Early Warning – Securities Regulation

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Purpose of Early Warning: potential sign of a takeover bid where people will offer premiums to share price. If someone acquires a certain percent of the shares of a company, they have an obligation to say so and what their intention is, so that the market is aware of what is going on.

  • Give advance notice to the world that someone is accumulating stock because it might be relevant to your investment decision
  • The most important thing: increases potential for competing bids, and allows management time to engage in defensive tactics, if necessary
  1. STEPS:
  2. Have you bought shares that, together with what you already own, put you at an ownership threshold of 10% (you can trade up to 9.9 without disclosure)? If yes (102.1(1))
  3. PRESS RELEASE: Disclose that you bought them, how much you have, and your intentions by issuing and filing a press release, identifying the person/extent of their control over the voting securities (7.1 of Rule 62-504)
  4. even if there are 4 ppl with different amounts (under 10%), sec act holds the entire group as one no wise guys!
  5. FILE A REPORT: giving the details as soon as is practicable (also 7.1)
  6. **ALSO REMEMBER (and see below): HAVE TO FULFILL INSIDER REPORTING

TOO!!!

  1. Do you want to buy more shares? If yes^ wait one business day before buying more (s.102.1(3))
  2. Freeze: you must WAIT ONE BUSINESS DAY before buying more (102.1(3)) (give market time to digest and incentive to get info out faster – efficient markets)
  3. If 2% more in proportion of securities of that class of voting securities, have to do it again (102.1(2))
  4. Every additional 2% up to 20: triggers same obligation to file press release, file report ASAP, 1 business day freeze after you’ve filed report, continues to 20%, then TOB rules
  5. If you want control: if you own 9%, you should buy whatever the next biggest block is if you want to acquire control so you get as much as possible w/o reporting again
  6. Can’t go to prepare your sellers (e.g. get someone to sell to one seller) so that you can buy the max amount in one trade
  7. If you have 2 who own separate securities agree to vote together (and don’t buy additional shares), this doesn’t trigger any obligation
  8. STATUTORY PROVISIONS
  9. OSA S.102.1 – 10% Rule and 2% Rule
  • S.102.1(1): 10 per cent rule: Every acquiror (someone buying securities w/o making formal bid) who acquires beneficial ownership of, or the power to exercise control or direction over, voting or equity securities of any class of a reporting issuer or securities convertible into voting or equity securities of any class of a reporting issuer that, when added to the acquiror’s securities of that class, would constitute 10 per cent or more of the outstanding securities of that class, shall disclose the acquisition in the manner and form required by regulation.
  • (2) Same, further 2 per cent rule: An acquiror who is required to make disclosure under subsection (1) shall make further disclosure in the manner and form required by regulation each time any of the following events occur:

o 1. The acquiror or any person or company acting j ointly or in concert with the acquiror acquires beneficial ownership of, or the power to exercise control or direction over,

  • i. an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates, or
  • ii. securities convertible into an additional 2 per cent or more of the outstanding securities referred to in subparagraph i.

o 2. There is a change in any material fact in the disclosure required under paragraph 1 or under subsection (1).

  • (3) Period when acquisitions prohibited – ONE BUSINESS DAY FREEZE: During the period beginning on the occurrence of an event in respect of which disclosure is required to be made under this section and ending on the expiry of one business day after the date that the disclosure is made, the acquiror required to make the disclosure or any person or company acting jointly or in concert with the acquiror shall not acquire or offer to acquire beneficial ownership of any securities of the class in respect of which the disclosure is made or any securities convertible into securities of that class.

o POLICY: to allow market to digest information

  • (4) Exemption – FREEZE does not apply to person with 20% (because they have different rules):

Subsection (3) does not apply to an acquiror who has beneficial ownership of, or the power to exercise control or direction over, securities that, together with the acquiror’s securities of that class, constitute 20 per cent or more of the outstanding securities of that class.

• Note: Section 102.2: if someone announces a takeover bid, there is a second obligation under early warning. If someone else acquires 5% or more, that person has to (1) put out a press release (before opening of trading next day) and (2) disclose every 2% thereafter. o Applies until 20% acquired

  1. OSCRULE 62-504: Section 7.1 – Early Warning

s. 7.1 Early warning: An acquiror under subsections 102.1(1) or (2) of the Act shall,

  • (a) promptly issue and file a news release containing the information required by section 3.1 of National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues; and
  • (b) within 2 business days from the day of the acquisition, file a report containing the information required by section 3.1 of National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.

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