Law 463 Securities Regulationsee bcsc.bc.ca before exam

In class notes:

9/18- Canada is one of few modern nations to have non-federal securities regulation- Through time, regulation has evolved as a provincial domain.- R v W. Mackenzie Securities Inc 1966 Man CA established that if you trade in a

province, you should be registered in that province. Customer’s province has jurisdiction.

- Multiple Access v McCutcheon Provincial legislation is allowed to stand where it doesn’t contradict Federal legislation.

Various proposals for regulatory reform:Wise persons committee:

- proposal for a single regulator/single regulatory act- Canada is perceived internationally as a country that is weak on enforcement of

regulatory standards, this proposal is meant to change that.- problem: regulators are now self-funded, what if they couldn’t afford to be under

the new proposal?- bonus: it would eliminate the inefficiency of 10 offices doing the same thing in

ten different provinces.

CSA- An umbrella group to which all provincial regulators belong, develop policy

together- Uniform Securities Legislation Project: They came up with a platform legislation

that incorporates stuff that everyone agrees on. This is still just a proposal.- 4 areas that push the envelope:

o The power of a regulator to delegate decision making abilities to anothero Streamlined multijurisdictional registrationo Civil liability for 2ndary market participantso Streamlined Act.

Passport system- Company that registers only needs to register in one jurisdiction the “primary

regulator” then that company can go to “host regulators” who accept the registration in the other province.

- ON doesn’t like this proposal because the majority of trading is in ON.- Enforcement is an issue: primary/host/both who gets involved?- In May, BC changed its regulatory act to make the passport system closer to real

o language closer to the acts of other provinceso Power to delegate authority to other regulators

- This seems like the most popular system except for ON’s reluctance

9/20

- Each province has broad statutes allowing the right to regulators to do most of their own policymaking

- Some of these policies are then challenged- Ainsley Financial v Ontario: OSC’s right to regulate penny stocks was

successfully challenged, the problem is that the legislature took too long to regulate it themselves.

- Pezim Defined the role of commissioners, said they have no law making authority- As a result of these two cases, the govt started a notice-comment type of system.

They let regulators give notice of their proposed reforms and then the govt has 60 days to comment if they don’t like what they see.

- Most rules are now NIs or MIs- A companion policy statement aids with the interpretation of most instruments- BCSC able to give blanket orders, which differ from regular rules b/c there is no

notice-comment period. If something arises several times with various companies, BCSC develops a policy for each single instance of that particular thing.

- Investment Dealers Association:o National associationo Aims to protect investorso Regulates the actions of dealerso provides industry educationo Reprimands, fines, suspension and expulsion are all enforcement methods o No transparency to their investigations, people have problems with this,

especially since Investment dealers fund them.- Mutual Fund Dealers Association

o National, self regulatoryo regulates memberso Aims to protect investorso Standards for members are high, reviews occur and sometimes even

investigationso Investor protection fund (for if your dealer screws you).

- Market Regulation Services Inc. regulator owned by TSX is this fair?

9/25

- FOFI must contain a cautionary note that its not a crystal ball in order to be free of liability

- Can’t distribute a security without a prospectus

9/27

- Waiting period: between receipt for preliminary prospectus and receipt for final prospectus, there is a chance to vet your prospectus (meaning a chance to check it out and make any necessary comments etc.)

- Waiting period allows the public a chance to reflect- Ontario has a risk-based review:

o basic review accounts for regular stuff like prospectuso detailed review Basic plus some accounting stuff etco Issue oriented review Search for a specific issue

10/2

- Common law stance: innocent misrepresentation leads to rescission but not damages

- Anyone signing a prospectus and anyone quoted in it are liable for misreps.- Pearson v Boliden BCCA 2002 reviewed concept of lex loci delicti which holds

that the laws of the place where the wrong occurred are the laws that apply. It was determined that this principle doesn’t apply to securities regulation. Secondary market purchasers were out of luck, b/c s. 131 of BCSA was interpreted to mean they had nothing to do with representations made in the prospectus

- Interestingly, OSA part 23.1 allows secondary market purchasers to sueo Also specifies that there are three new causes of action for disclosure

violations: misrepresentation in public documents misrepresentation in public statements by a person with

real/apparent knowledge Timely disclosure

o You can sue The issuer Officers Directors Influential persons (ie people with 20% + of shares) Experts Spokespersons

- Core documents (ie prospectus etc) subject to stricter liability than other documents which are not as fundamental to the securities market

- Must convince a court that the case has a reasonable chance of success before they will allow it. Loser pays costs. Liability is proportional

10/4

- Enron scandal: they created shell companies to whom they sold assets, then it looked like the shell had debt, but Enron had profit

- Worldcom tallied regular expenses like paperclips as assets, their asset overstatement was as high as $11b.

- Channel stuffing: A practice where manufacturers force retailers to buy stuff from them at the end of the month in order to accentuate monthly profit statements. Problem is, the stuff can be returned after the quarter, its not really a profit at that point.

- Continuous disclosure requirements help build a case against such fraud.- A public company with continuous disclosure obligations is called a reporting

issuer.Canadian Accounting Standards Board sets GAAP, GAAS, GAAT etc.- International Financial Reporting Standards IFRS are set by the IASB. Most of

the world is gravitating toward these practices.- MD&A is a plain language, assailable document that’s supposed to give you the

goods without a lot of impenetrability. - Annual report promotional document, no required info. Annual Information

Form Required form, involves negative info etc.

Re Pacific Papers

- This was a company that needed 60% of voting shares in order to accomplish a proposal. They solicited 60%, but some dude with a large interest wasn’t consulted, he rose a stink.

- The court said you can’t inform some but not others. PP got away with it, however, since the proxy voters can change their minds at any time. Thus, the large interest guy had every opportunity to sway the voters back.

Re Cambior

Ratio: Can’t advertise in waiting period in order to further a trade. You can tell everyone to look at your preliminary prospectus though. Orally pitching your idea is okay too, but not advertising in papers, TV, radio etc.

Adverse selection Two similar companies, one’s more expensive, they seem similar to an untrained eye, so the untrained eye buys the cheaper stock. Others follow and suddenly, the crappy company is worth more, and the good one worth less. In order to deal with this effect, regulators require disclosure of various info to the public.

Arbitrage All investors aren’t rational, but the ones who know what they’re doing should keep the market on track

Belief Bias A predisposition to believing something makes you prone to noticing examples of it, while ignoring or playing down counterexamples

Call option you pay money, to guarantee you can buy a specific number of shares at a certain price on a certain day. (get this if you think the market rate will be more than your deal rate on that day)

Derivative security gives you value derived from an index like a commodity or an exchange’s value

Efficient Market Theory 3 forms:

1. Weak form: no pattern to stock market

2. Semi-strong form: Market reacts instantly to public info3. Strong form: Market reacts instantly to public and private info

Endowment effect People tend to slightly overestimate the value of their possessions, thus hold on to them/sell them for a slightly high price, thus all stock prices are slightly elevated

Fundamental analysis look at returns and risks[contrast with Technical Analysis analysis of patterns in trading etc]

Fundamental vs. Informational efficiency market reactions to new info not always indicative of real value

House money effect Feeling like you’re up, so it doesn’t matter as much if you lose it

IOSCO International Organization of Securities Commisioners. Trying to harmonize regulation internationally. Not binding, and thus far not too successful.

Income Trust A trust holding income producing assets, there are unit holders who benefit from the income in monthly or quarterly payments. The problem is if the companies go bankrupt, you’re not a shareholder and thus you can’t get any piece of their assets.

Primary market

1. bought deal- shares issued to an underwriter who resells the shares to investors- This helps avoid market price fluctuations during the period when the prospectus

is being prepared.

2. Direct issue- No underwriter, issuer sells directly

Agency agreement:- shares not sold to UW- UW promises to try to sell

Standby UW- UW buys a chunk, tries to be an agent for the rest

Best efforts underwriting- In this scenario, the underwriter agrees to act as an agent for the security issuer

without actually buying the securities.

Syndicated underwriting- Really big issue, thus lots of risk, UW solicits other UWs to share risk

Over the counter trading:- when securities don’t meet standards of a SE, other exchanges exist that don’t

require standards, they just trade in securities while making no promises about them

Margin trading:- brokers loan creditworthy investors part of the price of a purchase. They are

usually limited as to what %age they can lend.

Short selling:- promising shares at a specific price even though you don’t own the shares yet. Then you’ve gotta find them. If price drops, you make $, if price goes up you make $.

Representative bias People tend to see the most recent action as their overall trend, ie a lucky month makes them forget 5 years of bad luck

Secondary market

- Stock exchanges etc are secondary markets.- Rules emerged to govern trading at markets in order to garner image. Image then

began to dictate prices, so exchanges would charge for a listing.

Open outcry exchange method

- I call my broker (called a client broker) and tell him to buy/sell something. He calls the floor broker, who tells the floor trader, who goes to a specialist (some guy who sits on the floor of the exchange and only deals in a few different stocks) who either matches a buyer with a seller, or buys/sells himself from a company account

- You used to need to own the physical stock certificate, with your name on it. Clearing houses changed that, by holding the stocks, and just keeping records of transactions. They own the shares, and you pay them to become the ‘beneficial owner’ so that we don’t need to reprint a certificate for each transaction.

- This can cause problems with voting, etc. But there are ways around those problems.[Put option Same as call option, but selling instead of buying]

Short form prospectus:

- For national companies that have lots of info out there already, if you just want to change format or list something else, you don’t need to publish all that info again.

