Securities Final Flashcards

Question

What is a viatical settlement?

Answer 1

* When someone with a terminal illness holding a life insurance policy sells this policy to an investor at a discount (usually 20-40%); the investor then makes their ROI when the patient dies.

Answer 2

* US: Life Partners (NO, because failed Howey test) * Canada: Universal Settlements International (YES, because passed Howey test via Pacific Coast) * Note: viatical settlements are illegal in Canada

Answer 3

* OSA s.1(1): o (1) Transactions by security holders, o (2) Transactions by intermediaries, o (3) Transactions (transfer/pledge) by control persons, and o (4) Promotional efforts related to trade transactions (advertisement and solicitations before or after trade), but does not include those not involved in decision-making, such as admin/clerical roles (more about promotional efforts regarding prospectus) o Note: gifts are excluded

Answer 4

* Rule: Canadian regulators can pursue non-Canadian companies for illegal behaviour (regardless of the communication methods used); in this case, it was a pump-and-dump scheme targeting Alberta investors

Answer 5

* Primary: securities issued to public for first time (either brand new securities through IPO or new issue of pre-existing class) * Secondary: traded between investors (exchanges, OTC)

Answer 6

* Distribution is a trade: o (1) where a security is issued (by issuer) on the primary market for the first time, or o (2) where a control person sells a previously issued security on the secondary market  Rationale: control person has informational advantage * Note: Distributions require a prospectus or a prospectus exemption (and once prospectus issued, corp becomes a reporting issuer)

Answer 7

* Definition: Person holding enough shares to affect materially the control of the issuer (20% or more of voting shares) o Can be individual or group of people acting in concert acting pursuant to an “agreement, arrangement, commitment or understanding” * Rationale: 20% is the threshold (even though 50% + 1 gives you actual control of corp and elect BoD) because with 20% you can exert a lot of power (influence other shareholders, call shareholder meetings) * Note: For widely dispersed corps, someone with less than 20% can be deemed to be a de facto control person

Answer 8

* Definition: public company (or private company deemed a reporting issuer by OSC) that has filed a prospectus and obtained a receipt

Answer 9

* Definition: Private company (not listed)

Answer 10

* Market efficiency can be broken down into: o allocable efficiency: money going where best utilized o operational efficiency: carry out transactions at low cost o informational efficiency: source of Efficient Market Hypothesis

Answer 11

* Definition: EMH states that share prices reflect all available information; stocks trade at their fair market value on exchanges. EMH can be divided into three types of theory: o Weak EMH theory: stock prices reflect all past historical data (so technical analysis is pointless because past prices are not indicative of future prices; aka random walk theory), but stocks do not always immediately reflect all releases of public information (so fundamental analysis can be used to determine which stocks or undervalued or overvalued)  Accuracy: This was likely the most accurate form of EMH up until the internet age, as value investors (like Warren Buffet) could make large profits on figuring out what stocks were undervalued o Semi-strong EMH theory: stock prices reflect all past historical data AND all publicly available data immediately, so both technical and fundamental analysis are pointless  Accuracy: This is probably the most accurate form of EMH today because of the incredible speed of data transmission through the internet (but EMH is still flawed because many people do not act rationally) o Strong EMH theory: stock prices reflect all past historical data, all publicly available data immediately AND all privately held data (meaning that people who trade on insider information will not profit in the long-term)  Accuracy: This theory is clearly wrong in practice, as there are many examples of hedge fund managers making enormous profits based on insider information * EMH accuracy: Generally speaking, EMH relies on rational market behaviour. However, people often act irrationally, much insider trading goes undiscovered/unpunished, markets do not reflect all information, and all available information is not always understood (markets often run on fear and greed [or envy according to Munger]); meme stock craze is a good example of this.

Answer 12

* Answer: Sometimes yes, sometimes no * Explanation: o Price is what the market determines something is worth (value) o While EMH and securities regulation believes that value = price, these can often be disconnected due to speculation, panic, irrationality, insider trading, and failing to properly value underlying assets o Corps are often valued by looking at P/E ratio, P/D ratio, or market capitalization o The more information is quickly available and understandable, the more likely the market is efficiently determining value (but this is not always the case)

Answer 13

* Definition: ESG stands for Environmental, Social, and Governance, and represents a way to rank investment opportunities by their positive or negative impact in those categories * Rationale: to encourage companies to act responsibly for not just shareholders but all stakeholders * Problems: o According to SEC, no real regulation, standards, and disclosure for ESG  Example: Tesla has lower ESG rating than oil companies, so obviously some politics o Repeat of ratings for payment reminiscent of credit rating agency fiasco leading up to 2008 financial crisis? o Several recent cases of ESG litigation involving banks accused of greenwashing (lying about a product being environmentally friendly)

Answer 14

* The 2006 Crawford Panel Report suggested a single federal regulator via 5 executive calls: o (1) Market efficiency and competition o (2) Preserve provincial uniqueness o (3) Capital access for SMEs o (4) Single organization provides a practical structural solution o (5) Promote global competitiveness * The panel’s recommendations were not adopted in light of the 2011 Reference Re Securities Act o Reference Re Securities Act, 2011 (SCC)  Held: Bill for single federal securities regulator rejected, because day-to-day securities regulation doesn’t fall under the federal power to regulate trade and commerce, and instead deals with issues of contracts and property, which fall under provincial jurisdiction o Reference Re Pan Canadian Securities Regulation, 2018 (SCC)  Held: Despite the 2011 reference, SCC found that a federal-provincial cooperative scheme to regulate securities was not unconstitutional (perhaps paving the way for a single federal regulator one day) * Personal opinion: having a single federal regulator might very well increase market efficiency and reduce regulatory barriers, but a hybrid approach might be best, considering the fact that Toronto is the capital for securities transactions, and other provinces view regulation in different ways than Ontario (especially Quebec)

Answer 15

* Anyone involved in the buying and selling of securities (dealer, advisor, investment fund manager, underwriter)

Answer 16

* Investor protection and market efficiency (same as securities regulation objectives)

Answer 17

* Dealer * Advisor * Investment fund manager

Answer 18

* Definition: Person is engaged in trading of securities (transfer, or solicitation/conduct in furtherance of a trade) o Types: any kind of “dealers” * Business trigger: Person is engaged in the business of trading securities

Answer 19

* Definition: Person gives advice (including opinions) on the wisdom, value or desirability of investing in specific securities o Types: any kind of “portfolio manager” * Business trigger: Person is engaged in the business of advising (easily fulfilled if advisor receives commission/payment, or profits indirectly from sale; can also be fulfilled through gifts, like an expensive meal, but this is a grey area) o Note: there is an exemption for advice that is not tailored to a specific person or group of persons (through media for example), but you must still disclose any positions you have in the investment you are pushing

Answer 20

* Definition: Person who manages an investment fund * Business trigger: none; simply managing a fund requires registration

Answer 21

* Definition: Business triggers refer to trading or advising securities for a business purpose. This looks at the type of activities and whether it is carried out for a business purpose. Factors include: o (1) Engaging in activities similar to a registrant (such as promoting securities or stating that you will buy or sell securities) o (2) Intermediating trades or acting as a market maker (such as acting as a broker) o (3) Directly or indirectly carrying on the activity with repetition regulatory or continuity o (4) Being, or expecting to be, remunerated or compensated o (5) Directly or indirectly Soliciting

Answer 22

* (1) Security issuers with active non-security businesses who issue or trade in their own securities who: o (a) do not present themselves as being in the business of trading securities o (b) trade securities infrequently o (c) are not, or do not expect to be compensated for trading securities o (d) do not act as intermediaries o (e) do not produce a profit from trading in securities * (2) VP and PE firms (because while investment funds manage pooled money of investors, VCs raise capital for risky acquisitions (for purpose of control/management) * (3) One-time trading or advising activities (usually involves trustees and/or sale of business) * (4) Activity incidental to a firm’s primary business (such as professionals who primarily advise on other issues but occasionally provide advice on securities, such as lawyers, M&A specialists, accountants, engineers, etc.)

