Commission Approval of Rule: OSC Rule - 56-501 - Restricted Shares

Notice of Commission Approval OSC Policy

April 11, 1997

NOTICE OF RULE UNDER THE SECURITIES ACT
RULE 56-501
RESTRICTED SHARES

Notice of Rule

The Commission has, under section 143 of the Securities Act (the "Act"), made Rule 56-501 Restricted Shares (the "Rule").

The Rule and the material required by the Act to be delivered to the Minister of Finance were delivered on April 9, 1997. If the Minister does not approve theRule, reject the Rule or return it to the Commission for further consideration, the Rule will come into force on June 23, 1997. If the Minister approves the Rule,the Rule will come into force 15 days after it is approved.

Substance and Purpose of Proposed Rule

Since the late 1970s restricted shares have been a popular financing device in Canada. Restricted shares are equity shares that either (i) do not have voting rights(non-voting shares), (ii) carry fewer votes per share than those carried by another class (subordinate voting shares) or (iii) carry a right to vote subject to somerestriction on the number or percentage of shares that may be voted by one or more persons (restricted voting shares). One of the results of issuing restrictedshares is that the voting interests of the person or group of persons holding shares that carry voting rights superior to those carried by the restricted shares isgreater than the equity interest in the corporation represented by the shares held by that person or group of persons, and as a result voting control can be held bythat person or group of persons notwithstanding a minority equity interest.

As a result of concerns over the increasing use of restricted shares, the Commission first held public hearings in 1981 on whether or not restricted shares shouldbe regulated. At that time, the Commission adopted a disclosure oriented policy regulating restricted shares and determined to defer resolving a number of issuesuntil the reaction of the public markets to the proliferation of restricted shares as a financing tool could be considered. In 1984, the Commission revisited the useof restricted shares as a result of this market experience and concerns about the impact of restricted shares on investors and the efficiency of Canadian capitalmarkets. In December 1984, the Commission adopted in final form OSC Policy 1.3 (the "Policy") regulating restricted shares. The final form of the Policy wasadopted after the Commission held a series of public hearings on the regulation of restricted shares at which time it considered numerous written and oralsubmissions on the appropriateness of regulating restricted shares and what form the regulation should take.

The Policy requires that (i) holders of restricted shares and prospective purchasers of restricted shares be made aware that restricted shares have rights that differfrom those attached to an issuer's common shares, (ii) holders of restricted shares receive material sent to holders of common shares, (iii) holders of restrictedshares be provided with certain rights in an issuer's constating documents to attend and speak at meetings of voting shareholders, and (iv) shareholders generallyhave the right to approve, by a majority of the minority vote, the creation and issuance of restricted shares.

The proposed Rule replaces the Policy in its entirety. The purpose of the proposed Rule is to provide holders of restricted shares and prospective purchasers ofrestricted shares with similar rights to those previously available to them under the Policy. The summary that follows describes the proposed Rule and significantdepartures from the Policy.

Summary of Proposed Rule

The proposed Rule is divided into four parts. Part 1 contains a definition and application section. The proposed Rule applies to reporting issuers and to issuers("CDN issuers") any of the equity shares of which are quoted on the CDN system operated by The Canadian Dealing Network Inc. and on no other publishedmarket. The proposed Rule does not apply to (i) shares of mutual funds, (ii) shares that restrict the right of non-Canadians to vote, and (iii) shares that aresubject to restrictions imposed by law on the level of ownership by a person or company. The continuous disclosure obligations of the Rule do not apply to U.S.issuers that have a class of securities registered under section 12 of the 1934 Act and to other issuers if, as of a specified date, less than two percent of theoutstanding shares of each class of equity shares of such issuers are held by Ontario registered holders or beneficially owned by persons or companies in Ontario.The offering document disclosure requirements and minority approval requirements of the Rule do not apply to issuers that distribute securities under theMultijurisdictional Disclosure System, and to other issuers if, as of a specified date, issuers expect that after giving effect to the transaction less than two percentof the outstanding shares of each class of equity shares will be held by Ontario registered holders or beneficially owned by persons or companies in Ontario.

