This securities law review provides a brief overview of some key securities law developments over the past year. This review also comments on two of 2013's proposed legislative changes.
I. The Securities Act Reference - Death of the National Regulator
In December 2011, the Supreme Court of Canada ("SCC") ruled that the federal government's proposed plan to set up a single national securities regulator was unconstitutional.
The federal government argued that the plan was within its constitutional right to govern trade and commerce, but the SCC was not persuaded and ruled that the day-to-day regulations of the markets are contractual in nature and thus fall within the provinces' jurisdiction over property and civil rights.
However, the SCC suggested that a co-operative approach, which recognizes the provincial nature of securities regulation and allows the federal government to deal with genuine national concerns, would be supported by Canadian constitutional principles.
II. Shareholder Rights Plans
The following summarizes three of 2012's principal decisions in the area of shareholders rights plans ("SRP") as well as comments from the Executive Director of the Ontario Securities Commission ("OSC").
Notable Decisions Relating to SRPs
AbitibiBowater Inc. c. Fibrek Inc.
AbitibiBowater launched an unsolicited bid for Fibrek shares and locked-up certain Fibrek shareholders.
In response, Fibrek sought out Mercer International Inc. as a white knight and proposed to issue warrants to Mercer; Mercer launched a friendly bid for Fibrek shares and offered a higher price than AbitibiBowater.
As a result of a series of regulatory and judicial decisions, the proposed warrant issuance to Mercer was cease traded, with the SCC eventually refusing leave to appeal.
Fibrek illustrates that in the absence of a real need for financing, the Québec Bureau de décision et de révision will consider it improper for a board to issue securities to dilute a potential acquiror, even if allowing the dilution would result in a higher offer for all shareholders.
For an earlier McMillan comment on Fibrek click here.
Inmet Mining Corporation v. Petquilla Minerals Ltd., BCSC
In Inmet the British Columbia Supreme Court held that the test for determining when a SRP should be rendered ineffective turned on two factors: 1) the period of time the offer had been announced and outstanding; and 2) whether there was a real and substantial possibility of an alternative that would increase shareholder choice and maximize shareholder value.
The commission found that Petquilla had 60 days to find a better offer and that it did not demonstrate that there was a "real and substantial" possibility of a superior bid forthcoming. The commission concluded that it was time for Petaquilla's SRP to go.
Thirdcoast Limited and Parrish & Heimbecker Limited, OSC
In ordering a cease trade order for Thirdcoast's SRP, the OSC considered the amount of time Thirdcoast had to respond to the bid.
The formal bid had been outstanding for 35 days prior to its expiry and Parrish & Heimbecker's intention to make the bid had been publically known for 122 days.
Since no other viable bidder had come forward, the OSC held that it was not satisfied that the SRP would serve the purpose of enhancing shareholder value.
Comments from Maureen Jensen, Executive Director of the OSC
In March 2012, Maureen Jensen, executive director of the OSC, commented on SRPs in the context of shareholder democracy stating that SRPs go "to the heart of how decision-making authority is allocated between the board and shareholders".
Jensen further commented that the CSA's regulatory approach to SRPs is based on commission decisions interpreting the national policy on defensive tactics.
This interpretation has effectively meant that the role of target boards in responding to hostile bids is limited to using a SRP to solicit a better offer.
Jensen stated that this approach needs to be revisited in light of significant market, governance and regulatory developments that have occurred since the policy was adopted in 1986.
The OSC and CSA are creating a framework for SRPs that allow target boards more latitude in responding to hostile bids if shareholder approval of the SRP has been obtained.
The aim of the proposed legislation is to leave the decision on how to respond to a hostile bid to an issuer's board and its shareholders, rather than a decision made by regulators. In January 2013, Instrument 62-105 Security Holder Rights Plans is expected to be published for public comment.
III. Notable Judicial Decisions
Development of Securities Class Actions
Fischer v. IG Investment Management, Ontario Court of Appeal
In Fischer the Ontario Court of Appeal considered the relationship between OSC proceedings and proceedings commenced under Ontario's Class Proceedings Act ("CPA") and held that persons that settle complaints with the OSC may still be subject to class action lawsuits.
Sharma v. Timminco, Ontario Court of Appeal
In Sharma the Ontario Court of Appeal held that the limitation period governing a cause of action created by section 138. 3 of the Securities Act (Ontario) ("OSA"), for misrepresentations in an issuer's continuous disclosure, will continue to run until leave is granted by the court, and that the limitation period is not suspended by the CPA. The SCC dismissed the plaintiff's application for leave to appeal.
Definition of a "Responsible Issuer" - Abdula v. Canadian Solar Inc., Ontario Court of Appeal
In Abdula, the Ontario Court of Appeal ruled that a statutory cause of action for secondary market misrepresentations can be raised against foreign-listed issuers that maintain a "real and substantial connection" to the province of Ontario, even though their shares are not traded on a Canadian exchange.
