Keep Calm and Carry On - InterOil and Smoothwater

Sean Vanderpol -

There are, generally speaking, relatively few judicial decisions touching on the practical aspects of M&A law in Canada, particularly when compared to the output of the Delaware courts.  In November, however, we saw decisions out of the Yukon Court of Appeal (through the British Columbia Court of Appeal acting as the appellate court for the Supreme Court of Yukon) in InterOil, and the Alberta Court of Appeal in Smoothwater, that touched on important considerations relating to change of control transactions, particularly transactions progressed by way of a judicially-sanctioned “plan of arrangement”.  While unlikely to substantially alter the “best practices” for boards of directors of target companies in the discharge of their fiduciary duties, they do serve as a reminder of the importance of careful and thoughtful attention to the discharge of those duties and the potential hurdles that buyers and sellers can face in trying to bring their transactions to completion.  

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Court of Appeal provides guidance for securities class actions

Alan D’Silva, Alexander Rose and David Spence - 

In the proposed $1 billion class action Rooney v. ArcelorMittal S.A., the Ontario Court of Appeal has clarified that security holders who sell their securities in the secondary market in connection with a take-over bid have no right to pursue an action for misrepresentation under Section 131(1) of the Securities Act (Ontario). The question was one of first impression before the Court. Consistent with the overriding policy objectives of the Securities Act, the Court confirmed that security holders who sell their securities in the secondary market cannot bypass the strict leave requirements, liability caps, and other elements of Part XXIII.1 included by the Legislature as part of the balance struck in creating statutory secondary market liability for misrepresentations.

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Hedge fund investments survive section 94.1 challenge

Marianne Kennedy Beaulne - 

Although based in low-tax jurisdictions, Tax Court finds business reasons for investments overshadowed their tax benefits

Section 94.1 of the Income Tax Act (Canada) is an anti-avoidance rule aimed at attempts to divert investment income to an offshore entity in a low (or no) tax jurisdiction. In Gerbro Holdings Company v. The Queen [1] the Tax Court of Canada considered, for the first time, the application of this rule to investments in offshore hedge funds.[2]The Court concluded that the underlying assets of such funds may be “portfolio investments” for purposes of section 94.1, but the section did not apply in Gerbro because none of the main reasons for investing in the hedge funds was to defer or avoid Canadian taxes.

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BCSC decides Red Eagle poison pill case as take-over bid amendments loom

John Anderson

The British Columbia Securities Commission (BCSC) released its reasons in Re Red Eagle, 2015 BCSECCOM 401, in which it cease-traded a rights plan in the face of a hostile bid. As perhaps one of the last rights plan cases to be decided before the proposed amendments to Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids(MI 62-104) come into force, its conclusions regarding rights plans are not surprising and may be of limited relevance in the future. However, the reasons do set out some timeless principles in relation to the other issues the BCSC faced in this case.

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Follow-Up: automatic disclosure of financial records from Canadian financial institutions

Roanne C. Bratz -

On September 30, 2015, Justice Donald J. Rennie, on behalf of a three member panel  of the Federal Court of Appeal, denied the appellants’ motion for an interlocutory injunction prohibiting the disclosure of their financial records by the Minister of National Revenue to the U.S. Department of the Treasury pursuant to the IGA.

This would appear to give the Canada Revenue Agency a “green light” to turn over bank account information of U.S. persons residing in Canada to the Internal Revenue Service. For further background on related developments, please see our previous posts.

Can in-house counsel be summoned by the AMF to testify in an investigation?

Frédéric Paré -

The Supreme Court of Canada denied leave to appeal with respect to the 2014 Quebec Court of Appeal decision requiring in-house counsel to attend an Autorité des Marchés Financiers (AMF) investigation into her employer’s trades.

By refusing leave to appeal, the Supreme Court of Canada confirms the Quebec Court of Appeal’s decision in Autorité des marchés financiers c. X that recognized the validity of a subpoena issued to an in-house counsel (Me X) ordering her to testify on facts in the context of an AMF investigation into Me X’s employer and a confidentiality order with respect to the investigation.  The challenge, based in substance upon the application of solicitor-client privilege, was considered premature given the absence of evidence that the AMF had asked, or was going to ask, Me X to disclose privileged information.  This decision does not affect the scope of in-house counsel’s solicitor-client privilege as such privilege can, and very often does, apply to communications (depending on their nature) between employers and their in-house counsel.  Nor does this decision prevent Me X from objecting to specific disclosure to the AMF later on the basis of such privilege. Given this ruling, the involvement of external counsel early on when such an investigation is launched, or expected to be launched, would be well advised.

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Supreme Court of Canada denies authorization in first Quebec secondary market securities class action

Alan D’Silva and Sinziana Hennig -

On April 17, 2015, the Supreme Court of Canada released its decision in Theratechnologies inc. v. 121851 Canada inc., the first case to consider the authorization of a secondary market class action under the provisions of the Quebec Securities Act that came into force in 2007. These provisions created a new statutory cause of action that enabled investors to bring claims against reporting issuers who breach their obligations to disclose material facts and changes; however, investors must obtain court authorization to commence such claims.

In a unanimous judgment, the Supreme Court held that the threshold for authorization to commence a secondary market action under the Quebec legislation requires showing “a reasonable or realistic chance that the action will succeed.” The Court allowed the appeal, concluding that the evidence did not credibly point to any material change that could have triggered timely disclosure obligations for the reporting issuer; accordingly, there was no reasonable possibility that the action could succeed.

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Ontario court interprets proviso in advance notice policy to permit late nominations

Sean Vanderpol and Ramandeep K. Grewal -

While advance notice policies have been utilized by issuers in the U.S. for quite some time, they are still relatively new to the Canadian market. As a result, the Canadian jurisprudence on their use and interpretation continues to develop.

The Ontario Superior Court of Justice may have recently added some uncertainty when it granted a declaration in favour of Orange Capital, finding that the investment firm had complied with Partners REIT’s advance notice policy in respect of the time frame for nominating trustees. In light of its finding that Orange Capital had complied with the policy, the Court declined to rule on the validity of the policy itself. Orange Capital had been seeking a declaration that the policy was of no force or effect, as the board had not submitted it for approval of unitholders.

As we discussed in an earlier post, Orange Capital launched a tender offer in May to purchase up to 10% of the outstanding units of Partners in an attempt to acquire enough proxy votes to get a new slate of independent trustees appointed to Partners’ board. Under the terms of the tender offer, tendering unitholders were also required to deposit proxies appointing Orange Capital as proxy holder, for all deposited units, regardless of the number of deposited units actually taken up and paid for by Orange Capital.

Subsequent to discussions with the OSC, Orange Capital clarified certain aspects of its tender offer. Specifically, the additional details and conditions set out in the subsequent release by Orange Capital suggest that the OSC sought to impose aspects of the take-over regime in the immediate situation.

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A Quebec tipping case serves to caution insiders

Maïté Murray and Vincent Laurin -

On April 7, 2014, the Bureau de décision et de révision (BDR) ruled on an application by the Autorité des marchés financiers (AMF) seeking an administrative penalty against a director of a reporting issuer for having allegedly contravened tipping restrictions under the Securities Act (Quebec). The AMF claimed that a general comment made by the director about the general status of the business of the reporting issuer to the effect that “things were going badly” should be considered as “privileged information” and could lead to a violation of tipping restrictions. (Tipping prohibitions under the securities acts of other Canadian jurisdictions refer to “material fact” and “material change” rather than “privileged information” but have the same purpose, namely ensuring that the investing public has equal access to information relating to reporting issuers.)

The comment in this case would have been made during an informal conversation between the director and a former CFO of the company, at a time when the company was faced with the prospect of having the relationship with its one and only client terminated prematurely. Shortly after this alleged conversation took place, the former CFO sold a significant amount of shares she held in the company.

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Ontario court provides guidance on fairness opinions when seeking court approval for plans of arrangement

Quentin Markin and Benoît Dubord -

The Ontario Superior Court of Justice released a decision on March 28, 2014 that provides practical insight for corporate lawyers and investment bankers in regards to the court process for plans of arrangement and the content of fairness opinions.

Justice Brown granted a final order approving the plan of arrangement among Champion Iron Mines, an Ontario Business Corporations Act corporation and TSX-listed, and its acquirer, Mamba Minerals, an Australian corporation listed on the Australian Securities Exchange (ASX). In issuing a set of reasons supporting the final order (which itself is not common), Justice Brown has reminded applicants, bankers and their counsel that in order to approve a plan of arrangement the courts have to consider (i) whether statutory procedures have been met; (ii) whether the application has been put forward in good faith; and (iii) whether the arrangement is fair and reasonable. It is on the latter point that Justice Brown focusses his comments, specifically in respect of the use of fairness opinions in the court approval process for a plan of arrangement.

