideration,
6. (vi) if any of the agreements referred to in subparagraph (i) was entered into with a selling
security holder by a person other than the offeror, the offeror reasonably believes, after
reasonable inquiry, that at the time of that agreement, the person did not know of any
material information in respect of the offeree issuer or the offeree securities that
a. (A) had not been generally disclosed, and
b. (B) if disclosed, could have reasonably been expected to increase the agreed
consideration,
7. (vii) the offeror does not know, after reasonable inquiry, of any material information in
respect of the offeree issuer or the offeree securities since the time of each of the
agreements referred to in subparagraph (i) that has not been generally disclosed and could
reasonably be expected to increase the value of the offeree securities;
vi. Rules and Policies
vii. (c) Auction all of the following conditions are satisfied:
1. (i) the insider bid is publicly announced or made while
a. (A) one or more bids for securities of the same class that is the subject of the
insider bid have been made and are outstanding, or
b. (B) one or more proposed transactions are outstanding that
i. (I) are business combinations in respect of securities of the same class
34 / 43

2.

3.

that is the subject of the insider bid and ascribe a per security value to
those securities, or
ii. (II) would be business combinations in respect of securities of the same
class that is the subject of the insider bid, except that they come within the
exception in paragraph (e) of the definition of business combination and
ascribe a per security value to those securities,
(ii) at the time the insider bid is made, the offeree issuer has provided equal access to the
offeree issuer, and to information concerning the offeree issuer and its securities, to the
offeror in the insider bid, all offerors in the other bids, and all parties to the proposed
transactions described in clause (i)(B),
(iii) the offeror, in the disclosure document for the insider bid,
a. (A) includes all material information concerning the offeree issuer and its
securities that is known to the offeror after reasonable inquiry but has not been
generally disclosed, together with a description of the nature of the offeror's access
to the issuer, and
b. (B) states that the offeror does not know, after reasonable inquiry, of any material
information concerning the offeree issuer and its securities other than information
that has been disclosed under clause (A) or that has otherwise been generally
disclosed.

(6) Issuer Bids

a. Disclosure: similar to above
(7) Valuation requirements
a. Exemptions from valuation requirement; 61-101 s. 3.4
3.4 Exemptions from Formal Valuation Requirement -- Section 3.3 does not apply to an issuer in
connection with an issuer bid in any of the following circumstances:
(a) Bid for Non-Convertible Securities -- the issuer bid is for securities that are not equity securities
and that are not, directly or indirectly, convertible into equity securities,
(b) Liquid Market -- the issuer bid is made for securities for which
(i) a liquid market exists,
(ii) it is reasonable to conclude that, following the completion of the bid, there will be a market for
holders of the securities who do not tender to the bid that is not materially less liquid than the market that
existed at the time of the making of the bid, and
(iii) if an opinion referred to in paragraph (b) of subsection 1.2(1) is provided, the person providing
the opinion reaches the conclusion described in subparagraph (b)(ii) of this section 3.4 and so states in its
opinion.
(8) Related Party Transactions
a. Material change report
i. Purpose and effect of transaction
ii. Interests of every interested and party
b. If minority approval required, then information circular
i. Discussion of review process by board
ii. Number of votes excluded
iii. Other offers received within previous 24 months
c. Valuation
i. Similar requirements to above
d. Number of exemptions from valuation including
i. If fair market value of transaction less than 25 percent of market cap
ii. If transaction is in ordinary course of business (and approved by the board)
e. Minority approval required
i. Obtained from all classes of affected securities, voting separately
f. Votes of interested parties, related party of interested party or joint actors w/ above excluded
g. Exemptions from minority approval requirement
i. Fair market value not more than 25 percent

Enforcement and Public Interest Considerations

Overview
35 / 43

Securities enforcement in Canada can be distinguished by criminal enforcement (Criminal Code and quasi-criminal powers
under securities legislation), administrative enforcement, and civil enforcement.
o Only administrative enforcement provides for the provincial regulator to be the ultimate decision maker.
o The role of regulators in enforcement may change as the federal government devotes more resources to securities
enforcement. The federal government recently created the integrated market enforcement team (IMETS)
o Self-regulatory organizations also play a role in enforcement, including RS.

