Insider trading settlement agreement calls to attention consequences of unsolicited expressions of interest

Maïté Murray -

Last July, the former CEO and President of Daylight Energy Ltd. (now Sinopec Daylight Energy Ltd.) entered into a settlement agreement with the Alberta Securities Commission (ASC). The agreement settled claims that he had breached Alberta securities laws and acted contrary to the public interest by purchasing securities of Daylight with knowledge of undisclosed material facts about the company, namely that a potential acquirer was interested in a “major strategic investment transaction”.

Background

In 2011, Daylight, an Alberta corporation engaged in the oil and gas industry with headquarters in Calgary, was acquired by Sinopec International Petroleum Exploration and Production Corporation (SIPC), a wholly-owned subsidiary of the state-owned China Petrochemical Group. The acquisition was carried out by way of a plan of arrangement that was completed in December 2011. Anthony Lambert, the respondent in this matter, had purchased securities of Daylight at various occasions before the transaction was publicly announced in October 2011. He subsequently made a significant profit on the sale of those securities when, pursuant to the plan of arrangement, SIPC acquired all of Daylight’s securities at a substantial premium.

In an initial Notice of Hearing issued in April 2013, the ASC alleged, among other things, that the respondent had purchased securities of Daylight in August and September 2011 with full knowledge of certain material facts about Daylight that were then generally undisclosed, thereby contravening the insider trading restriction under section 147(2) of Alberta’s Securities Act (ASA), and that he had acted contrary to the public interest.

Although the settlement agreement contains no legal analysis on this point, the notice identified the “facts and information regarding the anticipated acquisition of Daylight by SIPC” as being all separately and collectively “material facts” as defined in the ASA. What is notable about the allegations and ensuing settlement agreement is that the process of acquisition by SIPC was, arguably, at an exceptionally early stage at the time at least one of the impugned trades took place. Specifically, at that point in time, the information regarding a possible acquisition was limited to indications of potential interest, which were evidenced primarily by a letter sent to Daylight on August 5, 2011 regarding the possibilities of exploring “a major strategic investment transaction” between SIPC and Daylight.

The letter of interest was unsolicited and contained no reference to any terms, price or the nature of a possible transaction. For this and other reasons, including that Daylight was not “in play”, had not retained any financial advisors in view of a sale transaction, and had previously received several other expressions of interest from various parties about possible transactions that never proceeded beyond preliminary or introductory stages, the respondent formed the view that SIPC’s indications of interest were immaterial and therefore did not raise any insider trading issues. This view was corroborated upon further enquiry to Daylight’s General Counsel, Governance Chair and outside counsel.

One of the trades identified in the notice, however, took place on August 8, the same day a letter (executed by Lambert) was sent to SIPC confirming Daylight’s interest in exploring a potential business opportunity, which was accompanied by a draft form of confidentiality agreement. The settlement agreement provides specifically that it would have been prudent for the respondent to confirm with Daylight’s General Counsel that it remained permissible for him to trade on that day.

Legal Framework

The ASA provides that no person in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with knowledge of a material fact or material change with respect to that reporting issuer which has not been disclosed to the public. The term “material fact” is defined in the ASA (and under the securities laws of Canadian provinces and territories generally), in relation to securities issued or proposed to be issued, as a fact that would reasonably be expected to have a significant effect on the price or market value of the securities. In contrast, a “material change” is defined, in relation to an issuer, as a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities.

The settlement agreement, though not explicitly, draws our attention to the distinction between the criteria that trigger insider trading restrictions for those persons in a special relationship with a reporting issuer, and those that trigger material change disclosure obligations for a reporting issuer under securities laws. If a material fact constitutes a material change for the issuer, it must be disclosed immediately via press release. Meanwhile, a material fact will trigger the insider trading restrictions notwithstanding that it does not amount to a material change. (Note that the rules and policies of the Toronto Stock Exchange, which are not covered here, require disclosure of “material information”.) This distinction was echoed in the comments of Bill Rice, the ASC’s CEO, who stated in the press release announcing the settlement that “it is important that senior company officials – insiders – understand that insiders cannot trade while in possession of undisclosed material information; whether or not that material information must yet be disclosed under our continuous disclosure regime.”

In Re Coventree Inc., which we discussed in an earlier post, the Ontario Securities Commission (OSC) confirmed that the definition of “material fact” under Ontario’s Securities Act (OSA) is broader than that of “material change”, as the former will not necessarily arise from a change in an issuer’s business, operations or capital. Coventree also made clear that the standard of materiality for both concepts is the same and is based on an objective standard, and that assessments of materiality are not to be made with the benefit of hindsight, as had been previously established by the OSC in its 2008 decision In the Matter of AiT Advanced Technologies Corporation and as was reiterated by the British Columbia Securities Commission in its recent ruling in respect of Canaco Resources Inc. and four of its directors. AiT remains the key decision with respect to disclosure obligations in the context of a strategic transaction. (In that decision, the panel held that the obligation to disclose a potential merger as a “material change” under section 75 of the OSA does not apply to proposed mergers and acquisitions until the board believes that the parties are committed to the transaction and that completion is substantially likely.)

A different standard, unrelated to the notion of materiality, is observable, however, when, on the basis of their public interest jurisdiction, securities commissions intervene to determine whether an individual’s conduct is contrary to public interest, a determination which can, and often does, occur concurrently with the assessment of insider trading allegations.

In the recent decision of Re Donald, the OSC found that, while the respondent was not technically in breach of the OSA’s insider trading restriction, since he was not in a special relationship with the issuer, his conduct had failed to meet the high standard of behavior expected of market participants and officers of public companies. The OSC levied sanctions against him for that reason. (Also see the subsequent amendments to the OSA, which expanded the scope of what it means to be in a special relationship with an issuer.)