-

Snake bite effect Once bitten twice shy, applies to investors

Systematic risk hurts a group of stocks, for instance a spike in oil prices hurts airlines[ contrasted with unsystematic risks anomalies only affecting one company]

Global Research Analyst Settlement

Ratio: If an advisor has a bias toward or against a certain stock, that info must be posted with that advisor’s recommendation for that stock. Because a bank can loan a business money and also make buy/sell recommendations, they must show two independent reports in addition to their own report.

YBM Magnex

Facts:Issue:Dicta: CEO and CFO must sign a prospectus saying that everything is true. UW only has to say its true as far as he knows.Ratio:

Sources of securities law:

Provincial securities actsLieutenant GovernorSelf regulation (since 1994, under statutory authority to make rules)

- Theses rules are subject to government authority, but they have largely replaced the LGs role in making regulations

- Some provinces also require each rule to be shown to a government guy who then has a period during which to object, after which the rule stands.

- In BC, Minister’s consent is required to pass or repeal a rule.National instruments

- agreed to by all members, but still not binding legallyPolicy statements

- These indicate how the commissions (who issue the statements) interpret legislation

- Securities Commissions in Ontario and Saskatchewan have been expressly given the power to issue policy statements with a “policy” defined as

a written statement of the Commission of (i) principles, standards, criteria or factors that relate to a decision or exercise of discretion by the Commission or the Director under this Act, the regulations or the rules;(ii) the manner in which a provision of this Act, the regulations or the rules is interpreted or applied by the Commission or the Director; or (iii) the practices of the Commission or administrator in carrying out their responsibilities under the Act.

Notices and communiqués:- Securities boards distinguish between documents developing policy and

documents stating in certain language what their policy is.Memoranda of Understanding (MOUs)

- When commissions try to clarify among themselves, their clarification documents must be sent to the minister for approval.

Rulings by the commissions - these can be appealed in court forming more rigid laws

Blanket orders- When the SC makes an order that applies to situations that arise frequently, these

are called blanket orders, and are intended to pertain to this situation every time it arises.

Bulletins and websitesStock exchanges self regulation

- Stock exchanges make their own rules about conduct/threshold standards etc.Other self regulators

- Investment Dealers Association of Canada must be joined in order to be an investment dealer, they have rules.

- Provincial authority must recognize a stock exchange in order to allow it to do business

Securities commissions

- Securities acts of most provinces create two-tiered securities commissionso first tier: a panelo Second tier: a commissioner

Pezim SCC 1992

Facts: Company finds gold, stocks soar. Find second tests not so promising. Insiders sell, then disclosure, then the stocks plummet. Analysis: Material change: a change in business, operations or capital that is reasonably likely to affect market price. Mat fact: anything that could affect mkt price.Ratio: Assess using the ‘market impact test’: Would a reasonable investor consider this info important?

- Some people want the stricter US test, but most countries do the Canadian version- Best practices as a result of NP 51-201:

o Establish a corporate disclosure policyo Disclose by press releaseo Maintain website, don’t allow chatrooms etc.o authorize spokespeopleo Adopt an IT policy, including blackout period.

10/16

Reporting issuer: One with continuous disclosure requirements. Non-reporting issuers are sometimes exempt.“need to know test”“common bonds test”

- Ralston Purina: Company offers shares only to employees. Court says that the employees still needed to know prospectus type info. Thus, it’s still a public sale.

- Piepgrass: Guy says that previous relationship with clients waives his obligation to disclose to them now. Court disagrees. This only works for family.

- Ways to sell in a closed system:o Within the closed system (ie to exempt purchasers)o Issue a prospectus (thus unclosing the system)o Resale ruleso Apply to Securities Commission for an exemption

- Eron Mortgage: Pyramid scheme of investment with no actual property to invest in.

Stephen Tsoi article:

- Proposes an overhaul of the regulatory regime where buyers, not sellers, are regulated according to their relative levels of expertise

- This would allow quick access to stocks without having to wait between prospectuses, especially for the top bracket of investor.

- Investing licences would be required

10/18

- Canadian Well Known Securities Issuers (C-WKSIs) Some want to see them elevated to a different status from other issuers. They also suggest making the term ‘accredited investor’ apply to those who know a lot and those who seek professional advice.

- Capital raising exemptions to prospectus requirement: rights offerings where a current owner is offered more shares (Commision must be alerted to sale so they can satisfy themselves that there is no new material info). Also plans where dividends are reinvested into more shares.

- “sophisticated investors” are also exempt. This includes charities who have been advised on investing and people worth $5m, or $1m liquid or claimed $200k net per year for two straight years.

- All these categories and those others in NI 45-106 have hold periods attached in order to prevent backdoor underwriting.

- During a takeover bid, the TOB circular gives enough info that no prosp req’d.

10/23

- Some argue that insider trading should be legal for a number of reasons:o Gets info to market quicker

o Just one more advantage of working at a firmo Fiduciary duty = ample SH protection, no need for more

- Its okay to engage in IT when the info is disclosed or not of material importance- After becoming an insider, you must file a report within ten days, and another

report within ten days of each transaction. Exemptions are possible.- 4 factors to making a trade illegal:

o Special relationship with the reporting issuero Transactiono With knowledge of material fact/changeo Information not generally disclosed

- BCSA s 155 defines penal sanctions- Thinking reasonably that it was generally disclosed is the only defence.

Laura Benny Article (on call)

- Study of effects of IT laws in 33 countries- More stringent laws = more accurate stock prices- More liquidity in stock market = more widely dispersed ownership of shares- Absent IT laws, you would need large investors to monitor, this would

concentrate ownership- Stricter laws are the best regulation method

10/25

- Federal or Provincial Crown can prosecute- Lots of ‘facial compliance’ or ‘miming’ alluded to by critics- Some argue against extending criminal liability to corporations. They argue that

the entire purpose of a corporation is to put arm’s length between you and it. Why punish shareholders who don’t know of the crime?

- Defences to IT charges:o BCSA 86 (4) Showing on a balance of prob that there was a reasonable

belief the info had been disclosedo BCSA 86 (1) Defines the 4 elements of illegal insider trading (see my

presentation notes)- Fingold: trader claimed to believe the bad news would be okay, trading thus not

based on bad news. Court believed him- Harper: Harper was an insider at a mining company. He kept publishing positive

test results, but not negative ones. All the while he was selling his own shares. Court said there was no reasonable excuse for these actions.

- Royal Trustco: RT didn’t want Campo to take them over, tried to find other companies to take them over. They solicited other companies and gave them lots of material info. This was not in the normal course of business.

- Doman v Benet: Dudes sell $5.9m based on insider info, then start moving on the info. This is about as wrong as possible.

11/1

- Bust up fee/break fee: give one bidder financial guarantee in the event of their bid failing, ie ‘if you don’t win with this bid, our company will pay you $1m.’ That gives a disincentive to all but your favourite bidder.

- Poison Pill: Needs SH approval- Tactics must be reasonable responses to threats.

Producers Pipeline

Facts: PP wanted to defeat a takeover bid from Saskoil. They offered all SHs but S the ability to purchase 10 additional shares at ½ price. Also defined a permitted bid, but the definition gave an outrageous standard. No SH approval. Ratio: These were unreasonable defensive tactics. NP 62-202 defines the primary objective of TOB rules as protection of SH rights in the target company. Secondary objective: allowing open, even market for TOBs.

RE Shareholdings Inc and WIC Western International Communications Ltd et al Ontario Court General Division 1998

Facts: Canwest and Shaw are trying to buy WIC. Shaw recently acquired a 49.96% voting interest in WIC, CW is also a big SH, but not a voting SH. CW makes a $39 bid that gets turned down. Shaw negotiates, gets a $43.50 bid and entitlement to a $30m break fee and an irrevocable option to purchase radio assets (CW’s target) for $160m. CW claims oppression. WIC class A voting shares aren’t traded, class B non-voting shares are. Cathton holds 49.96% of Shaw’s 49.96% of class A shares. Canwest argued that its takeover bid was in order to give it a voice that the new owners of the voting shares couldn’t ignore. Canwest’s Class B shares carried ‘coat tail’ rights to transfer to class A shares upon change in control of the company. WIC got a committee to review CW offer, they recommended rejecting it. Same board recommends accepting Shaw’s offer. WIC then offers $30m break fee and discount purchase of major radio assets to Shaw (crown jewel). Issue: CW claims oppression as SH and bidder, WIC counters that it maximized purchase price, thus no oppression.Analysis: Adopts claim from Revlon that, if a sale is contemplated, maximization of sale price is the new obligation of the board. Break fees are acceptable when a) They induce competitive bids, b) That bid represents a better value for SHs, and c) There is a reasonable balance between its auction-promoting, and auction-ending potential. Asset options are fine too, subject to similar provisos. WIC properly organized a committee to assess the respective bids, this was the proper thing to do in order to minimize their conflict of interest. The composition of that committee, was not appropriate, it included members whose interests were at stake. Courts should defer to sec. com. on such issues, due to an imbalance of expertise.Ratio: Inappropriateness of committee was not enough to invalidate the board decisions based on its recommendations. The minutes of the meeting indicate that the board duly considered the pertinent questions. The decision can ultimately be said to have passed the maximization of SH value test. Oppression remedy only available in capacity as SH,

not as bidder. Every part of the deal was reasonable, thus as an SH Canwest profited, and has no remedy.

Royal Host v REIT

Issue: Timing, how long can you keep a poison pill effective? Ratio: Reasonable time, up to SecCom. Can’t last forever.