Part 2, which consolidates most of the disclosure requirements in the Policy in one section, deals with the description of shares of an issuer. This Part requiresthat documents sent to shareholders by issuers, dealers or advisors use the appropriate term to describe restricted shares. The Part also requires that eachinformation circular, annual information form and other document (including a directors' circular) required to be sent by a reporting issuer or CDN issuer to itsshareholders describe the restrictions on the voting rights of restricted shares and the rights of holders of restricted shares if a take-over bid is made for securitiesof the issuer that have superior voting rights. Offering documents under which restricted shares or securities that may result in the creation of restricted sharesare distributed and information circulars concerning transactions under which restricted shares are created must also contain the disclosure described in thisparagraph.

Part 3 provides that an issuer shall not file a prospectus, and prospectus exemptions are not available, in respect of a stock distribution (as defined in the Rule),unless either the stock distribution or reorganization (as defined) that resulted in the creation of the restricted shares received minority approval (as defined).These provisions of Part 3 replace the provisions in the Policy requiring minority approval for the creation of restricted shares and for the distribution ofrestricted shares by way of stock dividend. The Policy requires that reorganizations receive minority approval at the time of the reorganization. The Rule allowsissuers the option of obtaining minority approval at the time of the reorganization or at the time of the actual stock distribution. The requirement for minorityapproval is not applicable if the reorganization creating the restricted shares took place before December 21, 1984, being the date the Policy was adopted in finalform. It is also not applicable in the case of an initial public offering of restricted shares by an issuer that immediately before the offering was a private companyor for subsequent distributions by that issuer of the same class of shares. In the event that a person that is a "control person" for purposes of the Rule is of theview that the votes attached to its shares should not be excluded in determining minority approval, application for relief can be made under section 4.2 of theRule.

Part 4 of the proposed Rule allows the Director to make determinations that equity shares are restricted shares and to grant exemptions in whole or in part fromthe provisions of the proposed Rule. The Rule provides that the Director's determination shall be based upon a consideration of certain specified factors, all ofwhich are currently found in the Policy. The factors to be considered are (i) whether there is another class of shares that, in view of the consideration and time atwhich the shares were or are being issued, carries a disproportionate vote per share relative to the equity shares, (ii) whether the conditions of the equity sharesor other classes of shares or the issuer's constating documents have provisions that tend to nullify or significantly restrict the voting rights or interests of theequity shares, and (iii) whether there is another class of equity shares, the shares of which are entitled to participate in earnings or assets to a substantially lesserextent, on a per share basis, than the extent to which the first class of equity shares is entitled to participate. If the Director determines that shares are restrictedshares, the Director may designate a term to describe such shares.

The Rule does not carry forward the provisions in the Policy that require that constating documents of an issuer provide for holders of non-voting shares toattend and speak at meetings of holders of equity shares. Nonetheless, the Commission would encourage issuers to provide such rights, either formally in theconstating documents or otherwise.

In a 1989 Notice - "Notice Regarding Compliance with Restricted Share Disclosure Requirements and Disclosure Regarding Take-Over Bids" (1989), 12 OSCB1227, the Commission reminded issuers of their disclosure obligations under the Policy. The Notice specifically provided that when issuers disclose to holders ofrestricted shares their rights, if any, if a take-over bid is made for securities of an issuer which have superior voting rights, shareholders should be advised of thepotential loss of an opportunity to participate in take-over bid premiums. That Notice is not being reissued as it refers to the Policy. As the Rule requires issuersto disclose to holders of restricted shares their rights, if any, if a take-over bid is made for securities of an issuer which have superior voting rights, issuers will berequired to continue to advise holders of restricted shares of the potential loss of opportunity to participate in take-over bid premiums in order to comply withthe Rule.

