Category: Securities Regulation

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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

You can grab notes on other topic from here.

You can grab notes on other topic from here.

Remember, 1(1): Material Change = change in business operations or capital of a company that would reasonably be expected to have a significant effect on market price or value of the securities, or a decision to implement a change referred to above by the board or senior management who believe that confirmation by the board is probable

• This definition distinguishes the following:

o a) Internal vs external changes: Limited to internal changes (business operations or capital of company), unless that external change impacts your business in a way that is more fundamental than rest of the world (then you have an obligation to disclose)

• E.g. fact that government passes law such that cigarettes can no longer be sold at drugstores is material for Shoppers’ Drug Mart.

o b) Actual vs proposed: Definition in 1(1) of Material Change covers both – actual, and proposed by directors OR proposed by managers who believe that approval of directors is probable

• Proposed: decision to make change, triggers the disclosure ^ makes sense since you are trying to get info to marketplace in time for it to be useful to marketplace.
• Note: it is likely that when mgmt. has decided, you can likely see that on a balance of probabilities it will be accepted by the board

o c) Material change vs fact: Obligation to disclose material CHANGES, not facts

• Lines get blurred b/w material facts/changes all the time ^ difficult to determine

Royal Trust Co v Campbeau

Ratio: Difference in material change vs. material fact (example)^ only have to disclose material changes, not material facts

Facts: Campbeau going to make bid for Royal Trust Co based on getting 2/3 SH approval, stock was going to go way up in price. Standard Trust Co realized that those holding lots of votes were not going to tender to bid, and Campbell bid was going to fail. When it failed, Campbeau complained, saying directors told people that they knew 40% of shares would not tender to the bid, had obligation to disclose that ^ had they done that, I wouldn’t have spent all this $ on this bid

Decision: No, the fact that shareholders won’t tender to the bid, that is a MATERIAL FACT, not a material CHANGE (doesn’t affect operations/business of the company) ^ no obligation under s. 75 to disclose material fact

DANIER

Also difficult to tell – whether a change in the weather and a subsequent crappy sales promotion of leather goods is a material fact or a material change (TJ found it to be a material fact)

1. Materiality Standard from National Policy 51-201

Pezim v. British Columbia (1994, SCC)

Ratio: National Policy Statements/ Sec Commissions should be given deference wrt to determining what constitutes a material change

Per Iacobucci: “the Commission’s policy-making role is limited. By that I mean that their policies cannot be elevated to the status of law”. However, Iacobucci J: also noted that considerable deference should be accorded to the securities commission in determining what constitutes a “material change” because this is within the expertise of the commission

You can grab notes on other topic from here.

You can grab notes on other topic from here.

• Section 75 of the SA in conjunction with NP 51-201
• Irregular and unpredictable intervals. A fire, a flood, a strike, a new product, a contract. That information has to get into the market place.

Steps:

1. You must report material changes in your business, capital or operations (75(1))

• Timing: You must report them at the right time (not too early, not too late)

o Difficult to determine b/c hard to determine on the margin

o Don’t want to disclose b/c it can be really harmful (e.g. Financial Post – would have to disclose its losses which could reduce its advertising revenues). HOWEVER, if it is a material change, you have no choice.

o Also NP 51-201 indicates that disclosure must be factual and balanced (must disclose unfavourable news just as quickly as favourable news)

• Internal Changes or External if Impacting Differently: Material and internal, unless the external change (e.g. war in another country) affects your business, capital, operations in a way that it does not affect others (per NP 51-201)
• CHANGES not FACTS and should be MATERIAL:

o Definition in 1(1): Affects business, capital or operations

o Examples in NP 51-201, 4.3^NP 51-201 recommends: Erring on the side of materiality and disclose (although keeping in mind risk of premature disclosure)

• Actual AND Proposed Changes: Definition of Material Change in 1(1) and NP 51-201

o Actual: things that have occurred (e.g. judgment against you, fire) o Proposed:

• (a) when board decides to do something (BEFORE they’ve actually done it)

• (why: fact decision is made is the info they want to get into the marketplace so that market is efficient, works, and is trading with best possible information)

• (b) when management decides to do something and they believe BoD approval is probable.
• To bring action for Failure by an issuer to make timely disclosure, must show: 1) Reporting issuer or any other issuer with a real and substantial connection to the jurisdiction whose securities are publicly traded, failed to make a timely disclosure; 2) The P acquired or disposed of a security of the issuer; 3) Acquisition or disposal occurred between the time when a disclosure was required and before the subsequent disclosure of the material change.