Investigation Powers under Securities Law Page 590

Scope of Investigation and Examination Powers
Securities statute provides regulators with a range of powers of investigation and examination. Under the OSA:
o Section 11(1) (Investigation Order): The Commission may, by order, appoint one or more persons to make such
investigation with respect to a matter as it considers expedient, for administration of securities law or market
regulation in (a) Ontario or (b) another jurisdiction
o Section 11(3) (Scope of Order): A person appointed to make the investigation may investigate and inquire into, (broad
scope to look at securities transactions, assets, and relationships of the person/company being investigated)
o Section 11(4) (Right to Examine): [documents or other things] whether they are in the possession or control of the
person or company in respect of which the investigation is ordered or of any other person or company.
o Section 12 allows the securities commission to order an examination of the financial affairs of a market participant.
These sections do not require evidence of any threshold level of suspicion on the part of enforcement staff in order to support
the request for the order.
Once an order is granted under section 11 or section 12, section 13 gives the regulator power to compel testimony or document
production: (same power as vested in the court refusal to cooperate can make one in contempt of court)
o While section 13 includes a search power, the power does not extend to the search of private residences (section
13(9)).
Safeguards for Subjects of Regulatory Investigation
There are some boundaries to the reach of OSA investigation and examination powers. The investigation order or any evidence
that arises from it is strictly confidential (16(2))
Section 17 allows the commission to disclose the information described in section 16 only if it is in the public interest.
o s.17(5) allows a court hearing a prosecution by the OSC to compel production of any of these materials and order their
release to the defendant.
Disclosure of testimony to criminal law enforcement requires the written consent of the person from whom it was obtained.
Section 18 says that testimony given under section 13 cannot be used against that person in a prosecution for an offense under
section 122.
o Requires the OSC to be strategic: if they are pursuing a section 122 action they should not interview the accused under
section 13, but if they are pursuing a section 127 action they can still interview the accused.
It is still unclear as to whether the Charter provides (section 7 and 8 reasonable expectation of privacy) applies when a
securities action is primarily penal.
o When the offence is not penal, there is not a reasonable expectation of privacy since securities are so heavily regulated
(Branch, SCC 1995).
Deloitte & Touche LLP v. OSC (2003 SCC)
Pursuant to Rule 3.3(2) of the OSC rules of practice, OSC staff is required to disclose to a defendant all relevant material in its
possession.
o OSC staff decided that the compelled material from Deloitte was relevant and therefore should be disclosed to Philip
(accused)
Staff sought an order from the OSC to disclose the information to Philip under section 17(1) and Deloitte opposed disclosure
unless and until staff could demonstrate relevance.
Issue: What is the role of the OSC in disclosing compelled testimony to defendants in an OSA section 127 proceeding? Is
disclosure to a defendant in the public interest?
Decision: The decision of the OSC to order disclosure must be made on the standard of reasonableness. Here, the decision to
order disclosure was reasonable and should be upheld.
The OSC reached its decision by considering the relevance of the information. Factors applied to determine relevance included:
o Nature of the allegations
o That the evidence had been produced subject to an OSC investigation
o Indices provided by Deloitte in describing the files
o Representations by OSC staff that at least 2 of the defendants indicated they planned to challenge the credibility of
Deloitte in the s.127 proceeding
36 / 43

Some of the compelled material would be relied on by Staff in presenting its case.

