Month: March 2018

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Actions by or on Behalf of the Reporting Issuer

• Issuer can bring action against insider. Issuer must show that the person was an “insider”, “affiliate” or “associate” of the issuer, that the person bought or sold with knowledge of material information, or informed, and that they did so before the information was generally disclosed.
• The Securities Commission can bring an application for leave to bring an action in the name of and on behalf of the issuer to enforce the duty to account if the issuer does not.

1. Administrative sanctions
2. Cease trade orders
3. Removal of exemptions
4. Prohibitions from acting as a director or officer
5. Administrative penalty
6. Insider reporting.

*subject to defences above

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1. “Make Use of Defence – no longer applicable

• Used to be a defence in Canada saying that you had info, but didn’t MAKE USE OF IT (I would have bought it anyways)

o E.g. Martha Stewart ^ knew it, but made decision to trade before I knew this (found guilty of lying about insider trading, not guilty OF Insider trading)

• Made it impossible to convict anyone or find them liable for insider trading (to prove that they USED that knowledge to buy the securities, not just that they bought it)

o People in securities market not happy ^ can’t have an efficient market if you have such severe consequences and a broad rule

o In response to that: created another defence under OSA- now only requires that person “has knowledge” of a material fact that has not been disclosed (although Crim Code insider trading provision, s.182.1, requires that accused sold sec “knowingly using insider info” – therefore, may hamper effectiveness of provision)

1. “Protecting Integrity of the Info” (s.175 of Regs)

If you take all reasonable precautions to protect integrity of info and someone else trades, not guilty (only if reckless)

• Under agency law: partner is deemed to know what partners now (when in reality, you don’t)

o Thus, if you take all reasonable precautions to protect integrity of that information and someone else trades, not guilty, but if you’re reckless and they’re still not sure, rather take $ from you than investor

o Policy considerations to protect shareholders

Rule:

• If you’re a person in a special relationship, you buy/sell securities with knowledge of material change/fact that hasn’t been generally disclosed, you’re NOT guilty of insider trading if ALL of the following conditions are met:

o (a) only reason you’re deemed to have knowledge is bc info was known to one of your officers, directors, partners or employees

o (b) decision to buy/sell was made by someone who did not have ACTUAL knowledge of the information

o (c) no advice was given by person who had actual knowledge to person who made decision to trade

o (d) appropriate mechanism (wall) was in place to prevent flow of information from person who had actual knowledge to person who made decision to trade o firm or business took reasonable precautions to protect the integrity of that information

REGULATIONS, s.175

• s. 175(1) A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act, where the person or company proves that,

o (a) no director, officer, partner, employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities of the reporting issuer had actual knowledge of the material fact or material change; and o (b) no advice was given with respect to the purchase or sale of the securities to the director,

officer, partner, employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities by a director, partner, officer, employee or agent of the person or company who had actual knowledge of the material fact or the material change, o but this exemption is not available to an individual who had actual knowledge of the material fact or change.

• (2) AGENTS/INVESTMENT PLANS/FULFILLING CONTRACTS: A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act, where the person or company proves that,

o (a) the purchase or sale was entered into as agent of another person or company pursuant to a specific unsolicited order from that other person or company to purchase or sell;

o (b) the purchase or sale was made pursuant to participation in an automatic dividend

reinvestment plan, share purchase plan or other similar automatic plan that was entered into by the person or company prior to the acquisition of knowledge of the material fact or material change; or

o (c) the purchase or sale was made to fulfil a legally binding obligation entered into by the person or company prior to the acquisition of knowledge of the material fact or material change.

• (3) In determining whether a person or company has sustained the burden of proof under subsection (1), it shall be relevant whether and to what extent the person or company has implemented and maintained reasonable policies and procedures to prevent contraventions of subsection 76 (1) of the Act by persons making or influencing investment decisions on its behalf and to prevent transmission of information concerning a material fact or material change contrary to subsection 76 (2) or (3) of the Act.
• (4) A person or company who purchases or sells a security of a reporting issuer as agent or trustee for a person or company who is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act by reason of clause (2) (b) or (c), is also exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act.
• (5) A person or company is exempt from subsections 76 (1), (2) and (3) of the Act where the person or company proves that such person or company reasonably believed that,

o (a) the other party to a purchase or sale of securities; or o (b) the person or company informed of the material fact or material change, o as the case may be, had knowledge of the material fact or material change.