Answer 23

* Dealers + Advisors: must deal fairly, honestly and good faith with clients (high standard of care, but does not rise to fiduciary duty standard) * Investment fund managers: must perform duties honestly and in best interests of investment fund (fiduciary duty), and degree of care diligence and skill that a reasonable person would exercise in comparable circumstances (duty of care, and an objective standard) o Fiduciary duty: you put your client’s interest above your own (highest standard of care) o Standard of care: you can be sued if you fail to uphold either duty of care or fiduciary duty

Answer 24

* No, because this would place an unfair burden on dealers/advisors, and would likely force some of the smaller players out of the industry altogether * Why not (4)? o (1) Many of the defences available under a simple duty of care breach are not available under a breach of fiduciary duty (for example, using the defence of suitability when dealing with client losses would no longer be sufficient for fiduciary responsibility) o (2) Damages for breach of fiduciary duty can be much higher o (3) Opens the door to punitive damages o (4) 1-3 leads to lower incentives for dealers/advisors to enter the market, meaning lower market efficiency

Answer 25

o (1) Fit and Proper Requirements  (a) Proficiency standards  (b) Solvency requirements  (c) Financial records o (2) Conduct rules  (a) Know your client (KYC) rules  (b) Suitability rules  (c) Relationship disclosure document o (3) Record-keeping rules

Answer 26

* (1) Fit and Proper Requirements o (a) Proficiency standards: licensing, education, training, experience o (b) Solvency requirements: minimum capital requirements, maintenance of insurance o (c) Financial records: appointment of auditor, and send financial records to OSC

Answer 27

* (2) Conduct rules (31-103CP) o (a) Know your client (KYC) rules (13.2): Requires registrants “act as gatekeepers of the integrity of the capital markets” and they cannot bring the market into disrepute. Requires registrant to look into client’s:  (i) Identity (age, net worth, etc.)  (ii) Reputation (this puts advisors in sensitive position)  (iii) Insider or majority shareholder status  (iv) Enough other info to make recommendations o (b) Suitability rules (13.3): Registrants must also ensure a trade is suitable for a client by fulfilling:  (i) KYP obligations (know risks, features, and fees of security)  (ii) Matching the security to the client’s * Financial circumstances * Risk tolerance * Investment knowledge * Investment objectives  Note: you need to make sure the client expectations are in line with their risk profile * If a client had a low risk profile but wanted to execute a high-risk trade, a note would be added to the file (or even an affidavit is signed by the client) to show that the advisor advised against it * If the advisor/broker doesn’t mention that the risky request goes against the client’s KYC, they will have breached the DoC, and can be sued * Defence: If the client bought a risky investment that clearly fell outside their KYC, and you didn’t advise against it, and it went to court because client lost everything, a good defence may be to show a past pattern of client’s risky trades o (c) Relationship disclosure document: before providing advice or acting on client’s instructions, registrant must get client to fill out client disclosure document, which outlines:  Type of account opened  How registrant will address KYC + suitability rules  Risk factors  Conflicts of interest * Fees * Client reporting

Answer 28

* (3) Record-keeping: firm must maintain records with respect to business activities, financial affairs, client transactions, and regulatory compliance

Answer 29

* Dealers (firm or individual): o Who trade debt securities issued or guaranteed by federal, provincial, or municipal governments in Canada o Any registered advisor who trades (aka a dealer) for an investment fund for which they act as the advisor and investment fund manager * Advisors (firm or individual): o Who provide advice in the media (publications, TV, or online) about buying or selling securities, but the advice is not tailored to the needs of anyone specific  Additional requirement: the advisor must disclose any financial interest they have related to the securities they are advising about * Financial institutions (as dealer, advisor, or investment fund manager): o (1) A bank listed in Schedule I, II or III to the Bank Act (Canada). o (2) Credit Union, loan corporation, trust corporation, insurance company o (3) Business Development Bank of Canada

Answer 30

* Fact: o Unregistered radio host offered investment advice during speaking engagements o Told listeners to consult with dealers who were registered, but did not disclose that he had a financial interest in those dealers * Rule: o (1) Cannot use teacher exemption for advisors because if your main occupation is not education, but instead financial advice o (2) You are not considered a dealer if your activities are not sufficiently proximate to your audience placing trades o (3) You cannot be found guilty of failure to disclose certain conflicts of interest because if you are unregistered, because that OSA section only applies to registered persons  However, your failure to disclose can be contrary to the public interest under OSA

Answer 31

* Facts: o Unregistered Donas printed newsletters regarding a food company and distributed them to registered dealers and friends. o The newsletters said to “buy now”, that the stock would explode, and that the company would soon be listed. * Held: o (1) Donas should have been registered as an advisor. o (2) Donas made representations in the flyer about upcoming stock listing without proper approval.

Answer 32

* Facts: Momentas issued convertible debentures without registration and without a valid registration exemption. Two directors took money from proceeds of sale of debentures (neither was registered). * Held: Both directors were found to have violated the OSA by selling debentures without being registered

Answer 33

* Rule: Providing financial information about securities is not advice, but providing opinions about investing in specific securities is.

Answer 34

* Prospectus is a filing at the beginning of the disclosure process * All public offerings need a prospectus * Once you file a prospectus, you become a reporting issuer (and must subsequently comply with continuous disclosure obligations)

Answer 35

* (1) Provides info to investors to make investing decisions * (2) Allows regulator to screen the document before it is made public (but regulator does not provide opinion, just ensures that prospectus conditions are met) * Note: There are different forms of prospectus for different types of issuers

Answer 36

* (1) Seasoned issuer (established companies) * (2) Junior issuer (under $10m assets, annual revenue, and shareholder equity [for each]) o Require additional disclosures (concerning funding, cashflow, and expenditures) * (3) Venture issuer (unproven company with no significant operations, often listed on TSXV) o Require additional disclosures for issuers with no significant operations in last two years

Answer 37

* Step 1: appoint underwriter for issue * Step 2: develop and file preliminary prospectus (with help of underwriter) and obtain receipt * Step 3: mandatory waiting period (no marketing allowed) * Step 4: OSC sends issuer a comment letter (explaining changes to be made for final prospectus) * Step 5: underwriter meets with institutional investors to determine pricing and subscription * Step 6: respond to regulator’s comments on preliminary prospectus, carry out revisions, file final prospectus, and obtain final receipt o Note: issuer must file amendment to prospectus (and receive another receipt) if there are any material changes between the preliminary prospectus and final prospectus * Step 7: issue securities via IPO

Answer 38

* (1) Determine price of issue and advise issuer in marketing security * (2) Carry out obligations to the public (obtain required assurances and covenants from issuer)

Answer 39

* (1) Agency agreement: “best efforts” to sell securities, minimal involvement from underwriter (not very common; underwriter not sure about how many of the securities can be sold, but best effort will be made) * (2) Firm commitment: shows confidence to the market; considerable effort from underwriter and higher commission as underwriter is now accepting risk; issuer assured that the issue will be sold (multiple types) o (a) Bought deal: underwriter buys from issuer and then resells to market, so actual seller is the underwriter (more common) o (b) Marketed deal offering: underwriter first markets deal to potential investors and assesses market demand before underwriter agreement finalized (gives underwriter a bit more flexibility) (more common) o (c) Stand-by underwriting: Sell at pre-determined price and then underwriter will buy unsold securities

Answer 40

* Conflicts can occur (2): o (1) When the underwriter is the investment bank arm of a bigger institution that wants to issue its shares (such as TD); this also applies to related parties o (2) When the underwriter will own and hold some of the shares to then sell later (they might make the shares appear to be better than they actually are by other certifying a prospectus that should not be certified, or fail to notice issues) * Rule: Where there is a conflict of interest, a second underwriter must be appointed (and this underwriter must underwriter at least 20% of the distribution)

Answer 41

* With large issuances, several underwriters will team up to spread the risk * However, there will always be a lead underwriter

Answer 42

* 5% of money raised in the offering

Answer 43

* First version of prospectus * Will be near final form, but will not include (5): o (1) auditor’s report, o (2) financial statements, o (3) size of offering, o (4) price of shares, o (5) percentage paid to underwriters