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Ontario Court finds press release responding to dissident's allegations not a proxy solicitation

Kevin Smyth and Marshall Eidinger -

The Ontario Superior Court of Justice recently issued its decision in Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc. The decision deals with the interplay between the issuance of a press release by a company to address allegations levelled by a dissident shareholder and the proxy solicitation rules, which prohibit the solicitation of proxies without sending a proxy circular. The court affirmed that the existence of a proxy solicitation is a question of fact depending on the nature of the communication and the circumstances of the transmission. In the case at hand, the court concluded that the company did not violate the proxy solicitation rules as the “principal purpose” of the company’s press release was to provide certain explanations and defend its historical position, not to solicit proxies.

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Delaware provides guidance on single-bidder process

Stéphane Rousseau and Benoît C. Dubord -

In Koehler v. NetSpend Holdings Inc., decided last year, the Delaware Chancery Court discussed the duties of directors in a change-of-control transaction executed with a single-bidder process.

NetSpend conducted an initial public offering in 2010 for a price of $11 per share. In the following year, the share price fell to less than $4. After two rounds of share repurchases in 2011 and 2012, the board of directors explored several possibilities for enhancing shareholder value, including additional stock repurchases, a self-tender offer or a possible sale of the company. At that time, the board concluded that it was in the shareholders’ best interest to maintain the company as an independent, publicly owned entity.

In the fall of 2012, NetSpend’s two dominant shareholders informed the board of their intention to sell all or a significant portion of their shares. The board assisted the shareholders in their selling efforts. While noting that the entire company was not for sale, the board authorized the disclosure of financial projections to two private equity firms. For this purpose, the company executed confidentiality agreements with standstill provisions containing “Don’t Ask Don’t Waive” (DADW) clauses. In a nutshell, the clauses prevented the private equity firms from asking NetSpend to amend or waive any provision of the standstill provisions. Further, the standstill agreements did not terminate upon the announcement of another transaction.

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Five developments to follow in 2014 - Securities class actions and fraud-on-the-market theory

Stéphane Rousseau and Benoît C. Dubord -

Later this year, the U.S. Supreme Court will begin hearing arguments in Halliburton Co. v. Erica P. John Fund, Inc., a case that has enormous potential implications for securities class actions. Arguably one of the most important securities cases of the last twenty years, Halliburton concerns the fraud-on-the-market presumption of reliance that applies in class actions under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Courts have held that Rule 10b-5 provides a private right of action that allows investors to recover damages in cases of securities fraud. To be entitled for damages, investors must demonstrate: (i) a material misrepresentation or omission by the defendant; (ii) scienter; (iii) a connection between the misrepresentation or omission and the purchase or sale of a security; (iv) reliance upon the misrepresentation or omission; (v) economic loss; and (vi) loss causation. 

In Basic Inc. v. Levinson (1988), the U.S. Supreme Court stated that the reliance requirement placed “an unnecessarily unrealistic evidentiary burden” on plaintiffs who traded on an impersonal market. To alleviate this concern, the Court endorsed the “fraud-on-the-market” theory, pursuant to which plaintiffs benefit from a rebuttable presumption of reliance on material misrepresentations made to the public. The endorsement of the fraud-on-the-market presumption spurred the development of securities class actions in the U.S.

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Supreme Court uses reasonableness standard to review BCSC order

Maïté Murray -

On December 5, the Supreme Court of Canada released its decision in McLean v. British Columbia (Securities Commission), a case in which the Court found that a standard of reasonableness applied to its review of a BCSC decision in respect of the limitation period applicable to secondary proceedings under the Securities Act (British Columbia).

In September 2008, the appellant McLean entered into a settlement agreement with the OSC in regards to claims of misconduct that allegedly occurred between March 1996 and June 2001. The settlement agreement and the corresponding agreed-upon order issued by the OSC generally barred her from trading in securities for a period of five years and from acting as an officer or director of certain registered entities for a period of ten years.

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Delaware case provides guidance to directors of overseas corporations

Stéphane Rousseau and Benoît C. Dubord -

The recent In re Puda Coal, Inc. Stockholders Litigation decision serves as a cautionary note to directors of corporations with significant activities overseas. Specifically, the decision provides guidance to directors as to what is expected from them in order to fulfill their duties.

Puda Coal concerned a Delaware corporation listed on the New York Stock Exchange following a reverse triangular merger. The operating subsidiary and assets of the parent corporation, Puda Coal, were based in China. According to the plaintiffs, the corporation’s Chairman and Chief executive officer illegally sold the shares of the subsidiary to a third party, effectively looting the corporation of its assets.

The independent directors of Puda Coal, however, took 18 months to realize that the assets had been looted, during which time they authorized the disclosure of documents referring to the corporation’s ownership of the assets. The shareholders plaintiffs sued the directors for breach of their duty of loyalty, more specifically breach of their duty to monitor the corporation’s affairs and officers.

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Delaware case provides guidance to directors in the context of a debt proxy put

Stéphane Rousseau and Benoît C. Dubord -

In Kallick v. Sandridge Energy, the Delaware Chancery Court addressed the duties of directors in the context of a proxy put contained in a notes indenture. A group of dissident shareholders of Sandridge had advised the board of directors of their willingness to launch a consent solicitation whereby shareholders would be asked to consent to de-stagger the board, and to support their slate of candidates to the board. The board argued that the proposed candidates were not as qualified as the incumbent directors to manage the company. The board also notified shareholders that following the proxy put, the election of the dissidents’ candidates would be a change of control triggering the obligation for the company to buyback the notes at 101% of par value. According to the board, the notes buyback would put financial stress on the company.  The proxy put provided that the buyback obligation was not triggered if the board approved the list of nominees. However, the board refused to take position.

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Shareholders entitled to reimbursement in connection with shareholders' meeting

Zev Zelman and Mike Devereux -

The Ontario Superior Court of Justice recently issued its decision in Goodwood Inc. v. Cathay Forest Products Corp. The decision is noteworthy in that it could have significant and practical implications for dissident shareholders (and target companies) in respect of reimbursement of expenses by a target company.


Cathay Forest Products Corp. is a commercial forest products company incorporated under the Canada Business Corporations Act (CBCA). Cathay’s last annual meeting of shareholders took place in June 2010, and the company’s board of directors hasn’t held an annual meeting since. The company also failed to take steps to call and hold a meeting of shareholders that was requisitioned by a shareholder under section 143(1) of the CBCA.

Upon application to the Ontario Superior Court of Justice, the Court ordered, under section 144(1) of the CBCA, that a meeting of Cathay’s shareholders be held on July 30, 2012. Despite the Court order, the incumbent directors took no steps to facilitate a meeting. Rather, it was left to the requisitioning shareholder, with the assistance of its shareholder advisor, VC & Co. Incorporated, to bring about the court-ordered meeting. Prior to the July 30 court-ordered meeting, the incumbent directors of Cathay resigned, leaving Cathay without any directors. At the meeting, Cathay’s shareholders elected four new directors supported by the requisitioning shareholder.

Following the successful election of the requisitioning shareholder’s proposed slate of directors, the requisitioning shareholder brought a motion before the Court for an order requiring Cathay to reimburse it for the costs it incurred in connection with its activities and the calling and holding of the court-ordered meeting.

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BCSC panel finds "spectacular" drill results not a material change

On August 7, a three-member panel of the British Columbia Securities Commission unanimously dismissed allegations that Canaco Resources Inc. and four of its directors contravened the B.C. Securities Act by failing to immediately disclose positive drill results emanating from the company’s marquee property.

Canaco was a TSX-V issuer with a property in Tanzania known as Magambazi on which it had made a gold discovery. On December 3, 2010, its board issued a significant number of options to directors and management. At the time of those grants, the company had in its possession undisclosed drill results from eight drill holes. In internal emails, the directors described the results as “just beautiful, “spectacular” and “fantastic news”.

Canaco disclosed the drill results in three separate news releases on December 6, 9 and 22, 2010 (that is, after the option grants). Two of those news releases described the drill results as “spectacular”. On each of the three days that the drill results were announced, the stock price rose. On two of those days, the price increases were significant. The TSX-V subsequently ordered the company to re-price the options to reflect the (much higher) market price following dissemination of the news releases.

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Relying on counsel doesn't excuse illegal share distributions

Denise Duifhuis and Lisa Trienis -

Directors who rely in good faith on advice from professional advisors, such as accountants and lawyers, may have a due diligence defence to certain legal claims in some situations. However, a recent decision of the British Columbia Securities Commission (the Commission) in Photo Violation Technologies Corp. (2013 BCSECCOM 276 and 2012 BCSECCOM 284) makes it clear that reliance on legal counsel doesn’t allow directors to avoid liability under securities laws when a company issues shares without appropriate exemptions from the registration and prospectus requirements.