1. Report in one of three ways: 1) Full Reporting; 2) Incomplete Disclosure, 3) Confidential Reporting (must apply to use this, and can only use if you meet conditions)

• Conditions for confidential reporting:

o (a) unduly detrimental to disclose; or

o (b) as of right if mgmt makes a decision that is likely to be approved by board and no one is trading with the info, and then must disclose once it’s approved/or if it leaks

POLICY:

To bring action for Failure by an issuer to make timely disclosure, must show: 1) Reporting issuer or any other issuer with a real and substantial connection to the jurisdiction whose securities are publicly traded, failed to make a timely disclosure; 2) The P acquired or disposed of a security of the issuer; 3) Acquisition or disposal occurred between the time when a disclosure was required and before the subsequent disclosure of the material change.

• Equal Access to Information and proper valuation: Intended to provide investors with up-to-date information which is equal to the access enjoyed by insiders and proper valuation results.
• Tension: BUT HARD TO DECIDE WHEN YOU SHOULD DISCLOSE

POLICY Tension: Investor Information + Protection VS. Efficient capital markets

Efficient Capital Markets (don’t want premature or late disclosure, both are bad)

• (a) Confidentiality/ Privacy issues: You cannot have a proper negotiation if public companies need to disclose that they’re in talks (lets the person buying negotiate a lower price b/c you look stupid if you don’t end up selling) – you cannot disclose every time you get a sense something material might happen (no one will sell or buy ever)

o e.g. Steve Jobs being ill – hard to draw line and decide when appropriate to disclose (it is relevant and material to company HOWEVER we are talking about someone who deserves privacy)

• (b) Regulators Afraid of premature disclosure: do not want you to manipulate the market (e.g. say you’re buying at a premium just so price will go up).

o also rumours: if premature disclosue happens, you are in trouble – disappointed investor expectations

• They just want you reporting MATERIAL CHANGE UPON ITS OCCURRENCE, no sooner, no later and they’ll decide in hindsight.

Spectrum ^ at what point in these discussions is disclosure required?

1. Statutory Provision: OSA, Part XVIII – Continuous Disclosure

s.75 (1) must report a material change; (2) within 10 days of change; (3) exception for confidentiality; (4)

keep reporting every 10 days; (5) requirement to disclose subsequently if someone purchases

• S.75(1): What you must report – material change: Subject to subsection (3), where a material change occurs in the affairs of a reporting issuer, it shall forthwith issue and file a news release authorized by a senior officer disclosing the nature and substance of the change.
• (2) Report of material change: Subject to subsection (3), the reporting issuer shall file a report of such material change in accordance with the regulations as soon as practicable and in any event within ten days of the date on which the change occurs.
• (3) Exception – Confidentiality: A reporting issuer may, instead of complying with subsection (1), promptly file with the Commission the report required under subsection (2), marked as confidential, and its written reasons for doing so if,

o (a) the reporting issuer reasonably believes that a disclosure required under subsections (1) and (2) would be unduly detrimental to its interests; or

o (b) the material change consists of a decision made by the senior management of the reporting issuer to implement a change and the senior management,

• (i) believes that confirmation by the board of directors of the decision to implement the change is probable, and
• (ii) has no reason to believe that any person or company with knowledge of the material change has purchased or sold the reporting issuer’s securities or traded a related derivative.
• (4) Idem – keep reporting every 10 days: Where a report has been filed with the Commission under subsection (3), the reporting issuer shall advise the Commission in writing where it believes the report should continue to remain confidential within ten days of the date of filing of the initial report and every ten days thereafter until the material change is generally disclosed in the manner referred to in subsection (1) or, if the material change consists of a decision of the type referred to in clause (3) (b), until that decision has been rejected by the board of directors of the issuer.
• (5) Requirement to disclose subsequently – if someone purchases, have to disclose: A reporting issuer that has filed a report under subsection (3) shall promptly disclose the material change in the manner referred to in subsection (1) if the reporting issuer becomes aware or has reasonable grounds to believe that a person or company having knowledge of the material change is purchasing or selling securities of the reporting issuer or trading a related derivative.

You can grab notes on other topic from here.