11/15

- going private is often done by smaller companies that can’t afford disclosure fees- Can be effected by selling all assets to a new company owned by the managers.- Buying/selling at the same time puts management in a conflict of interests.- Seccom has ability to appoint an investigator if they feel such is in the public

interest. This investigator can go to offices + other business properties, demand evidence

- s. 155 of BCSA defines quasi-criminal offences (strict liability) including prospectus, IT, TOB, Proxies

- Crown still brings the charge, but Seccom investigators alert them.- Some worries that the crown can’t actually handle such complex prosecutions.- Cartaway SCC 2004 two guys get max sentences public interest invoked.- IMETS:

o Special branch of RCMP investigating CC securities violationso Mandate: to protect capital marketso Investigate big offences, 9 employees in Canadao Still haven’t laid a single chargeo Investigations said to be very difficult

- SEC New market security measureso 3rd parties now monitor corporate compliance w securities lawo This is instead of levying huge fines, which shouldn’t be the only

compliance mechanism, this should address deeper issues than fines couldo Some say this approach intimidates too much

11/20

- Canadian regulation substantially tracks US regulation. This is an effort to make us seem credible to American investors.

- Ontario copied SOX, BC went more Euro in their approach.- America’s markets are the #1 in every way by a mile. NYSE $13.3 trillion

market cap, #2 is Tokyo at $4.6t, TSX is 1.5. NI 71-101allows American companies to pass in Canada under their home regulation. Vice versa too.

- SEC has 5 commissioners on staggered 4yr terms. Always 2 democrats, 2 republicans, the remaining guy is the same party as the President, who appoints them.

- SEC office of compliance and information exchange regulates the NYSE and the NASD

- After SOX, state AGs lost a lot of power to investigate stuff. Elliot Spitzer found some obscure Act, Donnely, to start investigating investment banks.

- Federal Reserve regulates fiscal policy, interest rates, this affects securities.

Sam on call, NYSE merger

- Many SEs thinking about merging recently, this includes LSE and NYSE- This could result in easier access to foreign markets, longer trading hours.- Securities Act ’33 deals with primary markets, Securities Exchange Act ’34 deals

with secondary markets.SEC very efficient govt agency- SEA s. 10 (b) anti fraud including across state lines. s. 13: requires accurate

bookkeeping. s. 17 Anti fraud in primary markets.

- SOX established Public Company Accounting Oversight Board. Also s. 404 requires managers to make yearly reports on controls and auditors must report on that report

- Due diligence is now on the head management, this is controversial because they don’t always know this stuff

- Companies have spent billions of dollars trying to comply with SOX- Executive compensation disclosure:

o Options back-dating: Allowing employee options to be granted on days with historically lower prices

o Investors complain they don’t get the same benefito This led to new SEC rules on director’s compensation including principle-

based disclosure, with narrative and numerical components- SEC now requires a report within two days of backdating, so its not strictly

illegal.

11/22

- Guest speaker who co-authored NI 58-101- ccgg.ca: Canadian Coalition for Good Governance. They name corporate champs

of governance each year, last two winners CTC and Enbridge.- Dey report: Offered 14 tips for good governance in ’94. TSX adopted in ‘95- “5 years to the Dey report” 1999 – talked about how governance was now going.- 2002 – Saucier report: Recommended TSX revise itself to align more with

international standards, before it could happen, SOX came into place in US.- See 58-108, 109, 110.

11/29

Anand reading:

- To restore investor confidence, we should empower SHs regarding relationships with auditors

- SH right to appoint auditors is not currently meaningful since management does it.

- SHs should have a role in selection, retention and monitoring of auditors- Replacement should be mandatory after 5 years unless SHs want the auditor to

stay on.- More active SHs greater auditor independence.

In the Wake of Enron

- Audit Committee: independent group of directors who relate with the auditors- This is a statutory creation provoked by Enron showing the old way didn’t work- The failure is attributable to small group psychology: it has been shown that small

groups exhibit a propensity for extreme decisions, thus there is a greater likelihood of risk, not a great likelihood of abandoning a course of action

Jack Coffee article

- talks at first about Cutler Speecho Cutler (SEC guy) says good corporate culture = talk the talk, walk the

walk (ie not just lip service to values or blind adherence to rules)- Create market deterrence by responding to a few specific problems highlighted by

Enron led to much bigger problems.- Auditing firms can fire consultants more easily than corps can fire auditors if

nobody wants to arouse suspicion.- The reaction to Enron affected all because of an isolated event.- The gatekeepers’ authority was undermined in Enron case, the reactions were too

strong.Gillen

Ch. 1

- Commercial paper: Carries an obligation on part of issuer to pay face value on maturity date, sometimes with interest, sometimes sold at a value lower than the face value.

- Bonds: secured interest in certain asset/assets of the corporation- Debentures: Unsecured debt.- Often bonds/debentures have a call feature, which allows the issuer to buy them

back after a certain date for a certain rate.- Preferred shares: first access to dividends, first access to assets on liquidation.

Sometimes have redemption/call provisions which allow the company to buy it back at a fixed price. Sometimes retraction rights, the holder can demand a certain amount and redeem the share.

- Call option: right to buy. Put option: right to sell.- REITs: investments in real estate related stuff like construction, property etc.- derivative securities: Like stock index options etc.

Ch. 2

- Market microstructure: How the market works at the smallest level, ie how does buyer connect to seller and is efficiency lost therein?

- To analyse market efficiency, see whether the market is efficient in producing information

o does a dollar’s worth of info equal a dollar’s worth of benefit to society?- How quickly does the market respond to information?- To what degree do prices reflect the underlying value of the securities?- Arbitrage: buying low in one market then immediately selling high in another.

Ch. 3

- blue sky regulation: initial forays into the world of regulating markets, it required provincial registration based on meeting some standards of market-worthiness.

- Kimber report: commissioned in 60s to look into insider trading and disclosure.o recommended ongoing disclosureo periodic financial statements

- Closed system introduced after the Merger Report of 1970. This system allows certain groups exemption from prospectus etc requirements.

Ch. 4

The long form for a prospectus requires, among other things, that the following kinds of information be given:

(i) the number and types of securities offered under the prospectus;(ii) the method of distribution including the price to the public (where the securities

are distributed for a fixed price), the underwriting discounts or commissions and the proceeds to the issuer or selling security holder;

(iii) the use of the proceeds of the issuance;(iv) the name and structure of the corporation or other form of business

organization; (v) a description of the issuer’s business and the development of the business over

the past three years;(vi) attributes of the securities offered;(vii) for directors (or persons occupying similar positions) and executive officer their

names, their occupations in the past five years, their ownership of securities of the issuer or its subsidiaries, and their executive compensation;

(viii) indebtedness of directors or executive officers to the issuer or its subsidiaries or indebtedness of directors or executive officers to other entities that is guaranteed by the issuer or its subsidiaries;

(ix) information on principal shareholders (and on selling security holders if there will be sales from the holdings of one or more existing security holders);

(x) factors that make the purchase of the security a risk or speculation; and (xi) arrangements with underwriters.

- Inclusion of future oriented information is allowable, but with clear indications that it is just that.

- projection: future oriented info that includes one or more hypotheses. Compare with ‘forecast’: no hypotheses.

- Whether you need to file a prospectus depends on three questions: (i) Does the transaction involve a “security”?(ii) Does the transaction involve a “trade”?(iii) Does the “trade” in the “security” constitute a “distribution”?

- if the answer to all three is “yes” then you need to file one- Three definitions of security in the act:

o Typical. Bonds, debentures, stocks etc.o Less typical: an interest in a mining venture or an educational savings plan

and other such thingso Catch all terms: intended to outsmart tricky lawyers/accountants, the

wording here is broad and extends to a wide range of stuff.

Ch. 6

- Disclosure doesn’t stop with the issuing of a prospectus, there are continuous disclosure requirements.

- advantages of disclosure:o allows public evaluation of business performance o allows for more effective use of votingo Ensures that senior management is apprised of important factso facilitates proper behaviour

- disadvantageso allowing too much confidential info to slip to rivalso costs associated with disclosureo Too much info can bury the important infoo timeliness of disclosure, there is a time and place to speak of upcoming

deals without robbing yourself of the potential advantages you might gain

The following mostly applies to what most provincial acts call ‘reporting issuers’ who deal with cases we’ll learn more about in ch. 7 called “closed system” cases.

Reporting issuers are required to provide the following types of material:- annual financial statements, including balance sheets, income statements, retained

earnings statements, cash flow statements, and comparisons to last year’s figures. These reports must be audited

- Interim financial statements, provided every three months from the end of the financial year. These don’t need to be audited, but if they aren’t, a notice saying so must be attached.

Furthermore

- reporting issuers must send letters to shareholders asking if they wish to receive a copy of the reports

- Statements are to be prepared according to GAAP as defined in the CICA handbook. Exceptions to this rule can exist if the administrator sees fit.

- Exemptions can be granted where the securities commission feels that such an exemption would not be contrary to the public interest.

- Most securities commissions have the ability to order exemptions where their rules for statements conflict with the rules in the company’s home jurisdiction

Management discussions and analysis (MD&A)

- interim statements must be accompanied by the MD&A- MD& A includes information about issuer’s liquidity, success in the most recent

year potential viability of the reporting issuers earnings and cash flow in coming years.

Annual information form

- must be filed by the reporting issuer, unless s/he is a venture issuer- addresses such things as products, services, specialized skill and knowledge,

competitive conditions, new products, intangible properties, cycles, economic depedence on major contracts, patents, formulas, trade secrets or processes, environmental processes, employees, foreign operations

- focus is on material that would influence someone to buy or sell- Similar documents required by the SEC can suffice in cross-border cases

Proxy/Information circulars

- Form of proxy is a document that gives a person a right to vote for a shareholder- People can solicit proxies, concerns arose, thus we get proxy and information

circulars

Proxy circular:

- proxy solicitation must indicate if it’s from management, the right of the shareholder to transfer voting rights or to keep them

- They must clearly indicate how the proposed proxy will vote on all matters- You must send an information circular to everyone you solicit.- specific info required by the information circular:

o interest of persons soliciting proxies in the matters being voted ono Names and holdings of persons with more than 10% ownership of corp.o Info re people proposed as directorso Details of executive compensationo Info respecting compensation plans where issuers equities are authorized

for issuanceo indebtedness of directors/senior officers to the reporting issuer

o Interests of insiders in material transactionso details of contracts that are largely performed by people other than

executive officers.