Photo Violation Technologies Corp. (PVT) raised approximately $5.2 million from 322 investors between 2005 and 2008. In respect of 272 investors, who invested approximately $3.6 million during the relevant period, PVT purported to rely on the friends, family and business associates and accredited investor exemptions from the prospectus and registration requirements of the BC Securities Act, none of which applied in the circumstances.  PVT retained legal counsel, with expertise in financing, who advised them in connection with the private placements.

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Activism Update: Ontario Court in Bioniche clarifies rights of dissidents in requisitioning a contested meeting

Mike Devereux and Zev Zelman -

The Ontario Superior Court of Justice recently issued its decision in Wells v. Bioniche Life Sciences Inc. The decision is noteworthy in that it clarifies a number of significant issues that both dissident shareholders and boards must deal with in the face of contested meetings, finding that:

  • Only registered shareholders are entitled to requisition a shareholder meeting under the Canada Business Corporations Act.
  • A requisition must contain sufficient detail to allow shareholders to make an informed decision about the business proposed in the requisition (including names and qualifications of proposed director nominees).
  • A requisitioning shareholder may be entitled to call its own shareholder meeting under s. 143(4) of the CBCA even if the target’s board is justified under the CBCA  in refusing to call the meeting in response to the requisition.

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Mazzarolo v. BMO Nesbitt Burns: why clients should pay close attention to the reports provided by their brokers

Éric Azran and Patrick Desalliers -

The decision rendered by the Québec Court of Appeal on February 11, 2013, in the case of Mazzarolo v. BMO Nesbitt Burns, shows how important it is for investors to pay close attention to the reports they receive from their brokers and to complain within a reasonable time about investments they believe to be unauthorized or non-compliant with their investment profile.

Relevant Facts

On April 26, 2000, the appellant Ivonis Mazzarolo met with representatives of the brokerage firm BMO Nesbitt Burns, L and A, and opened several non-discretionary accounts.

On August 23, 2000, L and A presented Mazzarolo with an investment plan. Mazzarolo would have indicated that the proposal did not provide for a sufficient proportion of investments relating to emerging technologies. By December 31, 2000, such investments (which were considered speculative) comprised approximately 60% of Mazzarolo’s portfolio. The portfolio subsequently generated significant negative returns, leading to a deterioration of the relationship between the investor and the representatives of Nesbitt Burns.

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U.S. court vacates SEC Resource Extraction Issuer Disclosure Rules

Ivan T. Grbešić -

While it was recently announced that new Canadian transparency rules are expected for mining and oil and gas companies, on July 2, 2013, the U.S. District Court for the District of Columbia (the Court) vacated the resource extraction issuer disclosure rules (Rule 13q-1 under the Securities Exchange Act of 1934) adopted last year by the Securities and Exchange Commission (SEC) pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The disclosure rules adopted by the SEC in August 2012 required “resource extraction issuers” to file and publicly disclose annual reports with information relating to taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits paid by such issuer, a subsidiary of the issuer or another entity under the issuer’s control to certain governments in connection with the commercial development of oil, natural gas, or minerals, beginning with fiscal years ending after September 30, 2013.

The disclosure rules were challenged by way of a motion for summary judgment by the American Petroleum Institute, among other associations of oil, natural gas, and mining companies whose members were subject to the rules. The Court found that the SEC “misread the statute to mandate public disclosure” of the reports of each resource extraction issuer. The Court also determined that the SEC’s “decision to deny any exemption” under the disclosure rules “was, given the limited explanation provided, arbitrary and capricious”.

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Standard interpretation of OSA applied: secondary market purchasers have no cause of action for misrepresentation in a prospectus

Adrian C. Lang, Vanessa Voakes and Genna Wood -

In the recently released decision of Justice Perell in Tucci v. Smart Technologies, secondary market purchasers were excluded from a proposed plaintiff class seeking damages stemming from an alleged misrepresentation in a prospectus under s. 130(1) of the Ontario Securities Act (the “OSA”). This decision confirms the conventional interpretation of s. 130(1), which restricts the statutory cause of action to primary market purchasers.


On July 15, 2010, Smart Technologies, a maker of educational interactive technology products, filed a final Supplemental Prep Prospectus, for its initial public offering (the “IPO”). The IPO closed on July, 20, 2010, and purchasers in the IPO received their Class A shares. However, the Class A shares had also begun trading in the secondary market on July 15, 2010 during the IPO. The proposed plaintiffs argued that the disclosure in the offering materials was materially deficient, and that they suffered damages by acquiring Smart Technologies shares at an inflated price under s. 130 of the OSA (and its provincial equivalents) when a correction regarding disclosure was made on November 9, 2010.

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Mason Capital succeeds: Appeal court confirms CDS' ability to requisition meeting by "empty voter"

Matthew Nied and Taylor Little -

In TELUS Corporation v. Mason Capital Management LLC, the British Columbia Court of Appeal considered the validity of a shareholder's requisition for a general meeting of shareholders. The Court clarified that a requisition made under s. 167 of the Business Corporations Act need not identify the beneficial owner of the shares used to call the meeting in order to be valid. In addition, the Court held that it had no authority under the Act to restrain a shareholder from requisitioning a meeting on the basis of its “net investment” or that its interests are not aligned with the economic well-being of the company.


The requisition concerned the capital structure of the respondent, TELUS Corporation (TELUS). TELUS has two classes of shares: common shares and non-voting shares. TELUS originally adopted this capital structure in order to comply with foreign ownership restrictions on its voting shares.

When foreign investment in TELUS decreased and the rationale for having non-voting shares disappeared, TELUS's board of directors explored the possibility of consolidating the company's share structure by exchanging the non-voting shares for voting shares.

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BC Court comments on empty voting in context of shareholder requisition

Ramandeep Grewal and Simon Romano -

In its reason for judgement dated September 11, 2012, the Supreme Court of British Columbia ruled that Telus Corporation was not obliged to hold a shareholder meeting requisitioned by Mason Capital Management LLC on the basis that the requisition for the meeting did not comply with the law. While the ruling was based on application of the shareholder requisition provisions of the British Columbia Business Corporations Act (the BCBCA), the court also made some interesting comments regarding the need to disclose beneficial owners when making a requisition, the practice of “empty voting” and, in particular, the implications for corporate law principles where some shareholders have an economic interest that does not align with the interests of shareholders in a broader sense.

Telus had called its own meeting of shareholders to implement a plan of arrangement that would see the conversion of its non-voting shares into common shares.   Telus’ historical dual-class shares structure was originally implemented to allow for foreign ownership without tripping Canadian telecommunication company restrictions on foreign control. While similar in attributes, other than voting, the common shares had historically traded at a premium to the non-voting shares. Mason, a U.S. based hedge-fund, proposed instead its own resolutions that would prevent the conversion unless it took place at a ratio which reflected the purported historical premium paid for the common shares. After learning of Telus’ proposal, Mason acquired a significant number of both classes of shares, simultaneously short selling to hedge its position. In effect, while controlling close to 20% of the vote, Mason had very little net economic interest. 

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Court upholds board's last-minute advance notice policy

Lisa Trienis and Denise Duifhuis -

In a recent decision of the Supreme Court of British Columbia, the Honourable Mr. Justice R. Punnett dismissed an application brought by a dissident shareholder, Northern Minerals Investment Corp. (NMI), (i) to prevent Mundoro Capital Inc. from postponing its annual general meeting of shareholders and changing the record date for the meeting, and (ii) for a declaration that an advance notice policy previously approved and announced by Mundoro's board of directors was unenforceable. The Court dismissed NMI's application in its entirety.

NMI wanted to replace the board of directors of Mundoro by nominating a new slate from the floor at the AGM. The AGM was originally scheduled to take place on June 26, 2012. Mundoro, however, presumably suspected that a dissident shareholder was waiting in the shadows, because on June 11, it announced the adoption of the policy by the board, to be effective immediately.

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Court denies leave to commence secondary market class action

Ingrid A. Minott

In Green v. Canadian Imperial Bank of Commerce, a decision released on July 3, 2012, Justice Strathy denied the plaintiffs in a putative secondary market securities class action leave to assert a cause of action under Part XXIII.1 of the Ontario Securities Act (OSA).  His Honour concluded that although the plaintiffs met the test for leave under section 138.8 of the OSA, the right to pursue an action under section 138.3 was time-barred because leave had not been obtained prior to the expiry of the three year limitation period under section 138.14. In addition, Justice Strathy refused to certify the plaintiffs’ common law claim for negligent misrepresentation.


The plaintiffs, two shareholders of Canadian Imperial Bank of Commerce sought leave under section 138.8 of the OSA to pursue an action under section 138.3 for statutory misrepresentation in the secondary securities market against CIBC and four of its senior directors for misrepresentations that allegedly occurred between May 31, 2008 and February 28, 2008 (the Class Period). The plaintiffs also sought to certify the action as a class proceeding pursuant to section 5 of the Class Proceedings Act, 1992 (CPA).