Answer 44

* Business description * Use of proceeds * Forward-looking information * Management Discussion and Analysis (MD&A) * Description of securities (size of offering, price of shares, percentage paid to underwriters) * Capitalization of company * Prior sales * Principal shareholders * Directors and executive officers * Executive compensation * Risk factors (to itself or its business operations) * Legal proceedings and regulatory action * Relationship between issuer and underwriter * Material contracts * Certificate page * Market out and disaster clause (not obligatory, but common)

Answer 45

* Includes certification signatures of o two directors (CEO and CFO) of issuer, o two directors who are not the CEO or CFO of issuer, and o each underwriter * Signatures are preceded by statement saying that prospectus contains “to the best of knowledge, information and belief…full, true and plain disclosure of all material facts” relating to the securities being distributed under the prospectus * This forces underwriter to challenge issuer on disclosures as they take on liability

Answer 46

* Enables underwriter to avoid purchasing shares from issuer where there are significant changes in market conditions between time of contract and issuance

Answer 47

* Full: facts are sufficient to permit investors to make an informed investment decision * True: disclosure is accurate and not misleading (and does not omit facts that are material or necessary to understand other facts) * Plain: understandable to investors and in plain language

Answer 48

* If you file with the regulator in one province (and receive a receipt), you can issue your securities in any other province (except Ontario; if you want to issue in Ontario, you must file prospectus with OSC) * Note: underwriters who certify prospectuses must be registered with the regulator of the jurisdiction where the shares are issued

Answer 49

* When you file in a passport jurisdiction and Ontario at the same time, you receive a coordinated review * If the principal regulator and the OSC make the same decision, the receipt of the principal regulator generates a deemed receipt in Ontario (and any other passport jurisdiction where the prospectus is filed)

Answer 50

* OSC has the right to reject a prospectus and refuse to issue a receipt * If any problem is found with either the preliminary or final prospectus after issuance of a receipt, the OSC can issue a cease trading order

Answer 51

* OSC Director can refuse to issue receipt if prospectus: o (1) does not comply with OSA o (2) contains misleading statements o (3) contains misrepresentations o (4) reasons of unconscionability o (5) the proceeds of the sale of the securities are insufficient to accomplish the purpose(s) outline in the prospectus o (6) past conduct of issuer, directors, or control persons o (7) financial condition of issuer o (8) reasons of public interest (macroeconomic reasons, risks offending rule of law)

Answer 52

* The current OSC regime allows the Director to refuse issuing a receipt for reasons that seem to go beyond the bounds of mere full, plain and true disclosure, and begin to look like some merit is involved. * Ensuring that the prospectus complies with the OSA, contains no misleading information or misrepresentations, and that proceeds of sale are sufficient to accomplish the purposes outlined within the prospectus are all objective standards that fit well within the FPT standard. * However, looking at issues of unconscionability, the past conduct of issuer/directors/control persons, the financial condition of the issuer, and reasons of public interest all seem to be subjective standards that veer into the domain of merit (which is not good, because it is overly paternalistic, gives the regulator way too much power, and increases the possibility of corruption)

Answer 53

* Between the preliminary prospectus and final prospectus, underwriters will meet with prospective institutional investors to gauge interest in the shares * Investor interest will be recorded * Oversubscription: when demand is higher than supply * Undersubscription: when demand is lower than supply

Answer 54

* Purpose: shorter prospectus for issuances of a corp that is already a reporting issuer * Rationale: much shorter and less expensive; no need to disclose info that was already disclosed before

Answer 55

o (1) Must already be a reporting issuer in at least one jurisdiction o (2) Be a filer with SEDAR o (3) Must file periodically and timely disclosures o (4) Not in breach of any regulatory order o (5) Have financial statements and annual information form in at least one jurisdiction o (6) Have listed equity securities o (7) Have a continuous and substantial business (capital requirements) o (8) Short form prospectus must also be approved by regulator

Answer 56

* Essential features: o (1) Price o (2) Date of issuance o (3) Critical information for investor, such as updated business plan explaining what corp will do with the money raised, risk factors

Answer 57

* Purpose: o For longer time frame available for distribution of securities o You have 25 months from date of receipt of shelf prospectus to file your securities * Rationale: o Tend to be used because there is no ready market (when market is uncertain), and corp may wish to distribute over the 25 months

Answer 58

* Requirements: same as short form prospectus o Before every distribution, supplement (summary update) must be filed, although not reviewed by regulator

Answer 59

* Purpose: Enable issuers in the US and Canada to use the same disclosure forms for operating in each other’s markets * Rationale: Allows time and cost benefit (on the same basis as short form prospectus, because information is already available in the market) * Note: Does not deal with original offerings, just offerings already in the market

Answer 60

* Purchaser can sue: o (1) the issuer o (2) each underwriter o (3) every director of the issuer (who were directors at time of issue) o (4) every other person/corp who signed the certificate of accuracy * Note: to sue, no need to show reliance on the misrepresentation o However, if proven that plaintiff knowingly purchased the securities despite the misrepresentation, liability is waived

Answer 61

* Material fact: a fact that would reasonably be expected (forward-looking) to have a significant effect on the market price/value of issuer securities o Example of material fact: political, social, or economic issues that impact business (such as COVID-19) o Note: Facts are deemed material (and must be disclosed) if they give rise to material risk (the risk can be uncertain, but the facts are not; the test for materiality looks at market impact) * Material change: a change (or decision of the BOD/senior management to implement 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/value of issuer securities o Example of material change: decision by BOD to sell a significant asset, the loss of a large class-action lawsuit against the corp * Note: Material fact is broader than material change (includes more than just developments that affect the business, operations or capital of a business); therefore, every material change is a change in a material fact, but every material fact is not a material change

Answer 62

* Material facts: Certification signature page includes statement saying that prospectus contains “full, true and plain disclosure of all material facts” relating to the securities (for both preliminary prospectus and final prospectus) * Material changes: If any material changes take place (or there is intent to implement a material change by BOD or management) after a receipt is received during the prospectus process, issuer must file amendment to prospectus (and receive another receipt) o Note: this duty only applies to material changes that are negative, not positive (since investors don’t need to be protected from good news, and the market will take care of this naturally)

Answer 63

* Future information/forecasting is difficult (especially relating to political or economic factors), and material changes are usually within the control of the corp * Therefore, forcing corps to amend based on every change in material fact would be too onerous and time-consuming for both the issuer and the regulator

Answer 64

* Issuer has duty to disclose risk factors relating to its business * Risk factors include: o cash flow and liquidity problems; o risks re management experience; o general risks as to issuer’s business; o reliance on key personnel; o regulatory constraints, o economic and political conditions; o any other material risk

Answer 65

* Disclosure about: o Possible events o Possible financial performance * Based on: o Future economic conditions o Future courses of action * Includes other info such as: o Key performance indicators o Future Oriented Financial Information (FOFI)  FLI financial info presented in format of historical financial statements o Financial outlook  FLI financial info not presented in format of historical financial statements  Examples: projected EPS, projected EBITDA, revenue targets, R&D spending, earnings guidance

Answer 66

* Reporting issuers usually provide FLI in news releases, MD&As, annual information forms, marketing materials, or websites

Answer 67

* If a reporting issuer discloses FLI, it must: o (1) identify FLI as FLI (to be clearly distinguished from historical information) o (2) cautions users of FLI about using it o (3) explain how assumptions of FLI were used (if you sue on FLI, you must prove assumptions were not reasonable) o (4) describes the reporting issuer's policy for updating FLI

Answer 68

* FLI is less reliable than historical information because it is based on management’s best judgement and assumptions of how future trends will impact their business

Answer 69

* Definition: o 20% voting rights are deemed control, but can be less if broad investor base o Can be individual or group of people acting in concert acting pursuant to an “agreement, arrangement, commitment or understanding” (no written agreement needed) * Rationale: Control persons must file a prospectus because: o (1) they may be insiders, o (2) can hold influence over issuer and disclosures, and o (3) sale can have a significant influence on price of shares