- Executive compensation disclosure in the proxy circular must disclose the salaries and benefits of various top officers of the company

- If fewer than 15 shareholders are solicited, the circular isn’t required- If the company is complying with such regulations in its own jurisdiction, it is not

required to do these things- Actual owners are required to forward materials re voting to beneficial owners- Beneficial owners might solicit actual owners to vote for them, but this is

obviously outside of the realm of actions requiring circulars

Some discretionary exemptions

- some conflicts may arise between jurisdictions, in which case the commission may exempt a company from these rules.

- Other adequate justifications are discretionary

Business acquisition reports

- BARs required by NI 51-102- Within 75 days of acquisition, the business must report on it.- Significant acquisition defined as

o Worth 20% of the acquiring issuero Investments in and advances to acquiree exceed 20%o Income from acquiree exceeds 20% of income

Insider reports- Insider trading must be reported, insiders: directors or influential people with

more than 10% of the company

timely disclosure

- You must report material changeso By press release ASAPo By filing a report ASAP (no longer than 10 days)

- Majority of BCCA in Pezim decided material facts don’t require reporting, only material change.

- SCC agreed, but pointed out that securities regulators should be given broad discretion in determining what is/isn’t material change.

- Materiality is determined by the effect on price. This is affected by effect of improved pricing, benefits vs. cost of disclosure.

- A confidential report is possible. The issuer must write a report marked confidential to the commission and every 10 days thereafter prepare a report

saying why the info is still confidential. confidential reporting is for situations where:

o The reporting issuer believes disclosure would be unduly detrimental (harm of disclosure outweighs benefits, ie if info of imminent purchase would boost the purchase price)

o The change involves a decision made by senior management that they feel will likely be adopted, and where they don’t believe anyone is trading based on that info.

- Often, disclosure is made after the trading day, or trading is halted for some time after disclosure, this ensures that the info is disseminated adequately before trades can be made.

SEDAR

- SEDAR was set up by regulators to improve access to information. It allows companies to file everything centrally and instantly

- It is owned and operated by Canadian Depository for Securities Ltd.- Paper documents may be filed in some instances, esp. for confidential reports.

Sanctions

- Sanctions can be statutory or common law. Statutes exist to suspend trading, penal sanctions or compliance orders

- You must show thato The issuer is a reporting issuer or someone with ties to the provinceo A misrepresentation was made in their public documento You bought/sold something based on the misrep during the period when it

still had not been corrected.- If it is not a core document, then you must also show that the defendant (unless

s/he was an expert) knew of the misrepresentation or was negligent in not knowing

- The non-core document test also applies to a public oral statement - The same test applies for timely disclosures, except that the fourth element now

applies to people who aren’t the issuer or an officer of the issuer- People responsible for failure to make timely disclosure: a. Issuer b. Directors and

officers c. Influential persons- Reliance is not a necessary element to prove. - Defences:

o due diligenceo plaintiff’s knowledgeo court consideration of a system to ensure continuous disclosureo reliance on an expert’s reporto Took steps to avoid it told the board to fix it, then told commission

within two days if the board didn’t fix it.o Experts’ withdrawal of consent to use their opinion prior to document’s

publication

o Confidential disclosure: If it was made properly, excuses a lack of timely disclosure

Damages and limits

- Issuer liable for a max of the greater between 5% market capitalization or $1m- Similar for experts and directors- Fraud on the market theory: you must prove to the court that its reasonable to

believe that you actually read/relied on the document in question. Some argue that the semi-strong market theory applies, thus market prices reflect fraud and it was therefore implicitly relied upon. Canadian courts have so far called bullshit on that.

To the public

- Distribution under a prospectus is not required where the distribution is not a ‘primary distribution to the public.’

- The words “to the public” have caused problems for courts. In SEC v Ralston Purina, the US SC ruled that it didn’t need to mean ‘to the whole world.’ The real question is whether or not the group in question would need to know the information that the prospectus would provide.

- R v Piepgrass, a leading Canadian case ruled that the people sold to were not ‘friends or associates of the accused.’ They said it was not ‘to the public.’

- “closed system” developed to address the uncertainty of these words. In this system, no unregulated trading is allowed. When companies gain special exemption from the requirement to file a prospectus, subsequent trading is limited to a few people, all of whom know the info a prospectus would have.

- Trading outside of the closed market will only be possible if there is continuous disclosure

- NI 45-102 sets out resale restrictions. Resale of securities sold under exemption is deemed a ‘distribution.’ Two situations where it isn’t:

- First, a situation where:o The issuer is a reporting issuer for the four months preceding the trade

(with continuous disclosure requirements)o Four months have elapsed since the distribution under exemptiono Security certificate/ownership statement says when securities can/can’t be

tradedo Distribution is not a control distribution. o No unusual effort has been made to prepare the market or create demand

for the securities.o No extraordinary commission has been paid respecting the trade.o If the seller is an insider or officer of the issuer, they have no grounds to

believe the issuer is in default of regulations.- In the other situation, it’s the same, but minus a, d, e, f, g from above. - Different rules apply to control persons making distributions

- A restricted period sometimes exists to prevent ‘backdoor underwriting.’ This period is a period during which resale is prohibited.

SEC v Joiner

Ratio: Selling a right to prospecting is trading in securities.

HoweyFacts: People sold interests in orange groves, but not to actually own the oranges, rather to profit from the vendor company’s harvesting thereof.Dicta: The court set out a test for the identification of “investment contracts” that has been applied in many subsequent U.S. decisions. The test, known as the “common enterprise” test, requires:

(i) a contract, transaction or scheme whereby a person invests;(ii)that the investment be in a common enterprise; and(iii) that the person is led to expect profits solely from the efforts of a promoter or

third party.Furthermore, the act embodies a flexible principle, to be applied at the court’s discretion, for determining what does and doesn’t conform to its definitions.

State of Hawaii v. Hawaii Market Center Inc.

Facts: A store in which only members could shop. The capital for the store was raised by the sale of founding memberships for which the members paid $320 or $820 for merchandise (a sewing machine and/or cookware) worth $70 or $140. They earned returns by selling other memberships and by commissions.Issue: An investment contract?Ratio: Yes, even though they could profit from their own actions (selling memberships)Dicta: definition from Howey too narrow, new definition:

(i) the offeree furnish initial value;(ii)a portion of the initial value is subjected to risks of the enterprise;(iii) the furnishing of the initial value is induced by promises or representations

leading to a reasonable expectation or understanding that a benefit above initial value will accrue; and

(iv) the offeree does not have the right to exercise practical and actual control over the managerial decisions of the enterprise.

Pacific Coast Coin Exchange v. O.S.C. SCC

Facts: customers could buy bags of silver coins through Pacific Coast Coin Exchange. For a commission, Pacific would buy coins and deliver them to customers who demanded delivery of silver coins in specie. The price at which Pacific sold silver coins to its customers was fixed by Pacific several times each day. The price was the market value quoted by Pacific plus commissions and other charges. They allowed buying on margin

for 35% of cost of coins, but if the cost of silver fell, you’d have to pay the difference so that your loan only represented 65% of the value of the silver.Ratio: This is securities trading since profit depends on risks and, more specifically, the health of the company.

- Trade, security and distribution: All with long explanations, but also open ended definitions.

- Must file a preliminary prospectus, then a final prospectus after a waiting period. This is to give potential investors time to consider buying.

- After primary prospectus, comes vetting process. This is where regulators determine whether everything has been complied with by the company that’s trying to list.

- Then the regulator sends a letter with any concerns, then these concerns must be addressed.

- Then a waiting period in which there can be no selling and only limited forms of advertising.

- In NP 11-201 there are now four conditions under which such stuff can be submitted electronically:

o Recipient must be notified that the document will be sent electronicallyo Recipient should have easy access to the document.o Deliverer must have evidence that the document was either delivered or

made available to the recipiento Document received must be the same as the document delivered (it is the

responsibility of the deliverer to make sure all reasonable measures are taken to make it so)

- Because so many different regulators can cause overlap and other problems, NP 43-201 allows for one regulator to control the handling of the prospectus, it is usually the one in the company’s home province.

- NI 71-101 allows for prospectuses prepared in USA to apply here under certain conditions

- “Blue-Sky” rights to refuse any prospectus that wouldn’t be in the public interest belong to most regulators in Canada. These rights are broad and sweeping.

- Failure to deliver a prospectus can result in penal, administrative or civil sanctions including rescission, reprimand, suspension of trading, fines and jail time.

- Ontario has common law backing for claims of rescission etc for failure to do the appropriate prospectus stuff

- BC has no common law rule, but statutes void contracts where prospectus regulations weren’t followed.

Chapter 5

What types of common law remedies were available for failure to disclose in a prospectus?

- May be entitled to rescission even if misrepresentation is innocent- No right to damages b/c of innocent misrep.

- If the buyer can show that the representation formed part of the contract for sale of the security or induced the sale, they may be able to win damages for breach of contract.

- If not part of the contract, suing in tort was an option. Derry v Peek was an important precedent.

Derry v Peek UK 1889

Issue: What is the nature of liability in cases of misrepresentations in a prospectus?Ratio: One must show that the misrepresentation was fraudulent. This requires knowing, or the reasonable expectation of knowing that a representation you made would be relied on by the buyer and that it was relied on by the buyer. Also, that you made it knowing it was false or reckless as to whether it was false.