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SEC awarded stay in "no contest" settlement case

On March 15, the U.S. Court of Appeals for the Second Circuit issued a stay of proceedings in a case brought against Citigroup Global Markets Inc. by the Securities and Exchange Commission.  The SEC's complaint against Citigroup for negligent misrepresentation related to the company's marketing of collateralized debt obligations (CDOs) and followed an industry-wide investigation into the recent financial crisis.

The SEC had asked for the stay of proceedings after the district court refused to approve the proposed consent judgment that contained no admission of liability. The district court had rejected the settlement based in part on the rationale that a consent judgment without an admission of liability was bad policy and failed to serve the public interest.

In granting the stay, the Second Circuit found a strong likelihood that the district court's ruling would be overturned. The Second Circuit took particular issue with the district court's lack of deference towards the SEC's judgment on discretionary matters of policy.

The ruling may be of particular interest to Canadian regulation-watchers in light of the fact that the OSC is currently considering adopting new enforcement tools, including "no-contest" settlements.

Court of Appeal makes it clear that plaintiffs must obtain leave for secondary market class action within 3 year limitation period

Alan D’Silva, Lesley Mercer and Ingrid Minott  -  

In Sharma v. Timminco Limited, a decision released on February 16, the Court of Appeal for Ontario determined that section 28 of the Class Proceedings Act, 1992 (CPA), which allows for the suspension of a limitation period applicable to a cause of action asserted in a class proceeding, is not triggered until after leave is granted under Part XXIII.1 of the Securities Act to commence a statutory cause of action for misrepresentation.1


The plaintiff commenced a putative class action for damages in excess of $500 million on behalf of a class of persons who acquired Timminco securities between March 17, 2008 and November 11, 2008.  The Statement of Claim asserts claims for negligence and negligent misrepresentation and simply “mentions” that the plaintiff intends to deliver a notice of motion seeking an Order permitting the plaintiff to “assert” secondary market claims pursuant to section 138.3 of Part XXIII.1 of the Ontario Securities Act.  Pursuant to section 138.8 of the Securities Act, “no action may be commenced under section 138.3 without leave of the court”. Section 138.14 of the Securities Act provides that an action under section 138.3 must be commenced within 3 years of the misrepresentation.

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Coventree sanctions decision raises interesting points

Simon Romano -

On December 23, the Ontario Securities Commission released its reasons for imposing sanctions in its case against Coventree Inc. and two of Coventree's directors. As we discussed in an earlier post, the Commission recently ordered Coventree to pay an administrative penalty of $1 million and costs of $250,000, while the defendant directors were each ordered to pay a penalty of $500,000.

The sanctions decision raises a couple of points of particular interest. First, the decision considers the principle enunciated in Kienapple that an accused cannot be punished for more than one offence arising out of the same set of facts. While the principle has been applied in an administrative context in the past, the Commission in the immediate case raised doubt as to whether the principle would apply to an OSC proceeding. Regardless, the Commission found that the failure to issue and file a news release  in respect of a material change in this case was a distinct offence from the failure to file a material change report in respect of the same material change. As such, the Commission's opinion on the applicability of Kienapple was not determinative.

Further, the decision discusses Staff's request that the Commission issue an order preventing the director defendants from seeking or accepting indemnification from Coventree for any penalty imposed. The Commission ultimately found that it lacked the authority to make such an order. In the Commission's view, however, there would be nothing preventing Staff from negotiating a provision in a settlement agreement limiting a director or officer from seeking such indemnification.

Supreme Court of Canada finds proposal to nationalize securities legislation outside the authority of the federal government

On December 22, the Supreme Court of Canada released its much-anticipated opinion, rejecting the federal government’s proposal to implement a national securities regulatory scheme under the oversight of a national securities regulator. The express question posed to the Court was whether the proposed Securities Act (the “proposed Act”) fell within Parliament’s general authority to regulate trade and commerce under section 91(2) of the Constitution Act, 1867. The Supreme Court answered in the negative, concluding that taken as a whole, the proposed Act was chiefly directed at regulating matters falling within provincial authority over property and civil rights.

In considering the division of powers between Parliament and the provinces, the Supreme Court noted the emergence of a flexible view of federalism "that accommodates overlapping jurisdiction and encourages intergovernmental cooperation," highlighting that while important, cooperation and flexibility cannot override or modify the separation of powers. The Supreme Court then applied a “pith and substance” analysis against this backdrop of “cooperative federalism,” looking at the purpose and effects of the proposed law to determine whether its “main thrust” was within Parliament’s jurisdiction over trade and commerce.

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Supreme Court finds federal government out of bounds with national regulator proposal

The Supreme Court of Canada ruled today that the proposed Canadian Securities Act is outside the jurisdiction of the federal Parliament.

Siding in certain respects with the lower court decisions from Alberta and Quebec, the Court held that the Act viewed in its entirety cannot be classified as falling with the general trade and commerce power of the national government.

Check back here for more details on the decision.

Supreme Court to rule on national regulator this week

The Supreme Court of Canada announced today that its judgment in the reference case regarding the proposed Canadian Securities Act and whether Parliament has the Constitutional authority to create a national regulator will be released on Thursday morning at 9:45 a.m. Check back here on Thursday for coverage of the decision. The Supreme Court heard arguments in the case in April of this year.

For more information, see our earlier posts on the subject:

SCC hearing on national securities regulator: Day 2 (April 14, 2011)

SCC hearing on national securities regulator: Day 1 (April 13, 2011)

Quebec Court of Appeal rules against federal securities regulator (April 1, 2011)

Alberta Court of Appeal finds proposed federal Securities Act unconstitutional (March 8, 2011)

CSTO provides update on federal securities regulation (January 12, 2011)

Proposed federal securities legislation moves Canada a step closer to capital market regulation at a national level (June 8, 2010)

Proposed federal Securities Act outlines framework for regulation of derivatives (May 27, 2010)

Courts extend privilege to non-lawyer deal team members

Eliot N. Kolers and Andrew S. Cunningham -

Earlier this year, the Ontario Superior Court heard a motion that considered whether solicitor/client privilege extends to documents shared with non-lawyers who participated in structuring a complex commercial transaction. The ruling in Barrick Gold Corp. v. Goldcorp Inc. is brief but expands on a point made in Camp Development Corp v. South Coast Greater Vancouver Transportation Authority.

In Camp Development, the B.C. Supreme Court held inter alia that solicitor-client privilege extends to communications between the defendant’s solicitor and another member of the client’s transaction team who was not a lawyer (a project manager). In that case, it was not that the project manager served merely as a conduit or “channel of communication” between solicitor and client (that being one way in which a third party could traditionally fall under the umbrella of solicitor-client privilege) but rather that his function was “essential to the existence and operation of the solicitor-client relationship”, a slightly different criterion arising from the leading case of General Accident Assurance Co. v. Chrusz. As implied in Camp Development, this is essentially a “deal team” exception, recognizing the “practical reality in major commercial projects where teams of individuals with focused expertise are assembled.”

In Barrick, meanwhile, the plaintiff contested a claim of privilege over documents containing the advice of various advisors from (for example) BMO and GMP Capital. Ultimately, the Court found that the non-lawyer advisers were

appropriately regarded as part of the "team" for the purposes of requesting, obtaining and/or receiving legal advice.

The documents make clear the particular input of a relatively small number of non-lawyer individuals outside the companies, whose input was necessary and appropriate to the consideration, structuring, planning and implementation of very complex transactions in a very short timeframe.

While accepting the general principle of Chrusz, Justice Campbell added:

I do not accept that there is to be expected a “deal team” extension of solicitor/client privilege in every complex commercial transaction where there is not a specific protocol that has been executed. In each instance the context, the parties and that framework for the establishment and maintenance of privilege must be established to the satisfaction of the Court.

To be privileged, then, the solicitor's advice should be targeted to those members of the team whose input is essential to the proper performance of the solicitor's role. An example given in the ruling is that of a former senior employee of one of the defendant companies, whose “institutional knowledge and wisdom” was required in order to develop the legal strategy for the transaction, in the view of Justice Campbell.

SEC fines dark pool $1 million for misleading customers

Ramandeep Grewal -

The U.S. Securities and Exchange Commission recently imposed a $1 million administrative penalty against Pipeline Trading Systems LLC for misleading investors in connection with the operation of its dark pool.  Pipeline was launched in 2004 as an alternative trading system operating as a “crossing network” to facilitate trades among institutional investors while minimizing market impact associated with information leakage about their large buy or sell orders. To that end, Pipeline advertised that to prevent pre-trade information leakage, it would not reveal the side or price of a customer order before a trade was completed. Pipeline also claimed that all users were treated equally.