Empty Voting - Telus Corporation v. CDS Clearing and Depository Services Inc. and CDS & Co., British Columbia Court of Appeal
In Telus Corporation, Telus argued that Mason Capital Management LLC ("Mason"), a U.S. hedge fund, should not be allowed to requisition a shareholders' meeting because it had a very limited financial interest in the company.
The British Columbia Court of Appeal held that, while it recognized there was a strong concern that Mason's interests did not align with the economic well-being of the company, there was no indication that Mason violated any laws. Further, Telus did not point to any viable statutory authority which would allow the courts to intervene on broad equitable grounds.
The British Columbia Court of Appeal concluded that the remedy to the concern of empty voting must lie in legislative and regulatory change.
For an earlier McMillan comment on the Telus - Mason decision click here.
Televote System - International Energy and Mineral Resources Investment Hong Kong Company Limited v. Mosquito Consolidated Gold Mines Limited, the British Columbia Supreme Court
The BC Supreme Court ruled in Mosquito that before telephone solicitation systems can be widely used there are multiple protocol issues that must be resolved.
The court's decision arose in the context of a proxy fight between the present directors of Mosquito and a dissent slate led by two former directors of Mosquito.
The directors used the televote system, and instructed their televote operators to accept verbal voting instructions from the solicited shareholders and to execute proxies on their behalf.
The court identified the following items relating to the televote system as problematic:
- oral grant of authority insufficient - the televote system's reliance on an oral grant of authority (as opposed to written confirmation) is inconsistent with legislative requirements;
- no unique identifier - the televote system did not have a reliable means of identifying the person giving instructions, nor ensuring the integrity of the information contained in the proxy;
- no complete record - the televote system did not produce a complete record of oral grants of authority;
- agency relationships - the proxy solicitor acting as agent for both the shareholders and management creates potential for confusion and possible conflict of interest;
- lack of prior disclosure - the facts that a televote system was going to be used was not mentioned in any of the meeting materials; and
- lack of sufficient safeguards - the court cautioned that there is danger of abuse when partisan solicitation is combined with vote taking. A televote system must have sufficient safeguards built into it to ensure that instructions are properly given and shareholders have freedom to vote as they choose.
The court noted that televote systems are relatively new and encouraged the industry to take steps to establish appropriate protocols, which will include addressing the issues presented above, to ensure that proxy and voting instructions are properly given and that shareholders have the freedom to vote as they choose.
Advance Notice By-Laws - Northern Minerals Investment Corp. v. Mundoro Capital Inc., BCSC
In Mundoro Capital, Mundoro adopted an Advance Notice Policy ("Policy"), which set a deadline for shareholders to submit nominations for directors, and stated that only persons nominated before the deadline would be eligible for election.
The Policy also specified that the chairman of the meeting has the power and duty to determine whether a nomination was made in accordance with the Policy and that the board could waive any Policy requirement.
The petitioner, Northern Minerals, argued that there was no legal basis for the Policy.
The BCSC held that nothing expressly prevented the directors from creating the Policy, nor did the petitioner establish that the Policy infringed shareholder rights.
The BCSC found that the Policy encouraged an orderly nomination process and ensured that shareholders are informed of the issues in advance of the AGM.
McMillan publicly advocates for public companies to adopt advance notice by-laws. During the 2012 proxy season, the firm assisted several clients in adopting advance notice by-laws; in each case the by-laws were approved by shareholders without legal challenge.
OSC Public Interest Jurisdiction – Paul Donald
Paul Donald, a vice president at RIM, bought $300,000 worth of shares in Certicom Corp., after learning from another RIM executive that RIM was interested in acquiring Certicom.
The OSC determined that while Donald's trading did not technically breach insider trading securities laws, his actions were contrary to public interest.
The OSC explained that market participants and officers of public companies are expected to adhere to a high standard of behavior, and that Donald's conduct impugned the integrity of Ontario's capital markets.
For an earlier McMillan comment on the Donald decision click here.
IV. Legislation – Adoption of Amendments
Amendments to NI 31-103: Registration Requirements, Exemptions and Ongoing Registrant Obligations
In January 2012, amendments providing exemptions to registered members of the IIROC or the Mutual Fund Deals Association were approved. These amendments came into force on February 28, 2012.
In June 2012, the CSA published for comment proposed amendments to provide investors with increased disclosure regarding compensation as well as investment performance reports.
In November 2012, the CSA published for comment proposed amendments requiring all registered dealers and advisors, outside of Québec, to utilize the Ombudsman for Banking Services and Investments to resolve client disputes and complaints.
Amendments to NI 54-101: Communication with Beneficial Owners of Securities of a Reporting Issuer(Notice and Access)
The amendments are focused on modernizing and improving communications between reporting issuers and their shareholders by allowing a greater use of the internet to deliver proxy-related materials.
It is anticipated this system will cut costs of proxy voting communication materials.
