On March 24, 2015, the Ontario Securities Commission (“OSC”) issued its decision In the Matter of Paul Azeff, Korin Bobrow, Mitchell Finkelstein, Howard Jeffrey Miller and Man Kin Cheng (a.k.a Francis Cheng)[1], an important insider trading case in which the OSC identified a gap in Ontario’s then insider trading laws.
Information about a potential transaction or event that is anticipated to occur in our capital markets but not yet publicly disclosed could be very valuable to those persons who hold the information. Generally speaking, Ontario’s insider trading laws require that persons with such valuable information about a proposed transaction not share it (i.e. tipping) or otherwise use it (i.e. purchase or sell securities) before the information is publicly disclosed. This is premised on the belief that our capital markets function best and most fairly when there is a so-called “level playing field” with regard to information.
Ontario’s insider trading laws prohibit a “person or company in a special relationship with an issuer”[2] from purchasing or selling securities of an issuer with the knowledge of a “material fact”[3] or “material change”[4] with respect to the issuer that has not been generally disclosed. Such laws also prohibit a person or company in a special relationship with an issuer from informing, other than in the “necessary course of business”[5], another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed.
Ontario’s insider trading laws were amended effective July 1, 2016. The changes, among other things, prohibit a person or company in a special relationship with an issuer from recommending or encouraging, other than in the necessary course of business, another person or company to purchase or sell securities of the issuer with the knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed.
Prior to the recent legislative amendments, Ontario’s insider trading laws only prohibited a person from sharing material undisclosed information about an issuer with another person and did not catch instances where a person made a recommendation regarding purchasing or selling a security of an issuer without disclosing any material undisclosed information about the issuer.
Through the recent amendments, our lawmakers have provided all participants in our capital markets, including the OSC, with more certainty about the scope of prohibited insider trading activities and eliminated one area of prohibited activities where the OSC should not have to rely on its public interest jurisdiction in the future.
[1] http://www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20150324_azeffp-2.pdf.
[2] Under Ontario securities laws, “person or company in a special relationship with an issuer” means,
(a) a person or company that is an insider, affiliate or associate of,
(i) the issuer,
(ii) a person or company that is considering or evaluating whether to make a take-over bid, as defined in Part XX, or that proposes to make a take-over bid, as defined in Part XX, for the securities of the issuer, or
(iii) a person or company that is considering or evaluating whether to become a party, or that proposes to become a party, to a reorganization, amalgamation, merger or arrangement or similar business combination with the issuer or to acquire a substantial portion of its property,
(b) a person or company that is engaging in any business or professional activity, that is considering or evaluating whether to engage in any business or professional activity, or that proposes to engage in any business or professional activity if the business or professional activity is,
(i) with or on behalf of the issuer, or
(ii) with or on behalf of a person or company described in subclause (a) (ii) or (iii),
(c) a person who is a director, officer or employee of,
(i) the issuer,
(ii) a subsidiary of the issuer,
(iii) a person or company that controls, directly or indirectly, the issuer, or
(iv) a person or company described in subclause (a) (ii) or (iii) or clause (b),
(d) a person or company that learned of the material fact or material change with respect to the issuer while the person or company was a person or company described in clause (a), (b) or (c),
(e) a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship.
[3] Under Ontario securities laws, “material fact” means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities of an issuer.
[4] Under Ontario securities laws, “material change” means (i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or (ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable.
[5] National Policy 51-201 – Disclosure Standards provides guidance on the interpretation of “necessary course of business”:
3.3(2) The “necessary course of business” exception exists so as not to unduly interfere with a company’s ordinary business activities. For example, the “necessary course of business” exception would generally cover communications with:
(a) vendors, suppliers, or strategic partners on issues such as research and development, sales and marketing, and supply contracts;
(b) employees, officers, and board members;
(c) lenders, legal counsel, auditors, underwriters, and financial and other professional advisors to the company;
(d) parties to negotiations;
(e) labour unions and industry associations;
(f) government agencies and non-governmental regulators; and
(g) credit rating agencies (provided that the information is disclosed for the purpose of assisting the agency to formulate a credit rating and the agency’s ratings generally are or will be publicly available).