1. Defence in Practice – Law Firms

• Protect themselves against inadvertent trade – they all have rules on insider trading.

o Restricted List: Some say, every time you have transaction involving public company that is material, you have an obligation to phone a designated person and put that company on a restricted list so that someone in the law firm knows that people in that law firm cannot buy/sell shares b/c “we have knowledge of..

o Either way, trying to stop inadvertent/unintended insider trading claim. Integrity of information is protected (so you can use the defence) o In investment banks: Geographic separation b/w traders/investment bankers doing the deal, so bankers can’t get access to broker’s information (doesn’t work in law firm)

1. Trading as an agent & you ’ve given no advice (s.172((a) of Regs)

If you trade as AGENT for another person pursuant to unsolicited order, and you gave NO advice, you’re not guilty of insider trading

• I phone my broker, say buy apple. My broker knows that apple is about to make a massive announcement. What should my broker do?

o Not say anything. If broker tells me I can’t do that trade, I’ve learned something. In absence of defence, if my broker executes that trade, he’s guilty of insider trading. He shouldn’t be. So there’s a defence.

• 1. .5.5 Automatic Investment Plan (175(2)(b) of Regs)

If automatic dividend reinvestment plan, not guilty of insider trading, even if you knew

• Example: Disney: automatic dividend reinvestment plan: don’t want to send you cheques every quarter for .05 if you own 1 share ^ accumulate dividends for you, when it reaches price of a share, we buy you one

If you know someone is going to bid for Disney and they automatically buy you a share pursuant to Automatic Dividend Reinvestment Plan, you ’re not guilty of insider trading, even if you knew. They’re doing it for you w/o you asking

1. To fulfill legally binding agreement that happened before material info was known (s.175(2)(c) of regs)

Defence b/c entered into legally binding contract BEFORE You had knowledge, then you subsequently get

knowledge, don’t have to breach contract (Policy rationale dno uneven playing field I- not making decisions

w/ knowledge)

• E.g. Enter into legally binding agreement that on Halloween, you’ll buy 100 shares of apple from me, we both know nothing. Then I get insider info that stock is going down. Halloween comes, what should law be? dOKAY
• What if I have an option, then I learn information? No, b/c option not a legally binding contract.

1. Trades between 2 People Who Both Know the Info (s.175(5) of Regs)

Fine b/c both have same info, no one has advantage over someone else. Playing field still level.

• NOTE: insider trading isn’t designed to create equal opportunities or be fair in every circumstanced can’t do everything

1. Actions, Sanctions & Penalties for Insider Trading
2. Penal sanctions – CRIMINAL

Under s. 382.1 Criminal Code prohibits trading on basis of material info concerning an issuer that has not been generally disclosed (similar to OSA s.76)

Conviction for insider trading: Prosecution must prove:

1. Accused was in a “special relationship”
2. Accused purchased or sold securities of the reporting issuer
3. Accused made the purchase or sale with knowledge of a “material fact” or “material change” concerning the affairs of the reporting issuer; AND
4. That the material fact or material change had not been generally disclosed.

Conviction for tipping/informing:

1. Accused person was in a special relationship with reporting issuer
2. Accused informed another person of a material fact or material change with respect to the reporting issuer.
3. Accused informed another person of the material fact or material change before it was generally disclosed.

*also note: that unlike OSA, Crim Code does not cover tippees of tippees

*also makes no distinction between reporting issuers and non-reporting issuers (who would not have to disclose insider trading under OSA)

4.6.6.2 Civil Actions

Defencedinformation was given in the necessary course of business of the reporting issuer; a defence where the giving of the information is necessary to effect the takeover, business combination or acquisition; finally where the person reasonably believed the information had been generally disclosed.

The Act provides for an action for damages against a person trading on inside information by the person with whom the trade was made.

P must show:

1. D was in “special relationship” with RI
2. D purchased or sold securities of RI
3. D made purchase or sale with knowledge of a material fact or change
4. Material fact or change had not been generally disclosed.

Tipping: The Act also provides for an action for damages against a person who informed another of the inside information.

P must prove:

1. D is RI was in “special relationship” with issuer
2. D informed another person of material information
3. Information was given before material information generally disclosed.