In a Notice dated September 30, 1987 - "Blank Cheque Preferred Shares" (1987), 10 OSCB 5690, the Commission advised issuers that the setting of the termsof a series of preferred shares ("blank cheque preferred shares") is subject to the Policy if those shares are restricted shares or have the effect of making anotherclass of shares restricted shares. Again the Commission is not reissuing that Notice as it refers to the Policy. The setting of the terms of a series of blank chequepreferred shares that results in restricted shares is a reorganization for purposes of the Rule. A distribution of those shares will be a stock distribution if thoseshares are restricted shares or have the effect of making another class of shares restricted shares and will require minority approval unless the reorganizationpreviously received minority approval or occurred before December 31, 1984. The minority approval is in addition to any shareholder approval obtained inconnection with the initial creation of the class of shares. The Notice also advised issuers that blank cheque preferred shares constitute a means by whichdirectors of a reporting issuer could implement various take-over bid defensive tactics and that the use of blank cheque preferred shares in this manner during thecourse of a bid may be reviewed by the Commission under National Policy No. 38. The Commission continues to hold this view and issuers are advised thatNational Policy 62-202 Take-Over Bids - Defensive Tactics, the National Policy that has replaced National Policy No. 38, continues to be relevant to an issue ofblank cheque preferred shares.

Capital market participants are also reminded that certain stock exchanges, both within and outside Canada, have policies in place that also regulate restrictedshares. For example, issuers that have securities listed on The Toronto Stock Exchange are subject to The Toronto Stock Exchange Policy Statement onRestricted Shares.

Summary of Written Comments Received by the Commission

A comment was received on the proposed Rule by Lang Michener by letter dated January 22, 1996. The following is a summary of Lang Michener's commentsand the Commission's response to the comments.

(a) Exemption from Stock Distribution Requirements

Section 3.1 of the proposed Rule provided that the Director shall not issue a receipt for a prospectus in respect of a stock distribution unless the stockdistribution received minority approval or certain other conditions are satisfied including that the reorganization that resulted in the creation of the restrictedshares received minority approval. Section 3.1 has subsequently been modified to refer to the issuer not filing a prospectus unless the stock distribution receivedminority approval or certain conditions are satisfied rather than the Director not issuing a receipt. Section 3.2 provides that the prospectus exemptions underOntario securities law are not available in respect of a stock distribution of securities of certain issuers unless the stock distribution received minority approval orcertain other conditions are satisfied including that the reorganization that resulted in the creation of the restricted shares received minority approval. Bothsections provide an exemption if the stock distribution is of securities of an issuer that was a private company immediately before the filing of the preliminaryprospectus or prospectus for the stock distribution in the case of section 3.1 or before completion of the stock distribution in the case of section 3.2. LangMichener stated that the restrictions in section 3.1 and 3.2 would not be in the public interest since they would effectively prohibit an issuer whose restrictedshare class was authorized before an initial public offering from issuing additional restricted shares unless the stock distribution is the initial public offering. Theysubmitted that there should be an exemption if the stock distribution is of securities of an issuer whose class of restricted securities was authorized before theissuer became a reporting issuer or a CDN issuer. Lang Michener submitted that in this area the proposed Rule extends beyond the scope of the Policy and thatif their language is not adopted, greater public input should be required.

The Commission does not agree that the exemption should extend as broadly as suggested in the comment. In order to take advantage of the "reorganization"exemption in the proposed Rule, the issuer must have been a reporting issuer or a CDN issuer at the time minority approval for the reorganization is obtained.Alternatively, there is an exemption if the issuer was a "private company" immediately before the distribution. The intention of the Rule is that shareholders havea say on the use of restricted shares. Given that the Commission has published the Rule for comment, it does not feel additional public input, as suggested byLang Michener, is required. However the Commission has modified the exemption to add a second branch providing for an exemption for subsequentdistributions by an exempt issuer of securities of the same class as offered under the prospectus or private placement.

(b) Approval by Holders of Non-Voting Securities of a Stock Distribution

Lang Michener submitted that the subparagraphs of subsection 143(1) of the Act cited as authority for the proposed Rule may be challenged as being too narrowto authorize the grant of voting rights to securities that are otherwise non-voting.

Sections 3.1 and 3.2 of the Rule impose restrictions on the filing of a prospectus and the use of private placement exemptions for a stock distribution unlessminority approval has been obtained or certain other conditions have been satisfied. The Commission believes that there is authority under section 143 of the Actfor sections 3.1 and 3.2 of the Rule.