- Ontario securities act 1891 included a clause allowing the director to argue that he had reasonable grounds to believe that the misrepresentation was true.

- Hedley Byrne and Queen v Cognos are cited. the five requirements for negligent misrepresentation are:

o Duty of representor to the representeeo Representation must have been untrueo Representor must have been inaccurate in making the representationo Representee reasonably relied on representationo Reliance on it led to damages.

- Greater skill in the representor makes liability more likely, advice given casually, in a social situation makes liability less likely. These parameters are likely both met in the case of prospectuses such that liability is more likely.

- Statute re prospectuses goes beyond this. It lists people who owe a duty, it says it applies to misstatements or omissions and it makes reliance, negligence and causation defences, but not elements necessary for the plaintiff to prove. This makes the plaintiff’s claim much easier.

- BCSA 131: purchase of the security during the distribution period and a misrepresentation in the prospectus together = rescission and possible damages (subject to some defenses).

- Prospectuses also can’t contain half-truths designed to mislead according to Danier Leather.

- People liable for misreps in a prospectus:o issuero underwriterso directorso experts who consented to their opinions being cited in the prospectuso CEOo CFOo anyone else who signed the thing

- There are several ways to defend against your liability including:o Purchasers knew of the misrepresentation when they bought the security

o The person did not consent to the publication of the prospectus, or withdrew their support within a reasonable time preceding the purchase.

o Statement not made by the defendant or defendant had no reason to believe and did not believe that it was a misrepresentation

o Reasonable effort was taken to ensure that there was no misrepresentationo Depreciation in value of the security was not caused by the misrep.

- The issuer is subject to strict liability, not able to use defence of due diligence or statements not having been made by them. a and e above are still available for issuers.

- If you use an authority’s comments in your prospectus, in the belief that you use them properly, then you’re not on the hook if that’s a misrep.

- If you want to use a due diligence defence, you’d better do some research before publishing the prospectus.

Escott v Barchris USA

Facts: Barchris is a construction company, built bowling alleys, bowling market goes bust and now they have lots of delinquent debt. The owners are illiterate immigrants who don’t know what the hell the prospectus is/says. They issue a prospectus for debentures that downplays how much they’re owed, plays up how much they have etc. Underwriters argued that the whole thing was based on the authority of experts (the lawyers who wrote it). This argument was thrown out by the judge. CFO and treasurer tried to say that they didn’t know what a prospectus was, and they relied on advice of others in preparing it.Ratio: Not understanding the prospectus is no excuse if you signed it. Treasurer and CFO didn’t conduct a reasonable investigation, there were several omissions of which they were/should have been aware. Pres and VP also liable b/c their positions couldn’t excuse the lack of disclosure in the prospectus. Controller liable, b/c either he knew of some facts or failed in his due diligence duty. Basically everyone who knew/ought to have known about any of the inaccuracies was found liable. Underwriters liable for failing to inspect claims of company.Dicta: Liability of directors not based on whether or not they read/understand the prospectus. Even a new director is liable because the purpose of the relevant statute was to ensure full disclosure in order to protect investors. Same deal for underwriters, they can’t just rely on what they were told by officers of the company.

Feit v Leasco USA

Facts: One company taking over another. They offer shares in their company in exchange for shares in the takeover target. This means they need to file something similar to a prospectus. This thing fails to disclose certain assets held by the target and thus, may have led target shareholders to not realize the full value of their shares. Ratio: Liable, no due diligence exercisedDicta: “reasonable investigation” is a term that varies with expertise, level of involvement and access to pertinent info. Inside directors may be held to higher standards than outside directors.

Kerr v Danier Leather 1998 OCA

Facts: Danier issues an initial prospectus. Before final prospectus, sales info comes in that potentially affects the info in original prospectus. Issue: Should they have included the changes?Ratio: No, the prospectus contains cautionary language saying that projections are not guarantees. They made a business decision, many possible interpretations, as long as theirs was reasonable it is okay. Also, they came close to projections despite the sales blip, this can be used as evidence of reasonableness of projection.

Re YBM Magnex Ontario Securities Commission Report

Facts (abridged): YBM founding members were still largely in control of the company. They were linked by authorities to Russian mafia and money laundering schemes. They didn’t disclose this in a prospectus despite knowing about it.Dicta: A CFO or a lawyer who is also a director might be held to a higher standard than those who are not directors, because they have two reasons they should know what to put in the prospectus. An underwriter can’t just rely on company officers, they must do their own research wherever possible. The person YBM got to investigate for them had an interest in the company, thus was not impartial, thus no due diligence was employed.

- Lawyers are to provide their clients with advice about due diligence, otherwise those lawyers could be sued for negligence

- Also should advise clients if their prospectus is deliberately misleading, may even be required to blow the whistle if the client persists with the misinformation.

- Lots of factors involved in a due diligence defence (See Gillen p. 142 for more info.)

- Lawyer should keep a file showing all steps taken toward ensuring due diligence.- There are other administrative sanctions possible including: cease trade orders,

removal of exemptions, order for correction of the misrepresentation or removal of that person as director

- Also, CC C-46 s. 400 provides for penal punishment for issuing false info in a prospectus.

Reasons for exemptions:

- Several reasons exist to exempt companies from the requirement to produce a prospectus etc. These include:

o Cost of producing prospectus outweighs its benefitso Investors are sophisticated, or have common bonds with the issuero Prospectus might yield no new infoo Safety of securities renders the protection a prospectus affords useless

- The main rationale is that, for whatever reason, the investors don’t need to know the info that the prospectus would contain. Subcategories include:

o Sophisticated investors (who know what they need to know)

o Large purchases, which imply expertise, or at least a need to consult an expert (a need that was hopefully fulfilled).

o Wealthy investors: who are presumed to have experience managing a portfolio, or access to investment planners. Also, more capable of swallowing a loss.

o Common bonds with the owner: close to business, or family member/best friend etc.

- When no new information will realistically result from the production of a syllabus, it is not required. This usually occurs because the potential recipient(s) of the info received such info in other documents. Examples include:

o A rights offering The purchaser already holds some of the security being sold. An exemption is likely in such circumstances

o Stock dividends reinvestment of dividends, it’s the same security.o Takeover bids Often a takeover is paid for by a new issue from the

prospective purchaser. In this case, a ‘takeover bid circular’ is required for all the holders of security in the takeover target. This circular contains info similar to that found in a prospectus. Similarly in an amalgamation, shareholder approval is obtained by a proxy circular, thus a new prospectus would be redundant and unnecessary.

o Reinvestment plan When cash dividends are directed toward reinvestment in the same security, it is not the directors choice to issue these shares every time, so there is no concern that the director is trying to sell because of overvaluation in the market.

- Safe investments are another exempt form. In this case, the government issuing the bonds has a tax base from which it can pay the debt, thus there is no fear of default, and no need for a prospectus.

- When there are few investors and/or little cash involved there may be an exemption granted based on the relative impact of a lack of prospectus type info.

- There is also an exemption in cases where the offering is not made ‘to the public’ but this term is ambiguous, it is unclear so far how we are to interpret it. One subgroup of this is a group who has ‘common bonds’ with the issuer, meaning close friends, family and directors and officers of the company.

- Groups of wealthy investors can create an exemption since they are presumed to be sophisticated or to be able to solicit the advice of a registered investment planner. The company must still provide some disclosure documents in such cases. No vetting of these documents takes place. These investors are often ‘angel-investors’ who make a living on venture capital deals. They have a reputation for being very demanding re info re the company.

- If the security is already regulated in another market, an exemption may be granted on the basis that there are already protective measures in place.

- Reliance on the efficient market can lead to an exemption, where the prospectus refers to other documents instead of simply disclosing the facts found therein, this is an acceptable amount of disclosure if there are enough sophisticated investors following the security to ensure that these facts have been checked, and the market price therefore reflects the true value of the stock.

- Some specific industries are sometimes promoted by granting them an exemption from disclosure requirements. This includes charities and religious organizations.

- For more info see NI 45-106

Re Donnini OCA 2005

Facts: Donnini had an interest in a securities company. In this role, he got insider info and traded based on that info. He tried to conceal the identity of the person making the trades (himself). Commission banned him from trading for 15 yrs (except personal accounts) also banned him from being a director for the same period. Trial court reduced from 15 to 4 and said the costs sheet was too vague, redirected the matter to the commission. This is an appeal/cross-appeal from that decision.Issue: Is he liable, what is an appropriate length of ban, what is an appropriate damages amount?Analysis: Donnini claims he didn’t have any solid facts to act on. He’s asking to overturn a mistake of fact, not one of law. He is denied by the OCA His volume of trading and his motivation both = material fact. Caselaw establishes that courts reviewing decisions of the commission should review them on the basis of reasonableness. If the reasons given can somehow support the conclusion of the tribunal, a court should not interfere. Great deal of deference to be given to the commission because of the expertise they possess in such matters. Lower court failed to consider the reasons given by the commission for its decision, instead used its own factors in reversing the commission’s ruling. This is reversed by the OCA. Denying one’s own liability is one’s own prerogative and should not put a greater punishment on that person. Ratio: Liability is shown, 15 year ban is restored, being based on articulable and reasonable considerations. Costs were not duly considered by the commission. The issue of costs is referred back to the commission with instructions to disclose the relevant documents to Donnini so that he can answer the calculations of costs.

Condon et al excerpt on Insider Trading

- Generally disclosed: an ambiguous term. NP 51-201 says any disclosure that is calculated to reach the public effectively and, the public has had time to digest said info.

