General Policy of Securities Regulation

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For the exam:
1) Know what the rules are;
2) Look at why they exist (why does the law regulate these activities? What objectives is the rule trying to establish?);
3) THEN Challenge the rules

  • Always keep in mind that he wants you to answer WHY it is that you’re doing what you’re doing
  • WHY does the law regulate this particular activity? (will mostly have to do with achieving the three above goals/dealing with tensions among those goals)
  • Securities reg is nothing more than sophisticated consumer protection legislation with the consumer being investors.
    o The Securities Act is really a policy document where intention is the most important thing.
    o The rules that the SA sets out are intended to be appropriate in the circumstances in which they are employed.

3 types of policy statements
o OSC Policy –> info about how the Ontario Securities Commission will decide
o Uniform Act –> provinces of BC, Alberta, Saskatchewan, Manitioba and Ontario
o National –> all of the Securities Commission get together and say how they’re going to use their discretion

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Methods of Achieving Goals of Securities Regulation

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1) Registration Requirement, 2) Disclosure Requirement, 3) Remedies for Breach of 1 and 2

1.2.1 Registration requirement

  • Licence people in the business
  • you cannot trade in securities unless you’re licensed (underwriters)
  • There are exceptions, e.g. can sell Canada Savings Bonds without registering (b/c it wouldn’t make sense  in the context to register; b/c they are so safe – unlikely Govt of Can will default)

POLICY: This helps ensure accountability, makes sure you are educated and policed –> fosters confidence in the market, and the exceptions are to provide efficient markets for securities that are considered to be very low-risk to the public. People will lose confidence if some whackos are selling you securities.

  • 1.2.2 Disclosure Requirement
    To protect investing public, must make sure they have full, true and plain disclosure of all material facts related to the company (adv/disadvantages, risks, contracts etc.) via a prospectus and continuous disclosure
    Note: there is an adv to being an investor in a public company –> the asset is easily liquidated but must have info to do so
    To provide info:
    1) Prospectus: comprehensive disclosure document – tells investor what they need to know to make an informed decision
    Also creates a cause of action for misrepresentations and omissions in a prospectus
     2) Continuous disclosure: once a company goes public, the company has continuing disclosure/reporting obligations which require the company must keep information current. Continuous  disclosure has 4 parts:
    a) Regular Financial Reporting
    b) Timely Disclosure (for material issues must file press release and amendment to prospectus)
    c) Insider Reporting (insiders must disclose when they buy/ sell shares to prevent insider trading)
    d) Early Warning (at a certain level of ownership in shares, need to tell the world how many you own and your intentions)

POLICY: need to protect investors, OSA is consumer protection legislation and in order to do that, we need to give you the information that you need to make an informed investment decision
1.2.2.1 Exceptions to the Disclosure Rule

(i) the purchaser is sufficiently sophisticated (wealthy/ well resourced); (Private Placement)
(ii) the information is otherwise readily available; or
(iii) the securities are “safe” (Canada Savings Bonds)
POLICY: Need to balance the objectives of the efficiency of capital markets (would be inefficient to file a prospectus every time a company needs money) with the need to protect the public.

1.2.2.2 Closed System & Resale Restrictions
When securities are acquired pursuant to one of the private placement exemptions and not pursuant to a prospectus, the resale by the initial investors of these securities to other investors on the secondary market
is restricted and certain conditions must be satisfied prior to their resale.
Conditions that must be satisfied prior to resale:
1. You issue a prospectus;
2. You sell pursuant to another private placement exemption;
3. You comply with the resale rules; or
4. You receive an exempting order from the Ontario Securities Commission

Policy: Transparency is key to the process

1.2.3 Remedies for Breach of Registration or Disclosure Requirements

  • If you don’t satisfy the requirements, there are remedies for the investor against you for breaches of these obligations
  • Remedies can be civil, criminal, or administrative (more detail below)
    Policy: investor protection and confidence in the market (fix something when it goes wrong)
    Now just a bunch of rules that play into one of these three objectives.
    Note: will also look at take-over bids
  • Overall protect shareholders of target company and make sure there is a level playing field
    • Make sure they have enough info to make an investment decision
    • Give them suff time to make that decision
    • Protect against company doing bad things

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Three Goals of Security Regulation – Law School Notes

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1.0 MAJOR THEMES IN THE COURSE
1.1
Three Goals of Securities Regulation
3 purposes:
1) Protection of investing public;
2) Ensuring the Efficient Operation of Canadian Capital Markets;
3) Increasing and Maintaining Public Confidence in Capital Markets / In the Persons and  Institutions Operating Them