The decision on the merits in Donald offers a clear description of the law relating to the OSC’s public interest jurisdiction. It points to the Supreme Court of Canada’s decision in Committee for the Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission), which addressed the scope of the public interest power, and to other decisions where securities commissions found that a respondent’s conduct was contrary to the public interest even though not in breach of securities laws. The Ontario Superior Court of Justice (Divisional Court), in reviewing and ultimately upholding the OSC’s decision in Coventree, also made clear that the OSC could exercise its public interest jurisdiction irrespective of whether the conduct under review was willful or deceitful.

The fact that conduct in this context is evaluated beyond its compliance with the “letter of the law” is evidence that commissions, pursuant to their public interest jurisdiction, are applying a high standard of scrutiny when reviewing the conduct of insiders, persons in a “special relationship” with the issuer, and even others, as was the case in Donald. Yet, this is not to be equated to evidence that commissions are applying a lower threshold of materiality to assessments of insider trading.

The Supreme Court confirmed in Asbestos that the protection of investors and the efficiency of, and public confidence in, capital markets generally should be considered in the OSC’s application of its public interest jurisdiction. It also held that deterrence may inform the choice of sanctions the OSC can apply pursuant to its public interest power. The open-ended and forward-looking aspect of those considerations raises some uncertainty as to the elements that commissions will take into account when ascertaining whether certain conduct is contrary to the public interest and the appropriate sanctions.

Takeaways

The challenge when interpreting or attempting to derive recommendations as to best practices from a settlement agreement is that a large part of the regulator’s reasoning is typically excluded and we are left to fill in the gaps. Even so, the settlement agreement between Lambert and the ASC makes clear that early stage discussions or negotiations towards a possible change of control transaction should be carefully scrutinized to determine the appropriate stages at which a trading blackout and disclosure are required. Most significantly, it cautions that the receipt of unsolicited expressions of interest should always be viewed in light of the relevant circumstances at hand to determine whether, and when, such measures are required.

The author wishes to thank Ramandeep Grewal and Alex Colangelo for their helpful comments.

Insider trading amendments could impose "special relationship" where take-over "considered"

Simon Romano -

As we discussed last week, the Ontario government recently released its 2013 budget plan, which included discussion of amending the Securities Act to clarify the statute's insider trading provisions. The text of the budget bill now provides further detail of the government's intentions. 

Among the proposed amendments to the Act would be a change to the definition of "person or company in a special relationship with the reporting issuer" in respect of those to whom the insider trading restrictions apply. Specifically, the definition would be expanded to include not only persons and companies associated with those proposing to make a take-over bid of a reporting issuer (as is currently the case), but also those associated with a party considering or evaluating whether to make a take-over bid. Similar changes to the wording respecting those considering or evaluating whether to engage in business or professional activities are also proposed. Thus, current provisions of the Act that prohibit persons or companies in a special relationship with a reporting issuer, and with knowledge of an undisclosed material fact or change, from trading in the issuer's securities would, subsequent to the amendments, also prohibit trading by those associated with a party considering or evaluating whether to make a take-over bid or become party to a similar transaction.

The changes appear intended to address an OSC decision released last year that limited the application of insider trading provisions in a case where an executive of a potential acquiror, began purchasing shares of a potential target after learning of his company's interest during a company golf tournament. Ultimately, the OSC found the executive not to have been in a special relationship because the company had not yet proposed a take-over.

Whether the amendments are ultimately adopted, however, remains to be seen. The amendments, and the budget bill as a whole, must still withstand the legislative process, which is more uncertain this year due to the governing Liberals' minority position at Queen's Park.

IIROC guidance would require marking of all insider trades

The Investment Industry Regulatory Organization of Canada (IIROC) yesterday published proposed guidance related to marking orders entered on behalf of insiders and significant shareholders. Specifically, the proposal, intended to vary current guidance, would require all insider orders be marked with the Regulation ID Order Marker irrespective of whether any resulting trade would be subject to insider reporting requirements under applicable securities legislation.

Currently, the need to mark an order as "insider" is correlated to the requirements of NI 55-104 Insider Reporting Requirements and Exemptions in that the requirement generally only applies to orders of reporting insiders not otherwise exempted from reporting obligations in respect of a particular transaction. According to IIROC, the broader application of the marking requirements will improve IIROC's ability to assist in the detection of insider trading violations.

IIROC is accepting comments on the proposed guidance until November 21, 2011. For more information, see IIROC Notice 11-0269. For a background on last year's changes to Canada's insider reporting requirements, see our update of April 21, 2010.

OSC "cracking down" on insider trading

According to an article in today's Globe and Mail, the OSC has been "widening the net" as it investigates potential cases of insider trading in advance of major corporate deals and announcements. OSC enforcement director Tom Atkinson is cited as stating that the sources of insider trading are rarely executives of a company but, rather, employees of the law, accounting, consulting and investment firms involved in deals.

The article also discusses the OSC's new Trade Nexus software, which "allows the OSC to search trading data and look for patterns using numerous variables. It can also be used to identify webs of connections as investigators check to see whether more than one person is involved in a case."

Insider reporting changes to affect filing deadline

As we discussed back in April, new harmonized insider reporting rules in Canada will soon result in an accelerated deadline for filing insider reports in respect of changes to previously reported holdings. Specifically, with respect to transactions occurring after October 31, 2010, an insider report will now have to be filed within five calendar days rather than the previous 10 day deadline. Thus, insiders should ensure that they are prepared to comply with this new requirement. Note, however, that initial reports will still be subject to a 10 day deadline.

For more information on the new insider reporting obligations generally, see our previous posts, below.