- No strict method for determining if dissemination is adequate, courts use many different factors

Lewis v Fingold 1999 OSCourtFacts: He sold with knowledge of material fact.Ratio: A reasonable belief that the fact was not material is a valid defence

Royal Trustco Ltd. v Ontario Securities Commission 1983 Ont div. ct.

Ratio: Securities commission has a lot of deference from courts in determining whether something was done in the ordinary course of business.

- Insider trading restrictions are tough to enforce and often too costly to be effective- Prosecutions are infrequent (less than one per year), lengthy (4 yrs avg.), and

disparate in damages (small thousands to multi millions)- Although easy to check, many insider trading rules are not followed in Ontario

(such as buyback rules). This implies that a lot of directors are not reporting their insider trades too.

- More trading by insiders occurs preceding disclosure of good news than at any other time. This is highly suspicious

- Authors recommend implementing more US-style laws, which they say are more effective. For example, allow tipsters a portion of the fines levied against the insiders they expose.

- Info given to the OSC can easily be cross-referenced with info given to stock exchanges. These bodies should consider a uniform reporting system

- Also recommended: Disclosure should be at the same time as the trade, insiders should not be allowed to trade after plans have been made to announce some change/fact

Re Siddiqi BCSecCom 2005

Facts: Siddiqi in a special relationship with a company he was trading in. Previous hearing found him guilty of insider trading. Executive director now recommends a twelve year ban on S trading, directing etc plus some hefty fines.Analysis: when making decisions, the commission reviews·the seriousness of respondent’s conduct,·the harm suffered by investors as a result of the respondent’s conduct,·the damage done to the integrity of the capital markets in British olumbia by the respondent’s conduct,·the extent to which the respondent was enriched,·factors that mitigate the respondent’s conduct,·the respondent’s past conduct, ·the risk to investors and the capital markets posed by the respondent’s continued participation in the capital markets of British Columbia,·the respondent’s fitness to be a registrant or to bear the responsibilities associated with being a director, officer or adviser to issuers,·the need to demonstrate the consequences of inappropriate conduct to those who enjoy the benefits of access to the capital markets,·the need to deter those who participate in the capital markets from engaging in inappropriate conduct, and·orders made by the Commission in similar circumstances in the past.Ratio: In this case, he only manipulated one stock, not a habitual offender etc, thus his penalty should be smaller than the worst

offenders. After reviewing some more egregious offenders, the court rules that 6 yrs is a plentiful ban.

Thomas Hazen Principles of Security Regulation [American]

- Two national exchanges: NYSE and National SE. 7 smaller ones incl. Cincinnati, Philadelphia, Inter-mountain, Pacific, Midwest, Boston and the Chicago Board Options exchange.

- In 2000, SEC approved International SE, a fully electronic exchange.- Attempts are being made to unite national exchanges with over the counter ones.

So far unsuccessfully. The national exchanges’ prestige makes them unlikely to go away, but the ability to buy extra-market shares in listed companies shows that some movement toward consolidation is taking place.

- Glass-Steagal Act of 1933, banks prohibited from dealing in securities other than government bonds.

- Most distributions will require registration of securities.- Commodities are regulated by the Commodity Futures Trading Commission

CFTC. Some overlap has caused disputes, but most things fall into one category.- SEC has broad rule-making abilities, issues 3 types of rules:

o Procedural: how to file documents, when the SEC office is open etc.o Rules that fill in blanks left open to the SEC by statute, ie where a statute

says blah blah blah... as the SEC sees fit.o Definitions of terms

- SEC also forwards ‘releases’ to the media. Though not binding, they often become the source for rules.

- “No-action” rules set forth in letters requiring an opinion about how to proceed with a certain transaction the company/law firm has inquired about. The SEC staff defines in these letters the way in which the company can act without incurring penalties etc.

- SEC has no power to force the injuring party to make restitution, however they can make recommendations that the courts often follow.

- Lots of uncertainty because the court may overrule what the SEC desires. 1978, American panel of lawyers completed an 8 year project to produce a unified securities code that would replace all other securities laws and introduce more certainty to the field. It was not adopted by congress, but some of its provisions have come into force in the SEC rules.

- More recently, no action letters have been made available through several sources including westlaw and quicklaw.

- First securities laws in the US grew out of the 1933 SA, part of the new deal.- State ‘blue sky’ laws preceded the federal laws, focusing on disclosure of info and

qualification of securities. - 1996 Securities Markets Improvement Act took away a lot of the state authority in

regulating securities. Gave it to Feds.- 1933 act focused on disclosure, not qualifying criteria, the thought being that

anyone can invest as they see fit, but they do have to know the relevant facts.- Congress created SEC to oversee implementation of securities legislation

- Additional sources of federal regulation:o Public utility holding company act of 1935 regulates securities in large

public utilitieso Trust Indenture Act, 1939 regulates bond offerings as debt

management toolso Investment Company Act, 1940 Regulates mutual funds etc.o Investment Advisers Act, 1940 Just what it sounds like.o Securities Investor Protection Act, 1970 Addressed the then problem of

insolvent brokerages- The Sarbanes-Oxley Act, 2002 introduced reforms based on scandals like

Worldcom and Enron. These targeted corporate governance, accounting etc. It also gave protection to corporate whistleblowers.

- The 96 Improvement Act exempted lots of different securities from state laws.- SEC has four divisions:

o Enforcement decides whther to fine, let be or refer to Justice Department for prosecution

o Corporate finance Checks all documents to ensure compliance with regulations.

o Market Regulation develops internal policies re markets.o Investments management oversees regulation of mutual fund investors

etc.- Also offices:

o General counsel advises other branches on issues of law.o Accountant Generates policy on accounting practices.

- SEC rulemaking is limited to the power granted by the statute.- Interpretive rulemaking, trying to capture what statutes mean, is often done. One

type of this is ‘safe harbour’ rulemaking statements of what the SEC will interpret as having complied with the law.

- SEC investigates all potential violations of all acts it oversees.- They can go to court to bar directors from associating with companies- Securities activities of banks are now SEC’s jurisdiction, all other banking is

regulated by other authorities.

Gillen ch 11

Ways to effect takeover bids:

- Proxy contest: dissident shareholders attempt to align other shareholders with them in order to vote in new management

- Acquisition/merger- Purchase

Motivation for takeover bids:

- inefficient management- Synergy

- Market power- Tax considerations- Undervaluation- Emperialism/managerialism- Looting: selling assets after a takeover, often at minority SH’s expense- Hubris: A belief that the takeover will result in some gain. Some evidence

suggests that takeovers lose $ on average.

Reasons for regulation:

- Defending against ‘Saturday night specials.’ Bidder makes an offer on Saturday night after the market is closed and says it is only good until Monday morning a couple of hours after the market opens. This gives the target company very little time to develop a defensive strategy.

- Insufficient info The offeror was often an agent for an unknown third party, thus the offerees often didn’t know who was offering the money, for what purpose etc. This was a problem for regulators.

- Insufficient time to respond Such a short window of opportunity put undue pressure on the offerees.

- Lock up of tendered shares Once shares were tendered under an offer, they were not withdrawable. Thus if another bid came along and you already tendered, you were screwed

- Unequal consideration If company A bids $12 per share, but only gets half the shares they wanted, they might now bid $13 to get the other half. They would still only pay $12 per share to the first half of people who signed on though.

- Looting The takeover might result in new management bullying minority shareholders.

- No strict rules on payment due dates etc.

Response to these problems:

- Takeover bid circular is require to be distributed to all holders in the relevant province

- This circular must include info such as the identity of the offeror, the nature of the bid, the source of the payment, the method and due date of payment and other relevant info.

- A director’s circular follows within 10 days. This gives the offeree directors a chance to respond and make their recommendations re the bid. Also, they must indicate their direct interests in the offeror, and intentions regarding the bid.

- Civil penalties for misreps in these docs similar to that for misrep in prospectuses- Minimum bid period of 21 days- No first come first served offers allowed. Ie: if the bid is for 750 shares and 1000

are offered, each shareholder is entitled to have ¾ of the shares they offered purchased.

- No lock up period within the 21 days, offers can be withdrawn. A variation of the bid extends this period by 10 days.

- Bids must be extended to all holders of the securities sought.- Laws prevent forcing minority shareholders to sell at unfair rates after a takeover.- A formal valuation of the target by an independent evaluator is required in

circumstances where the offeror might otherwise take advantage of minority shareholders. ie a going private transaction or an insider type of situation.

- Ontario Policy 9.1 goes further. In a going private trasaction, it requires a review by an independent board and the consent of a majority of minority shareholders. If the offer is less than the valuation price, approval must be by 2/3 of the minority SHs

- Bidders are restricted on how many shares they can buy during the bid period. Also, they can’t sell shares they’ve acquired under the bid to a competing bidder.

When do the rules apply?

- A takeover bid is defined by the legislation as a bid in which 20% of voting shares are sought.

- Exceptions to the rules include: when an owner of 20% or more buys 5% or less of the remaining shares in one year.

- Purchase of one person’s control block is not subject to these rules, but any premium of 15% or more over market rate is not allowed, unless made to all holders of the same class of security. Any offer to 5 or fewer persons is not subject to these rules unless the 15% contingency is met.

- Exemptions also exist where there are very few holders of the securities in question in the jurisdiction where the rules apply (<2% of SHs or <50 SHs in province).

- The offeror might try to avoid these regulations by buying futures. Legislation combats this possibility by deeming the offeror to own any shares it has the right to within 60 days of the date when their ownership of securities is being assessed.

- Broad anti-avoidance clause holds that the rules apply to direct or indirect offers. ie no holding company whose assets are the controlling block then I buy the holding company... type of deals will be under the radar.