Found in s.1.1 of the Ontario Securities Act (OSA) under the purposes of the act! The purposes of the Act are (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets and confidence in capital markets

Danier case: The securities act is remedial legislation and is to be given a broad interpretation (Pezim). It protects investors from risks of an unregulated market, and by its assurance of fair dealing and by the promotion of the integrity and efficiency of the capital markets it enhances the pool of capital available to entrepreneurs.
The act supplants the buyer beware mindset of the common law with the compelled disclosure of relevant information… at the same time, recognizes burden it places on issuers and Part XV sets limits on what is required to be disclosed…
(para 32) – Binnie J

1. Protection of investing public
a.
Should not protect public against loss, but ensure that public has knowledge needed to make a decision about the company – assurance that its losses are genuine economic losses (correct pricing via prospectus)
b. Very high-level consumer protection legislation

2. Ensuring the Efficient Operation of Canadian Capital Markets
a.
Ensure capital markets facilitate mobility and transferability of financial resources and provide facilities for continuing valuation of financial assets
b. Achieved through a free and open securities market with regulator correcting for market failure
i. More info prevents problem of adverse selection in the market (drive out high quality securities, leaving only low quality securities which would be a misallocation of financial resources)

3. Increasing and Maintaining Public Confidence in Capital Markets/In the Persons and Institutions Operating in Them
a.
Investors will be WTP more for new issues of securities in primary market if confident they will be able to sell securities fairly on secondary market (want to know its fair, you can make money!)
b. With investors paying more for new issues, more savings would be channelled into investment, thereby improving allocation of financial resources (see goal #2)
c. Creating confidence in market, adverse selection is overcome – of assured of accuracy of info, investors WTP more, therefore, higher qual securities more likely to survive
*However, reg must not be at excessive cost (therefore, tension between protecting investing public and eff capital markets)

Another theme: NO SMART GUYS and NO CERTAINTY

  • Certainty in almost every circumstance is a bad thing, takes away judgment
  • judgment is what we need to make the right decisions
  • The Securities Act –> don’t care what act actually says, care what it ought to say or intended to say. Don’t care about geniuses that spend lives devising schemes to get around SA (Securities Act). Securities regulators or courts say you’re  smart, but who cares… if you’ve done something you think outsmarts securities act, they’ll shut the door on you = no smart guys.

 

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Securities Regulation – Law School Notes

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These notes cover Securities Regulation in Canada.

The best material to have an in-depth understanding of Capital markets irrespective of what jurisdiction you are based in. Especially helpful if you are an Indian law student due to lack of good material covering the fundamentals. OCRed text, might suffer from few readability issues.

Five aspects of continuous disclosure:
(1) Regular disclosure (quarterly/annually);
(2) timely disclosure (of material changes);
(3) Early Warning (if buying up 10%- could signal takeover bid);
(4) Insider Reporting (allowed to trade, but we want to know what you’re doing);
(5) Insider Trading (to keep things fair, can’t do)
Want to make sure investors are protected and a fundamental tenet of that Is disclosure Companies change, and people are still trading on secondary market, the info from prospectus goes stale (to ensure ppl buy on primary market, must maintain efficiency of secondary market)

  1. Policy Behind Continuous Disclosure Regime – Merger Report (3 objectives)
  2. PART I: Regular Disclosure
    1. Application to Reporting Issuers
    2. Obligation to File Financial Statements
  3. PART II: Timely Disclosure (of changes)
    1. Statutory Provision: Ontario Securities Act (OSA), Part XVIII – Continuous Disclosure
    2. Material Change vs Material Fact
    3. What must be filed with a material change (3 Report Options)
  4. PART III: Early Warning
    1. STEPS
    2. STATUTORY PROVISIONS
  5. PART IV: Insider Reporting
    1. Analysis: When do insider reporting rules apply?
    2. STATUTORY PROVISIONS
  6. PART V: Insider Trading

TWO PARTS:
(1) Trading: You cannot sell with insider information and
(2) Tipping: you cannot tell anyone else about that information 

  1. Policy Discussion about Insider Trading / Tipping Prohibition
  2. Steps
  3. Statutory Provisions (OSA)
  4. Meaning of Generally Disclosed (Defence)
  5. Defences to Insider Trading / Tipping
  6. Actions, Sanctions & Penalties for Insider Trading

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CPC Case Brief – Khanna v. Dillon (Section 115)

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FACTS: The appellant and the respondent entered into a partnership to do business as Construction Engineers but in February 1956 they agreed to dissolve it. It was agreed that the respondent was to take over all the assets and liabilities of the partnership and keep the appellant indemnified from all liability. Later on, a suit was filed by the appellant for dissolution of partnership and rendition of accounts. That suit ended in a compromise which provided that all realizations of the old partnership would be converted into cash and placed in joint account in the name of the two partners before being paid towards the liabilities of the partnership. The respondent filed two suits against the appellant for recovery of certain amounts on the allegation that the appellant had taken that amount as loan. The defense of the appellant was that as the money was still in the joint name of the two partners and he had taken the money from the joint account, suits between the two partners were not maintainable.