Answer 70

* Acting in concert involves sharing information on common interests

Answer 71

* (1) Lawyers (before it’s issued for sure, but maybe after if they want to invest) * (2) Underwriters (they must also sign it), * (3) Auditors, * (4) Institutional investors, * (5) Regulators (in order to issue a receipt), * (6) Advisors (as a tool to provide advice), * (7) Some investors (since prospectuses must be sent to all investors, even retail ones)

Answer 72

* To maximize investor interest, I would advise my client to ensure that: o (1) All the material facts are correct o (2) All relevant parties have signed the certification form o (3) The chosen auditor is reputable and has a good track record o (4) FLI is accurate, is clearly distinguished from historical information, and includes a clear warning statement that says that investors should not “place undue reliance on FLI statements within, especially those relating to expectations of future growth, revenue, cashflow, etc.) o (5) Risk factors are accurate, and include a statement that says that investors “may lose all or part” of their investment o (6) Any material changes that take place during the prospectus process are followed by amendments refiled with regulator for new receipt

Answer 73

* Facts: o YBM was formed to commit securities fraud o They eventually raised nearly $900m before the company declared bankruptcy o But case is not about crime, but instead about disclosure of risk * Held: o YBM's key disclosure documents did not contain full, true and plain disclosure of all material facts, and YBM also failed to disclose a material change * Rule: o Disclosure is the main principle for protecting investors, ensuring fairness in the markets, and enhancing investor trust. o Materiality is the standard for such disclosure in securities markets  Determining materiality involves exercise of judgment and reasonable due diligence

Answer 74

* DDD: When charged with failure to disclose material facts, a defence of due diligence is available when there was an honest and mistaken belief that material facts were properly disclosed (but the accused has the onus of demonstrating that due diligence was undertaken) * Relevance to case: interesting because one of the directors, being young and inexperienced, was permitted to use the due diligence defense. The others were not permitted to, as they were experienced underwriters.

Answer 75

* Periodic disclosure * Timely disclosure

Answer 76

* Requirement that reporting issuer files disclosure documents on SEDAR on a periodic basis (quarterly and annually)

Answer 77

* When reporting issuers must immediately disclose a material change (separate from periodic disclosure)

Answer 78

* (1) Interim Financial Reports (Quarterly) * (2) Annual Financial Reports * (3) Annual Information Form (AIF) * (4) Management Discussion and Analysis (MD&A) * (5) Other Documents

Answer 79

* To provide financial information to investors that has been checked by auditor * Auditor checks if reports fairly represent corp, and whether they abide by IFRS/GAAP accounting principles

Answer 80

* Income statement * Balance sheet * Cash flow statement

Answer 81

* Annual financial statements (not quarterly)

Answer 82

* Definition: a committee made up of independent members of the BOD * Purpose: o to act as the intermediary between the corp’s officers and the third-party auditor o to recommend appointment of third-party auditor o to recommend fees paid to auditor o to decide whether auditor has other responsibilities outside of auditing FS * Requirements: o committee must have a written charter o members must be independent directors (no relationship with issuer) o members must be financially literate

Answer 83

* Allows management to explain how the company performed (by looking to financial statements), and looks to future prospects * MD&A complements but is not part of financial statements

Answer 84

* Annual and interim: o Must be approved by BOD o Must be certified by management * Annual: o Must be reviewed by audit committee (if any issues arise, audit committee communicates with auditor)

Answer 85

* Document that must be filed by reporting issuer to OSC (SEDAR) * AIF discloses business and financial information about the year, and some information from past years * Similar to a prospectus (shows more than financial statements)

Answer 86

* Document sent to shareholders outlining matters being raised at shareholder meeting\ * Also includes proxy vote form

Answer 87

* Document that outlines compensation for CEO, CFO, and 3 highest-paid executives * Also describes how compensation policy was used to determine compensation * Not required as separate document if already disclosed in AIF or information circular

Answer 88

* Top executives were charged by OSC and fined $75m for improperly backdating stock options * They were supposed to grant options based on the previous day’s price, but instead used days in quarter with the lowest price (at a benefit of $66m) * Punishment was severe, as directors also had to step down for a while

Answer 89

* If there is a material change, issuer must file news release immediately and file report via SEDAR within 10 days (unless information is confidential)

Answer 90

* If the issuer thinks that timely reporting of a material change involving confidential information would be “unduly detrimental to the issuer’s interests,” the issuer can file the material change with the OSC (but not via news release or SEDAR)

Answer 91

* OSC will keep info confidential for 10 days (extensions are possible) * If matter/negotiations related to the info fail, this is disclosed immediately * If matter/negotiations related to the info succeed, it will eventually be released to the public

Answer 92

* (1) Internal: a decision made by BOD to implement a change, or where senior management believe that it is “probable” that such change will be approved by the BOD * (2) External: exogenous to corp (such as a political disturbance, or financial crash) o Note: usually, any external factor is a change in material fact, not a material change, but courts have found that serious changes in material facts (due to external circumstances, such as COVID-19 leading to a 90% loss of revenue) is also a material change

Answer 93

* You look at: o (1) the nature of the information itself; o (2) the volatility of the reporting issuer’s securities; and o (3) prevailing market conditions.

Answer 94

* On top of disclosing material changes, all listed companies should disclose all material information (which includes changes in material facts) * The TSX surveillance unit might also require issuers to disclose rumours

Answer 95

* Facts: OSC staff argued that AIT was obligated to disclose a potential merger and had not * Rule: o (1) Material change includes a decision to implement a material change o (2) The probability/magnitude test should be used to determine materiality of information o In short, corps should disclose when something is likely to happen and have an impact on share price

Answer 96

* Facts: Allegations that respondents had violated continuing and timely disclosure requirements and insider-trading provisions. * Held: respondents guilty (CoA overturned) * Rule: Directors of the issuer have a positive duty to inquire about material changes and to ensure that any such changes are disclosed prior to the transaction taking place

Answer 97

* Facts: Danier had forecasted demand for leather would be lower than in previous years (leading to lower earnings) via business analysis which was conducted before the completion of the final prospectus. o Danier had not disclosed this information while their IPO was ongoing. o Class action for prospectus misrepresentation was started * Held: Danier wins; class loses. o Rule: Changes in intra-quarterly results (within reason) are not changes in the issuer’s business, operations or capital, and are therefore not materials changes (only changes in material facts)  Therefore, no requirement to amend prospectus due to change in material fact

Answer 98

* (1) Private issuer exemption (SMEs) * (2) Accredited investor exemption (wealthy and sophisticated investors) * (3) Minimum amount exemption (wealthy investors) * (4) Crowdfunding exemption * (5) Pre-existing relationships with issuer * (6) Offering memoranda exemption * (7) Discretionary exemptions * Note: some exemptions might overlap

Answer 99

* Definition: exemption for private SME * Requirements: SME shares must be held by 50 persons or less (excluding employees) * Who can purchase shares (3): o (1) Director, officer, employee, founder, control person of issuer/affiliate (or any of their family members, close personal friends, or close business associates) o (2) Accredited investor o (3) A “person that is not the public”

Answer 100

* Accredited investors are (8): o (1) Canadian bank + credit union o (2) Canadian government (federal, provincial, municipal) o (3) Person/organization recognized as accredited investor by OSC (such as an advisor or dealer, including those are registered as representatives of advisors or dealers, or who were formerly recognized) o (4) Pension fund o (5) Person or couple worth $1m+ of financial (liquid) assets net of liabilities o (6) Person or couple worth $5m+ of total assets net of liabilities o (7) Person with average pre-tax income of $200k+ (past 2 years + expected to increase) o (8) Couple with average pre-tax income of $300k+ (past 2 years + expected to increase)

Answer 101

* Definition: substitute for a prospectus (with less detail) * Purpose: allows raising of funds where issuer can’t find enough “accredited investors” or those in a “sufficiently close relationship”

Answer 102

* Definition: statute grants powers for regulator to exempt from almost anything * Rationale: whenever investors are no worse off by the exemption from disclosure