The system allows issuers to distribute their materials to shareholders by posting the documents on SEDAR, a website that is not SEDAR, such as the reporting issuer's own website or that of a service provider and by sending a specified notice to beneficial owners.
For an earlier McMillan comment on Notice and Access click here.
Amendments to the TSX Company Manual
In December 2012, the TSX's amendments to its Company Manual regarding the election of directors came into in force.
The amendments require issuers to: 1) elect directors individually (opposed to slate); 2) hold annual elections for all directors; 3) disclose in their company's information circular whether they have adopted a majority voting policy for uncontested director elections, and if not, to explain their practices for electing directors and why they have not adopted a majority voting policy; 4) advise the TSX if a director receives a majority of "withhold" votes (if a majority voting policy has not been adopted); and 5) promptly issue a news release providing detailed disclosure of the voting results for the election of directors.
The TSX has also published for comment a proposed amendment which would require all TSX issuers to adopt a majority voting policy effective January 1, 2014.
For an earlier McMillan comment on the TSX amendments click here.
V. Canadian Securities Administrators Comments
In 2012, the CSA issued multiple notices to provide the public with guidance and support when interpreting securities legislation. The following summarizes four such notices.
CSA Staff Notice 41-307 – Concerns regarding an issuer's financial condition and the sufficiency of proceeds from a prospectus offering
Staff Notice 41-307 provides guidance to issuers with short-term liquidity concerns, on how to avoid a prospectus receipt refusal.
First, the prospectus must contain clear disclosure on how the proceeds will be used, as well as the issuer's financial condition.
Second, the anticipated proceeds from the prospectus offering must be sufficient to accomplish the purpose of the offering.
Anticipated proceeds from an offering may be considered insufficient if they are raised: 1) for a specific purpose, but do not address the issuer's short-term liquidity requirements; 2) through a best efforts offering without a minimum subscription, or a minimum subscription that does not appear to be sufficient to satisfy the issuer's short-term liquidity requirements; or 3) through a shelf prospectus offering that can be drawn down in small increments that, when considered separately, may not be sufficient to satisfy short-term liquidity requirements.
CSA Staff Notice 43-307 – Mining Technical Reports – Preliminary Economic Assessment
Staff Notice 43-307 discusses the CSA's concerns regarding the recent misuse of Preliminary Economic Assessments ("PEAs").
The notice states that issuers should not be representing that their PEA has been or will be done at or close to the level of a prefeasibility study.
The CSA recommends that issuers be careful to not describe a study as a PEA unless it falls within the PEA definition.
CSA Staff Notice 51-720 – Issuer Guidance for Companies Operating in Emerging Markets
Staff Notice 51-720 summarizes the CSA's concerns from its March 2012 report titled Emerging Market Issuers Review ("Report").
The Report was published to assess the quality and adequacy of emerging market issuers' compliance with disclosure and other regulatory requirements.
The notice provides emerging market issuers with guidance on the following eight areas: 1) business and operating environment; 2) language and cultural differences; 3) corporate structure; 4) related parties; 5) risk management and disclosure; 6) internal controls; 7) use of and reliance on experts; and 8) oversight of the external auditor.
TSX Emerging Markets Consultation Paper
Following CSA Staff Notice 51-720, the TSX and TSXV published a consultation paper on their respective listing requirements applicable to issuers with a significant connection to an emerging market jurisdiction. The principal purposes of the paper are to: 1) present the potential risks associated with listing emerging market issuers (EMIs) that have been identified by the TSX and the TSXV; 2) provide preliminary guidance to issuers and their advisors with respect to listing considerations applicable to EMIs; and 3) solicit comments from market participants on matters related to listing EMIs, including possible new guidance or requirements the TSX and TSXV may implement.
Consultation Paper 25-401 – Potential Regulation of Proxy Advisory Firms
The Consultation Paper attempts to address the public's concerns regarding proxy advisory firms and their potential impact on Canadian capital markets, and serves as a tool to further inform the CSA of whether there is a need to regulate proxy advisory firms.
Concerns raised by the public include: 1) potential conflict of interest; 2) lack of transparency; 3) potential inaccuracies and limited opportunity for issuer engagement; 4) perceived corporate governance implications; and 5) the extent of reliance by institutional investors.
VI. Proposed Legislative Changes for 2013
NI 51-103: Ongoing Governance and Disclosure Requirements for Venture Issuers
NI 51-103 will introduce a new regulatory regime for venture issuers focused on streamlining and tailoring continuous disclosure requirements and governance obligations.
The aim of NI 51-103 is to: 1) improve access to key information and facilitate informed decision-making through improved disclosure requirements; 2) allow management more time to focus on the growth of their company by streamlining and reducing disclosure requirements; 3) enhance investor confidence in the venture market by introducing substantive governance standards; and 4) enhance the ability of securities regulators to focus on the unique challenges associated with the venture market.
For an earlier McMillan comment on NI 51-103 click here.
Pamela Lindsay, student at law