TRIAL JUDGE: in preliminary issues raised in the suits the trial Judge held that the suits were not maintainable, but instead of dismissing the suits there and then, he set them down for a future date.

REVISION PETITIONS FILED: Against the findings of the trial Judge, revision petitions were filed in the High Court under s. 115 of the Code of Civil Procedure. The High Court set aside the orders passed by the Trial judge and held that the suits could not be held as not maintainable.

APPEAL AGAINST HC JUDGMENT: The appellant appealed by special leave. The appellant challenged the order of the High Court on the ground that the order of the trial Judge did not amount to “a case which has been decided” within the meaning of s. 115 of Code of Civil Procedure, that the decrees which may be passed in the suits being subject to appeal to the High Court, the power of the High Court was by the express terms of s. 115 excluded, and that the orders of the trial Judge did not fall within any of the three clauses (a), (b) and (c) of s. 115.

SUPREME COURT: The High Court was right in setting aside the order passed by the trial Judge and in holding that without investigation as to the respective claims made by the parties by their pleadings on the matters in dispute, the suits could not be held as not maintainable. The decision of the trial Judge affected the rights and obligations of the parties directly. It was the decision on an issue relating to the jurisdiction of the court to entertain the suit filed by the respondent. The decision attracted cl. (c) of s. 115 of the Code of Civil Procedure.

REVISIONAL JURISDICTION OF THE HC: High Court is not bound to interfere merely because the conditions are satisfied. The interlocutory character of the order, existence of another remedy to the aggrieved party by way of appeal from the ultimate order or decree in the proceeding or by a suit, and the general equities of the case being served by the order made are all matters to be taken into account in considering whether the High Court even in cases where the conditions which attract the jurisdiction exist, should exercise its jurisdiction.

Revisional jurisdiction of the high Court may be exercised irrespective of the question whether ;an appeal lies thereto from the ultimate decree or order passed in the suit or not. The expression “in which no appeal lies thereto” does not mean that it excludes the exercise of the revisional jurisdiction when an appeal may be competent to the High Court from the final order. If an appeal lies against the adjudication directly to the -High Court or to another court from the decision of which an appeal lies to the High Court, it  has          no power to exercise  its  revisional jurisdiction against the adjudication, but where the decision itself  is not  appealable to the High Court directly  or    indirectly, exercise  of the revisional jurisdiction by the High  Court would not be deemed excluded.

A decision of the subordinate Court is amenable to the revisional jurisdiction of the High Court unless that jurisdiction is clearly barred by a special law or an appeal lies therefrom.

The decision of the trial Judge was erroneous because he denied himself the jurisdiction of holding that the suits were not maintainable. The fact that he did not dismiss the suits and did not draw up decrees for that purpose, was itself an exercise of jurisdiction with material irregularity, if not also illegality. In so far as the parties were concerned, the suits were no longer live suits as the decision had put an end to them. The word “case” in s. 115 does not mean a concluded suit or proceeding but each decision which terminates a part of the controversy involving a matter of jurisdiction.

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CPC Case Brief – Mahant Dhangir v. Madan Mohan

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ACT:    Question regarding maintainability of cross-objection in appeal-order 41, rules 22 and 33 of Civil Procedure Code- Applicability thereof.

There is a Math known as Juna Math in Bikaner.

FACTS- The first appellant is the present Mahant of the Math and the second appellant is the presiding deity of the Math, both referred to collectively as ‘the Math’, herein. Previously, one Lalgiri Maharaj was the Mahant of the Math. He mismanaged the Math and disposed of its properties. He gave on lease for 99 years land measuring 2211 sq. yards in favour of Madan Mohan, the respondent No. 1.he sold to Madan Mohan 446 sq. yards of land out of the land leased to him. Madan Mohan constructed shops on the land purchased and sold them to Jankidas and Mohan Lal, who are respondents Nos. 2 and 3. Then Madan Mohan sold another piece of land purchased from Lalgiri to the respondents Nos. 2 and 3. Later, the first appellant became the Mahant of the Math, and the Math filed a suit, challenging the alienations made by Lalgiri, and for a declaration that the said alienations were without authority and not binding on the Math and for possession of the property from the respondents 1 to 3. The trial Court decreed the suit in part only, as it gave a declaration that the lease deed dated August 19, 1963, was null and void, but the relief regarding possession of the land demised was rejected.

