Notice of Ministerial Approval of Amendments

The CSA have approved amendments to NI 51-102, 51-102F3 Material Change Report, NI 52-108 Auditor Oversight and NI 81-106 Investment Fund Continuous Disclosure. The changes are primarily of a technical nature required in order to conform these rules to the recent harmonization of securities laws among passport jurisdictions, and are effective July 4, 2008.

Additional amendments have also been made to section 9 of NI 51-102 with respect to proxy solicitation in order to exempt certain types of public solicitations from the requirement to send a proxy circular (to conform with what is currently required under the CBCA).

Secondary market civil liability arrives in Quebec

Robert Carelli and Alex Colangelo  | Version française

On November 9, 2007, Bill 19, An Act to amend the Securities Act and other legislative provisions (Bill 19) came into force in Quebec. Bill 19 introduces a regime of secondary market civil liability, enabling investors to sue issuers and others for failing to make timely disclosure of material changes and for misrepresentations contained in public disclosure. Bill 19 closely follows the Ontario regime and readers will notice a substantial similarity between the two. Quebec also joins other provinces, such as Alberta and British Columbia, which have enacted, or are in the process of enacting, secondary market civil liability provisions.

Court Authorization

Similar to the Ontario requirement for leave, an action in Quebec may not be brought without prior authorization of the court. In order to determine whether to grant authorization, the court must find that the action "is in good faith" and that there is a reasonable possibility it will be resolved in favour of the plaintiff. Unlike Ontario, however, which prescribes specific limitation periods for the commencement of proceedings of three years from the date of the statement of misrepresentation (or non-disclosure) or six months after the issuance of the news release announcing that leave has been granted, Quebec's Bill 19 allows any interested party to request the court to perempt the authorization if an action is not commenced within three months of the authorization being awarded. 

Cause of Action

Bill 19 identifies four situations that may lead to a cause of action. These consist of situations where:

  • the issuer or a representative of the issuer releases a document containing a misrepresentation;
  • a representative of the issuer makes a public oral statement relating to the issuer's business or affairs, which contains a misrepresentation;
  • an influential person or representative of the influential person releases a document or makes a public oral statement relating to the issuer, which contains a misrepresentation; or
  • the issuer fails to make timely disclosure of a material change.

Persons Potentially Liable

Also similar to Ontario, Quebec's Bill 19 provides for a number of potential defendants.  These include:

  • the issuer, its directors and officers who authorized, permitted or acquiesced in the release of the document or the making of the public statement containing the misrepresentation, or in the failure to make timely disclosure of a material change;
  • an "influential person", which includes a control person, promoter, an insider who is not a director or officer of the issuer, or an investment fund manager if the issuer is an investment fund, who knowingly influenced the misrepresentation or failure to make timely disclosure, or who authorized, permitted or acquiesced in the misrepresentation if it was made by the influential person or representative;
  • an expert, which includes, inter alia, accountants, engineers, financial analysts and geologists whose report, statement or opinion contained the misrepresentation, who was quoted in the offending document or statement and who consented in writing to the use of the report, statement or opinion;
  • in the case of a public oral statement, the person who made the statement.

Burden of Proof

The plaintiff is not required to prove that there was reliance on the document or statement containing the misrepresentation or on the issuer having complied with its timely disclosure obligations. Unless the defendant is an expert or the misrepresentation was contained in a core document (prospectus, take-over bid circular, etc.), the plaintiff must prove that the defendant knew of the misrepresentation or deliberately avoided such knowledge, or was guilty of gross fault in connection with the release of the document or of the public oral statement. With respect to a failure to disclose, unless the defendant is the issuer, its officers, an investment fund manager or its officers, the plaintiff must prove that the defendant knew that a material change report should have been filed or deliberately avoided such knowledge, or was guilty of gross fault in the failure to make timely disclosure. In determining "gross fault", the court will consider a number of factors that are substantially similar to those to be considered in Ontario for determining "gross misconduct". They include, inter alia: the nature of the issuer, the knowledge, experience and function of the defendant, and the reasonableness of reliance on the disclosure compliance system.