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Question of fact- onus on D (accused of insider trading) to show you believe it was generally disclosed

When is it satisfactory general disclosure? When is it generally disclosed? ^ Question of fact.

Onus on the defendant being accused of insider trading to show that you believe it was generally disclosed (reverse onus)

Market knows, and has had time to digest it. How long is that? Whatever’s Reasonable.

NP 51-201 indicates that corp can meet “generally disclosed” defence by (a) news release, (b) announcement through press conference (although it is good to disclose on company website, this is not enough)

Texas Gulf Facts: TG puts out press release, and immediately, insiders bought up huge quantities of shares. Releasing a news release and then trading right away is not appropriate. Investors reading the news release is only one step in the process for complying with regulatory objective of allowing all investors to make an informed investment decision. Even assuming the contents of the release could be instantaneously acted upon, still should have waited until it could reasonably have been expected to appear in broad circulation.

Info must be effectively disclosed: Before insiders may act on material information, must be effectively disclosed in manner to ensure its availability to investing public. So basically, you cannot disclose and trade on the information one minute later.

National Sea

Ratio: Two-part test for when you can trade as an insider: 1. Must be disseminated to the trading public; and 2. The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/ complexity of the info (generally, wait one full trading day after release of info) Facts: Insiders bought a bunch of shares once it was on the wire. Said you still have to wait.

Reasons:

• Two part test for when you can trade as an insider and one day general rule:

o 1. Must be disseminated to the trading public; and

o 2. The trading public must have had it in their possession for a period of time allowing them to digest it in accordance with the nature/complexity of the information

■ Thus, insiders are NOT free to trade as soon as press release is on Dow Jones News Wire^ need to give it enough time to be effectively disclosed

• No Firm rule re: interval, BUT a safe working rule: should wait a minimum of one full trading day after release of information
• Factors to consider in length of time:

o a. nature/complexity of information o b. nature of market for stock

o c. place of company’s operations vs. place of disseminating info thru news release Policy Notes:

• Reverse Policy issue: *my argument: doesn’t really create equal playing field, b/c now the public gets to buy it before you do, whoever has their ear to the ground and is monitoring the Dow Jones, for instance.
• Bright line tests don’t work ^ you cannot legislate integrity

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1. OSA – Section 76 – Trading Where Undisclosed Change/Tipping

• (1) Trading where undisclosed change: No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.
• (2) Tipping: No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed.
• (3) Idem: No person or company that proposes,

o (a) to make a take-over bid, as defined in Part XX, for the securities of a reporting issuer;

o (b) to become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with a reporting issuer; or

o (c) to acquire a substantial portion of the property of a reporting issuer,

• shall inform another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed except where the information is given in the necessary course of business to effect the take-over bid, business combination or acquisition.
• (4) Defence- reasonably believing it was generally disclosed: No person or company shall be found to have contravened subsection (1), (2) or (3) if the person or company proves that the person or company reasonably believed that the material fact or material change had been generally disclosed.
• (5) Definition: For the purposes of this section,“person or company in a special relationship with a reporting issuer” means,

o (a) a person or company that is an insider, affiliate or associate of,

• (i) the reporting issuer,
• (ii) a person or company that is proposing to make a take-over bid, as defined in Part XX, for the securities of the reporting issuer, or
• (iii) a person or company that is proposing to become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its property,

• Notes: Takeover Bids: Insiders of the company making the takeover bid are in a special relationship (like directors/officers), but the company itself can still trade shares ^ why?

o Policy objective saying it’s a good thing to allow people to make takeover bids (balancing of investor protection and efficient capital markets), and the only realistic way to do that is to buy shares to complete the transaction, to defray their costs. ^ ought not be insider trading b/c something else we want to protect ^ don’t want the insider directors (or from other company) to prosper from it, there’s no policy justification for that. So want to allow take-over-bids, but not enrich directors/officers.