Answer 103

* If securities were issued (distributed) under a prospectus, investor who bought them is free to sell them without the sale being considered a distribution * However, if investor bought securities from issuer under exemption from the prospectus requirement, the first trade (aka a sale) is a distribution (and prospectus requirements would apply) * However, there are two exemptions where the prospectus requirements would not apply, but these are subject to certain limitations before the securities become freely tradable: o (1) Restricted period: applies when securities were originally issued by a reporting issuer under certain prospectus exemptions o (2) Seasoning period: applies when securities were issued under certain prospectus exemptions and issuer subsequently became a reporting issuer

Answer 104

* (1) Accredited investor exemption * (2) Minimum amount investment exemption * (3) Family, friends and business associates exemption * (4) Offering memorandum exemption

Answer 105

* (1) Private issuer exemption * (2) Stock dividend exemption * (3) Convertible or exchangeable securities exemption * (4) Business combinations or reorganization exemption * (5)Distribution to employees exemption

Answer 106

* Because the types of prospectus exemptions listed under restricted are more likely to be abused

Answer 107

* All reporting issuers except investment funds

Answer 108

* CEO + CFO (or persons fulfilling those roles) * And third-party auditor certifies attached auditor report

Answer 109

* (1) that, after due diligence, the annual/interim filings do not contain any misrepresentations, * (2) that those persons have designed or supervised the design of disclosure controls and procedures (DC&P) and internal controls over financial reporting (ICFR), * (3) that they have caused the issuer to disclose any material changes in ICFR, * (4) that they have annually evaluated the effectiveness of the issuer’s DC&P, and * (5) that they have caused the disclosure of their conclusions about the effectiveness of the DC&P

Answer 110

* Overall health of issuer, including o (1) liquidity o (2) capital resources o (3) solvency

Answer 111

* (1) information gets disclosed by issuer in its filings, * (2) information is recorded, processed, summarized and reported in a timely fashion, * (3) information flows to management and senior officers, and * (4) 1-3 are done in a manner that allows timely decisions regarding required disclosure * Note: these disclosure controls are huge and impose significant obligations

Answer 112

* These are processes designed by or under the supervision of certifying officers that o Are implemented by the BOD, management, and other personnel o Provide “reasonable assurance” that financial reporting is reliable and in accordance with IFRS o Include policies and procedures (relates to corporate governance):  (1) relating to maintenance of records that reflect accurately transactions and asset dispositions,  (2) are designed to provide assurance that transactions are recorded so that financial statements can be prepared in accordance with IFRS, and expenditures are made under proper authorization, and  (3) are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized use, acquisition or disposition of assets that could impact the financial statements  Note: not only the supervision of the design of the procedures, but also their implementation, must be certified

Answer 113

* Certifying officers must certify that: o (1) financial statements fairly present the financial condition of the issuer, o (2) internal controls exist to ensure the communication to the decision makers of material information, and o (3) disclosures have been made to the auditor and to the audit committee about internal control deficiencies or instances of fraud that may affect the financial position

Answer 114

* Standard = “Fairly present in all material respects the financial condition, financial performance and cash flows…” of the issuer”

Answer 115

* Because not omitting them would impose an accounting standard instead of a legal standard (legal standards are stronger, and prevent you from sheltering under the opinion of an accounting firm)

Answer 116

* Facts: Auditor provided certification that financial statements were in accordance with GAAP * Rule: Court said that standard of care acceptable at law is independent of professional accounting standards (must use legal standard)

Answer 117

* No, because no matter how fast technology gets, people will not be able to access all disclosed information instantly, and even if they could, there will always be insider trading

Answer 118

* Prospectus: o Material facts: Certification signature page includes statement saying that prospectus contains “full, true and plain disclosure of all material facts” relating to the securities (for both preliminary prospectus and final prospectus) o Material changes: If any material changes take place (or there is intent to implement a material change by BOD or management) after a receipt is received during the prospectus process, issuer must file amendment to prospectus (and receive another receipt) * Continuous disclosure: o Timely disclosure: if there is a material change, issuer must file news release immediately and file report via SEDAR within 10 days (unless information is confidential)

Answer 119

* DC&P impose significant obligations on senior officials, but reducing these obligations in any way would be a bad idea. * By removing any one of the controls, or by cutting the link between senior executives and others that may come up with the controls, you are opening the issuer up to risks of negligence, and even intentional harm. * Reducing these controls would severely limit executive liability and reduce the power of regulators to uphold standards. Since the purpose of securities regulation is to protect investors and increase market efficiency and trust, reducing these controls would almost certainly make securities regulation less effective, leading to less trust, more corruption, less market efficiency, and must less investor protection

Answer 120

* (1) Insider (person, as defined in OSA) in a special relationship who * (2) purchases or sells securities with knowledge of a material fact or change, and * (3) the material fact or change has not been disclosed to the public

Answer 121

* (1) Director or officer of a reporting issuer * (2) Director or officer of a company that is a subsidiary of a reporting issuer * (3) Person who owns and/or controls securities that have 10%+ of voting rights of reporting issuer (excluding an underwriter in the course of a distribution) * (4) Reporting issuer that has purchased/redeemed its own issued security (as long as it holds it) * (5) Person designated as an insider of a reporting issuer by OSC under OSA * (6) Person designated an insider who would reasonably be expected to have access to material information about the business, operations, assets or revenue of the issuer

Answer 122

* (1) Issuer or person in special relationship with issuer who * (2) informs, other than in the necessary course of business, the tippee of a material fact of change, and * (3) the material fact or change has not been disclosed to the public

Answer 123

* (1) Insider of issuer or subsidiary of issuer (including director, officer, employee) * (2) Person engaged or planning to engage in any business/TOB/restructuring with issuer * (3) Insider of company proposing to engage in any business/TOB/restructuring a of substantial assets of issuer * (4) Person who invertedly acquired (did not seek out) undisclosed material fact/change as a result of their position/status listed in 1-3 * (5) Person who invertedly acquired (did not seek out) undisclosed material fact/change from a person listed in 1-4, but who ought to know that person had a relationship with the issuer (overhearing private convo in restaurant)

Answer 124

* Definition: normal and routine day-to-day operations consistent with the past practices and customs of the business. o This includes ordinary business communications between issuer and:  (1) vendors, suppliers, and partners related to R&D, sales, marketing  (2) employees, officers, and directors  (3) professionals (lawyers, underwriters, lenders)  (4) parties to negotiations  (5) labour unions  (6) government agencies and regulators  (7) credit rating agencies

Answer 125

* The tipper has an onus to ensure the person receiving information knows it is confidential and should not be disclosed (this is where obligatory filling of forms comes into play)

Answer 126

* Facts: o Royal Trustco was the target of a TOB o Two officers who knew that majority shareholders would not accept the bid had revealed to a major shareholder (TD Bank), other than in the “necessary course of business” certain material facts that had not been generally disclosed including:  (i) the bid would probably fail, and  (ii) dividend on Trustco shares would probably increase * Held: the information disclosed fell within the category of material facts and that such material facts had been made available to such shareholder not "in the necessary course of business" from Royal Trustco's perspective, but instead to influence TD Bank regarding the bid o In other words, this was tipping, and therefore illegal

Answer 127

* (1) the insider/tipper reasonably believed the material fact or change had been disclosed, * (2) the material fact or change was known or ought to have been known to the seller or purchaser of securities, or * (3) for tipping, information was given in the necessary course of business

Answer 128

* Reg 175 (1): if company that traded on insider info can prove that nobody who was involved in the trade o (a) had knowledge of the material fact/change, or o (b) was given advice by someone who had knowledge of the material fact/change * Reg 175 (2): if person who commits the trade is an innocent agent for another person o Example: if client instructs their broker to buy shares in a corp (even if broker has knowledge of undisclosed material fact/change), this is fine, as long as broker did not solicit the trade from client * Reg 175 (3): If person with insider knowledge has an automatic dividend reinvestment plan (as long as the DRIP was created prior to the acquisition of knowledge) * Reg 175 (4): If person with insider knowledge has a legally binding contract to buy/sell securities that was entered into prior to acquisition of knowledge (but this does not include options to buy/sell) * Reg 175 (5): if both buyer and seller are both insiders and are both privy to the same information