Preparing for Canada's new insider reporting requirements in force April 30, 2010 (Posted: April 21, 2010)
CSA publish insider reporting FAQ (Posted April 29, 2010)
CSA publish revised guidance respecting equity monetizations (Posted June 14, 2010)

CSA publish revised guidance respecting equity monetizations

On June 11, the Canadian Securities Administrators (CSA) published revised guidance relating to the reporting of certain derivative-based transactions, including equity monetizations, intended to "assist reporting insiders who have entered into such transactions and to promote consistency in filings." The notice provides examples of arrangements and transactions involving derivatives along with guidance as to how to report these arrangements and transactions on SEDI. A revised notice was also published by the CSA setting out questions and answers intended to assist users in filing information on SEDI. The Q&As are set out based on the steps in the SEDI filing process and the type of SEDI filer.

You may also want to see our previous post of April 21 regarding the newly-implemented insider reporting requirements and our post of April 29 regarding the CSA's FAQ on the new requirements.

GuidanceCSA Staff Notice 55-312 Insider Reporting Guidelines for Certain Derivative Transactions (Equity Monetization) (Revised)
Q&A
CSA Staff Notice 55-316 Questions and Answers on Insider Reporting and the System for Electronic Disclosure by Insiders (SEDI)

CSA publish insider reporting FAQ

The Canadian Securities Administrators (CSA) yesterday published a staff notice addressing frequently asked questions regarding the new insider reporting regime under National Instrument 55-104 Insider Reporting Requirements and Exemptions. The notice contains examples of arrangements and transactions and corresponding guidance regarding the reporting of such arrangements and transactions. Specifically, the questions addressed include those with respect to (i) whether existing insiders have to file a new initial report; (ii) whether existing insiders who are not reporting insiders under NI 55-104 have to file anything to show their change in reporting status; (iii) exemptions for automatic securities purchase plans; and (iv) grants of related financial instruments.

The CSA also stated that it intends to shortly publish general guidance regarding: (i) reporting for certain derivative transactions and (ii) questions and answers on insider reporting and SEDI.

Preparing for Canada's new insider reporting requirements in force April 30, 2010

Simon Romano and Ramandeep Grewal

While a narrower group of “insiders” will be required to report, the rules also include specific reporting obligations in respect of management companies, income trust issuers and those holding convertible securities.

Effective April 30, 2010, the Canadian Securities Administrators (CSA) will be implementing a new regime for insider reporting under National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104 or the Instrument). NI 55-104 will principally harmonize all requirements relating to insider reporting and most insider reporting exemptions across all provinces and territories.  Generally, NI 55-104 will reduce the scope of persons required to file insider reports and expand the nature of interests that must be reported. As discussed in detail below, some of the key features of NI 55-104 include:

  • introducing a new concept of a “reporting insider”, which is a subset of those persons defined to be insiders. Generally, only reporting insiders will be required to file insider reports;
     
  • expanding the insider reporting obligation to apply to persons who are not insiders as defined under securities legislation, but that are designated as insiders for the purposes of the Instrument;
     
  • applying the insider reporting requirement beyond beneficial ownership or control or direction over securities to also include interests in, or rights or obligations associated with, related financial instruments and to agreements, arrangements or understandings that alter a reporting insider's economic exposure to the reporting issuer; and
     
  • accelerating filing deadlines for subsequent insider reports, from 10 calendar days down to five, starting October 31, 2010 (initial reports will still be subject to a 10 day filing deadline).

Reporting issuers and insiders should review the new definitions and requirements carefully to determine how their reporting obligations are affected. Insiders who are not “reporting insiders” will be relieved from most of their reporting obligations, while those that fit within the definition will be required to report a broader range of interests. The new rules will also impact management companies by requiring reports by their directors, officers and shareholders and will replace the insider reporting-related undertakings that were required in respect of income trust issuers and their subsidiaries. Those who hold convertible or similar securities but are not otherwise insiders may be determined to be insiders for the purposes of the Instrument and subject to insider reporting obligations. Issuers may need to review their insider trading policies and procedures for any required modifications and determine whether they will file issuer grant reports to enable their insiders to rely on certain reporting exemptions in respect of compensation arrangements.

Determining who is a “reporting insider”

Generally, the scope of persons required to file insider reports will be reduced by requiring only insiders who are “reporting insiders” to be subject to a reporting requirement. A “reporting insider” includes:

  • a 10% voting shareholder; being a significant shareholder of the reporting issuer or a significant shareholder based on post-conversion beneficial ownership of the reporting issuer’s securities (based on ownership or control or direction over securities carrying more than 10% of the voting rights);
     
  • a member of senior management or the board;  being the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO) and every director of a reporting issuer, a significant shareholder, a significant shareholder based on post-conversion beneficial ownership or a major subsidiary (based on the threshold of 30% or more of the consolidated assets);
     
  • key personnel; being a person or company responsible for a principal business unit, division or function of a reporting issuer;
     
  • external managers: being a person or company established or contracted to provide significant management or administrative services to an issuer or a subsidiary of the issuer (a “management company”) and that provides significant management or administrative services to a reporting issuer or a major subsidiary of the reporting issuer, and every CEO, CFO, COO, director and significant shareholder of the management company;
     
  • those performing similar functions; being an individual performing functions similar to the functions performed by any of the positions described above; or
     
  • individuals with information and influence; being any other insider that (i) in the ordinary course receives or has access to undisclosed material information; and (ii) directly or indirectly, exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of a reporting issuer (referred to as the “basket criteria”).

New obligations relating to management companies, income trust issuers and those holding convertible securities 

While the Instrument generally reduces the breadth of persons who are subject to the insider reporting requirement, it will result in imposing insider reporting upon certain persons who may not have previously been required to report. These include significant shareholders based on post-conversion beneficial ownership and management companies that provide significant management or administration services to the issuer or a subsidiary of the issuer. With respect to management companies, their directors, officers and significant shareholders are also considered to be “insiders” for the purposes of the Instrument. 