According to the SEC, Pipeline’s claims were false and misleading because one of its affiliates (a trading entity owned by its parent company) filled the vast majority of customer orders on Pipeline’s system, by seeking to predict the trading intentions of Pipeline’s customers and trade elsewhere in the same direction as customers before filling their orders on Pipeline’s platform. Accordingly, the SEC found that Pipeline generally did not provide the “natural liquidity” it advertised. The SEC further found that the trading affiliate was given certain advantages not available to other users. These included providing the affiliate with a FIX connection to Pipeline's graphical user interface known as the "Block Board", soliciting and receiving input from the affiliate regarding the minimum order size for each stock, and providing the affiliate with information regarding ATS features designed to "predator proof" the system.

Ultimately, Pipeline was found to have violated the Securities Act prohibition against making false or misleading statements in the sale of securities, as well as Regulation ATS requirements regarding disclosure to be made to the SEC and the implementation of safeguards to protect confidential trading information.

The SEC release quotes Robert Khuzami, Director of the SEC’s Enforcement Division as saying that “[h]owever orders are placed and executed, be it on an exchange floor or in an automated venue, whether dark or displayed, one principle remains fundamental – investors are entitled to accurate information as to how their trades are executed.

Alternative trading systems compete with exchanges for trade execution by providing alternative operation models, trades types and fee structures to facilitate a wide range of execution strategies. Crossing systems or crossing networks generally do not offer price discovery but are intended to facilitate trades between buyers and sellers who quote their prices on other trading systems. Dark pools meanwhile, are trading systems that accept buy or sell orders without pre-trade transparency (disclosure of the details of the trade, specifically price and quantity).

ATSs are regulated in Canada under National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules. ATSs are also regulated by the Investment Industry Regulatory Organization of Canada (IIROC) through its UMIR and Dealer Member Rules.

Court finds FINRA lacks authority to sue for collection of fines

In a judgment released earlier this month, the United States Court of Appeals for the Second Circuit found that the Financial Industry Regulatory Authority, which regulates securities firms doing business in the U.S., lacks the authority to bring court actions to collect disciplinary fines. The case, Fiero v. FINRA, involved FINRA's pursuit of unpaid fines subsequent to disciplinary action against the plaintiffs.

Specifically, the Court of Appeals found that while Section 15A(b) of the Securities Exchange Act of 1934 (the Exchange Act) provides self-regulatory organizations with the authority to discipline members by various means, including suspension, fine and censure, the legislation provides no express statutory authority for such organizations to bring judicial actions to actually collect fines. The Court found the statutory omission to be significant and intentional, and compared the provision to section 21(d) of the Exchange Act, which provides the SEC with express authority to seek judicial enforcement of penalties. In addressing the apparent enforcement gap created by FINRA's ability to levy but not pursue fines, the Court noted that FINRA can already enforce fines by the "draconian sanction" of revocation of a firm's registration.

A 1990 rule change purporting to authorize FINRA's collection of fines, meanwhile, was found to have been mischaracterized as a "house-keeping" rule when, in fact, it was a substantive change requiring publication of a notice and comment period. As such, the purported rule change "was never properly promulgated and cannot authorize FINRA to judicially enforce the collection of its disciplinary fines."

Time to rethink poison pills

Sean Vanderpol and Edward Waitzer -

It has been 20 years since the Ontario Securities Commission first relied on its public interest jurisdiction to cease trade a shareholder rights plan, or "poison pill," in a case called Canadian Jorex. The recent decision of the Delaware Chancery Court in Airgas serves as a reminder that it may be time for Canadian securities regulators to reconsider their basic approach to and role in adjudicating defensive tactics.

Airgas illustrated the importance of recognizing and respecting the statutory obligations of boards of directors under corporate law in the context of a change-of-control transaction. It also illustrates the competence of courts to scrutinize board conduct in takeovers.

A contested control transaction - that is, a hostile takeover - raises a number of important issues that touch on both corporate and securities law. This includes the fundamental question of who, as between the shareholders and the directors of a Canadian corporation, ought best to decide when and if the corporation should be sold. Since Canadian Jorex, Canadian securities regulators have consistently taken the position that this is a decision to be made by shareholders. Boards can use a "poison pill" to delay submitting the deal to shareholders, but there is always a time (generally within 90 days) when "the pill must go."

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SEC will not challenge court decision on proxy access

The SEC announced last week that it will not seek a rehearing of the recent decision of a U.S. Appeals Court to vacate its new proxy access rule. As we discussed last year, the new rule (Rule 14a-11 under the Securities Exchange Act of 1934) would have required companies to include shareholder nominees for director in the company's proxy materials where the shareholder held shares representing at least 3% of the voting power of the company’s stock for the previous three years.

The SEC's final proxy rule amendments released last year also contained changes to Rule 14a-8, which were intended to narrow an exemption that currently permits companies to exclude shareholder proposals that relate to elections. Rule 14a-8a was not subject to court challenge. As we discussed at the time, the amended rules would apply to foreign issuers that were otherwise subject to U.S. proxy rules unless foreign law prohibited shareholders from nominating director candidates.

In its release last week, the SEC also confirmed that the amendments to Rule 14a-8 will come into force shortly. The SEC had stayed implementation of Rule 14a-8 along with Rule 14a-11 pending resolution of the court challenge to the latter.

Courts, not regulators, should scrutinize poison pills: Waitzer

As we discussed last month, our very own Sean Vanderpol and Ed Waitzer recently published an article in the Osgoode Hall Law Journal that questioned the emphasis on the primacy of shareholder choice in the case of Canadian take-over transactions. In today's Globe and Mail, Mr. Waitzer expounds on the argument that securities regulators should no longer scrutinize the actions of companies fending off hostile takeovers and, rather, leave the issue to the courts.

Canada's Corruption of Foreign Public Officials Act shows its teeth

Susan Hutton and Paul Beaudry -

On June 24, 2011, Niko Resources Ltd., a Calgary-based oil and gas exploration and production company, entered a guilty plea under Canada’s Corruption of Foreign Public Officials Act (CFPOA) with respect to charges of bribing a public official in Bangladesh. Niko, which operates in a number of countries around the world, had been notified by Canadian authorities in January 2009 that it was being investigated over allegations that it had provided the Energy Minister of Bangladesh with a $190,000 vehicle for personal use as well as with trips to Calgary and New York. These gifts had been made at the time when the Minister was assessing how much compensation was owed to Bangladeshi villagers for water contamination and other environmental concerns caused by explosions at a Niko operation.

Niko’s sentence included a $9.5 million fine and a three-year probation order that requires the company to implement a detailed compliance program subject to review by an independent auditor. Prior to Niko’s conviction, only one Canadian company had been convicted of foreign bribery under the CFPOA in the past decade. The $25,000 fine issued by the court in that case, known as R. v. Hydro Kleen Services Inc., was less than the bribe involved.

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US Appeals Court vacates proxy access rule

As we described last August, the U.S. SEC adopted a new proxy rule last year to, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials. In a decision released last week, however, the United States Court of Appeals for the District of Columbia vacated the rule.

Specifically, the petitioners argued that the SEC had enacted the rule

in violation of the Administrative Procedure Act ... because, among other reasons, the Commission failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation, as required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940.

Ultimately, the Court of Appeals agreed, finding that the SEC "acted arbitrarily and capriciously" in failing to adequately "assess the economic effects of a new rule."  

Fairness opinions revisited: Lessons for the board

William J. Braithwaite

Fairness opinions are largely accepted as forming an essential component of the board’s review of a major business transaction. They are typically obtained from a financial adviser for the purpose of analysing the consideration that is being received or paid, in order to determine whether the transaction meets the requisite standards of fairness. In this respect, the fairness opinion can assist in demonstrating that the board has fulfilled its duties in considering a transaction, and provide objective evidence of its fairness. A fairness opinion often supports a board’s recommendation to the shareholders when a transaction requires the affirmative vote of the shareholders in order to proceed. Issues relating to fairness opinions and the proper board process surrounding such opinions have surfaced recently on a few occasions in Canada, the most recent being the high-profile dual class share declassification of Magna International Inc, a transaction where, ironically, no fairness opinion was given. What follows from the Magna transaction is a clear affirmation that the facts will be paramount in determining whether a fairness opinion fulfils its objectives. These facts include not only the nature of the transaction and consideration involved, but also the process followed by the board in retaining and working with its financial advisers.

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SEC concludes that Stanford Group investors entitled to SIPA protections

The U.S. SEC announced yesterday that it had concluded that investors with brokerage accounts at the Stanford Group Company who purchased certificates of deposit through the broker-dealer were entitled to protected "customer" status under the Securities Investor Protection Act of 1970. As such, the SEC referred the case to the Securities Investor Protection Corporation and asked the SIPA to initiate a court proceeding to liquidate the SGC. The broker-dealer, owned by Robert Allen Stanford, was charged in 2009 with perpetuating an $8 billion Ponzi scheme. For more information, see SEC release 2011-129 and SIPC's responding release.