- If you make private transactions within 90 days of your takeover bid, you’ve gotta match the highest price paid in either transaction for the sellers in the other transaction.

- You can’t acquire any shares for 20 days after the bid in any way other than means available to all SHs or for any terms other than the bid terms.

Early warning disclosure

- Any person acquiring 10% of shares must issue a press release.- They must do so again on each subsequent 2% acquistion. These rules allow

early warning of potential takeovers.

- Interested persons can apply to have takeover bid documents banned from publication, or asking for any measures appropriate to any violation of these rules.

Takeover defences

- White knight Seeking a company more desirable than the offeror- Issuing shares into friendly hands in quantities that will defeat the bid.- Crown jewel defence selling the assets the bidder seeks- White knight bust up fee pledge to pay the white knight some exorbitant fee if

their bid fails. Thus if the other bidder gets the company, they get some massive debt along with it.

- Start litigation and seek an injunction until the action is resolved- Poison-pill shares options for conversion into actual shares if a bidder obtains

some percentage of the company. - Poison-rights Rights conferred as dividends, they provide that if a takeover

occurs, the target SHs now have rights to buy the new company’s shares at a (usually) drastically low price. This is a disincentive to the offerors. These rights are usually rescindable by the target, which encourages any bidders to negotiate with them.

Fox in S-Ox, by Ron Davis.

- Adopting SOX in Canada doesn’t make sense because of market differences between here and the US.

- SOX reacted to major breakdowns in corporate disclosure and the monitoring of directors.

- Enron developed ‘prepay’ contracts, where they were paid up front for a delivery that took years.

- Also, they kept ‘asset light’ meaning they did not carry a lot of assets. Assets they did have, they got investors in on, these investors were not on the books, so Enron’s share prices didn’t accurately reflect risks/ liability.

- Raptors: Special Purpose Entities created solely to deal with Enron. Their purpose was to be invested in, then pay out a greater amount 6 months later. This made it appear that Enron had receivables, when really all they had was indebted assets. Since reporting didn’t count these debts as enron’s, it looked like $1b of debt didn’t exist, when it actually did.

- Investigation revealed the directors had tons of red flags along the way.- Several ‘gatekeepers’ failed such as the removal of a requirement that directors

keep options paid to them for 6 mos. This req had encouraged long term growth instead of asset management to create short spikes in price. Also, the directors encouraged aggressive accounting procedures aimed at maximizing their wealth.

- The board didn’t fulfill its obligation to effectively monitor the actions of the CEO/CFO. The independent board was to all appearances an exemplar model of corporate security, with the interests of management not aligned with the interests of the board, the board was likely to vote for SH interests.

- The independece of directors as monitors has been criticized for years. Disincentives to acting appropriately outnumber incentives.

o Incentives: Noblesse Oblige desire to do good stuff as position demands. Also, concerns about their professional reputation as directors.

o Counter incentives: Nominated by management, close to management, directors not paid nearly enough for their obligations. Also, no evidence of existence of market for directors or the level of info shared in that market.

- Three main features of SOX: 1. switch from reliance on good faith to legislative regulation for accounting practices. 2. Move to federal law as the new dominant force in internal governance standards for corporations. 3. Continued reliance on disclosure as the principal means for monitoring corporate actions.

- Public Company Accounting Oversight Board now monitors accountants. You can’t be an accountant for a public company if you aren’t registered with PCAOB. Accountants were previously a self regulating group.

- Auditors can’t get more than 5% of audit fees for non-audit purposes from the auditee in a given financial year.

- Now disclosure requirements extend to off-sheet entities- Corporate codes of conduct now expected for managers, or an explanation why

there isn’t one, if there isn’t one.- Large, controversial shift to regulation as opposed to free market control

differences between US and Canada- Canada has far fewer companies so widely held that no one person/small group

has effective control of the company.- TSX, more than ¾ of listed companies have 3 or fewer who control the corp.- Canadian problem isn’t wide dispersal of SHs making effective monitoring hard,

a bigger problem is the possible subjugation of smaller SHs/SH groups to the will of larger voting blocks.

- Canada regulates securities provincially- Arguable that Canadian market is so different, that SOX just doesn’t apply here.- Of top 100 Canadian companies, 45% hold significant chunks of another in the

top 100. Lots of sharing of board members too.- Proponents of SOX-type legislation in Canada use three premises:

o Assuaging SH concerns about regulatory strengtho Maintaining a competitive level of stringencyo To combat inappropriate incentives

- Those opposed say the different structures among other factors offset these concerns

- National security regulators requested opinions on 3 different NIs. 1 A requirement for separate director and audit committee membership 2. the duty of the audit committee to monitor the corporation and 3. Executive officer certification of all financial statements.\

- OSC commissioned a committee to research these, the committee found that it would be profitable to implement these changes

- BCSC disagreed, saying directors already liable for misreps in financial statements. They noted that some big shot NYU prof dissed the OSC study.

- Problem with OSC evaluation is that it measured Extra Value Added (EVA) instead of added fairness, which is the proper ambition of a securities regulator.

- People should see corporate law not only as a way to enhance efficiency in contracts etc, but also a vehicle for the advancement of public policy goals.

- How to regulate illegitimate wealth transfers between SHs while retaining controlling SH right to control?

- Will SOX north make Canada abandon its culture of compliance for a more loophole-conscious rules based approach?

BC Securities Act

- new act received royal assent 5/13/04. It was supposed to:- Streamline system without straining businesses- create new remedies for investors who have been victims of misrepresentation- Create a new code of conduct for dealers and advisers including dealing in

good faith and with the clients best interests in mind- Continuous market access system: sometimes publishing stuff in newspapers

is okay, prospectuses aren’t always necessary

s. 15- Places rules on what can/can’t be done with money received as a result of penalties under the act- Anything received under s. 155, 157 must only be spent on education of offenders or members of the public about securities procedures etc.- 15.1 When the commission gets $ under 155, 157 it must advertise this to the public. The public then has 3 years to make a claim to this money.

s. 22-3- Exchanges must be recognized by the commission. Director has the power to review self regulatory organizations.

s. 63, 83- Prospectus must include a statement that the waiting period purchaser can rescind purchase during cooling off period or because of misrepresentations.

s. 66-7 - Must disclose an adverse material change during waiting period by amending your prospectus

s. 68- Prospectus must include “certificate of issuer” that states "The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by the Securities

Act and its regulations." signed by the CEO and CFO and two other directors authorized to do so and every promoter of the issuer.

s. 76 You can apply for an exemption to the requirment for a prospectus, which the commission will grant if they don’t feel its contrary to public interest to do so.

s. 85  A reporting issuer must, in accordance with the regulations,(a) provide prescribed periodic disclosure about its business and affairs,(b) provide disclosure of a material change, and(c) provide other prescribed disclosure.

s. 120 – 130

- Mutual funds not allowed to pay any fee to someone they invest in unless that fee is as per initial documents defining the Mutual fund’s rights etc. (124)- Good fiath required of manager (125)- managers can’t be interested in persons invested in unless disclosed (127)- Can’t use info gleaned as manager of MF to trade on (IT type definitions) (128)- Exceptions available if in public interest (130)

s. 131- Rescision only available against people who misrepresented facts if you bought the securities from them. This is based on the idea that if you don’t have a contract with a person, its hard to get rescission. - Defences available to an issuer: 1. The purchaser knew of the misrep and bought anyway, 2. The misrep didn’t induce the purchase- (9) says you’re not liable for more than your own portion of the issue.

s 132

- liable for misreps in bid circulars or standard disclosure documents

s. 133

- standard of reasonableness (defined as a defence in 131, 2) is that of a prudent person.

s. 135

- People have civil claims against directors who don’t deliver documents as required by this act

s 138

- If s. 51(2) is not complied with, a person is entitled to rescission of contract as a result.

s. 141

- Director can order production of records pertaining to an order

s. 142- Commission can order investigations pertinent to the act

s. 143- Investigators under s 142, 147 can investigate the affairs, business relationships, assets, conduct etc of the subject of the investigation.- The commission can order an investigation of the business premises of the investigatee- Supreme Court can order investigation of business premises etc pursuant to this section. These orders can be made without notice and heard without public audience.

s. 144- Investigators under s. 142,147 have the same power to compel testimony etc as the supreme court. Failure of witnesses to comply with investigation, can therefore be treated as contempt of court.

s. 151- Commission can order an asset freeze on an investigatee

s. 152- Commission can appoint a receiver for investigatee’s assets.

s. 153- Commission can order an investigation into the financial affairs of a person/institution if it considers that order to be in the public interest.

s. 155- people not complying with measures of this act are liable to fine of up to $3m or 3yrs in jail or both- Investment funds guilty of an offence = fund managers also guilty.

s. 157 - If the commission feels a person is not complying/has not complied/ is contravening/ will contravene orders made under this act, the commission may apply to the supreme court for (a) an order that(i)  the person comply with or cease contravening the provision or decision, and(ii)  the directors and senior officers of the person cause the person to comply with or to cease contravening the provision or decision;(b) an order that the person pay to the commission one or both of the following:(i)  any money obtained by the person directly or indirectly as a result of the failure to comply or the contravention;(ii)  the amount of any payments or losses avoided by the person

directly or indirectly as a result of the failure to comply or the contravention;(c) an order setting aside a transaction relating to trading in securities or exchange contracts;(d) an order that a security or exchange contract be issued or cancelled;(e) an order that a security or exchange contract be purchased, disposed of or exchanged;(f) an order prohibiting the voting of a security or the exercise of a right attaching to a security or exchange contract;(g) an order appointing a director of the person that is the subject of the application;(h) an order that the person repay a holder of a security or an exchange contract money paid by the holder for the security or exchange contract;(i) an order that the person compensate or make restitution to any other person;(j) an order that the person pay general or punitive damages to any other person.(2)  On an application under subsection (1), the Supreme Court may make the order applied for and any other order the court considers appropriate.(3)  An order may be made under this section even though a penalty has already been imposed on that person in respect of the same non-compliance or contravention.