• If you are the bidding company and you go to the company you want to sell – must agree nothing will be told in mtg that is not public info (otherwise would put in a special relationship)

o (b) a person or company that is engaging in or proposes to engage in any business or professional activity with or on behalf of the reporting issuer or with or on behalf of a person or company described in sub-clause (a) (ii) or (iii),

• Note: catches lawyers here

o (c) a person who is a director, officer or employee of the reporting issuer or of a person or company described in subclause (a) (ii) or (iii) or clause (b),

o (d) a person or company that learned of the material fact or material change with respect to the reporting issuer while the person or company was a person or company described in clause (a), or (c),

• Note: e.g. if I WAS a lawyer, learned something they’re going to do, then they fire you, can’t trade.

o (e) a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship; (“personne ou compagnie ayant des rapports particuliers avec un emetteur assujetti”)

• Note: Deliberately vague, b/c a code is either insuff or excessive
• Recall: “reporting issuer” includes an issuer that has a real and substantial connection to Ontario and whose securities are listed and posted for trading on the TSX Venture Exchange. (“emetteur assujetti”)
• (6) Idem: For the purpose of subsection (1), a security of the reporting issuer shall be deemed to include,

o (a) a put, call, option or other right or obligation to purchase or sell securities of the reporting issuer;

o (b) a security, the market price of which varies materially with the market price of the securities of the issuer; or

o (c) a related derivative.

• **note definitions of associate, affiliate, and insider in 1(1)

MISSING A CATEGORY: Tippees who don’t know or ought to know that the person they got the info from was in a special relationship!! ^ persons who learn of information from a person in a special relationship and knows or ought to know that the person was in a special relationship are people in a special relationship, but misses those people who don’t know or ought to know

• *on an exam: look for hints that the person knows or ought to have known: (e.g. if taxi driver tells you to buy RIM, fine, you don’t know or ought to know. If his last name is same of CEO of RIM, more of an issue)

76(1): it is an offence for a person or a company in a special relationship with reporting issuer to purchase or sell securities with knowledge of a material fact or material change that has not been generally disclosed

• See 76(4) for Definition of Special Relationship
• THE ONLY ONES WHO CAN BE CHARGED are those in a special relationship with reporting issuer

1. Tipping (OSA s.76(2) +(3))

76(2) and (3): offence for reporting issuer or someone in a special relationship with reporting issuer or any person proposing to make takeover bid ^ prohibited from disclosing or giving other people information with respect to a material fact/change that has not been generally disclosed except in the necessary course of business

• Relevant that this applies to both an undisclosed material FACT and CHANGE

o If you ’re in a special relationship with RI and you have info not in public domain, you can’t tell anyone that, except in regular course of business until it’s generally disclosed

• Note: the Phrase is actually a Misnomer: Tipping is not trading ^ don’t even have to trade. What is definition of trade? SALE OF SECURITY ^ doesn’t include a purchase
• POLICY: Level Playing Field: We’re trying to avoid people with knowledge from using that knowledge to detriment of market b/c not a level playing field!
• NECESSARY COURSE OF BUSINESS:

o Is a question of FACT (depends on the circumstances) –

• Easy example: If I’m a company and I want to make a takeover bid for RIM, I have to call a lawyer to help me make a takeover bid for RIM, I’m TIPPING, but in the necessary course of business b/c I can’t do it without a lawyer. Have to hire a banker, I need $100m, tell them why
• Other cases of necessary course of business mentioned by NP 51-201, dealings with vendors/ suppliers; employees and officers, legal counsel, parties to negotiation, labour unions and industry assoc, govt agencies and credit rating agencies
• However, would not incl analysts. Also must make sure the receiver of info does not given info to anyone else

Royal Trust Co v. Campbeau -^Changes v. facts: tipping covers both

In this situation, even though they decided that knowing a major SH wouldn’t tender their shares was not a material change, it was a material fact, and in that case, the Director told other SHs not to tender, b/c the bid wouldn’t go ahead ^ today, he’d be dead with these rules (due to tipping regs). Telling people not or that they don’t have to tender to protect your job is not in the necessary course of business, and you’re guilty of tipping

Whenever you give an informational adv that is considered tipping

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4.6.2.1 Trading

1. Are you a person or company in a special relationship with a reporting issuer?

a. Special relationship: (a) insider, affiliate or associate of: the reporting issuer, a person

proposing to make a takeover bid, person proposing to become part of a reorganization, amalg, etc.; (b) a person (or co) engaging in or proposing to engage in business on behalf of reporting issuer or a person described in abc, (c) director, officer, employee of reporting issuer or of person making takeover bid, reorganizing, or engaged in business, (d) person or co who learned of mat fact or change while they were person in abc, or (e) person or co who learns info from any other person described in the section (in a special rel/ship) and knows or reasonably ought to have known that the person they learned it from was in a special relationship