OSC secures finding of guilt against operator of unregistered securities sales office

Last month, the Ontario Securities Commission announced that it had secured the first finding of guilt for fraud in quasi-criminal proceedings it has brought before the Ontario Court of Justice. The accused pled guilty to fraud contrary to section 126.1 of the Securities Act (Ontario) in relation to his role with a company operating an unregistered securities sales office that offered trading units of limited partnerships fraudulently represented to constitute ownership interests in oil and gas leases. Sentencing is scheduled for November 24, 2011.

SCC hearing on national securities regulator: Day 2

The Supreme Court continued its hearings today on the reference case considering the constitutionality of the proposed federal Securities Act. While a number of interveners, including the Attorney General of OntarioFAIR Canada and the Canadian Coalition for Good Governance made submissions in favour of the federal scheme, a number of provinces lined up to oppose the initiative. Specifically, New Brunswick, Manitoba, British Columbia and Saskatchewan argued that the proposed legislation is outside the jurisdiction of the Parliament of Canada. Not surprisingly, the Supreme Court reserved its decision.

SCC hearing on national securities regulator: Day 1

The Supreme Court of Canada today began hearing the reference case submitted by the federal government regarding the constitutionality of the proposed federal Securities Act. As we've discussed in previous blog posts, the Courts of Appeal of both Alberta and Quebec have ruled that the proposed Act is outside the jurisdiction of the federal government.

The hearing began this morning with submissions by counsel for the Attorney General of Canada, who argued that the proposed Act met the General Motors  test (as expanded in Kirkbi) for determining whether there is a valid exercise of Parliament's general trade and commerce power under the Constitution Act, 1867. Essentially, the federal government argued that rather than focusing on a particular industry, this case impacts the economy as a whole. The Justices, however, were determined in their questioning, challenging federal counsel to explain how their arguments could withstand the fact that the provinces already work (relatively harmoniously) to regulate the space.

The afternoon saw submissions by counsel for Quebec and Alberta, who argued that the proposed Act is, in pith and substance, directed at the regulation of securities, which falls within the scope of property and civil rights under the Constitution Act, 1867. Quebec and Alberta also argued that the double-aspect doctrine did not apply in this case as the proposed Act has virtually identical subject matters, purposes and aspects as existing provincial and territorial securities regulatory legislation.

The hearing, which is being live-streamed on the Supreme Court website, will pick up tomorrow with submissions of interveners at 9:00 a.m. For live updates during the hearing, see our Twitter feed @Cdn_Securities.

Quebec Court of Appeal rules against federal securities regulator

In a decision released yesterday, the Quebec Court of Appeal found plans for a national securities regulator to be outside the jurisdiction of the federal government. As we recently discussed, an Alberta ruling of last month came to the same conclusion. The issue is set to be considered by the Supreme Court of Canada at hearings scheduled for April 13 and 14, 2011.

Alberta Court of Appeal finds proposed federal Securities Act unconstitutional

The Alberta Court of Appeal has just released its decision on the reference made by the Alberta government regarding the federal government's plan to implement the proposed federal Canadian Securities Act. According to the Alberta Court of Appeal, the proposed Act exceeds the constitutional authority of the Parliament of Canada as it encroaches on provincial jurisidiction.

The Alberta Court of Appeal's decision in one of among three references currently pending on the issue. The Department of Finance released the proposed Canadian Securities Act in May 2010 and the Canadian Securities Transition Office has since been working on a plan for transitioning securities regulation to a federal regulator. The Quebec Court of Appeal held hearings on the constitutionality of the federal Act in January, while the Supreme Court of Canada is scheduled to hold hearings on the issue on April 13 and 14, 2011.

Let courts rule on poison pills

The OSC should ease up on its application of the Defensive Tactics Policy

As published in Monday's Financial Post

Edward Waitzer and Sean Vanderpol

The current Baffinland Iron Mines Corp. control contest, in which the Ontario Securities Commission (OSC) has intervened several times, raises yet again questions about the fundamental differences between securities regulation and corporate law. It also casts more doubt on the utility of National Policy 62-202, known as the Defensive Tactics Policy, under which securities regulators deal with unsolicited corporate takeover bids and hostile control contests.

Criticisms of the Defensive Tactics Policy have been heard before. In June 2008, the report of the Competition Policy Review Panel, Compete to Win, said Canadian securities regulators should repeal the Defensive Tactics Policy and cease to regulate conduct by boards in relation to shareholder rights plans (poison pills). That conclusion was reached after broad consultations and input from the legal and investment banking community on both sides of the border. To replace the policy, the panel recommended that the regulation of substantive decision-making by directors in respect of change-of-control proposals should be left to the courts, as is the case in the U.S.

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Full and minority reasons for cease trading Lions Gate poison pill released

As we discussed in our post of June 3, the British Columbia Securities Commission released summary Majority Reasons in May for its decision to cease trade the shareholder rights plan (poison pill) implemented by Lions Gate Entertainment Corp. in response to a hostile bid by equity funds controlled by Carl Icahn.

On July 26, the BCSC released the full reasons of the panel majority and last week it released the reasons of the minority. While our more in-depth summary is forthcoming, a copy of the full reasons of the majority and the minority reasons can now be accessed from the BCSC website.

BCSC releases summary Majority Reasons for cease trading Lions Gate poison pill

Jonah Mann and Sean Vanderpol

On May 6, 2010, the British Columbia Securities Commission (BCSC) released its summary Majority Reasons for its decision to cease trade the poison pill (or shareholder rights plan) implemented by Lions Gate Entertainment Corp. (Lions Gate) in the face of a hostile bid by equity funds controlled by activist investor Carl Icahn (Icahn).

By way of background, Icahn held 19% of Lions Gate’s shares and sought to increase its stake to 30% by launching a partial bid. In the face of the Icahn bid, the Lions Gate board decided it was not the time to put the company in play and, therefore, adopted a poison pill. The pill allowed certain “permitted bids”, provided that these bids, among other things, had a “minimum tender condition” which could not be waived. The board called a shareholder meeting to consider the pill for May 4.

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US Supreme Court rules on fiduciary duty of investment advisers

On March 30, the Supreme Court of the United States released its decision in the case of Jones v. Harris. The case considered the fiduciary duty imposed on mutual fund advisers by section 36 of the Investment Company Act of 1940 (ICA) with respect to the receipt of compensation for services. This particular issue has been the topic of recent judicial attention.

Ultimately, the Supreme Court accepted the basic formulation of the Gartenberg test, stating that "to face liability under §36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining." While the basic formulation of the test appeared to be relatively uncontroversial in this case, the parties disagreed on a number of points concerning its application. Thus, the Supreme Court provided guidance on a number of issues. Specifically, the Supreme Court stated that: 

  1. since the ICA requires consideration of all relevant factors concerning the fees charged, there is no categorical rule prohibiting comparisons between the fees charged by advisers to different types of clients. The weight to be allocated to such comparisons, however, depends on the circumstances and the ICA does not ensure fee parity between mutual funds and institutional clients;
  2. Courts should not rely too heavily on the fees charged by other advisers; and
  3. A court's evaluation of an investment adviser's fiduciary duty must take into account both procedure and substance. "Where a board's process for negotiating and reviewing investment-adviser compensation is robust, a reviewing court should afford commensurate deference to the outcome of the bargaining process." Where the board's process was deficient or the adviser withheld important information, however, a court may take a more rigorous look at the outcome.

Finding that the Seventh Circuit panel focused almost entirely on disclosure, the Supreme Court vacated the Circuit Court's decision and remanded the case.

The immediate decision's effect on mutual fund fees remains to be seen, and will ultimately depend on the interpretation given to the Supreme Court's findings by lower courts. Thus, the mutual fund industry will undoubtedly watch with interest as this case, and those like it, proceed through the lower courts.

Earn-out providing for return of assets if targets not met, rather than expressly requiring purchaser "effort", will not be rewritten just because the weak economy and other factors have made an asset return unpalatable to the seller

Airborne Health, Inc. v. Squid Soap, LP, C.A. No. 4410 VCL
Delaware Court of Chancery | Vice Chancellor Laster | November 23, 2009

Andrew S. Cunningham

This ruling by Vice Chancellor Laster of the Delaware Court of Chancery reminds us that in a commercial relationship, the contract reigns supreme. Even though it had a sympathetic story to tell, and despite some creative appeals to tort and equitable doctrines, Squid Soap couldn't get around the fact that the Asset Purchase Agreement (APA) it had negotiated with acquiror Airborne Health - with payment heavily weighted toward the earn-out - had not adequately protected it against certain unanticipated post-closing events that occurred, most notably the economic downturn.


Squid Soap had developed a child-friendly hand washing product. A hit with U.S. TV morning shows and major magazines, "Squid Soap" was soon picked up by Wal-Mart and other mass retailers. As the brainchild of a single entrepreneur, the Squid Soap business was ripe for a buyout. Despite interest from Procter & Gamble and a major hedge fund, Squid Soap selected Airborne Health, Inc., a larger entrepreneurial company, as its acquiror. Airborne had made its name with a highly successful vitamin and herb supplement that was marketed as effective against coughs and colds.

