SECURITIES REGULATION AND IR

Canadian securities regulatory authorities are concerned that selective disclosure, or “tipping”, creates opportunities for insider trading and undermines the confidence of the investing public in the marketplace as a level playing field. Generally, selective disclosure occurs when a reporting issuer discloses material undisclosed information only to one or more recipients and not broadly to the investing public. Below is an overview of the Ontario statutory prohibitions against selective disclosure and insider trading and a brief discussion of the recent decision in the Paul Donald case (Re Paul Donald (2012) 35 OSCB 7383). 

Ontario securities laws prohibit reporting issuers and persons “in a special relationship with a reporting issuer” from informing, other than in the “necessary course of business”, anyone of a “material fact”[1] or a “material change”[2] with respect to the reporting issuer before the material fact or material change has been generally disclosed. Ontario securities laws also prohibit anyone in a special relationship with a reporting issuer from purchasing or selling securities of the reporting issuer with the knowledge of a material fact or material change about the issuer that has not been generally disclosed.

The special relationship definition is not limited to communications by senior management and includes, among others, (a) an insider of a reporting issuer, an insider of a person proposing to make a takeover bid for the securities of a reporting issuer, or an insider of a person proposing to become a party to a business combination with a reporting issuer, (b) a person engaging in or proposing to engage in business or professional activities with or on behalf of a reporting issuer, (c) a director, officer or employee of a reporting issuer, and (d) a person (a “tippee”) who learns of a material fact or material change with respect to the issuer from someone who the tippee knows or ought reasonably to know is a person in a special relationship with a reporting issuer. Since tippees are themselves considered to be in a special relationship, there is a potentially infinite chain of tippees who are caught by the prohibitions against tipping and insider trading.

Tipping is prohibited so that everyone in the market has equal access to, and opportunity to act on, material information[3]. Ontario securities laws allow an issuer to make a selective disclosure if doing so is in the “necessary course of business”. The question of whether a particular disclosure is being made in the necessary course of business is a mixed question of law and fact that must be determined on a case-by-case basis and in light of the policy reasons for the statutory prohibitions against selective disclosure and insider trading. The necessary course of business exception generally would not permit an issuer to make selective disclosure of material undisclosed information to an analyst, institutional investor or other market professional or to the media. 

National Policy 51-201 – Disclosure Standards (“NP 51-201”) provides that if an issuer discloses material information under the necessary course of business exception, it should ensure that those parties receiving the information understand that they may not pass the information on to anyone else other than in the necessary course of business or trade on the information until it has been generally disclosed. 

NP 51-201 also provides that if an issuer makes an unintentional selective disclosure, it should take immediate steps to ensure that a public announcement of the material information is made.  Pending the public release of the material information, the issuer should also advise those parties who have knowledge of the information that such information is material and has not been generally disclosed, effectively putting those parties on notice that they are prohibited from trading in the securities of the issuer until the information has been generally disclosed.

By now, most of us have heard or read about Paul Donald (“Donald”), a former vice-president of Research in Motion Ltd. (“RIM”), who purchased shares of Certicom Corp. (“Certicom”) months before RIM launched a hostile takeover bid for Certicom. On the day before his purchase of Certicom shares, Donald had attended a RIM golf tournament and dinner where he learned of certain information about Certicom from another officer of RIM. 

One of the questions that the Ontario Securities Commission (“OSC”) grappled with in this case was whether Donald was a person in a special relationship with Certicom. In order to answer this question, the OSC had to consider whether RIM was “proposing” to make a takeover bid for Certicom. The OSC considered all of the circumstances and concluded that RIM’s interest in Certicom had not yet evolved into a “proposal” and consequently, Donald was not a person in a special relationship with Certicom. Without being in a special relationship with Certicom, Donald could not have breached insider trading laws. However, this did not end the matter for Donald. The OSC ultimately concluded that even though Donald had not breached insider trading laws, he was found to have engaged in conduct contrary to the public interest, as he purchased securities of Certicom with knowledge of material facts that had not been generally disclosed. The OSC noted in its decision that market participants and officers of public companies are expected to adhere to a high standard of behaviour. 

While the facts of this case are unusual, following the OSC’s decision issuers will undoubtedly be considering whether it is prudent to impose blackout periods earlier in the mergers and acquisitions process than they had before.