Bill 19 contains a number of defences to an action for civil liability similar to those found in Ontario's Bill 198.  These include:

  • that the plaintiff knew of the misrepresentation or material change;
  • that the defendant conducted a reasonable investigation and had no reasonable grounds to believe that a misrepresentation or failure to make timely disclosure would occur;
  • that the misrepresentation was also contained in a document filed by, or on behalf of, a third person, other than the issuer, with the Autorité des marchés financiers or the securities commission of another province, providing that the misrepresentation was not corrected in another filed document, the document or statement contained the reference to the source of the misrepresentation and the defendant did not know and had no reasonable grounds to believe there was a misrepresentation;
  • that a misrepresentation or failure to disclose a material change that was made without the defendant's knowledge or consent was followed by corrective action in the form of notification to the board of directors of the issuer and possibly notification to the Autorité des marchés financiers. This defence is not available to an issuer;
  • in the case of a public oral statement, that a defendant other than the person who made the statement did not become, or should not reasonably have become aware of the misrepresentation before the plaintiff acquired or disposed of the issuer's security and that the person who made the public oral statement had no authority other than apparent authority to do so;
  • with respect to a forward-looking document or statement, that reasonable cautionary language was included in the statement along with a statement of the material factors or assumptions applied. The statement or document must contain certain qualifiers in order for the defendant to rely on this defence.  Futher, this defence is not available with respect to a statement or information required to be filed under the Securities Act or regulations;
  • non-experts who rely on expert reports, statements or opinions may rely on a lack of knowledge or reasonable grounds to believe there was a misrepresentation in the relied report and that the report of the expert was fairly represented in the document or statement;
  • an expert may rely on having withdrawn his or her report, statement or opinion in writing before the document containing the misrepresentation was released or the statement made;
  • that a defendant was unaware and had no reasonable grounds to believe that a document containing a misrepresentation would be released; and
  • that the issuer filed a material change report on a confidential basis, made the material change known when the basis for confidentiality ceased to exist, did not release a document or statement containing a misrepresentation and, if the material change became publicly known in some other way, promptly disclosed it.

Damages and Liability Cap

Damages under Bill 19 are assessed based on calculations that rely on the price of the securities bought or sold, and the average price of the security once the material change has been disclosed. Damages do not include changes in the value of the security due to market forces unrelated to misrepresentations or the failure to make timely disclosure.  Much like Ontario, Bill 19 also includes liability limits. They are:

  • in the case of the issuer or an influential person that is not a natural person, the greater of 5% of its market capitalization and $1,000,000;
  • in the case of a natural person other than an expert, the greater of 50% of the aggregate of that person's compensation from the issuer and its affiliates and $25,000 or, if the person is a director or officer of an influential person, the greater of 50% of the aggregate of that person's compensation from the influential person and its affiliates and $25,000;
  • in the case of an expert, the greater of the revenue that the expert and affiliates of the expert earned from the issuer and its affiliates in the year preceding the misrepresentation and $1,000,000.


The liability limits are available unless the plaintiff proves that the defendant, other than the issuer, authorized, permitted or acquiesced in the release of the document or making of the public oral statement containing the misrepresentation, or failed to make timely disclosure, while knowing it to be a misrepresentation or a failure to make timely disclosure.

Implementation and transition

As stated above, Bill 19 came into force on November 9, 2007.

Merger talks are not a reportable material change unless parties are committed and success is likely, OSC panel rules

Andrew Cunningham  | Version française

In its widely anticipated ruling of Re AiT Advanced Information Technologies Corp., the Ontario Securities Commission (OSC) held that the obligation to disclose a potential merger as a "material change" under s. 75 of Ontario's Securities Act 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.