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Securities class action certified: First of its kind in Ontario

Silver v. IMAX Corporation et al. [2009] O.J. Nos. 5573 and 5585 (S.C.J.)

Simon Bieber and Jennifer Imrie

On December 14, 2009, Justice van Rensburg of the Ontario Superior Court of Justice handed down two related rulings in the Silver v. IMAX Corporation litigation. The first (the “Leave Decision”) granted the plaintiffs leave to proceed with their class action against IMAX Corporation and certain individual respondents (collectively, the “IMAX Defendants”) under section 138.8 of Ontario’s Securities Act (“OSA”), while the second (the “Certification Decision”) certified the action, including both statutory and common law claims, as a class proceeding.

The Leave Decision is the first to consider the leave requirements for a statutory misrepresentation claim under the secondary market liability provisions in Part XXIII.1 of the OSA, while the Certification Decision appears to accept the “efficient market” (or “fraud on the market”) theory for common law misrepresentation claims. Justice van Rensburg permitted certification despite the defendant’s argument that the claim as pleaded is deficient for not alleging individual reliance by each member of the proposed class and accepted the plaintiffs’ argument that certification should extend to a global class of plaintiffs consisting of all persons who acquired securities of IMAX Corporation (“IMAX”) during the defined “Class Period” of February 17, 2006 to August 9, 2006 and who continued to hold some or all of those securities at the close of trading on August 9, 2006.

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BCSC reissues consent to disclosure of investigation information in response to Shapray decision

In response to last summer's British Columbia Court of Appeal (BCCA) decision in Shapray v. British Columbia (Securities Commission), the British Columbia Securities Commission (BCSC) has announced the rescission of BC Instrument 15-501 Disclosure of Investigation Information and its related policy, while also deleting section 2.6(d) of BC Policy 15-601 Hearings. In its place, the BCSC has announced a new BC Instrument 15-501 Disclosure of Investigation Information, which provides consent to disclose "any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined under section 143, 144 or 145 of the Securities Act."

In Shapray, the petitioner commercial litigation lawyer argued that section 148(1) of the British Columbia Securities Act, which restricted disclosure of information and evidence obtained pursuant to an investigation by the BCSC, was unconstitutional. Mr. Shapray claimed that the provision made it impossible for him to adequately defend allegations of misconduct under the Securities Act or to properly prepare witnesses. Section 148(1) of the Act, which is similar to provisions found in the securities laws of other provinces, states:

Without the consent of the commission, a person must not disclose, except to the person's counsel, any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined...

Ultimately, the BCCA struck down s. 148 of the Act as unconstitutional, but delayed the order of invalidity for a year so as to allow the Legislature to consider alternatives. The instruments and policies recently revoked, meanwhile, provided the BCSC's consent for the disclosure of investigation information under prescribed circumstances. The new instrument provides for a broader consent, effective December 3, 2009, until the earlier of July 8, 2010 and the date the legislature repeals section 148.

OSC grants relief allowing international dealer to distribute CFDs via an IIROC member affiliate without filing prospectus

On October 16th, the Ontario Securities Commission (OSC) granted relief on an application by CMC Markets U.K. and its Canadian affiliate allowing CMC Canada to distribute contracts for difference and foreign exchange contracts (collectively, CFDs) to Ontario investors without having to file a prospectus. CFDs are derivative products that "allow clients to obtain exposure to markets and instruments that may not be available directly, or may not be available in a cost-effective manner."

In granting the relief, the OSC stated that the requested relief would "substantially harmonize the Commission's position on the offering of CFDs to investors in Ontario with how those products are offered to investors in Quebec" under the Derivatives Act (Quebec). Under the QDA, such products may be offered through the distribution of a standardized risk disclosure document rather than a prospectus. The OSC noted that it had previously recognized that similar disclosure may be better suited for such products than a prospectus.

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OSC releases Reasons in Neo denying application to cease trade shareholder rights plan

Jonah Mann and David Weinberger | PDF Version |  Version française

On September 1, 2009, the Ontario Securities Commission (OSC) released the full Reasons for its decision to deny an application to cease trade a second shareholder rights plan (or tactical plan) implemented by Neo Materials Technologies Inc. (Neo) in the face of a hostile partial bid by Pala Investments Holdings Limited (Pala). Prior to the expiry of the Pala bid, the tactical plan was approved by 81.24% of shares voted (excluding shares held by Pala) at an annual and special meeting of Neo’s shareholders.

In its Reasons, the OSC reiterated that it has broad discretion to determine whether to exercise its public interest jurisdiction in a given matter and the scope of this jurisdiction must be interpreted in the context of the purposes of the Securities Act as a whole. While it will not hesitate to exercise its public interest jurisdiction in appropriate circumstances, it is also mindful that a degree of deference is owed to the decision of the board of directors. In determining whether to exercise its public interest jurisdiction, the OSC will examine all of the circumstances surrounding the establishment of a shareholder rights plan, including whether informed shareholder approval was given, and the context of that approval. While the Reasons put considerable emphasis on shareholder approval as a relevant consideration, the OSC was also careful to note that shareholder approval does not necessarily mean that a shareholder rights plan is protected from the OSC’s public interest jurisdiction.

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Court of Appeal affirms IDA jurisdiction over former member

On August 28, the Ontario Court of Appeal released its decision in Taub v. Investment Dealers Association of Canada, a case respecting the jurisdiction of the Investment Dealers Association, (now merged with Regulation Services to form the Investment Industry Regulatory Organization of Canada (IIROC)), to discipline former members. The IDA's rules and bylaws, by which members agreed to be governed, specified that the IDA had jurisdiction over former members for the purposes of discipline for five years after one's membership ended. In this case, the IDA brought disciplinary procedures against Taub a year after he ceased being a member of the association. Taub challenged the IDA's jurisdiction over former members, but was unsuccessful before the association's hearing panel in this regard. On review, the Ontario Securities Commission agreed that the IDA had jurisdiction over Taub. The Divisional Court, however, overturned the findings of the IDA panel and the OSC. In doing so, the Divisional Court found that section 21.1(3) of Ontario's Securities Act made no provision for the regulation of former members which, therefore, limited the reach of the IDA's jurisdiction to current members.

In the immediate appeal, the Ontario Court of Appeal found that the OSC's reasons were clear and understandable and that they justified the result reached by the Commission. The Court of Appeal disagreed that the language of s. 21.1(3) limited the jurisdiction of the IDA and ultimately set aside the decision of the Divisional Court.

OSC declines application to overturn TSX decision allowing private placement without unitholder approval

On August 26, the Ontario Securities Commission released a decision refusing to intervene in a case where the TSX allowed a private placement of units of a real estate investment trust without unitholder approval. The application to review the TSX decision was brought by NorthWest Value Partners, which objected to, among other things, the placement proceeding without being put to a vote of unitholders. The placement represented approximately 49% of outstanding units of InterRent Real Estate Investment Trust.

The OSC noted that it was entitled to intervene in cases where (i) the TSX proceeded on an incorrect principle; (ii) the TSX erred in law; (iii) the TSX overlooked material evidence; and (iv) new and compelling evidence was presented to the OSC that was not presented to the TSX. It stated, however, that it would do so "only in the rare case" where an applicant met the "heavy burden of proving such intervention is justified" in accordance with the above principles or some other acceptable ground. In the immediate case, the OSC found that the TSX considered all the relevant information, assessed relevant considerations, followed the appropriate process and carefully articulated its reasons. As such, the application to review the decision was dismissed.

The OSC ruling was released on an expedited basis and full reasons are expected in the near future.

ASC makes it a hat-trick - following decisions in Pulse Data and NEO Technologies, the Alberta Securities Commission refuses to cease trade shareholder rights plan

On August 25, the Alberta Securities Commission (ASC) dismissed the application filed by TransAlta Corporation requesting that the ASC cease trade a shareholder rights plan implemented by Canadian Hydro Developers, Inc. TransAlta's application to the ASC stemmed from its unsolicited bid for the outstanding common shares of Canadian Hydro. 

Pursuant to its bid circular dated July 22, 2009, TransAlta offered to acquire all of the issued and outstanding common shares of Canadian Hydro (together with associated rights) at a price of $4.55 per common share. The bid is set to expire today, August 27, 2009, and is conditional upon the board of Canadian Hydro redeeming all outstanding rights, waiving application of the rights plan or the plan being cease traded or its application otherwise prohibited or prevented by a relevant governmental entity. The shareholder rights plan was approved by shareholders of Canadian Hydro on April 24, 2008 and allows for certain types of takeover bids that qualify as “permitted bids” under the terms of the plan. A "permitted bid" requires, among other things, that such a bid be made on certain prescribed terms and conditions.