Answer 129

* By having a “Chinese wall” within a corp (to prevent transmission of knowledge, such as locked doors, code names on files, firewalls on servers, etc.) for various deals

Answer 130

* OSA S 134(4): anyone who trades on insider information or tips is liable to the issuer for any benefit or advantaged they received or will receive as a result

Answer 131

* (a) if plaintiff is buyer: damages = price paid by plaintiff – average market price over 20 trading days after disclosure of material fact/change o Example: if bought at $10, and price after disclosure is $7, damages = $3/share * (b) if plaintiff is seller, damages = average market price over 20 trading days after disclosure of material fact/change – price received by plaintiff o Example: If sold at $7, and price after disclosure is $10, damages = $3/share

Answer 132

* Reporting insider is: o (1) Director and key officers of a reporting issuer o (2) Significant shareholder (ownership/control of 10% or more voting rights) of a reporting issuer o (3) Key officer of significant shareholder listed in #2 o (4) Management company providing significant services to a reporting issuer o (5) Key officer of management company listed in #4 o (6) Any other insider that receives inside information in the normal course of business, and has ability to exercise significant power or influence/control over the reporting issuer o (7) Persons designated under the look back rule, which states that:  For an amalgamation or takeover, there must be reporting for previous 6 months:  Example: if A takes over B, the insiders of A are deemed to be insiders of B; one wants to know trades with respect to insiders from B.

Answer 133

* (1) On becoming a reporting insider, must file a report within 10 days (on SEDI) * (2) Every time a change in insider status, need file a report within 5 days * (3) Under look back rule, need file report on becoming insider within 10 days

Answer 134

* (1) If securities are covered by an automatic stock purchase plan (DRIP) * (2) If securities are part of a compensation arrangement disclosed in SEDAR * (3) If specific events (such as stock splits, amalgamations, reorganizations) affect all security holders uniformly * (4) If shareholders hold shares of mutual funds * (5) If significant shareholder of reporting issuer/subsidiary of reporting issuer does not have access to material facts/changes before being disclosed to public * (6) If reporting issuer transfer/pledges securities as collateral for debt

Answer 135

* Information has been generally disclosed when: o (1) the information has been disseminated in a manner calculated to effectively reach the marketplace; and o (2) public investors have been given a reasonable amount of time to analyze the information.

Answer 136

* A reasonable amount of time means you cannot disclose and then legally commit insider trading within a few seconds/moments of making the disclosure; you must wait between 24–48h before acting * However, no specific time is given in the statute/NI * This becomes more confusing with modern tech, such as social media platforms and push notifications from brokerages and banks

Answer 137

* (1) Is there a special relationship? * (2) Is there a material fact/change? * (3) Was there disclosure? * (4) Is there a defence to disclosure? * (5) Is the answer in line with the spirit of the Act (investor protection + market integrity)?

Answer 138

* Preventing insider trading eliminates informational advantage, which upholds market integrity, investor protection, and market confidence * In short, this evens out the playing field and makes retail investors more enthusiastic about investing

Answer 139

* Some might argue that you will never be able to truly eliminate all information advantage * Strong EMH theory also states that all information (public and private) is already baked into the price of securities, so insider trading does not provide any long-term gain o However, this theory is clearly wrong in practice, as there are many examples of hedge fund managers making enormous profits based on insider information

Answer 140

* Majority found fraud was committed under the OSA because investor funds were used in ways not disclosed that benefitted the accused * Former OSC chair Zordel was criticized for her dissent for being too lenient

Answer 141

* Majority found that some of the accused tipped, and others used this info to insider trade, but found that OSC was not able to prove that all parties accused of tipping and insider trading were guilty * Former OSC chair Zordel was criticized for her dissent for being too lenient

Answer 142

* Fact: Trader acted on insider information (a material fact about how the investment banking side of a firm was negotiating the financing of a company) * Held: Donnini not guilty of insider trading, but still found that he should not have traded on his information without first checking if the info was material or not, and forced him to pay the cost of the investigation and banned him from trading for 15 years * Rule: hallway discussions, and a strong expectation of something happening that hasn’t happened yet, can be deemed material facts

Answer 143

* Rule: o The plaintiff has the onus of showing that the insider defendant had specific confidential information, and that it was a factor in the action that the insider defendant took which resulted in the plaintiff suffering a loss o However, the insider defendant then has the onus to prove that he did not make use of the information in the transaction (that the information was not a factor in what he did)

Answer 144

* Prof takeaway: OSC monitors significant trades

Answer 145

* In this case, the ONCA considered the definition of “person in a special relationship with an issuer” for the first time * Rule: o Successive tippees further downstream the tipping chain can be held liable for insider trading/tipping o The factors considered by OSC in determining liability are:  The relationship between the tipper and tippee;  The professional qualification and standing of the tipper;  The professional qualification of the tippee;  The level of detail and specificity of the MNPI;  The length of time a tippee waits to make a trade after receiving MNPI;  The intermediate steps a tippee takes, if any, to verify the information received;  The tippee’s past ownership, or lack thereof, of the particular stock; and  The significance of the trade given the size of a tippee’s portfolio o The weight given to each factor depends on the circumstances o Based on these factors, someone who lacks subjective knowledge about the origins of Material Non-Public Information (MNPI) can still be liable if they “ought reasonably to have known” that it came from an insider. o Case also confirms the deference appellate courts will show to OSC findings

Answer 146

* Purpose: to warn the marketplace that a take-over bid could be imminent. * Rule: Every person who acquires securities (either alone or with others jointly or in concert) so they then hold 10% or more of the issued voting or equity securities (including convertible securities) of a reporting issuer must: o (1) Issue and file on SEDAR a press release immediately (by end of business day) to disclose their identity, their intention and the extent of their holding. o (2) file on SEDAR a disclosure report containing their identity, their intention and the extent of their holding within two business days. o (3) file an insider report (on SEDI) disclosing all beneficial ownership/control (since they are now officially an insider) within 10 days of SEDAR disclosure o (4) face a 1-day freeze on all trading of those specific securities (to allow the market to digest the information)

Answer 147

* legally acting as one entity

Answer 148

* 2 or more parties acting together separately but with a common interest

Answer 149

* Meaning: Finding cannot be rebutted in court (conclusive finding) * Applies to: o (1) a person who, as a result of an agreement with the offeror/acquirer acquires or offers to acquire securities currently being offered o (2) an affiliate of the offeror or acquirer (you control 50%+ of voting shares)

Answer 150

* You control 50%+ of voting shares

Answer 151

* Meaning: Finding can be rebutted in court (not conclusive finding) * Application: o (1) a person who, as a result of an agreement with the offeror/acquirer intends to exercise any voting rights attaching to any securities of the offeree issuer o (2) an associate of the offeror or acquirer (you control 10% of voting shares)

Answer 152

* You control 10%+ of voting shares

Answer 153

* The same early warning disclosure requirement applies each time: o (1) The buyer acquires (either alone or with others jointly or in concert) an additional 2% or more of the same securities (including convertible securities) o (2) There is a 2% decrease in ownership o (3) A shareholder’s ownership falls below the 10% reporting threshold o (4) There is a change in any material fact in the disclosure required in the most recent previously filed early warning report.