Similarly, for issuers that are income trusts, every trustee, director, officer and significant shareholder of the principal operating entity of the income trust issuer is also considered to be an insider for the purposes of the Instrument. With respect to all of these individuals or entities that are considered insiders, those that are “reporting insiders” as set out above will now be required to file insider reports.

For the purposes of the Instrument, a person or company is a significant shareholder based on post-conversion beneficial ownership if it has direct or indirect beneficial ownership, control or direction over securities carrying more than 10% of the voting rights attached to all the issuer’s outstanding voting securities, based on the conversion of any convertible or similar securities.   As is the case for determining beneficial ownership with respect to take-over bids (and filing of early warning reports), a person is considered to have, as of a given date, post-conversion beneficial ownership of a security if the person or company is the beneficial owner of a security convertible into the security within 60 days following that date or has a right or obligation permitting or requiring the person or company, whether or not on conditions, to acquire beneficial ownership of the security within 60 days, by a single transaction or a series of linked transactions.

With respect to the “information and influence basket criteria,” the CSA advise that, to determine whether an insider satisfies the significant influence criterion, “the insider should consider whether the insider exercises, or has the ability to exercise, significant influence over the business, operations, capital or development of the issuer that is reasonably comparable to that exercised by one or more of the enumerated positions in the definition.”

Reports by certain designated insiders for certain historical transactions

If an issuer becomes an insider of reporting issuer, the CEO, CFO, COO and every director of the first issuer is designated or determined to be an insider of the reporting issuer and is required to file insider reports for transactions that occurred in the previous six months or relevant shorter period. Similar reporting obligations also apply where a reporting issuer becomes an insider of another issuer, as the CEO, CFO, COO and directors of the other issuer are determined or designated to be insiders of the reporting issuer for the purposes of the Instrument.

Nature of interests giving rise to a reporting obligation

Pursuant to the Instrument, reporting insiders will be required to file insider reports disclosing the reporting insider's direct or indirect beneficial ownership, control or direction over securities of the reporting issuer, and interest in or right or obligation associated with a related financial instrument involving a security of the reporting issuer.

According to the CSA, the concept of an “economic interest” in a security is a core component of the definition of “related financial instrument” and is intended to have broad application that refers to economic attributes ordinarily associated in common law with beneficial ownership of a security. The CSA have also attempted to address any uncertainty related to derivatives by including derivative instruments in the definition of “related financial instrument” and have identified a broad range of instruments that they consider to be related financial instruments even if they do not, as a matter of law, constitute securities. These include: (i) forwards, futures, stock purchase or similar contracts involving securities of the reporting issuer; (ii) options issued by an issuer other than the insider’s reporting issuer;  and (iii) stock-based compensation instruments, including phantom stock units, deferred share units (DSUs), restricted share awards (RSAs), performance share units (PSUs), stock appreciation rights (SARs) and similar instruments.

The Instrument also contains a supplemental insider reporting requirement intended to capture the reporting obligations currently covered by Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization) relating to certain agreements, arrangements or understandings that have the effect of altering the reporting insider's economic exposure to the reporting issuer, involve, directly or indirectly, a security of the reporting issuer or a related financial instrument involving a security of the reporting issuer and do not otherwise trigger the obligation to file an insider report. Upon becoming a reporting insider, the reporting insider must file an insider report to disclose any such agreement or arrangement that was entered into prior to the date the person became a reporting insider and that is still in effect. According to the CSA, the term “economic exposure” generally refers to the link between a person’s economic or financial interests and the economic or financial interests of the reporting issuer of which the person is an insider.

Acceleration of Filing Deadlines

NI 55-104 accelerates the filing deadline for filing insider reports in respect of changes in a disclosable interest from 10 calendar days to five calendar days. However, initial insider reports, required to be filed upon becoming a reporting insider, are still subject to a 10 calendar day filing deadline. Under the transition provisions of the Instrument, the accelerated five day deadline comes into force after October 31, 2010.

Filing Exemptions for ASPPs, Compensation Arrangements and NCIBs

The Instrument carries forward certain existing exemptions that allow insider reports to be filed on an annual basis. These include acquisitions of securities and specified dispositions under automatic securities purchase plans (ASPPs) and under compensation arrangements established by the reporting issuer or by a subsidiary of the reporting issuer. For these types of transactions reports may be filed by March 31 of each year. To rely on the reporting exemption in respect of compensation arrangements, the reporting issuer is required to have previously disclosed the existence and material terms of the compensation arrangement in an information circular or other public document filed on SEDAR. For acquisitions of securities under a compensation arrangement, the issuer is required to have previously filed an issuer grant report on SEDI in respect of the acquisition. An issuer grant report must disclose: (i) the date the option or other security was issued or granted; (ii) the number of options or other securities issued or granted to each director or officer; (iii) the price at which the option or other security was issued or granted and the exercise price; (iv) the number and type of securities issuable on the exercise of the option or other security; and (v) any other material terms that have not been previously disclosed or filed in a public filing on SEDAR.  With respect to automatic securities disposition plans (ASDPs), the CSA note they may raise different considerations than ASPPs in that ASPPs are typically established and administered by the issuer while ASDPs are often private arrangements between the reporting insider and their broker. While not providing a reporting exemption in the Instrument in respect of ASDPs, the CSA state they will consider applications for exemptive relief on a case-by-case basis.

The Instrument also continues filing exemptions relating to normal course issuer bids (NCIBs) by permitting an issuer which acquires securities of its own issue under an NCIB to file a report within 10 days of the end of the month in which the acquisition occurred.  Also provided is a new general exemption for an issuer from having to report in connection with a transaction, other than an NCIB, involving a security of its own issue if the existence and material terms of the transaction have been generally disclosed in a public filing on SEDAR.