As a result of the decision of the ASC, the plan remains in force. This decision represents the third of its kind to refuse to cease trade a shareholder rights plan in the face of an unsolicited bid and follows on similar decisions made by the ASC in Re Pulse Data Inc. (2007) and the Ontario Securities Commission in the matter of NEO Material Technologies and Pala Investment Holdings Limited (decision rendered on May 11, 2009 with full reasons to follow). While the ASC did not release reasons at the time of its decision, full reasons are expected in the near future.

Update: The reasons have now been released.

BCCA finds that prohibition on disclosing investigation evidence unconstitutional

On July 8, the Court of Appeal for British Columbia found the prohibition contained in section 148 of the British Columbia Securities Act that restricts disclosure by any person, except to his or her counsel, of "any information or evidence obtained or sought to be obtained or the name of any witness examined or sought to be examined" pursuant to an investigation by the British Columbia Securities Commission (BCSC) to be unconstitutional. The petitioner in the case, a Vancouver commercial litigation lawyer, argued that the provisions made it difficult to adequately defend allegations of misconduct under the Securities Act or to prepare a witness to give evidence. While the provisions allow for disclosure with the consent of the BCSC, the Court of Appeal found that the prohibition, which is similar to the one found under section 16 of Ontario's Securities Act, infringes on the right to freedom of expression enshrined in the Canadian Charter of Rights and Freedoms. The order of invalidity, however, was delayed for a year. Whether new provisions are drafted that pass constitutional muster, or whether other provinces are affected by the persuasive force of the decision, remains to be seen.

U.S. Eighth Circuit considers mutual fund adviser's fiduciary duties with respect to fees

The U.S. Court of Appeals for the Eighth Circuit recently released its opinion in Gallus v. Ameriprise, a case considering the scope of a mutual fund adviser’s fiduciary duties under section 36 of the Investment Company Act of 1940 (ICA). The Circuit Court found that while the Gartenberg v. Merrill Lynch case provided a “useful framework for resolving claims of excessive fees”, the size of the fee was not the only factor in considering an alleged violation of the ICA and that the adviser’s conduct during negotiation should also be considered. “[W]e read the plain language of § 36(b) to impose on advisers a duty to be honest and transparent throughout the negotiation process.”

In reversing the Minnesota District Court's decision, the Eighth Circuit found that the lower court should have compared the fees charged to institutional and mutual fund clients. “Indeed, the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts is particularly strong in this case because the investment advice may have been essentially the same for both accounts.” Further, the District Court should have considered the defendants’ conduct “independent of the result of the negotiation” and specifically whether the defendants misled the plaintiffs with respect to the discrepancy in fees.

As such, the Eighth Circuit reversed the decision of the District Court granting the defendants summary judgment and remanded the case for further consideration.

Delaware Supreme Court considers directors' fiduciary duties in sale of company

On March 25, 2009, the Supreme Court of Delaware released its decision in Lyondell Chemical Company v. Ryan, a case where the defendant directors of Lyondell were accused of breaching their fiduciary duties in conducting the sale of the company in July 2007. The plaintiffs claimed, among other things, that the directors did virtually nothing to develop a strategy for maximizing shareholder value once they became aware of the buyer’s filing of a Schedule 13D with the SEC in May 2007, which indicated that the company was “in play”. Since the company charter provided directors protection for breaches of their duty of care, this case turned on whether the directors breached their duty of loyalty by failing to act in good faith. The opinion of the Delaware Supreme Court was issued with respect to the defendants’ appeal of the decision of the Court of Chancery (memorandum opinion of July 29, 2008 and letter opinion of August 29, 2008) denying them summary judgment.

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Delaware court considers business judgment rule in light of current market challenges

The Delaware Court of Chancery recently released its Opinion in the case of In re Citigroup Inc. Shareholder Derivative Litigation, a derivative action initiated by shareholders of Citigroup against current and former directors and officers of the company. The plaintiffs claimed that the defendants breached their fiduciary duties by not adequately overseeing and managing the risks associated with the company’s involvement in the subprime lending markets. The plaintiffs maintained that the defendants ignored numerous “red flags” that indicated problems in the real estate and credit markets. The plaintiffs also alleged that the directors of the company were liable for corporate waste for, among other things, approving a letter agreement providing a multi-million dollar payment and benefits package for the company’s CEO upon retirement in November 2007. The defendants, meanwhile, brought a motion to dismiss the action, since the plaintiffs did not make a pre-suit demand to the company's directors to pursue litigation. The plaintiffs countered by pleading that demand would have been futile.

In its decision dismissing the oversight claims (for failing to adequately plead demand futility), the Court expounded on the business judgment rule and its application in the present case, where the plaintiffs framed their allegations as Caremark (failure of oversight) claims, when, in fact, the plaintiffs were “attempting to hold the director defendants personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company” (emphasis added). With respect to the corporate waste claim, the Court found that without further information regarding the additional compensation received by Citigroup’s CEO as a result of the letter agreement and the real value of various restrictive promises provided by him, there was reasonable doubt as to whether the compensation provided by the letter agreement was unconscionable. As such, the motion to dismiss this particular claim was denied.

Two Ontario decisions consider scope of pre-certification evidence in secondary market securities class actions

Silver v. IMAX Corporation, [2008] O.J. No. 2751 (S.C.J.) and Ainslie v. CV Technologies Inc., [2008] O.J. No. 4891 (S.C.J.)

Alan D'Silva and Simon Bieber |  PDF Version | Version française

The interpretation of several key provisions under Part XXIII.1 of the Ontario Securities Act (OSA) was recently considered by the Ontario Superior Court of Justice in the context of proposed secondary market securities class actions in Silver v. IMAX Corporation (IMAX) and Ainslie v. CV Technologies Inc. (CV Technologies).

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Supreme Court releases reasons in BCE case

The Supreme Court of Canada has just released its reasons in the case of BCE Inc. v. A Group of 1976 Debentureholders. The Supreme Court's judgment, without reasons, was previously released on June 20, 2008.

Recent Case: Deer Creek Energy v. Paulson

Deer Creek Energy Ltd. v. Paulson & Co., Inc., June 13, 2008 | 2008 ABQB 326 (Court of Queen's Bench).

Andrew Cunningham

Alberta judge holds market valuation soundest basis for deciding fair value of dissenters’ shares; dissenters not permitted to take advantage of spike in market price after first stage of two-step transaction. Court also rejects dissenters’ claim for far higher valuation based on future possibilities, even though some of these had been touted by company in its marketing efforts.

In this long‑anticipated ruling, Madam Justice Romaine of Alberta’s Court of Queen’s Bench found that “market value” was the primary consideration in valuing the shares of dissenting shareholders of Deer Creek Energy Ltd., an ABCA corporation involved in an oil sands pro­ject near Fort McMurray, Alberta.

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CSX Corporation v. TCI and 3G Fund

CSX Corporation v. TCI and 3G Fund, June 11, 2008 | 08 CV 02764, U.S. District Court (S.D. N.Y.).

Alex Colangelo

U.S. Court deems hedge fund beneficial owners of shares due to arrangements designed to avoid disclosure obligations. The Court, however, finds itself constrained from ordering remedy sought by target company.

In a somewhat empty victory for the plaintiff railroad company, the U.S. District Court for the Southern District of New York found that the defendant hedge funds employed surreptitious means to avoid disclosure requirements while accumulating shares of CSX. Despite its findings, the District Court found itself restrained by precedent from preventing TCI and 3G Fund from exercising the votes associated with the shares they acquired during the time they were offside disclosure obligations. The plaintiff, therefore, had to settle for an injunction inhibiting the defendants from any future violations of disclosure obligations.

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Investment bank not liable for fairness opinion relying on unverified financial projections

The HA2003 Liquidating Trust v. Credit Suisse Securities LLC, February 20, 2008 | No. 06-3842 (U.S. Court of Appeals for the 7th Circuit)

Alex Colangelo

Contract between parties set out terms of engagement and the defendant did not have a duty to go beyond its mandate.

This case takes us back to the heady days of the dot-com boom. Back in the 1990s, HA-LO In­dus­tries was in the business of making logo-bearing promotional products that companies could use to market themselves. In 1999, the company decided it needed to join the e-commerce bandwagon and subsequently agreed to purchase for $240 million in cash and shares. While was a young start-up with a negligible track record, its e-commerce system was attractive to HA-LO.

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SCC releases much-anticipated Danier Leather class action decision

Adrian C. Lang and Andrew Cunningham

The Supreme Court of Canada has upheld the Ontario Court of Appeal's ruling in this much-anticipated decision, released on October 12, 2007.  While the Supreme Court largely followed the Court of Appeal's reasoning, the Court narrowed the application of the business judgment rule, held that there is an implied statement of reasonable belief with respect to forecasts, and narrowly interpreted "material changes" in the securities context.  Surprisingly to some, the Court also awarded costs against the unsuccessful class plaintiff. 

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