This decision will likely come as a relief to most corporations, directors and their legal counsel, as it largely confirms the existing commonsense approach to material change reporting. The OSC's investigative branch, which brought the regulatory action against AiT, had argued for reporting at a considerably earlier stage - a possibility that had caused concern in the business and legal communities.

A noteworthy aspect of the ruling is its recognition that the target board's duty to report may depend in some cases on the nature of the acquiror. In particular, where the acquiror is a large company, the rigours of its due diligence requirements and the multiple internal hurdles that may have to be surmounted before it can give final sign-off on a deal may mean that a transaction is not "substantially likely" until very late in the negotiation process. In the case at hand, the OSC panel agreed that, in light of the size and internal review procedures of the buyer (and other factors pointing to the contingent nature of the transaction), disclosure was not required until the final documentation was actually signed.

Highlights of the ruling

OSC Staff noted that the statutory definition of "material change" includes a "decision to implement" a "change in the business, operations or capital of the issuer" as well as such a change itself. From this they concluded that a material change need not actually have occurred in order to require disclosure. That this is so is widely accepted, but the issue (predictably) became what sort of decision by a board counts as a "decision to implement".

OSC Staff argued that AiT, a TSX-listed technology company, had been obliged to disclose a potential acquisition by Minnesota-based 3M Co. as soon as the board had given the go-ahead (through a resolution) to proceed with negotiating on the basis of a $2.88 per share offer by 3M. This approval, obtained on April 25, 2002, was followed the next day by a Letter of Intent (LOI) that was expressly stated to be non-binding, contained a no-shop provision, a right to respond to unsolicited superior offers and a stipulation that any agreement was subject to a favourable due diligence review to be completed over the following three weeks.

The OSC panel hearing the case rejected Staff's argument that the April 25 board resolution and/or the LOI constituted a "decision to implement" triggering a material change disclosure requirement. The panel stated the applicable principle as follows:

    [A]n issuer's disclosure obligations arise not when a potential transaction is identified and discussed with the board, but instead, when the decision by the board to implement the potential transaction is based on its understanding of a sufficient commitment from the parties to proceed and the substantial likelihood that the transaction will be completed.

Even though the minutes of the April 25 meeting described the transaction as though it were virtually a done deal, the OSC panel noted that the minutes had actually been drawn up several months later, after the deal was done, and discounted their definitive tone. While AiT dodged a bullet on this point, it is a good reminder of the importance of keeping accurate and sufficiently detailed minutes that fully record any doubts that may be expressed about the viability of transactions currently under negotiation. It is also advisable to avoid formal resolutions at an early stage, as a matter of best practices.

Based on the evidence of board members, the OSC panel concluded that the board had not considered the transaction substantially likely on April 25. It also found that the April 26 LOI reflected this uncertainty. While a LOI can trig¬ger disclosure obligations, it will do so only where its terms are sufficiently firm and there is an adequate commitment to the trans¬action as described. In this case neither of these conditions were satisfied: the LOI was non-binding, due diligence had to be completed, the $2.88 price was subject to downward renegotiation and key elements of the deal (e.g. the break fees and support agreements) remained to be negotiated.

A material change might still have occurred, quite apart from the LOI, as negotiations proceeded and the deal firmed up. However, the panel found that while AiT was clearly committed to the transaction in the weeks following April 26, 3M was not. In particular, the panel cited 3M's commitment to its complex "Six Sigma" approvals process and the fact that the driver of the deal at 3M was a middle manager. The panel observed:

    With an organization as large and complex as 3M it is important to distinguish between the business team's enthusiasm for doing a transaction which will enhance their operating unit's size and contribution to the 3M organization's success, and the corporate level approvals which had to be in place before 3M was committed to proceed with the acquisition of the AiT shares.

Even the May 14 approval by the 3M board was conditional upon CEO approval of the due diligence report and integration plan, which were fundamental to 3M's process. That approval was not obtained until May 21.