1. Are you trading (buying/selling)?
2. Are you doing so with knowledge of a material fact OR change (covers both!) that has not been generally disclosed?
3. Generally disclosed: question of fact
4. Reverse Onus: Onus on defendant to show that they believed it was generally disclosed (76(4))
5. Cannot disclose and then trade right away, must be effective disclosure (Texas Gulf)
6. When market knows and has had time to digest (“reasonableness”) (National Sea)

iv. Safe rule is one trading day (National Sea)

1. If you are in a special relationship and traded with knowledge of a material fact OR change (covers both!) that has not been generally disclosed, do you have a valid defence? (175 of regs)
2. That it was generally disclosed (or that you reasonably believed it was) (76(4))
3. *if you’re deemed to have knowledge b/c you’re an employee, partner, directors, etc. in a company that had the information, can show that you protected integrity of the information (REGS 175)
4. If you’re trading as an agent (broker) for someone else (and you DID NOT give the info out to that principal) (175(2)(a))
5. If they were purchased as part of an automatic reinvestment plan (175(2)(b))
6. If they were traded b/w two people who both knew the information (175(2)(c))
7. Are you a person or company in a special relationship with a reporting issuer? If not…

a. See def of special relationship above

1. Did you learn information from someone that you knew or ought to have known was in a special relationship? (76(5)(e) – puts you in a special relationship)
2. Did you share a material fact or change that has not been generally disclosed with anyone else not in the ordinary course of business?
3. Material fact or change
4. Generally disclosed
5. Not in the ordinary course of business

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Why do we have the rules? (why can’t you trade with info not generally disclosed?) ^ Kimber Report

POLICY: maintain integrity of capital markets, provide fullest poss knowledge so that investor confidence

is maintained (want everyone to play)

• “Not improper for insider to buy/sell securities in their own company.. .generally accepted that it’s beneficial to have officers/directors purchase, as they thereby acquire direct financial interest in welfare of co. Impossible to justify proposition that investment so made can’t be realized or liquidated merely bc investor is insider. BUT improper for insider to use confidential info acquired by virtue of his position as insider to make profits by trading in securities of company. Should be free/open market with prices thereon based on fullest possible knowledge of all material facts among traders. Anything that puts that into question reduces confidence in the market place and is therefore a matter of public concern”

Why doesn’t this work?

• Not many successful prosecutions out of millions of trades, hard to monitor.

Regulators should just be honest: there is no way to stop insider trading. 6 people at OSC. Millions of people trading. You as an investor should not rely on the fact that there is a level playing field ^ false sense of confidence.

Options?

• Abolish Insider Trading laws, Let the industry/market regulate itself.

o Opposite argument: these rules still serve a massive deterrent effect (just b/c people do bad things doesn’t mean you shouldn’t regulate that activity)

o Maybe: give liability to CEOs who don’t monitor it, giving DD defence

o Or have both.

• Manager or directors will police execs better than securities regulators, or else people won’t want to buy your stuff, bad reputation

o NBA Example – commissioner cares b/c if people don’t have confidence in integrity of the market, they aren’t going to play (did a lot more than the police to prevent fixing games). If true, Apple has a better chance of stopping insider trading than the securities commission^ These people have better chance of controlling b/c their career depends on integrity of their company or game

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You can grab notes on other topic from here.

1. STATUTORY PROVISIONS
2. OSA Section 1(1) Definitions: Insider

“insider” means,

• (a) a director or officer of a reporting issuer,
• (b) a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer,
• (c) a person or company that has,

o (i) beneficial ownership of, or control or direction over, directly or indirectly, securities of a reporting issuer carrying 10 _ per cent or more of the voting rights attached to all the reporting issuer’s outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, or

o (ii) a combination of beneficial ownership of, and control or direction over, directly or

indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuer’s outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution,

• (d) a reporting issuer that has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security,
• (e) a person or company designated as an insider in an order made under subsection (11),

(f) a person or company that is in a class of persons or companies designated under subparagraph 40 v of subsection 143 (1); (“initie”)

1. OSA Section 107 – Insider Reporting
2. Insider reporting

• Within 10 days of becoming an insider or within such other time period as may be prescribed, a person or company who becomes an insider of a reporting issuer, other than a mutual fund, shall file a report disclosing, in the prescribed manner and form, any direct or indirect beneficial ownership of or control or direction over securities of the reporting issuer and any interest in, or right or obligation associated with, a related financial instrument and the insider shall make such other disclosure as may be required by the regulations.