Criminal Code Enforcement Page 595

It is a federal offence to use a false prospectus, as well as buying and selling to engage in the appearance of market activity, and
insider trading
Relevant sections include sections 380-384 and section 400.
o Section 380(1) makes it an indictable offence to defraud the public of more than $5000.
o Section 380(2) makes it an offence to manipulate the market price of securities with the intent to defraud.
o Section 382 makes it an offence to manipulate stock exchange transactions to create false or misleading appearances of
active public trading.
o Section 400 makes it an offence to make a false prospectus with the intent to defraud
Bill C-13 recently increased maximum sentences for some offences from 10 to 14 years and also included aggravating
circumstances which may make the violation more serious.
New offence for insider trading and tipping under section 382.1. However it will be very difficult to prosecute someone under
this new offence due to knowingly standard.
Reality is that people are hardly ever prosecuted under the criminal code, however it signals that lawmakers take securities
laws very seriously
Quasi- Criminal Offences OSA Section 122 (Page 597)
122(1) Every person or company that,
o (a) makes a statement in any material, evidence or information submitted to the Commission, a Director, any person
acting under the authority of the Commission or the Executive Director or any person appointed to make an
investigation or examination under this Act that, in a material respect and at the time and in the light of the
circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or
that is necessary to make the statement not misleading;
o (b) makes a 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 or
furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances
under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary
to make the statement not misleading;
o (c) 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.
Section 122(2) gives an accused person a due diligence defence if the violation was not known and could not have been known
when committed if reasonable efforts were made.
Note also section 122(3): Directors and officers can be prosecuted for acquiescing in an offence, even where the company is not
even being prosecuted.
Note section 122(4) re insider trading
o Additional sanctions for contravention of section 76, the insider trading rules.
Note update re offences in section 126.1 & 126.2
o New offences for fraud and market manipulation
In general, there has not been a lot of enforcement actions under section 122 due to the higher criminal burden of proof,
however more enforcement is now occurring.
General prosecution under section 122:
R. v. Zelitt (AB 2003) Page 599
Facts: Zelitt lied that his company was developing 3D imagining technology.
Decision: Zelitt is liable. In order for untrue statements or omissions to be misrepresentations within the meaning of the
securities act, the must relate to a material fact as defined by the Act. Here, his statements were material facts and were
misleading.
o Ie must have a significant effect on the market price or value of the securities.
Zelitt was sentenced to 4 years in prison, a fine of $1.85 million, and prohibited in trading in securities or serving as a director
or officer for 25 years.
o Court considered deterrence, denunciation, and protection of the public
o Contributing factors: behaviour, breach of trust, magnitude and impact of violation
Insider Trading Prosecutions under section 122(4)
37 / 43