Answer 154

* When the 20% threshold is reached (and then TOB rules apply)

Answer 155

* If the issuer buys back its own shares (thus increasing the shareholder’s % interest), the 10% threshold rule does not apply

Answer 156

* TOB offer is made to shareholders, not target corp

Answer 157

* Most other shareholders will not own anywhere near as much, so you have a lot of power to bring proposals, requisition meetings, exert influence over BOD

Answer 158

* 20% threshold can be reached by either: o (1) purchasing a control block of shares from held by one person or a combination of persons acting jointly or in concert, or o (2) purchasing a percentage of shares from each shareholder

Answer 159

* Friendly: BOD supports it * Hostile: BOD does not support it

Answer 160

* (1) Vertical integration: one company takes over different stages in production or distribution of product or service (revenue increase through economies of scale) * (2) Horizontal integration: one company takes over similar or identical company involved in same stage in production or distribution of product or service (revenue increased through lowers competition and gaining of clients) * (3) Belief by executives of acquiring company that they can run target better than current management * (4) Belief by executives of acquiring company that target is undervalued * (5) Tax reduction strategy * (6) Acquiring IP

Answer 161

* (1) Shareholders of target company (short-term due to market sentiment) * (2) Shareholders of acquiring company (long-term if purchase was wise/profitable)

Answer 162

* Middle managers and junior executives + board members of target company, as many of these will often lose their jobs

Answer 163

* To ensure: o (1) Disclosure of information o (2) Target and shareholders have time to respond o (3) Equal treatment of shareholders (since first-come, first-serve offers unfairly pressure shareholders)

Answer 164

* Step 1: bidder secures necessary financing to launch bid (if bid has cash component) * Step 2: bidder publishes ad with summary of offer, or sends bid (as TOB circular) to shareholders, target corp, and OSC (via SEDAR) * Step 3: Within 15 days of the date of the bid, directors of the target corp must issue a director’s circular to shareholders * Step 4: bid remains open for minimum deposit period of 105 days from date of TOB launch * Step 5: once minimum deposit period expires and bid conditions are met, there is a mandatory 10-day extension period to allow shareholders who haven’t deposited their shares to deposit

Answer 165

* Document that include purpose of bid, source of funds, and minimum tender requirement

Answer 166

* This document includes recommendations of the target board to shareholders to accept or reject the bid, or must communicate that the board is unable to make a recommendation o All recommendations (or lack thereof) must include reasons by the board

Answer 167

* (1) Offer must be made to all shareholders of the class * (2) All shareholders must be offered identical consideration per share (or if consideration is different, shareholders must be given the choice); no collateral benefits (side offers providing greater consideration) allowed

Answer 168

* Definition: to acquire shares (but not having paid for them yet) * Take-up rules state that shares can’t be taken up until: o (1) expiry of 105-day minimum deposit period, o (2) all terms of TOB complied with or waived, and o (3) at least 50% securities subject to the bid have been deposited and not withdrawn by shareholders

Answer 169

* Shares tendered can be withdrawn by shareholders at any time before taken up * Ways shareholders can withdraw shares: o (1) when securities have not been taken up, o (2) if offeror has not paid for them within 3 business days after take up, o (3) before expiration of 10-day extension from a notice of change or variation of the bid

Answer 170

* Purpose: o If a bidder can buy all the outstanding shares to take the company private, the offeror no longer needs to consider the rights of any shareholders (which is what the bidder wants) o But in most cases, this will not happen without a fight, because some shareholders might reject the offer, while others might not get around to tender their shares to the bidder o This is where squeeze out transactions come into play, to squeeze out the remaining minority shareholders * Types: (1) compulsory acquisition and (2) amalgamation squeeze out

Answer 171

* Definition: If the bidder acquires at least 90% of outstanding shares, the bidder is entitled (by law) to acquire the remaining 10% * Steps: o (1) The bidder will send notices to the remaining shareholders who did not tender their shares, and will place the money (or any other consideration) for those shares in trust for those shareholders o (2) Once the TOB conditions are satisfied, the shares will be transferred to the bidder

Answer 172

* To apply to a court to establish the fair value of their shares * However, this is unusual, because courts are unlikely to determine that the fair value of the shares is different from the price (fair market value) the other shareholders accepted under the bid

Answer 173

* Fair market value: share value based on what the market would pay for, so what the 90% of shareholders sold their shares for) * Fair value: share value based on the value of the underlying company as a whole (realizable value of sold assets minus liabilities) * Note: fair value and fair market value may be the same, but it is sometimes not

Answer 174

* Definition: If bidder acquires under 90% of outstanding shares but over 2/3 of shares and a majority of the outstanding minority shares, the bidder can use an amalgamation squeeze out o Corporate law dictates the 2/3 amalgamation rule o Securities law dictates the majority of the minority rule for amalgamations post-TOB * For example, if bidder A holds 70% of C before the bid and then acquires 16% through the bid, this 86% is not sufficient to do a compulsory acquisition (under 90%), but it is enough to do an amalgamation squeeze out (because 16% is more than 50% of the 30% remaining outstanding minority shares) * Steps (assuming the TOB was already launched and the bidder acquired enough shares): o (1) The bidder creates a subsidiary o (2) The subsidiary and the target enter into an amalgamation agreement (if TOB was hostile, bidder will have replaced old directors to ensure that target cooperates in amalgamation process) o (3) Upon the amalgamation:  (i) the shareholder of the subsidiary (the bidder) receives common shares in the amalgamated company;  (ii) the shareholders of the target (those who didn’t accept the TOB) receive redeemable preferred shares of the amalgamated company; and  (iii) the redeemable preferred shares are immediately redeemed (meaning repurchased by the amalgamated company) for cash or whatever other consideration was paid under the TOB o (4) Upon completion of the amalgamation, the bidder ends up with all of the outstanding shares, and the former shareholders of the target end up with the same consideration they would have received if they had tendered their shares under the bid

Answer 175

* Yes. If the target’s BOD supports the TOB, it is more efficient to go straight to the amalgamation squeeze out stage instead of first conducting a TOB (but this requires cooperation of the target’s BOD, meaning that in the context of a hostile bid, you must go through both steps)

Answer 176

* Where there is a TOB outstanding, the early warning reporting requirement is lowered from 10% to 5% * Rationale: Because there might be another bid forthcoming, so you want to lower the threshold and give the market additional information

Answer 177

* Conflicts may arise where (especially in hostile TOBs): o (1) director is also an officer/employee of target and might lose job if bid is successful, or be entitled to payout if bid is successful; o (2) director is also a substantial shareholder of target, so would have financial interest in the bid; o (3) director also has ties to the bidder, such as holding shares in the bidder or being an officer/director of the bidder * Solution: Set up some form of independent committee/review to determine if there is a conflict, and then to figure out how to deal with it

Answer 178

* (1) Normal course purchaser exemption * (2) Private agreement exemption * (3) Non-reporting issuer (aka private company) exemption * (4) De minimis exemption

Answer 179

* Allows control block holders (more than 20%) to buy up to 5% more shares within a year

Answer 180

* Allows you to buy more shares without making the same offer to all shareholders, as long as you are buying from 5 shareholders or less (but the purchaser cannot pay more than 115% of the market price, meaning the premium cannot be more than 15%)

Answer 181

* Allows acquisition of smaller private company (not more than 50 shareholders)

Answer 182

* Allows TOB under rules from foreign jurisdiction when fewer than 50 shareholders who hold less than 2% of shares live in Ontario

Answer 183

* (1) Poison pill (shareholder rights plan) * (2) White knight (auction) * (3) Sale of crown jewels * (4) Roadblocks

Answer 184

* In case of a hostile TOB, a shareholder rights plan it put into place to disincentivize the hostile bidder from going through with the TOB * The plan (if triggered) allows all other shareholders (excluding the bidder) to buy additional shares of the company at a steep discount, thereby diluting the existing ownership of the bidder, making it much more expensive for the bidder to successfully complete the TOB (to the point where it no longer makes financial sense to pursue the TOB)

Answer 185

* Such plans are so effective that no poison pill defence has ever been triggered once put in place by the target BOD (meaning that no bidder has ever gone through with a TOB after facing a poison pill defence)

Answer 186

* Today, poison pills are still used very often in the US, but they are quite rare in Canada * Why? Because our new TOB rules (increasing the minimum deposit period from 35 to 105 days) allows BOD to solicit other interest, while 35 days often wasn’t enough, so a poison pill would be used to get additional time * When would a poison pill still be useful today? Perhaps during a recession when shares are worth less (and the company is undervalued), or during a creeping takeover (where shares are slowly acquired via exemptions to the TOB regime)

Answer 187

* If the BOD of the target is not satisfied with the terms of a TOB, the BOD may try to find another bidder offering better terms (the white knight) * The BOD may set up an auction whereby the white knight will offer a higher price than the original bidder, leading the original bidder to increase their offer price * The white knight might also be a preferable option for the BOD because of what they will do with the company post acquisition * White knights will often be reluctant to get involved in a bidding war over the target because of the associated costs and effort (especially due to the risk of the bid being unsuccessful), so the target will incentivize the white knight by entering into a “support agreement” with the white knight * The agreement states that the white knight will make a TOB, and in exchange, if the TOB is unsuccessful, the target will pay the white knight a break fee (anywhere between 3-5% of the value of the target, which can sometimes be substantial)

Answer 188

* Lock-up agreement between bidder and target (where the bid was originally friendly but turned hostile)

Answer 189

* For this defence, the target will sell one or some of the most attractive parts of the company to a friendly third party (such as a property, some IP, etc.) to disincentivize a hostile bidder from launching a TOB * Generally, only used in certain industries (such as mining)

Answer 190

* When a target tries to disincentivize an bidder by slowing them down via instigating (frivolous) litigation, conflicting out counsel, etc.