The panel did not accept Staff's position that these uncertainties were outweighed by the fact that some senior members of 3M were following the negotiations, that the proposed acquisition fit into the company's corporate strategy, that the LOI was signed by an executive VP of 3M who reported directly to the company's CEO, that the value of the transaction was only marginally over the level below which 3M board approval was not required or that 3M appeared to be acting in good faith. One significant take-away from this decision is that the board of a relatively small target may often be entitled to suspect the degree of "commitment" of a larger and more bureaucratic acquiror until the last of the acquiror's significant internal hurdles have been surmounted.

The panel noted in passing that a LOI might constitute a material change where an acquiror is "smaller [and] less process-driven" or where negotiations are led by the acquiror's CEO. In this case, however, the success of the transaction was insufficiently certain to require reporting as a material change at any point prior to the date that the merger agreement was actually approved by the 3M CEO and executed by the parties.

The OSC panel accordingly found that the corporation had not breached s. 75 of the Securities Act and that the company's outside counsel - who was also a director and who (as such) was alleged to have acquiesced in the alleged failure to disclose - was absolved.

The lesson of the case is that the common sense approach prevails, although it is important to note that the standard applied by the OSC panel is highly fact specific. In light of this, it is still essential for boards to consider possible disclosure obligations very carefully at each step in the process toward a proposed transaction and to ensure that their reasons for concluding that the transaction has not yet crossed the threshold of "commitment" and "substantial likelihood", where that is their conclusion, are both cogent and clearly recorded.

When to disclose merger talks

The OSC's AiT proceeding could start a trend towards earlier public disclosure.

Jeffrey Singer

Recent actions by the Ontario Securities Commission (OSC) in connection with the acquisition of AiT Advanced Information Technologies by 3M Canada may lead to tighter Canadian public M&A disclosure standards. The unexpected proceedings targeted AiT and two of its directors (its President/CEO and its legal counsel) over their alleged failure to make timely disclosure of the proposed transaction. The company and one of these directors have settled with the OSC, but the second director (the company's legal counsel) has chosen to defend her actions at a hearing.


The chronology of events in the OSC's statement of allegations, set out below, is generally consistent with the agreed statement of facts in the settlement agreements.

On January 25, 2002, a committee of the AiT board accepted management's recommendation that the company seek out a strategic buyer or merger partner. Exploratory discussions ensued in February with 3M Canada, which confirmed its interest in a potential acquisition on March 4. On March 12, the parties entered into a non-disclosure agreement.

On March 27 and 28, representatives of 3M conducted preliminary due diligence on AiT, including receiving presentations from management. In the weeks that followed, representatives of AiT and 3M had preliminary discussions related to value. On April 23, 3M advised AiT that, upon approval by the AiT board, 3M's interest in pursuing a transaction would be confirmed in a non-binding letter of intent which would be subject to a number of conditions, including exclusivity until May 15, due diligence and 3M board approval.

On April 25, 3M advised AiT that it was prepared to offer $2.88 per fully-diluted common share of AiT. Later that same day, the AiT board unanimously passed a resolution recommending that shareholders accept the offer, subject to the receipt of a favourable fairness opinion from the company's financial advisor and the satisfaction of the AiT board with respect to certain other terms of the transaction (including the tax consequences to shareholders). A letter was then circulated to certain directors and employees of AiT who were known to be aware of the proposed transaction with 3M. The letter stated that the AiT board had approved "the entry into an agreement in principal" [sic] with 3M and reminded the employees that it was unlawful to trade in securities of AiT until the information was publicly disclosed.

The following day the two companies signed a non-binding letter of intent relating to the proposed acquisition. The letter of intent specifically noted that the proposed transaction was subject to a number of conditions, including a favourable due diligence review by 3M, the entering into of definitive documentation between AiT and 3M, certain AiT shareholders entering into agreements with 3M in support of its proposed transaction with AiT, and the receipt of 3M management committee and board approval as well as any required third party consents and approvals.