R. v. Harper (2003 ON CA) Page 601 (Rankin also a 122 enforcement)

Issue: Section 122 makes an accused liable to a minimum fine equal to the profit made or loss avoided by the person or
company by reason of the contravention
o On sanction, Harper argued that the prosecution had to demonstrate that the loss avoided was by reason of his
contravening insider trading rules (page 601)
Decision: Court of appeal said that you dont need to show that loss avoided was by reason of violation. Once the prosecution
has proven that the insider trading rules were violated, and that a loss was avoided, that is sufficient.
o Direct causal linkage between nature of non-disclosure and fall or rise of stock price is not needed and not consistent
with scheme or object of Act
Civil Enforcement Powers Section 128 - Page 604
Provincial commissions rarely seek civil remedies from the court for securities law infractions, which is different from the US,
where civil penalties are increasingly common.
Section 128 of the OSA allows the OSC to apply to the Ontario court for a declaration that a person or company has not
complied with or is not complying with Ontario securities law.
If a court makes such a declaration, they can order compliance with the law, rescinding transactions, requiring compensation or
restitution, payment of damages, disgorgement, and the rectification of past non-compliance. Remedies are available in addition
to section 122 or 127 remedies, though it is inconceivable for the OSC to pursue them all.
Administrative Enforcement Powers Section 127 - Page 605
Section 127 is within the power of the regulators to apply. There is not a criminal standard of proof. Regulators may make
orders if it is in the public interest to make them.
o Public interest is interpreted in accordance with the regulators statutory mandate.
Making an order in the public interest does not require a breach of securities law, and it is also possible to make an order where
there is quasi-criminal action on same matter.
o Making an order where there has also been a quasi-criminal action does not infringe on the accused protections against
double jeopardy.
o See In the Matter of Glen Harvey Harper (2004) Harper prosecuted under 122 for insider trading, and also banned
from officer or director for 15 years under 127.
Hearings by provincial regulators are typically governed by rules of civil procedure.
The sanctions of section 127 are far less severe than sanctions under 122.
o It was only in the past few years that the regulators even got the power to issue fines
Variation in the Subject Matter of Public Interest Orders: Condon Study Page 605
Different provinces exercise their section 127 powers differently:
o BC is focused on the sale of unregistered securities
o Ontario is focused on bad behaviour of registrants
Regulators across the country uniformly define the public interest that section 127 is protecting as the integrity of the markets
and the protection of investors in the market.
o Capital market efficiency, while important, has not been as much of a priority or factor when exercising discretion.
Recent Examples of Circumstances in which Enforcement Orders are Made Page 607
Re Dix Jr. (2001 BCSCD) Page 607: Distribution of securities to elderly people in their homes without a prospectus or any
independent third party review or oversight.
L.O.M Medical (2004 BC): President of medical products company forced to pay $100K fine and banned from trading for 10
years for selling $2 million in securities without a prospectus.
Re WH Stuart Mutuals (2000 ASC): Stuart (a dealer) circumvented securities laws and was given a lifetime ban for a first
offence for general deterrence purposes
Other examples: improper exemption use, failure to file documents in accordance with CD
In the Matter of Nortel (2004 OSC) Page 610: Cease trading order imposed on insiders until Nortel deals with failure to file
required documents (quarterly reports).
Enforcement Actions against Lawyers Page 611
Under section 127, the OSC can reprimand a person or company. Wilder found that lawyers can be reprimanded, however this
is very controversial.
Wilder v. OSC (2000 ON GD) Page 612
Facts: Judicial review of the OSC decision, which sanctioned the lawyer who was responsibility for Filing YBM documents
with the OSC. OSC alleges that Wilder made a misleading misstatement of material facts.
38 / 43

Issues: does section 127 have the power to reprimand a lawyer, or should the Law Society be the only entity that can discipline
lawyers?
Decision: lawyers are subject to 127 as a person. Otherwise, the OSC would be unable to regulate capital markets
appropriately (paragraph 20).