Answer 191

* Facts: o Maple Leaf made a TOB for Schneiders o Schneiders created a Special Committee consisting of independent non-family directors to review the Maple Leaf offers o Schneider rejected ever-increasing bids for non-financial criteria (such as to keeping the business in the family) o Schneiders was only willing to accept the bid from Smithfield (but entered into a lock up agreement) o When Maple Leaf offered more than Smithfield and was rejected because of the lock-up agreement, they sued * Held: Maple Leaf loses * Rule: If Special Committee directors are independent, act in good faith, and use their business judgment, they are entitled to deference

Answer 192

* Agreement to bidder and target where target agrees to tender their shares to the bidder’s bid even if a superior bid comes along later * Can be used to defend against possible future white knight offers

Answer 193

* Facts: o Three large Sears Canada shareholders opposed the attempt by Sears Holding Company to buy out minority shareholders since Sears Holding had offered special consideration to some shareholders * Held: o Sears Holding loses * Recap: this case showed that the OSC is willing to act harshly when necessary to protect the interests of minority shareholders in cases where they find coercive or abusive behaviour

Answer 194

* Transactions that might be abusive in the absence of regulation * As a result, they have additional regulations imposed

Answer 195

* (1) Insider bids * (2) Issuer bids (buybacks) * (3) Business combinations * (4) Related party transactions

Answer 196

* Definition: TOB made by an insider (director, officer, 10%+ shareholder) * Concerns: bidder could have information about the company that shareholders are unaware of, and could use that info to gain an unfair advantage over the shareholders by offering a price that is less than what the shareholders think was the true value of the company if they had access to the same information as the bidder * Rationale: level the informational playing field

Answer 197

* Definition: share buybacks * Concerns: disparity of information; buybacks done for nefarious purposes * Rationale: level the informational playing field

Answer 198

* (a) Reducing cash (to make it less attractive to TOBs) * (b) Increasing majority shareholder holdings (via dilution) * (c) Boost share price (if officers think shares are undervalued)

Answer 199

* Definition: also known as a squeeze-out transaction (compulsory or amalgamation) * Concerns: o Unfair that dissenting shareholders who dissent for reasons other than financial ones are forced out in squeeze outs, but securities law only sees securities as a financial interest o Therefore, regulation is concerned with ensuring that dissenting shareholders are fairly compensated for their shares * Rationale: o Without squeeze-out rules, any 2/3 shareholder could force an amalgamation without fairly compensating minority shareholders o If squeeze-out rules didn’t exist, many bidders would be dissuaded from ever making a bid (meaning that the majority of shareholders would be deprived of the opportunity to sell their shares at the higher bidder price)

Answer 200

* Definition: a transaction involving two companies (or a company and an individual) in which one person has a material interest in both sides of the transaction * Concerns: o In a transaction only involving arm’s length parties (independent parties looking out for their own interests), it is assumed that a fair bargain is struck (otherwise the parties would not enter into the transaction) o However, if the transaction involves related parties, the influence that may be exerted by the related party may result in unequal bargaining  Example: a person may try to force a company they control to buy assets from that person at a price that is higher than if it had been negotiated between two arm’s length parties * Rationale: related party rules exist to level the playing field (to ensure the transaction is fair)

Answer 201

* (1) Disclosure requirements * (2) Formal valuation requirements * (3) Minority approval requirements

Answer 202

* Objective of CG: to align interests of the company (directors and officers) with stakeholders, and clarify accountability

Answer 203

* (1) Fiduciary duty * (2) Duty of care

Answer 204

* Definition: Directors must act honestly and in good faith, focusing on the best interests of the corporation (not owed to shareholders or creditors) * Standard: subjective; determination relies on business judgment rule

Answer 205

* Courts use BJR to give deference to the business judgment of directors, because they are in the best position to take into account the interest of the corporation and its stakeholders (as long as the decision is reasonable, not pointless, and not illegal)

Answer 206

* Definition: Imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation’s affairs o “To exercise the care, diligence and skill a reasonably prudent person would exercise in comparable circumstances” * Standard: objective

Answer 207

* (1) Shareholders * (2) Employees * (3) Creditors * (4) Consumers * (5) Governments * (6) The environment

Answer 208

* Facts: Debentureholders sued BCE for issuing new debt, because this new debt reduced the value of their old bonds by 20% * Held: BCE wins * Rule: absent of fraud or other illegal acts, directors can use the business judgment rule to defend actions where they consider all stakeholder interests, but end up making a decision that ends up harming one stakeholder if the net interests of all stakeholders benefits o Also, Debentureholders were a sophisticated party, so if they wanted to avoid this scenario, they should have included a clause in their original contract with BCE

Answer 209

* Discuss fiduciary duty * Discuss duty of care * Discuss Maple Leaf case * Discuss BCE case * Discuss obligatory duties * Discuss non-obligatory principles

Answer 210

* (1) Certification of disclosure (annual/interim financial statements, MD&A, CD&P, ICFR) for issuers * (2) Disclosure of matters relating to structure of BOD * (3) Information regarding independent audit committee

Answer 211

* (1) Suggesting (but not mandating) structure of BODs (but mandates disclosure of practices relating to composition of BOD) * (2) Suggesting (but not mandating) that BOD have a written mandate stating what BOD is responsible for, such as culture of integrity, identifying risks, internal control, succession planning, corporate governance, etc.

Answer 212

* Enron and Worldcom are examples where directors didn’t follow these rules (so they were clearly insufficient) * Whether there are formal conspiracies and active criminal activity, or just negligence, additional regulations will help reduce the severity and frequency of market harms and failures (we only need to look at the lack of regulation in crypto and the dozen or so of crypto firms that recently collapsed in the wake of the FTX fraud and collapse) * Moving forward, regulators may want to impose additional and specific regulations dealing with security and firewalls * However, we must also be worried about imposing too much personal liability on directors (because this would likely reduce market efficiency and overall wealth creation, since directors/officers would be less willing to take risks)

Answer 213

* Bring forward proposals * Push for more ESG * Push for more diverse BOD and senior management positions * Get more involved in executive compensation (say on pay votes) * Can demand stricter executive compensation claw-back policies for inaccurate disclosure, fraud, negligence

Answer 214

* Where executive compensation is voted on by shareholders (but is non-binding in Canada, often binding in US); but can have significant influence on board; if board ignores, even if non-binding, they may be voted out later as a result, so definitely important

Answer 215

* Definition: Control persons control 20% or more of voting shares * Additional obligations/Impact: o (1) Can influence whether regulator issues receipt for prospectus to another issuer o (2) Have a duty to file a prospectus upon share trades o (3) Cannot be investors in restricted or seasoning period exemptions * Rationale: To level the playing field, because they o (1) have additional information that the public does not o (2) can hold influence over issuer and disclosures o (3) there sales can influence share price

Answer 216

* Where employees and investors sell their existing stocks to the public without using an IPO

Securities Final Flashcards

(241 cards)