The suit for recovery of possession of the land sold by Lalgiri was also dismissed. Against the judgment of the Trial Court, two appeals one by the Math and the other, by Madan Mohan were filed before the High Court. By a common judgment in the two appeals, a single Judge of the High Court (i) allowed the appeal of the Math in part, giving a simple declaration that the sale of the land was void, but declining to pass a decree for possession of the land sold, and (ii) allowed the appeal of Madan Mohan, giving him complete relief, while holding that the suit as to the lease was barred by time. Against the judgment of the Single Judge, no appeal was filed either by the Math or by Madan Mohan. There was only an appeal filed by respondents 2 and 3, who impleaded the Math as         the first respondent and Madan Mohan, as the third respondent. The Math Preferred cross-objection. Madan Mohan did not do anything. The Division Bench of High Court dismissed the appeal on the merits.  It also dismissed the cross-objection on the ground of maintainability. Aggrieved by the dismissal of the cross-objection, the Math appealed to this Court for relief by special leave.

COURT HELD: The Single Judge invalidated the sale of the property to Madan Mohan, while denying a decree for possession. The appellants before the Division Bench wanted to get            rid of the finding as to the invalidity of the sale. The Math wanted to recover possession of the property from the appellants before the Division Bench, and Madan Mohan. The Math instead of filing an appeal for that relief, could as well file the cross-objection. That is clear from the provisions of R. 22 of 0.41,     C.P.C. The High Court was clearly in error in holding to the contrary. The next question for consideration was whether the cross-objection was maintainable against Madan Mohan, a co-respondent, and if not, whether the Court could call into aid R.       33, 0.41 C.P.C. Generally, the cross-objection could be urged against the appellant. It is only by way of exception to this general rule that one respondent may urge objection as against the other respondent. The type of such exceptional cases are    very much limited-when an appeal cannot be effectively disposed of without opening the matter as between the respondents inter se, or when there is a case where the objections are common as against the appellants and the co-respondent. This view has been accepted as a guide for more than two decades.  No attempt should be made to unsettle the law unless there is a compelling reason. The Court does not find any such compelling reason in the case.  The Math could urge the objection that the appellants before the Division Bench and Madan Mohan had no right to retain the property after the sale deed had been declared null and void. The validity of the lease deed and the possession of the land in pursuance there of, have to be determined only against Madan Mohan. It is not intermixed with the right of the appellants above-said. It has no relevance to the question raised in the appeal.

The High Court was right in holding that the cross-objection as to the lease was not maintainable against Madan Mohan.  But that does not mean that the Math should be left without a remedy     against the judgment of the Single Judge. If the cross-objection filed under R. 22 of 0.41,C.P.C. was not maintainable against the co-respondent, the Court could consider it under R. 33, 0.41, C.P.C. R. 22 and R. 33 are not mutually exclusive. They are closely related with each other. If objection cannot be urged under R. 22 against correspondent, R. 33 could take over and help the objector. The appellate Court could exercise that power in favour of all or any of the respondents even though such a respondent may not have filed any appeal or objection. The sweep of the power under R. 33 is wide enough to determine any question not only between the appellant and the respondent but also between a respondent and co-respondents.

The appellate Court could also pass such other decree or order as the case may require.  The words “as the case may require “used in R. 33 of 0.41, have been put in wide terms to enable the appellate Court to pass any order or decree to meet the ends of justice. This Court is not giving any liberal interpretation. The rule itself is liberal enough. The only constraint that could be seen, may be: that the parties before the lower Court should be there before the appellate Court, the question raised must properly arise out of the judgment of the lower Court; it may be urged by any party to the appeal.  It is true that the power of the appellate Court under R. 33 is discretionary, but it is a proper exercise of judicial discretion to determine all the questions urged in order to render complete justice between the parties.  The Court should not refuse to exercise that discretion on mere technicalities. Appeal allowed. The judgment and decree of the Division Bench of the High Court reversed.  The Division Bench to restore the appeal and cross objection of the parties and dispose of the same in accordance with law and in the light of the observations made.