New CSA insider reporting regime scheduled to come into force in April 2010

The Canadian Securities Administrators (CSA) today announced the adoption of National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104), and the related companion policy, along with the repeal of, or amendments to, a number of related instruments and policies. Insider reporting requirements and exemptions have been harmonized under NI 55-104 across all Canadian jurisdictions, except in the case of Ontario, where equivalent requirements will remain in the Securities Act (Ontario). Despite the difference in approach, the substance of the new requirements will be the same across the CSA jurisdictions. An earlier form of NI 55-104 was published in December 2008 for comment. While some changes where made to NI 55-104 in response to comments received, according to the CSA the final form of the instrument is substantively similar to the earlier proposal.

Specifically, NI 55-104 reduces the range of insiders required to file insider reports by introducing the concept of “reporting insider.” According to the CSA, this approach will focus the insider reporting requirement on a core group of insiders with the greatest access to material undisclosed information and the greatest influence over the reporting issuer. Interestingly, under NI 55-104, the concept of “reporting insider” includes a shareholder whose 10% beneficial ownership, control or direction is calculated based on post-conversion beneficial ownership of any convertible securities that are convertible within 60 days. 

While NI 55-104 aims to narrow the range of insiders that are subject to the reporting requirement, it also expands the nature of the interest that is to be reported by including not only an insider’s beneficial ownership of, or control or direction over, securities of a reporting issuer, but also the insider’s interest in, or right or obligation associated, with a related financial instrument involving a security of the reporting issuer. As well, NI 55-104 contains specific provisions relating to reporting requirements associated with convertible or exchangeable securities such as options and warrants as well as agreements, arrangements or understandings that have the effect of altering one’s economic exposure to a reporting issuer or involving a security, or a related financial instrument involving a security, of a reporting issuer.

NI 55-104 also accelerates the filing requirement for subsequent insider reports from 10 calendar days to five (but provides a six-month transition period until October 31, 2010 for compliance with this accelerated filing deadline). 

The new instrument is expected to come into force in all jurisdictions, except Ontario, on April 30, 2010, once Ministerial approval is received. In Ontario, the new requirements are expected to come into force on the later of April 30, 2010 and the date the requisite provisions of the Budget Measures Act, 2006 (No. 2) are proclaimed into force.

CSA publish notice regarding proposed new insider reporting requirements

On December 18, 2008, the CSA published for comment proposed National Instrument 55-104 Insider Reporting Requirements and Exemptions, its Companion Policy and related consequential amendments. The Proposed Instrument sets out the main insider reporting requirements and exemptions for insiders across Canada, with the exception of Ontario, where the Securities Act will govern the main insider reporting requirements. Despite this exception, the substance of the requirements and the reporting deadlines for insider reporting will be the same across the CSA jurisdictions.

The CSA's intention is to streamline and harmonize insider reporting by consolidating requirements in a single instrument. NI 55-104 also proposes specific changes to the insider reporting regime, specifically, it would:

  • reduce the number of persons required to file insider reports;
  • accelerate the insider report filing deadline from 10 calendar days to five;
  • make reporting requirements for stock-based compensation arrangements simpler and more consistent;
  • allow issuers to file an "issuer grant report" in order to facilitate reporting of stock-based compensation arrangements; and
  • require late filings by insiders to be disclosed in an issuer's information circular.

The CSA will accept comments on the proposals until March 19, 2009.

Notice of Approval - Amendments to NI 55-102 (SEDI)

The CSA have approved amendments to NI 55-102 effective June 13, 2008.

Amendments have been made to SEDAR filing procedures as well as to Form 55-102F1 Insider Profile, Form 55-102F2 Insider Report, Form 55-102F3 Issuer Profile Supplement and Form 55-102F6 Insider Report. These amendments are mostly of a house-keeping nature intended to streamline the filing and flow of information on SEDI.

Contested Take-over Bids - Offensive Strategies

Reprinted with permission from the 2007/2008 Lexpert®/CCCA Corporate Counsel Directory and Yearbook, 6th Edition. © Thomson Carswell.

Brian Pukier

The prevalence of hostile take-over bids and other forms of contested M&A transactions continued a theme in the Canadian M&A markets in 2006 and the first part of 2007. The number and profile of these types of transactions have continued to grow. despite the record number of transactions in the previous year.

Some of the more notable transactions include Alcoa Inc.'s hostile bid for Alcan Inc. and Saskatchewan Wheat Pool's bid for Agricore United (which was then topped by James Richardson International Limited, and then amended again once Saskatchewan Wheat Pool entered into an arrangement with James Richardson International to split up certain of Agricore United's assets). Other recent transactions include Harbinger Capital Partner's successful bid for Calpine Power Income Fund, Genzyme Corporation's successful bid for AnorMED Inc. and Avion Group hf's successful bid for Atlas Cold Storage Income Fund.

In addition, there have been an increasing number of topping bids in Canada, both in the context of an additional bidder making a hostile bid (such as Millenium Pharmaceutical's bid for AnorMED Inc. and James Richardson International's bid for Agricore United), and new bidders attempting to break up friendly supported transactions (such as Oxbow Carbon and Minerals Holding's successful attempt to acquire Great Lakes Carbon Income Fund following its friendly deal with Rain Commodities and Open Text Corporation's successful bid for Hummingbird Ltd. following its proposed transaction with Symphony Technology).

As well, we are now seeing aggressive suitors in Canada being able to impact the process that target companies employ through bear hug letters and public statements regarding the intentions of these potential bidders. One high profile example of this is the public disclosure made by Ontario Teachers Pension Plan Board regarding its change in investment intent relating to its holdings of shares of BCE Inc. which contributed to the review of strategic alternatives now underway by the board of BCE Inc.

This article focuses on the relevant strategic options and legal responsibilities of bidders. While my comments are based on Ontario securities legislation and regulation, the securities regimes of other provinces are quite similar in most respects. Indeed, our Canadian securities regulators have recently issued a proposed multilateral instrument, which when implemented will further harmonize the various provincial take-over bid rules.