The Use of the Public Interest in the Absence of a Breach of Statute Page 616
Very controversial: can the securities regulators make public interest orders absent an actual breach of securities law? In BC,
there must be actual breach of law in order to set down a fine
Re Canadian Tire Corp (1987 OSC) Page 616
Establishes the proposition that the securities commission can exercise its public interest powers even where the matter at issue
does not involve a breach of the requirements of Ontario securities law.
Facts: Involved a takeover transaction. Transaction designed to prevent coat-tail provision from triggering, which meant most
shareholders did not get to enjoy the substantial premium of the bid. Bid, while legal, privileged group of control block above
others.
Issues: Is this an abusive transaction that should be prevented in the public interest under section 127 of the OSA (cease trading
order)?
Decision: Securities commission says that this is an abusive transaction. While there is technical conformity to the rules, the
commission protects the interest of non-voting shareholders. See excerpts starting at page 619.
o The Legislature deliberately has given the commission a broad and unfettered power to move quickly to intervene in
the capital markets to stop a trade or a transaction which it deems to be contrary to the public interest
o The decision points out that the market is infinitely complex and dynamic, and that it is not feasible to have explicit
rules for everything. That is why the regulator is given the power to rule on activities that are not actual breaches.
o Public interest, page 622: If abusive transactions such as the one in issue here, and this is as grossly abusive a
transaction as the Commission has had before it in recent years, are allowed to proceed, confidence in our capital
markets will inevitably suffer and individuals will be less willing to place fund in the equity markets
The Test: for the regulators to intervene absent an actual breach, there must be clear abuse of the markets, not just unfairness.
The abuse must also raise a public interest issue.
o This rigorous test is to ensure that there is not undue uncertainty of regulator intervention, which could also harm the
markets.
Note that this could also be dealt with by seeking an oppression remedy under corporate law, but securities regulators were used
since a remedy could be reached much sooner.
o The court says that it does not need to consider corporate law when making an order, since it is more generally
concerned with market operation. Evidence of breach of fiduciary duty cannot justify an order, but it is evidence that
can support an order.
Attempts to Structure the Discretion of Regulatory Officials Page 626
With limited enforcement resources, regulators have set out criteria about when to pursue investigations and full hearings. This
is the risk regulation approach
OSC Staff Notice 11-719 (2002): guidelines for pursuing the potential breaches that appear to have caused (or may continue
to cause) the greatest harm to the integrity of Ontarios capital markets, taking into account likelihood of successful resolution
and resources required to reach resolution.
o Categories of Offences: Abusive trading (insider trading and market manipulation), abusive sales, deficient disclosure,
failure to file, takeover bid issues, registrant misconduct, and sale of unregistered securities.
o Selection Criteria: nature of the activities, impact, urgency, investigative value, other factors, and diminishing factors.
Sanctions Available in Connection with Public Interest Orders Page 628
Asbestos v. OSC (2001 SCC) Page 629
Regulators are required to keep in mind both the purposes of their governing statutes and where they are enumerated. Regulators
are required to act in accordance with the philosophy underlying regulatory legislation in general, which is to protect societal
interests rather than punish individual faults (protective and preventative rather than punitive)
Court agreed that Quebecs actions were abusive and manifestly unfair to minority shareholders. However shareholders were
not materially misled (asbestos was a speculative investment), that prevention would not have been a factor in a ruling, and that
the transactional connection was insufficient to trigger section 127 sanctioning.
Paragraph 41: it is an error to focus only on the fair treatment of investors when deciding whether to exercise section 127, and
the analysis should also focus on overall market efficiency and public confidence in the capital markets.
Section 127 is protective and preventative rather than punitive (though deterrence not really considered, even though it may
have been relevant if applied generally to markets)
39 / 43

Re Cartaway Resources Corp (2004 SCC) Page 636

Decision: General deterrence is a basis for making an order was in accordance with the protective and preventative orientation
of securities regulatory enforcement.
o Conventional wisdom is that market players are rational actors, and if they see other players are sanctioned, this will
shape their behaviour
The key is to note the distinction between general deterrence (of the public) and individual deterrence (targeting the individual
wrongdoer)
The court notes that unreasonable weight given to a particular factor, including general deterrence, will render the order itself
unreasonable.
o Example of unreasonableness would be a capricious or vexatious order
Convergence and Variation in Sanctioning Orders Page 641
Most provinces have the power to order cease trading, and while most provinces can levy fines, they may not all be able to levy
the same maximum amounts.
Few regulators have the power to order profits disgorged (Ontario has this power under 130(1)(10)
Only Manitoba has the power to order restitution to investors.
CSA Staff Notice 57-301 was an innovation in 2002 that allowed for regulators to issue management-only CTOs. Before this
notice, CTOs could only be made on all securities of an issuer. See Nortel as an example.
Judicial Review of Regulatory Decisions Page 645
Donnini v. OSC (2003 ON) Page 645
Decision: the court disagrees with many of the actions of the regulator, and the 15-year restriction on trading that it imposed.
Court reduces penalty to 4 years.
o The court criticized the court for not levying a penalty which was more in line with its previous decisions. Stare
Decisis does not have to rigorously followed by tribunals, but it must not be completely ignored in order for there to be
some predictability.
o The court criticized the tribunal for not explaining their claim for costs of $186K
Note that when a party is sanctioned under section 127, they can be responsible for OSC costs of
investigations, expert witness, staff, etc. These are levied under 127.1(4)
While courts must show deference to tribunals, but this does not mean that a court must accept whatever a tribunal concludes.