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CPC Case Brief – K.R. Mohan Reddy v. Net Work Inc

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Facts

  • The parties entered into a partnership which was reconstituted at a later date.
  • A (plaintiff-respondent) Firm
  • B (defendant-appellant)Partner
  • B handed over certain work to A for execution.
  • Though B retired, he still requested A to continue work in his name.
  • According to A, B owed some amount to A.
  • B issued a cheque in this regard but was dishonoured.
  • A filed a suit for recovery.
  • B denied the fact contending that the cheque was obtained by fraud.
  • Trial judge dismissed the case.

Issue

  • Whether respondent can produce additional evidence in the Court under Order 41 rule 27?
  • Interpretation of O41 R27 is important.
  • Condition precedent for application of (aa) is different from (b). If the former one is to be applied, it is for the applicant to show that the conditions precedent to that clause was met. If b is to apply, the court is to consider the entire evidence on record and come on independent findings.
  • In State of Gujrat v. Mahendra Kumar, it was held that the appellate court must admit fresh evidence only when it is required to pronounce judgment. The particular order does not allow the court to let in evidence just to pronounce judgment in a particular way.

Holding

  • The respondent may file an additional affidavit in support of its application under O 41 R27.

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CPC Case Brief – Banarasi v. Ram Phal (cross objections and power of appellate court)

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  • The appeals raise a short but interesting question of frequent recurrence as to the power of the appellate court to interfere with and reverse or modify the decree appealed against by the appellants in the absence of any, cross-appeal or cross-objection by the respondent under Order 41 Rule 22 of CPC and the scope of power conferred on the appellate court under Rule 33 of Order 41 CPC.
  • Thus it is clear that just as an appeal is preferred by a person aggrieved by the decree so also a cross-objection is preferred by one who can be, said to be aggrieved by the decree. A party who has fully succeeded in die suit can and needs to neither prefer an appeal nor take any cross-objection; though certain finding may be against him. Appeal and cross-objection, both are filed against the decree and not against the judgment and certainly not against any finding recorded in a judgment.

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CPC Case Brief – Santosh Hazari v. Purushottam Tiwari (first and second appeal principles)

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Facts:

  • The plaintiff filed a suit for declaration of title and recovery of possession and issuance of a permanent preventive injunction restraining the defendant from interfering with the possession of the plaintiff over the suit property.

Issue

  • What is the substantial question of law in the case and whether High Court can hear the case?
  • Section 100 talks about the second appeal. 100 (3) says that substantial question of law is the sine qua non for the exercise of jurisdiction under section 100.
  • In Rimmalapudi, the court laid down a test. The test for determining whether a question of law is substantial or not is whether it is of general public importance or whether it affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this court or is not free from any difficulty or calls for discussion.

Holding

  • The Court held that the substantial question of law existed in the case and High Court must have heard it. It stated the question as
  • “Whether on the pleadings and the material brought on record, the first appellate Court was right in holding that the case of adverse possession was made out by the defendant and the suit filed by the plaintiff was liable to be dismissed as barred by time under Article 65 of the Limitation Act, more so when such finding was arrived at in rehearsal of the findings of the trial Court?”
  • The second appeal of the plaintiff is allowed and the case is remitted back to the High Court for deciding the second appeal afresh.

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CPC Case Brief – Municipal Committee Hoshiarpur v. Punjab State Electricity Board (Second Appeal)

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Facts:

  • Municipal Committee took an electricity connection from Punjab State Electricity Board.
  • The average bill for the consumption of electricity came to around 5000 p.m. which was paid regularly.
  • A new bill to the tune of Rs 82, 300 was served to the appellant.
  • Considering the amount was high, the plaintiff filed a suit challenging the said bill.
  • The Board contended that there was a connection problem and the meter was showing only 1/3 of the actual consumption of the energy and once the connection was restored the reading of the meter jumped three times.
  • The appellant contended it again.

Issue:

  • Whether any prejudice needs to be shown by the appellant if no substantial question of law was framed by the High Court and no chance of hearing was given to him?
  • Right to appeal is a creation of statute and it cannot be created by acq of parties or by the order of the Court.
  • The existence of substantial question law is the condition precedent for entertaining the second appeal.
  • In Leela Soni v. Rajesh Goyal, it was held that the power of High Court under section 100 is confined to framing of substantial question of law involved in the second appeal and decides the same.
  • The power under section 103 can be exercised by the High Court only if the core issue involved in the case hasn’t been decided by the trial court or the appellate court and the relevant material is available on record to adjudicate upon the said issue.

Holding:

  • No prejudice needs to be shown.
  • The revised bill could not be held to be showing the correct quantity of energy consumed and hence the findings of the trial court and the first appellate court are correct.
  • The High Court could not decide without forming the substantial question of law and this case could not be warranted under section 103. The judgment and decree of the High Court are set aside.

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