Download file PDF of entire article

OSC clarifies questions on automatic securities plans and illegal insider trading

OSC Staff Notice 55-701 sheds light on the circumstances in which the purchase or disposition of securities under pre-arranged structured sales or acquisition plans by an insider do not constitute illegal insider trading.

On June 2, 2006 the Ontario Securities Commission (the "OSC") released OSC Staff Notice 55-701 - Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (the "Staff Notice"), addressing frequently asked questions concerning the exemption from insider trading and insider reporting for acquisitions and dispositions of securities under certain types of automatic disposition or purchase plans in Ontario.

Background

The types of plans dealt with in the Staff Notice are those involving the sale or purchase of securities from the holdings of an insider by a broker, based on a pre-arranged set of instructions ('disposition plans" and "purchase plans", respectively). These plans typically contemplate that trading is to continue under the plan regardless of "blackout periods" or of the insider being in possession of material undisclosed information at the relevant time.

The regulations under the Securities Act (Ontario) (the "Act") contain an exemption from the insider trading prohibition and insider trading liability under the Act where a person purchases or sells a security pursuant to an automatic dividend reinvestment plan, share purchase plan or other similar automatic plan that was entered into by the person or company prior to the acquisition of knowledge of a material fact or material change that has not been generally disclosed (the "automatic plan exemption"). Similar exemptions are also available under the Canada Business Corporations Act and the securities legislation of most other Canadian jurisdictions that impose liability for purchasing or selling securities with knowledge of an undisclosed material fact or material change, with the only notable exception being New Brunswick, and a distinction in Quebec where it appears the exemption is only available if the plan is established by the issuer.

Does the automatic plan exemption apply to dispositions of securities under a disposition plan?

The Staff Notice states that the automatic plan exemption will generally apply to disposition plans, provided the plan is "automatic". A disposition plan will be considered automatic if:

  • the insider can demonstrate that it does not have decision making ability over the trading of securities governed by the disposition plan and cannot make "discrete investment decisions" through the plan;

  • at the time the insider enters into the plan, the insider does not possess any material undisclosed information about the issuer (and if the plan has not been established by the issuer, the issuer must provide a certificate to the broker confirming that it is aware of the plan and that the insider has no such knowledge);

  • the plan is in the form of a written plan document setting out trading parameters and other instructions;

  • the plan contains "meaningful restrictions" on the ability of the insider to vary, suspend or terminate the plan (e.g. by including a requirement that any change in instructions be disclosed through a filing on SEDI, along with a representation that the insider is not aware of any material undisclosed information);

  • the plan prohibits the broker from consulting with the insider regarding any sales or purchases under the plan, and the insider from disclosing information to the broker concerning the issuer that might influence the execution of the plan; and

  • the plan is entered into in good faith.

Does the automatic plan exemption apply to plans established by the issuer only?

The Staff Notice states that while the automatic plan exemption typically refers to plans that are established by the issuer, this is not necessarily a required element under Ontario securities laws and that the term "other similar automatic plan" can include, subject to satisfaction of the automatic plan exemption and the "automatic" elements discussed above, a plan established by an insider. However, this is the opinion of OSC staff only and may not conform with the securities laws of, or interpretations made by securities regulatory authorities in, other jurisdictions. While the provisions of securities laws or regulations in most other Canadian jurisdictions contain an exemption similar to the automatic plan exemption, it is not clear whether the exemption could be extended to plans established by the insider. In most of these jurisdictions, the equivalent of the automatic plan exemption refers to "other similar automatic plan" without qualifying that it be a plan established by the issuer. The only exception is Quebec, where s. 187(2) of the Securities Act (Quebec) refers to ".any other automatic plan established by a reporting issuer.".

It is important to note however that, even in Ontario, if the plan is not established by the issuer, the broker must be provided with a certificate from the issuer confirming it is aware of the plan and certifying that the insider has no knowledge of material undisclosed information if the plan is to fall within the exemption.

Is there an obligation to disclose the establishment of the plan?

According to the Staff Notice, whether disclosure is mandated depends upon particular circumstances. Although no firm view is expressed, the Staff Notice indicates that disclosure/treatment might be warranted if, for example, establishment of the plan constitutes a material change (in which case a news release and material change report is triggered), a material fact (in which case the insider with knowledge is restricted from trading until the material fact is generally disclosed), a change in direct or indirect control or direction over the insider's securities (in which case an insider report is required), or a change in the insider's economic interest in/or the economic exposure to a security of the reporting issuer (again, requiring an insider report).

Whether or not there is a clear requirement to disclose, the Staff Notice does suggest that issuers and insiders may want to voluntarily disclose the existence of a plan to eliminate questions about any apparent trading activity by insiders during blackout periods and periods when insiders may have access to material undisclosed information.

Does an insider have to file an insider report for each disposition of securities under a disposition plan?

The Staff Notice states that, generally, the insider (or its broker) will be required to file an insider report (which, it is suggested, should refer to the plan) for each disposition. It also clarifies that the exemption in NI 55-101 allowing for reporting on an annual basis for certain acquisitions and dispositions of securities under or in connection with purchase plans will not generally be available for disposition plans. That notwithstanding, if an insider seeks exemptive relief in connection with disposition plans and can demonstrate that the plan is genuinely an automatic plan and that the insider cannot make discreet investment decisions through it, staff may be prepared to recommend exemptive relief and allow the insider to file insider reports annually.

Note - these guidelines are intended as a temporary measure and apply to Ontario only!