On May 9, AiT received a call from Regulation Services inquiring about unusual trading that had driven the company's share price up by 41%. In response, AiT issued a press release later the same day, advising that in response to recent trading activity in its stock, it was "exploring strategic alternatives that would ultimately enhance value for our shareholders". However, the press release did not mention the proposed 3M transaction.

On May 22, the AiT board received the favourable fairness opinion and approved the definitive merger agreement and related documents. The following day, AiT and 3M signed the merger agreement and AiT issued a press release and filed a material change report.

The transaction was approved by AiT shareholders on July 15 and completed July 19, 2002.

The OSC allegations

According to the OSC statement of allegations, the proposed transaction between AiT and 3M constituted a "material change" within the meaning of the Securities Act (Ontario) that should have been publicly disclosed by April 25 and in any event not later than May 9. Under the Act, a material change includes "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 any of the securities of the issuer, or a decision to implement such a change by the board.of the issuer."

Market reaction

Regardless of how the matter is ultimately resolved, Canadian public bidders and targets likely will be treading all the more carefully (and, at times, perhaps impractically so) in the wake of AiT - both in relation to the manner in which they approach material transactions as well as in their approach to public disclosure thereof.

This trend is already manifesting itself in the marketplace, with the decision in February by the board of Algoma Steel Inc. to disclose early-stage merger talks with Salzgitter AG, which disclosure was followed by a steep increase in Algoma's stock price and the abandonment of the proposed deal. Tentative merger talks between Wolfden Resources Inc. and Zinifex Inc. were also recently publicly disclosed. In that case, Wolfden disclosed the expected offer price, producing a corresponding increase the trading price of its shares. Many purchasers were disappointed when Zinifex came in with a lower offer after completing its due diligence.

These examples demonstrate some of the dangers of early disclosure that were raised by leading Canadian M&A counsel at a meeting held at the Toronto office of Stikeman Elliott LLP in February. The AiT hearing, scheduled for July 9, 2007, will be watched with interest by Canadian M&A market participants.

OSC Provides its Interpretation of the Forward-Looking Information Defence to Secondary Market Civil Liability

Proposed OSC Policy 51-604 provides guidance on how the OSC interprets the defence to misrepresentations in forward-looking information under the newly enacted civil liability provisions of the Securities Act (Ontario).

Amendments to the Securities Act (Ontario) (the "Securities Act") that came into force December 31, 2005 (the "Bill 198 Amendments") now allow secondary market purchasers to assert a new statutory cause of action for misrepresentations contained in public documents and public oral statements. Along with these newly created causes of action, the Bill 198 Amendments also make available certain statutory defences, including a defence for misrepresentations contained in forward-looking information (the "forward-looking information defence") included in either a document or a public oral statement.

The purpose of proposed OSC Policy 51-604 Defence for Misrepresentations in Forward-Looking Information (the "Draft Policy") is to express the views of the Ontario Securities Commission (the "OSC") on the policy considerations underlying the forward-looking information defence and to explain how the OSC interprets certain aspects of this defence. It includes guidance on satisfying the requirement to present cautionary language "proximate" to the forward-looking information which it qualifies and on application of the materiality thresholds that qualify the risk factors and assumptions that are to be disclosed. While issuers may have hoped for more detailed direction on how the technical elements of the defence are to be applied, the Draft Policy does provide valuable insight into the underlying objectives of the defence and is welcome guidance for all those dealing with disclosure compliance under Ontario's new secondary market liability regime. The Draft Policy is open for comments until August 2, 2006.


Forward-looking information is defined under the Securities Act as "disclosure regarding possible events, conditions or results that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented as either a forecast or a projection."

To rely on the forward-looking information defence, the document or public oral statement in question is required to contain, "proximate" to the forward-looking information:

  • reasonable cautionary language identifying the forward-looking information and the material factors (risk factors) that could cause actual results to differ from a conclusion, forecast or projection contained in it; and

  • a statement of the material factors or assumptions that were applied in drawing a conclusion or making a forecast.