s. 161- commission can order(a) that a person comply with or cease contravening, and that the directors and senior officers of the person cause the person to comply with or cease contravening,(i)  a provision of this Act or the regulations,(ii)  a decision, whether or not the decision has been filed under section 163, or(iii)  a bylaw, rule, or other regulatory instrument or policy or a direction, decision, order or ruling made under a bylaw, rule or other regulatory instrument or policy of a self regulatory body, exchange or quotation and trade reporting system, as the case may be, that has been recognized by the commission under section 24;(b) that(i)  all persons,(ii)  the person or persons named in the order, or(iii)  one or more classes of personscease trading in, or be prohibited from purchasing, any securities or exchange contracts, a specified security or exchange contract or a specified class of securities or class of exchange contracts;

(c) that any or all of the exemptions described in any of sections 44 to 47, 74, 75, 98 or 99 do not apply to a person;(d) that a person(i)  resign any position that the person holds as a director or officer of an issuer,(ii)  is prohibited from becoming or acting as a director or officer of any issuer, or(iii)  is prohibited from engaging in investor relations activities;(e) that a registrant, issuer or person engaged in investor relations activities(i)  is prohibited from disseminating to the public, or authorizing the dissemination to the public, of any information or record of any kind that is described in the order,(ii)  is required to disseminate to the public, by the method described in the order, any information or record relating to the affairs of the registrant or issuer that the commission or the superintendent considers must be disseminated, or(iii)  is required to amend, in the manner specified in the order, any information or record of any kind described in the order before disseminating the information or record to the public or authorizing its dissemination to the public;(f) that a registrant be reprimanded, that a person's registration be suspended, cancelled or restricted or that conditions be imposed on a registrant.(2)  If the commission or the executive director considers that the length of time required to hold a hearing under subsection (1), other than under subsection (1) (e) (ii) or (iii), could be prejudicial to the public interest, the commission or the executive director may make a temporary order, without a hearing, to have effect for not longer than 15 days after the date the temporary order is made.(3)  If the commission or the executive director considers it necessary and in the public interest, the commission or the executive director may, without a hearing, make an order extending a temporary order until a hearing is held and a decision is rendered.(4)  The commission or the executive director, as the case may be, must send written notice of every order made under this section to any person that is directly affected by the order.(5)  If notice of a temporary order is sent under subsection (4), the notice must be accompanied by a notice of hearing.(6)  The commission or the executive director may, after providing an opportunity to be heard, make an order under subsection (1) in respect of a person if the person(a) has been convicted of a criminal offence arising from a transaction, business or course of conduct related to securities or exchange contracts,(b) has been found by a court to have contravened a requirement of

this Act or the regulations, or(c) has been found by a securities regulatory authority or court in another jurisdiction to have contravened the laws of the jurisdiction respecting trading in securities or exchange contracts.

s. 162- Commission can order people to pay administrative penalties for contraventions of the act162.1- Commission can order a debtor of a person who owes the commission to pay the debt back to the commission directly instead of the person.

s. 163- After making a decision, the commission can file the decision with the supreme court. At that time, it becomes essentially the same as a judgment of the supreme court.

s. 169.1- Commission has some pretty liberal rights to collection of information etc under this act.

s. 184-6 - Gives the Securities Commission the power to make rules

INSTRUMENTS

Instruments are numbered thus: XX-YZZXX – area of law (ie 58 = corporate governance)Y – Scope: Canada-wide, multilateral or provincialZZ – Number in the series.

Multilateral Instruments

MI 11-101- creates passport system- In Ontario NP 43-201 allows you to choose whether or not to accept

endorsements of regulators from other provinces

MI 52-109

- CEO/CFO must say there are no misreps in financial forms of company- Criticized for vagueness lots of personal liability

MI 52-110

MI 52-509

- BC thing, saying it would require an independent person to conclude there was independence on the board

- Mainly adopted as a policy choice

52-110

- Audit committee not allowed compensation s. 1.5

- Global Exchange: A TSX-V company trying to launch a new Canadian ExchangeNational Instruments

NI 23-101- Deals largely with fraud - Companion policy gives examples of fraud- Your broker is obliged to find you the best possible price

NI 33-101- Attempts to protect integrity of underwriting process where the underwriter has an

interest in the IPO. The instrument defines a hierarchy of situations from worst to best:

o underwriter is the ownero is related to the ownero A connected issuer (a conflict other than share ownership)

- In the case of a. and b. you must get an independent underwriter in addition to the person with the conflict

NI 45-102 (Resale Rules)- Prospectus required unless some conditions are met:

o Seasoning period: Issuer is a reporting issuer and has been for four monthso Restricted/hold periodo Resale subject to similar restrictions (to prevent backdoor underwriting)o Not a control distribution (distribution by a control person)o No special effort to prepare market for purchase (because if only your info

is out there, it makes people hear your side)o No special commission paido Disclosure obligations are met

NI 45-106- Primary source of exemptions from disclosure requirements. Exempt things:

o No need to know the infoo No new infoo Safe investments (ie govt bonds etc)o Small # of investors

- Capital raising exemptions: o rights offerings buying more of the same security. Securiities

regulators must be notified of such offerings and may object within 10 days of notification

o Reinvestment plans Where the new shares are the same as the ones that yielded the dividends

o Accredited investors Exempt under s 2.3 of this Instrument. These sales are subject to seasoning/hold periods. Four categories of accredited investors:

1. Exempt institution Banks, trust companies, governments etc.2. Registered dealers and advisers certifications/experience3. Designated acc. Invstrs by application to regulators, who look at

size of investments, experience etc.4. Portfolio managers/trust companies same as #1, sophisticated.5. Charities who receive investment advice from a registered adviser.6. Rich people $5m in assets/ $1m in liquid assets/ $200k net

income in each of last two years (300 if a couple). These people are expected to be sophisticated/have adivisers.

7. If the owners of a ‘person’ are all accredited investors, then that ‘person’ is also deemed to be one.

o Private issuer, defined as one who:1. isn’t a reporting issuer2. Securities are subject to restrictions on transfer3. Securities are beneficially owned by 50 or fewer people and,4. it has distributed only to exempt purchasers as described in the

private issuer exemption provision. This includes directors, spouses, grandma, close friend, close business associate, security holder, majority voting shareholder, not the public

o Family, friends, business associates: No commission can be paid in this type of transaction.

o Affiliates, ie one of the two is subsidiary of the other or both are controlled by the same person.

o Offering memorandum: The purchaser can sign a risk acknowledgement form and receive an OM and thus waive the right to a prospectus. This is only in some provinces, and usually requires the purchaser to be an eligible investor. The OM still states it does not contain any misreps. No vetting process for the OM

o Minimum amount investor. If $150k+ is paid in cash at the time of purchase by a principal, the purchaser is assumed to have obtained all info necessary to them.

- There are also transaction exemptions for the following:o Business combination and reorganization circulars and similar

documents provide a lot of disclosure similar to a prospectuso Asset acquisition If assets traded for securities exceed $150ko When securities are exchanged in order to settle debto Issuer acquisition or redemption buying securities you have issued

o Takeover bids If buyer issues its own securities in order to pay for the target, no prospectus is required. This is because the takeover bid circular is adequate

NI 52-108

- Created the Canadian Public Accountability Board, which oversees auditors

NI 52-109

- Certification rule, CEO/CFO now obliged to sign certification on statements etc.- This was OSC’s attempt to make something like SOX

NI 54-101- Reports may just be sent to depositories (nominal, not beneficial owners). This

NI deals with that.- Before votes, 30-60 days before, companies must send notice- Must then request beneficial holders’ info, get it 20 days before the meeting

NI 58-101

NI 71-101- Canada and America can choose to accept the securities regulators’ endorsements

from the other jurisdiction

National Policies

NP 41-201- Deals with indirect offerings such as securities trusts- Must disclose material debt in income trusts- Arm’s length makes CEO/CFO not liable, this must be specified in prospectus

NP 43-201- One regulator deals with handling prospectus, usually the regulator from home

province of company in question.

NP 51-201- Timely diclosure is key, must be equally fast for good and bad news- Can keep it under wraps for a reasonable period when instant disclosure would be

unduly bad for business- Tip offs and insider info are prohibited. This applies to material facts and

material changes, whereas obligations usually only apply to material changes- Tipping prohibitions extend to those in a special relationship with the issuer.

Definition of this relationship is very broad.- Tips are allowed if they occur within the necessary course of business

- Credit rating agencies are usually okay to tell stuff that would otherwise be tipping

- Most common and generally acceptable way of general disclosure: news release- Posting on website alone doesn’t qualify as general disclosure- If someone accidentally spills the beans, you must take all measures necessary to

rectify the situation, including a news release and a call to the stock exchange to demand an immediate halt of trading pending a news release.

- materiality of changes is subjective. Companies are encouraged to monitor reaction to news releases such that they may judge the market impact of private info. Forecasted market impact determines materiality.

- Recommended to all companies to come up with a disclosure policy that ensures consistency in disclosure

- Limit the people who are allowed to talk to media etc. Spokespeople should be senior managers with awareness of disclosure rules

- You should adopt a no comment policy re rumors; you should not host a chat room; keep the website up to date and accurate.

NP 62-202 - defines the primary objective of TOB rules as protection of SH rights in the target

company. Secondary objective: allowing open, even market for TOBs.