The Staff Notice cautions that it is intended to be a temporary notice pending development by the Canadian Securities Administrators of their own notice which, in addition to dealing with disposition and other similar plans, is expected to address further questions, including the application of securities law requirements to fully managed accounts. Finally, the Staff Notice cautions that there may be differences in the securities law requirements of other Canadian jurisdictions with respect to automatic plans, which should be reviewed prior to the establishment of a disposition plan or purchase plan. Given that the exemption differs in Quebec, it would be advisable in Quebec to have the issuer establish the plan and/or obtain prior regulatory approval. Similarly, it would be advisable to consider the viability of an automatic plan in New Brunswick, given that in the absence of an automatic plan exemption, there is a risk of civil liability or exposure to enforcement actions where the counterparty to a trade under an automatic plan is resident in, or otherwise subject to, the laws of New Brunswick.

While limited to Ontario only, the Staff Notice contains welcome guidance for Canadian executives and brings practice in Ontario a little closer to the U.S., where purchases and sales are permitted under automatic plans on the basis that the trades take place under per-determined criteria and not "on the basis of" material non-public information.

New OSC Rule Restricts Trading During Distributions,Formal Bids and Share Exchange Transactions

Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601

Ontario Securities Commission Rule 48-501 - Trading during Distributions, Formal Bids and Share Exchange Transactions (Rule 48-501) was approved by the OSC on February 15, 2005 and came into force on May 9, 2005. Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601.

Rule 48-501, which has been harmonized with the Universal Market Integrity Rules amendments of Market Regulations Services Inc., imposes trading restrictions on dealers, issuers and certain related parties involved in the distribution of securities, take-over bids, amalgamations and issuer bids. The objective of Rule 48-501 is to reduce the possibility of price manipulation by those with an interest in the outcome of a distribution of securities or other transaction. Rule 48-501 also attempts, to the extent possible, to impose trading restrictions that are consistent with those imposed by the United States Securities and Exchange Commission's Regulation M.

Application of Rule 48-501 to Dealers

Subject to the exemptions outlined below, "dealer restricted persons" cannot bid for or purchase "restricted securities" during the "dealer restricted period" for their own account, an account over which they exercise control or direction, or an account that they know or reasonably ought to know is an account of an issuer of a restricted security (or selling security holder of the issuer, insider of the issuer with material information concerning the issuer, or any person acting jointly or in concert with such persons) or attempt to induce or cause any person to purchase any restricted security.

> Dealer Restricted Person

Rule 48-501 defines a "dealer restricted person" as:

  • an underwriter (i.e. a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution) in a prospectus offering or a private placement made in reliance on a prospectus exemption to an accredited investor;

  • agents participating in a private placement where the number of securities issued under the private placement would constitute more than 10% of the issued and outstanding securities and the dealer has been allotted to sell more than 25% of the securities issued under the private placement;

  • the dealer-manager, manager, soliciting dealer or adviser appointed by an offeror in respect of a securities exchange take-over bid or issuer bid;

  • dealers who are soliciting dealers or advisers in connection with amalgamations, arrangements, or capital re-organizations or similar transactions;

  • related entities of any person or company referred to above, unless there are written, annually reviewed "ethical wall" policies in place designed to prevent information flow between related entities, the dealer has no officers or employees that solicit orders or recommend transactions in securities in common with the related entity and the related entity does not act as a market maker for the restricted security, solicit orders or engage in proprietary trading;

  • partners, directors, officers and employees of dealers and related entities; or

  • any person or company acting jointly or in concert with a dealer or related entity for a particular transaction.

> Restricted Securities

A "restricted security" means, generally, any security being offered by way of a prospectus or private placement, or by an offeror in a take-over bid, or issuable to security holders pursuant to an amalgamation, arrangement, capital re-organization or similar transaction. A restricted security also includes a security into which any of the foregoing securities is convertible or that may be convertible into a restricted security.

> Dealer Restricted Period

The "dealer restricted period" for a dealer restricted person in respect of a prospectus distribution or private placement of a restricted security means the period commencing on the later of:

  • the date that is two days prior to the day the offering price of the restricted security is determined; and

  • the date of an agreement or understanding with the dealer to participate in the prospectus distribution or private placement of restricted securities, whether or not the terms and conditions of such participation have been agreed upon,

and ending on the date that the selling process ends and all stabilization arrangements are terminated.

In the bought deal context, the "dealer restricted period" would therefore typically commence on the date on which a bid letter is signed whereas in the marketed deal the dealer restricted period would typically commence two days prior to the pricing of the restricted securities.

The "dealer restricted period" in the context of a take-over bid or issuer bid commences on the date of dissemination of the take-over bid circular, issuer bid circular or similar document and ends with the termination of the period during which securities may be deposited under the bid (including any extension of the bid). Similarly, in the context of an amalgamation, arrangement, capital re-organization or similar transaction the "dealer restricted period" commences on the date of dissemination of the information circular for such transaction and ends on the date of approval of the transaction by security holders.

> Dealer Restriction Exemptions

The dealer restrictions do not apply in connection with market stabilization or market balancing activities that occur at or below the distribution price or last independent sale price for the restricted security for the purpose of maintaining a fair and orderly market by reducing price volatility.

Also, the dealer restrictions do not apply to a "highly-liquid security", which is defined as a listed security with an average of at least 100 trades per trading day during a 60-day period and with an average trading value of at least $1 million per trading day, or a security that is subject to the SEC's Regulation M as an "actively-traded security."

Other exemptions for the purchase of restricted securities include (i) units or shares of exchange-traded funds, (ii) "connected securities" (i.e. a security into which an offered security is immediately convertible, exchangeable or exercisable) of "highly-liquid securities" or exchange-traded funds, (iii) short positions entered into prior to the dealer restricted period, (iv) exercises of convertible securities held prior to the dealer restricted period, (v) purchases through a marketplace in accordance with marketplace rules, (vi) subscriptions of an offered security under a prospectus or restricted private placement (i.e. the offering itself is excluded), and (vii) unsolicited client orders.

It is important to note that while certain trading activities are permitted by Rule 48-501, these activities continue to be subject to the general provisions relating to manipulation and fraud found in securities legislation.