For public oral statements a person is deemed to have satisfied these requirements if he or she states that (i) the oral statement contains forward-looking information, (ii) actual results could differ materially from what is expected, (iii) certain factors or assumptions were applied in arriving at the forward-looking information, and (iv) that additional information about the material factors or assumptions that were applied in arriving at the forward-looking information and the material risk factors that may affect actual results is contained in a readily-available document. This means a document that is filed with the OSC or otherwise generally disclosed must contain the required cautionary statements and be identified for further reference. As well, to satisfy the forward-looking information defence for both documents and public oral statements, the person or company must have a reasonable basis for drawing the conclusions or making the forecasts or projections contained in the forward-looking information.

What the OSC says about the Defence

Recognizing that forward-looking information is both valuable and necessary "yet by its very nature carries a level of uncertainty," the Draft Policy states that the objective behind the forward-looking information defence is to avoid a "disclosure chill" on account of the risk of liability, while facilitating balanced and responsible disclosure about future prospects. The need for the OSC to provide clarification arises from the concern and confusion caused in the market by the specter of secondary market liability together with the technical aspects of the forward-looking information defence.

These technical aspects include the requirement that the cautionary language required to satisfy the defence be presented proximate to the forward-looking information itself and include a statement of both the relevant risk factors and the underlying assumptions. Depending on how these elements of the defence are interpreted and applied, it has the potential of rendering a disclosure document confusing, unwieldy and potentially of little use in conveying what is sought to be communicated to the reader.

In the Draft Policy, the OSC explains that it does not interpret the term "proximate" to require immediate juxtaposition of the cautionary language in every instance and where a disclosure document contains various threads of forward-looking information that are subject to common assumptions and risk factors, the proximity requirement may generally be satisfied by adding the required cautionary language either before or after the disclosure containing these threads. The OSC has also clarified that where particular assumptions and risk factors apply equally to multiple instances of forward-looking information, issuers should use their judgment in making cross-references to cautionary language in a manner that supports the principle underling the forward-looking information defence (namely, that an investor reading or hearing the information should be able to identify the forward-looking information, understand that it is being provided and be informed of the material assumptions and risk factors underlying or associated with it). In the OSC's view, these principles suggest that the more closely tied a particular risk factor or assumption is to a particular conclusion, forecast or projection, the more "proximate" it should be to the forward-looking information.

The OSC has also stated that in its view the reference to "material" risk factors requires the disclosure of only "significant and reasonably foreseeable" risk factors and does not require the issuer to anticipate and discuss every risk factor that could conceivably cause actual results to differ from expectations. Similarly, the requirement to state the assumptions underlying the forward-looking information is also subject to a materiality standard and does not require an exhaustive statement of every factor or assumption applied.

To satisfy the forward-looking information defence the person or company must also have a reasonable basis for drawing the conclusion or making the forecasts or projections contained in the forward-looking information. The OSC believes that the reasonableness of assumptions applied, inquiries made and the process followed in preparing and reviewing the information are all factors to be considered in determining what is a "reasonable basis" for this purpose.

With respect to the defence for misrepresentations in forward-looking information contained in public oral statements, the OSC states that the requirement that the person making the oral statement also make certain required cautionary statements (in order to be deemed to have satisfied the forward-looking information defence) should be interpreted pragmatically and is not meant to be exhaustive. This means, for example, that in appropriate circumstances these cautionary statements may be made by one person on behalf of another person who actually makes the statement containing the forward-looking information. Finally, the OSC has also expressed its view that it does not interpret the forward-looking information defence to impose a duty to update such information beyond what is currently required under Ontario securities law or otherwise.

The Draft Policy cautions that the guidance contained in it represents the views of the OSC only, which do not have the force of law. Notwithstanding this proviso, given the historic deference that courts have shown towards the OSC as a specialized regulatory body, the OSC's interpretation would conceivably be persuasive if not compelling before a court of law.

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.


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.