1. Same

• Within 10 days, or within such other time period as may be prescribed, of any change in the direct or indirect beneficial ownership of, or control or direction over, securities of the reporting issuer or any interest in, or right or obligation associated with, a related financial instrument, an insider of a reporting issuer, other than a mutual fund, shall file a report disclosing, in the prescribed manner and form, such change and the insider shall make such other disclosure as may be required by the regulations.

1. NI55-104 Insider Reporting Requirements (s.3.2 & s.3.3) & Exemptions AND Form 55-102F2 – Insider Reporting

Sections 3.2 and 3.3:

• 3.2: have to fill out a report within 10 days of becoming an insider disclosing (a) beneficial ownership of, control or direction over securities and (b) interest in same as sec act above.
• 3.3: same as 107(2) above – except it’s FIVE days after a change in ownership you have to file report

Form 55-102F2: Form to fill out for insider reporting

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Insider: big shareholders, managers, directors ^ people that have information

POLICY: we actually want insiders to have skin in the game (e.g. need escrow arrangements with an IPO so they can’t sell right away – (61(2)(g) – director can refuse to issue receipt)

• They should be able to buy and sell, but not when it’s based on information not available to the public. Therefore, if you’re an insider and you’re buying or selling, that’s fine if you tell everyone.
• Why do insiders have to disclose? Because investors want to know if insiders are trading (if they don’t believe in company, why should you?); ultimately increases confidence in sec market

1. Analysis: When do insider reporting rules apply?

• Are you an insider of a reporting issuer? If yes,

o Insider: 1(1): Director or officer of reporting issuer, (b) director or officer of a person or

company that is an insider or a subsidiary of the RI, (c) someone who (i) owns 10% of the voting shares (excluding underwriters), (d) a RI that has purchased, redeemed or otherwise acquired a security of its own issue for as long as it holds it, (e) designated as an insider under ss 11

• Comply with proper disclosure:

o File a report within 5 days of becoming one: to disclose any ownership and any interest in, or right or obligation associated with, a related financial instrument, and make any other disclosure required by the regulations (price you bought/sold them at) (107(1) and 3.2 of NI 55-104)

• Have to say (a) i am an insider, (b) how you’re an insider, (c) file a report within 10 days of becoming one indicating that you bought/sold, the price, quantity and date

o If you already are one, have to file report within 10 days of change in your holdings: Also have to disclose if there is any change in your ownership (107(2))

• Have to say (a) i am an insider, (b) how you’re an insider, (c) file a report within 10 days of becoming one indicating that you bought/sold, the price, quantity and date

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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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“Material change” in issuer’s business. NP 51-201, 4.3

o Changes in corp structure (changes in controlling share ownership, major reorgs/ M&A; take-over bids)

o Changes in capital structure (sale of additional sec; planned repurchases of sec; planned stock splits/ consolidation/ share exchange/ stock dividend; changes in dividend payments/ policies; poss initiation of proxy fight; material modification in rights of sec holders) o Changes in financial results (sig increase/ decrease in earnings; unexpected changes in financial results; shifts in financial circumstances – cash flow red; changes in value/ composition of corp’s assets)

o Changes in business and operations (development that affects corp’s resources, tech, products or markets; sig change in capital investment plans; major labour disputes; sig new/ losses of contracts; changes to BOD; developments in material legal proceedings; de-listing of corp’s sec)

o Acquisitions and dispositions o Changes in credit arrangements

• 4.2(2) of Policy encourages issuers to err on the side of disclosing the information if there is any doubt.

1. What must be filed with a material change (3 Report Options)
2. Complete Public Disclosure

1) File a press release per s.75 OSA, NI 51-201 s.2.1; 2) File a material change report (Form 51-102F3)

• 1) File a press release immediately disclosing the nature and substance of the change

o NP 51-201, 2.1: “A company’s press release should contain enough detail to enable the media and investors to understand the substance and importance of the change it is disclosing. Avoid including unnecessary details, exaggerated reports or promotional commentary”. o Obligation: to be factual and balanced (BUT no more said by Securities Commission)

• 2) File a material change report (Form 51-102F3) disclosing in greater detail the nature and substance of the change, within 10 days of the change.

o Example: a fire occurs. It is material. File press release immediately. File material change report within 10 days.