Dealer Research Activities During Restricted Period

A dealer may, during the "dealer restricted period", publish or disseminate any information, opinion or recommendation relating to the issuer of a restricted security provided that such information, opinion or recommendation is contained in a publication that is disseminated with reasonable regularity in the normal course of business of the dealer restricted person, includes similar information with respect to a substantial number of companies or a comprehensive list of securities recommended by the dealer and the information is given no greater space or prominence than that given to other securities or issuers.

An outright exemption is provided for research in respect of a "highly-liquid security", so long as it is contained in a publication that is disseminated with reasonable regularity in the normal course of business of the dealer restricted person.

Application of Rule 48-501 to Issuers and Insiders

A prohibition against bidding for or purchasing "restricted securities" during the restricted period also applies to the issuer of the restricted security, selling security holders of the restricted security, affiliates, associates or insiders of the issuer (except those insiders who have not had in the previous 12 months any board or management representation and do not have any undisclosed material information regarding the issuer) and any person or company acting jointly or in concert with any such persons.

OSC Applies "Credit For Cooperation" in Corporate Disclosure and Insider Trading Case

Confirms New Disclosure Obligations for Disclosure of Material Errors
On July 7, 2005, the Ontario Securities Commission (OSC), rather than instituting legal proceedings, applied OSC Staff Notice 15-702 - Credit for Cooperation, and issued a warning letter to CP Ships Ltd. regarding certain events involving what OSC staff considered to be non-disclosure of a material change and insider trading.

Corporate Disclosure -
A Restatement May Be Considered a Material Change

In June of 2004, the management of CP Ships determined that its financial statements would have to be restated. While this determination was made in June, the amount of the required restatement was only known in August. Public disclosure by CP Ships of the fact occurred in August 2004, once the amount had been determined.

Reporting issuers are required to disclose material changes:

  • immediately through a news release; and

  • within ten days of the date upon which the change occurs through a material change report.

In a news release dated July 7, 2005, the OSC stated that the determination by CP Ships that its financial statements would have to be restated constituted a material change that should have been disclosed, even though the quantum of the restatement had not yet been established. This is consistent with recently revised OSC Staff Notice 51-711 - Refilings and Corrections of Errors, which contemplates that "material" errors may or may not constitute material changes, and says that even in the latter case OSC staff is of the view that "investors should be informed immediately by way of a news release." This notice also now states that the determination that a material error occurred is discloseable, and that disclosure should not be delayed until the next required filing or earnings press release, "even if the issuer requires more time to investigate and quantify all aspects of the error."

The CP Ships position and Notice 51-711 both seem to be potentially at odds with the OSC staff position, as approved by the Commission, reflected in the recent Agnico-Eagle settlement. In Agnico-Eagle, rock fall events that occurred at a mine in early February 2003 were found to have become discloseable only in mid-March, after they were properly understood and management had determined that an unavoidable gold production shortfall would result. According to Notice 51-711, in contrast, time to fully analyze and understand the problem may not be contemplated.

Insider Trading

The investigation conducted by OSC staff also revealed that four insiders of CP Ships may have traded in securities of the company at a time when insiders knew that the financial results for the second quarter of 2004 were expected to be materially below analysts' publicly disclosed estimates. The OSC concluded that the expectation that financial results would be below estimates was a material fact. Trading with knowledge of a material fact would generally constitute insider trading. Although the trades were authorized by a member of senior management or the chairman of the company and the insiders had articulated their intention to sell the shares well in advance of their knowledge of the financial results, or had unrelated reasons to sell the shares, the OSC stated in a news release that the trades "may not have been in the public interest and that such conduct could have formed the basis of proceedings" against the insiders.

This aspect of the OSC staff warning seems to conflict with both NP 51-201 - Disclosure Standards and Toronto Stock Exchange (TSX) requirements. NP 51-201 contemplates that both a "significant increase in near-term earnings prospects" and "unexpected changes in the financial results for any periods" may be material information, and TSX requirements require immediate disclosure of all material information. Thus it is unclear why OSC staff did not conclude that CP Ships should not have immediately disclosed this expected discrepancy with analysts' consensus earnings, as was the case with the error in the financial statements.

Application of "Credit for Cooperation" Principles

While OSC staff considered that the events summarized above could have formed the basis of proceedings against both CP Ships and its insiders, the OSC chose to apply the principles set forth in OSC Staff Notice 15-702 - Credit for Cooperation, and issued a warning letter to CP Ships. OSC Staff Notice 15-702 provides that the OSC may reduce the consequences of a breach of securities laws where the persons involved show cooperation during the course of an investigation and have self-policed, self-reported and self-corrected the matters under investigation. In this case, cooperation was demonstrated by:

  • establishing a special committee to investigate the issues;

  • meeting with the staff of the OSC;

  • publicly disclosing that the OSC was conducting an investigation and that the trading by the insiders should not have taken place;

  • providing all relevant documents;

  • giving the OSC unlimited access to the special committee's advisors;

  • the restitution to CP Ships by the insiders of the amount representing the loss avoided on their trades (Cdn$1.4 million); and

  • reviewing and revising its insider trading and corporate disclosure policies.

Additionally, CP Ships agreed that the restitution paid to it by the four insiders would be re-directed to the MFDA Investor Protection Corporation, the new contingency fund for mutual fund dealers.

Conclusion

The CP Ships incident is a very public example of the OSC's Credit for Cooperation approach in action, and represents something of a road map for what the OSC staff considers cooperation to be. In addition, it demonstrates OSC staff's approach to financial statement and other disclosure errors and restatements, and how OSC staff views expected divergence from analysts' predictions. Unfortunately, in the latter case, the inconsistency of the warning represented by the OSC's press release with other OSC and TSX pronouncements creates some uncertainty, which is never helpful to issuers or their advisors in grappling with difficult disclosure issues.