122. (1) Every person or company that,

(a) makes a statement in any material, evidence or information submitted to the Commission, a Director, any person acting under the
authority of the Commission or the Executive Director or any person appointed to make an investigation or examination under this
Act that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or
does not state a fact that is required to be stated or that is necessary to make the statement not misleading;
(b) makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information
circular, take-over bid circular, issuer bid circular or other document required to be filed or furnished under Ontario securities law
that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or
does not state a fact that is required to be stated or that is necessary to make the statement not misleading; or
(c) 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. 1994, c. 11, s. 373; 2002, c. 22, s. 181 (1).
Orders in the public interest
127. (1) The Commission may make one or more of the following orders if in its opinion it is in the public interest to make
the order or orders:
1. An order that the registration or recognition granted to a person or company under Ontario securities law be suspended or
restricted for such period as is specified in the order or be terminated, or that terms and conditions be imposed on the registration or
recognition.
40 / 43

2. An order that trading in any securities by or of a person or company cease permanently or for such period as is specified in the
order.
2.1 An order that acquisition of any securities by a particular person or company is prohibited, permanently or for the period
specified in the order.
3. An order that any exemptions contained in Ontario securities law do not apply to a person or company permanently or for such
period as is specified in the order.
4. An order that a market participant submit to a review of his, her or its practices and procedures and institute such changes as may
be ordered by the Commission.
5. If the Commission is satisfied that Ontario securities law has not been complied with, an order that a release, report, preliminary
prospectus, prospectus, return, financial statement, information circular, take-over bid circular, issuer bid circular, offering
memorandum, proxy solicitation or any other document described in the order,
i. be provided by a market participant to a person or company,
ii. not be provided by a market participant to a person or company, or
iii. be amended by a market participant to the extent that amendment is practicable.
6. An order that a person or company be reprimanded.
7. An order that a person resign one or more positions that the person holds as a director or officer of an issuer.
8. An order that a person is prohibited from becoming or acting as a director or officer of any issuer.
8.1 An order that a person resign one or more positions that the persons holds as a director or officer of a registrant.
8.2 An order that a person is prohibited from becoming or acting as a director or officer of a registrant.
8.3 An order that a person resign one or more positions that the person holds as a director or officer of an investment fund manager.
8.4 An order that a person is prohibited from becoming or acting as a director or officer of an investment fund manager.
8.5 An order that a person or company is prohibited from becoming or acting as a registrant, as an investment fund manager or as a
promoter.
9. If a person or company has not complied with Ontario securities law, an order requiring the person or company to pay an
administrative penalty of not more than $1 million for each failure to comply.
10. If a person or company has not complied with Ontario securities law, an order requiring the person or company to disgorge to
the Commission any amounts obtained as a result of the non-compliance. 1994, c. 11, s. 375; 1999, c. 9, s. 215; 2002, c. 22, s. 183
(1); 2005, c. 31, Sched. 20, s. 8.
Terms and conditions
(2) An order under this section may be subject to such terms and conditions as the Commission may impose. 1994, c. 11, s. 375.
Cease trading order
(3) The Commission may make an order under paragraph 2 of subsection (1) despite the delivery of a report to it under subsection
75 (3). 1994, c. 11, s. 375.
Exception
(3.1) A person or company is not entitled to participate in a proceeding in which an order may be made under paragraph 9 or 10 of
subsection (1) solely on the basis that the person or company may be entitled to receive any amount paid under the order. 2004, c.
31, Sched. 34, s. 5.
Hearing requirement
41 / 43

(4) No order shall be made under this section without a hearing, subject to section 4 of the Statutory Powers Procedure Act. 1994, c.
11, s. 375.