1. Incomplete Public Disclosure

Still Form 51-102F3. This is the same, except leave out a fact and persuade the commission (via report) that a particular fact should not be disclosed. Here, only part of the material change is not disclosed. Prof has never seen this used.

1. Confidential Disclosure / Reporting

s. 7.1(1) and (2) of National Instrument 51-102: Material Change Reports

Do not have to follow usual procedure of disclosing material change (per s.7.1(1)) if, per s.7.1(2) it would be

1. unduly detrimental or (b) as a right, and the reporting issuer immediately files Form 51-102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure

Statute (OSA s.7.1(1))

Description

S.7.1(1) Publication of Material Change: Subject to subsection (2), if a material change occurs in the affairs of a reporting issuer, the reporting issuer must (a) immediately issue and file a news release authorized by an executive officer disclosing the nature and substance of the change; and (b) as soon as practicable, and in any event within 10 days of the date on which the change occurs, file a Form 51-102F3 Material Change Report with respect to the material change.

Statute (OSA s.7.1(1))	Description
(2) Subsection (1) does not apply if,
(a) Unduly Detrimental: in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure required by subsection (1) would be unduly detrimental to the interests of the reporting issuer; or	2.2 of NP 51-201: Comparative: Detriment outweighing benefits of disclosure (undue economic detriment). Might happen where disclosure would interfere with a company’s pursuit of a specific objective or strategy, with ongoing negotiations, or ability to complete a transaction. If that harm outweighs the general benefits to the market of immediate disclosure, then withholding disclosure is justified. WHY THIS IS A PROBLEM: You are admitting that it’s material and discloseable, and you’re obligated to disclose: so if your request is denied, you’re screwed and you have to disclose. You’ve removed any judgment from you or your client. This hardly ever applies, so may as well stay away from it. POLICY Tensions: o Investor protection: should be able to assume all material changes have been published and can be pissed about making inv decision w/o that info vs o Efficient Markets/Having People Play: There are circumstances where disclosure may be unduly detrimental, doing long-term harm to all investors potentially, making commission surrogate for investors Basically, just keep in mind that application of this is difficult (of whether it’s a material material change) e.g. the Harold Ballard heart condition – disclosable or not?
(b) As of right: the material change consists of a decision to implement a change made by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors is probable, and senior management of the reporting issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the reporting issuer,	Where senior management has decided to do something, will give you confidential disclosure as of right until board has approved it and when they have, you ’re into regular disclosure Why do they allow a material change not to be reported to the world yet? ^Preserve right of directors to make decisions: Forces directors to do it, if you’ve announced it, taking decision away from the directors o BUT HAVE TO DISCLOSE WHEN: (a) board has approved decision or as punishment when: (b) if you let it leak and people are trading with it No sympathy b/c should have protected info, b/w innocent parties, have to protect investors in marketplace. Have to let them know that no one is trading with that knowledge. The point of this confidential disclosure request to the commission (vs just not disclosing if you decide it is confidential): o So that commission knows insiders aren’t trading, they can monitor the stock, make sure people aren’t trading with the information o If regulator sees trading, corp has to disclose fact – seems to have looked Tension b/w investor protection and efficient capital markets: don’t want people using info to exploit, but don’t want to create situation where management can pre-empt board and this is the compromise. Once approved by board, under obligation to disclose ^ issue press release and file material change report
and the reporting issuer immediately files Form 51-102F3 Material Change Report marked so to indicate it is confidential as well as written reasons for non-disclosure	Must advise commission every 10 days until disclosed If board says no – therefore, nothing to release o and the reporting issuer immediately files the report required under paragraph (1)(b) marked so as to indicate that it is confidential, together with written reasons for non-disclosure. Material change in affairs of company but you do not file a press release or a report, and you seek a confidential ruling from the securities commission

Statute (OSA s.7.1(1))	Description
	saying this has happened, but I can’t disclose it for this reason

1. Best Practices Re: Disclosure (per NP 51-201)
2. Establish a corp disclosure policy and oversee its implementation
3. Have board/ audit committee review disclosure
4. Authorize limited # of company spokespersons
5. Adopt a “no comment” policy to rumours ^ otherwise inconsistent response may be interpreted as tipping

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