s Applications to court
128. (1) The 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. 1994, c. 11, s. 375; 2006, c. 19, Sched. C, s. 1 (1).
Prior hearing not required
(2) The Commission is not required, before making an application under subsection (1), to hold a hearing to determine whether the
person or company has not complied with or is not complying with Ontario securities law. 1994, c. 11, s. 375.
Remedial powers of court
(3) If the court makes a declaration under subsection (1), the court may, despite the imposition of any penalty under section 122 and
despite any order made by the Commission under section 127, make any order that the court considers appropriate against the
person or company, including, without limiting the generality of the foregoing, one or more of the following orders:
1. An order that the person or company comply with Ontario securities law.
2. An order requiring the person or company to submit to a review by the Commission of his, her or its practices and procedures and
to institute such changes as may be directed by the Commission.
3. An order directing that a release, report, preliminary prospectus, prospectus, return, financial statement, information circular,
takeover bid circular, issuer bid circular, offering memorandum, proxy solicitation or any other document described in the order,
i. be provided by the person or company to another person or company,
ii. not be provided by the person or company to another person or company, or
iii. be amended by the person or company to the extent that amendment is practicable.
4. An order rescinding any transaction entered into by the person or company relating to trading in securities including the issuance
of securities.
5. An order requiring the issuance, cancellation, purchase, exchange or disposition of any securities by the person or company.
6. An order prohibiting the voting or exercise of any other right attaching to securities by the person or company.
7. An order prohibiting the person from acting as officer or director or prohibiting the person or company from acting as promoter of
any market participant permanently or for such period as is specified in the order.
8. An order appointing officers and directors in place of or in addition to all or any of the officers and directors of the company then
in office.
9. An order directing the person or company to purchase securities of a security holder.
10. An order directing the person or company to repay to a security holder any part of the money paid by the security holder for
securities.
11. An order requiring the person or company to produce to the court or an interested person financial statements in the form
required by Ontario securities law, or an accounting in such other form as the court may determine.
12. An order directing rectification of the registers or other records of the company.
13. An order requiring the person or company to compensate or make restitution to an aggrieved person or company.
14. An order requiring the person or company to pay general or punitive damages to any other person or company.
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15. An order requiring the person or company to disgorge to the Minister any amounts obtained as a result of the non-compliance
with Ontario securities law.
16. An order requiring the person or company to rectify any past non-compliance with Ontario securities law to the extent that
rectification is practicable. 1994, c. 11, s. 375.

Interim orders
(4) On an application under this section the court may make such interim orders as it considers appropriate. 1994, c. 11, s. 375.

Liability for misrepresentation in circular

131. (1) Where a take-over bid circular sent to the security holders of an offeree issuer as required by Part XX, or any notice of
change or variation in respect of the circular, contains a misrepresentation, a security holder may, without regard to whether the
security holder relied on the misrepresentation, elect to exercise a right of action for rescission or damages against the offeror or a
right of action for damages against,
(a) every person who at the time the circular or notice, as the case may be, was signed was a director of the offeror;
(b) every person or company whose consent in respect of the circular or notice, as the case may be, has been filed pursuant to a
requirement of the regulations but only with respect to reports, opinions or statements that have been made by the person or
company; and
(c) each person who signed a certificate in the circular or notice, as the case may be, other than the persons included in clause (a).
R.S.O. 1990, c. S.5, s. 131 (1); 2004, c. 31, Sched. 34, s. 8 (1).
Same
(2) Where a directors circular or a directors or officers circular delivered to the security holders of an offeree issuer as required
by Part XX, or any notice of change or variation in respect of the circular, contains a misrepresentation, a security holder has,
without regard to whether the security holder relied on the misrepresentation, a right of action for damages against every director or
officer who signed the circular or notice that contained the misrepresentation. 2004, c. 31, Sched. 34, s. 8 (2); 2007, c. 7, Sched. 38,
s. 9 (1).
Idem
(3) Subsection (1) applies with necessary modifications where an issuer bid circular or any notice of change or variation in respect
thereof contains a misrepresentation. R.S.O. 1990, c. S.5, s. 131 (3).
Defence
(4) No person or company is liable under subsection (1), (2) or (3) if the person or company proves that the security holder had
knowledge of the misrepresentation. R.S.O. 1990, c. S.5, s. 131 (4).

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