As an alternative to obtaining minority approval, one of the conditions to the filing of a prospectus or the use of the private placement exemption for a stockdistribution is that the reorganization that resulted in the creation of the restricted shares received minority approval. Another condition is that the reason for thestock distribution is not inconsistent with the proposed uses for the restricted shares as described in the information circular sent to shareholders in respect of theshareholders meeting held to approve the reorganization. Lang Michener stated that where the information circular was prepared before the proposed Rule, the"proposed uses" may not have been expressly described but may have been implied. They submit that information circulars issued before the effective date of theproposed Rule be grandfathered. The Commission agrees that there may be situations where proposed uses may not have been expressly described in aninformation circular. However, there will also be situations where proposed uses for the restricted shares were expressly described. That being the case, theCommission does not believe that grandfathering all circulars is appropriate. Instead, the Commission has amended the condition in paragraphs 3.1(2)3 and3.2(2)3 to provide that if any proposed uses for the restricted shares were described in the information circular, then the reason for the stock distribution is notinconsistent with those uses.

(d) Definition of Control Person

The definition of "control person" in the proposed Rule includes a deeming provision in respect of persons or companies holding more than 20 percent of theoutstanding voting securities. Lang Michener stated that because 20 percent of the outstanding voting securities could represent less than 20 percent of the totalvotes if an issuer has two classes of voting securities, that it would be consistent with the purpose of the deeming provision in the definition of "control person"for the deeming provision to the triggered at 20 percent of the votes.

The Commission agrees and it has changed the definition of "control person" to provide that a holding of any person, company or combination of persons orcompanies holding more than 20 percent of the voting rights attached to all of the voting securities of an issuer shall, in the absence of evidence to the contrary,be deemed to affect materially the control of that issuer.

(e) Exemption in Paragraph 1.2(1)(b)

That paragraph provides that the Rule does not apply to shares that carry a right to vote subject to a restriction on the number or percentage of shares that maybe voted or owned by persons or companies that are not citizens or residents of Canada or that are otherwise considered as a result of any law applicable to theissuer to be non-Canadians, but only to the extent of the restriction. Lang Michener stated that the phrase "but only to the extent of the restriction" is ambiguousand that it could be interpreted as meaning that the exemption in paragraph 1.2(1)(b) does not apply to an issuer that has share constraints and determines tomake the share constraints effective in order not to exceed the stated threshold for ownership. A footnote to the proposed Rule provided that the phrase "butonly to the extent of the restriction" was added to make it clear that if the shares carry restrictions, other than the ones referred to in the subsection, that makethe shares restricted shares, the Rule will apply. Lang Michener submitted that the essence of that footnote could be included as a qualification by replacing thewords "but only to the extent of the restriction" with words such as "provided that if shares carry restrictions on the right to vote, other than a restriction referredto in the paragraph, the Rule will apply."

The Commission believes the words are clear and does not believe that further changes are required.

Other Changes

In finalizing the Rule, the Commission made a number of other changes, none of which are material. The more significant ones are as follows:

1. The term "published market" has been deleted as it appears in the proposed Ontario Rule 14-501 Definitions.

2. A beneficial ownership test has been added to the exemptions in paragraph 1.2(2)(b) and subsection 1.2(4) and (5) as an alternative to the registeredownership test.

3. Subsection 2.1(8) contained a reference to a custodian. That reference has been deleted as that term is used where a mutual fund is involved and the Ruledoes not apply to mutual funds.

4. The closing words in paragraph 2.3(1)5 have been changed from "a statement that holders do not have those rights that they do not have" to "a statement ofthe rights the holders do not have" in order to be clearer.

5. The reference in subsection 3.1(1) to the Director not issuing a receipt for a prospectus has been changed to the issuer not filing a prospectus. A newsubsection 3.1(3) has been added, which requires an issuer to disclose in a prospectus to which subsection 3.1(1) applies that the stock distribution has receivedminority approval or all the conditions in subsection 3.1(2) are satisfied. The authority for these provisions are paragraph 143(1)13 of the Act which allows theCommission to make rules regulating trading or advising in securities to prevent trading or advising that is fraudulent, manipulative, deceptive or unfairlydetrimental to investors and paragraph 143(1)39 of the Act which allows the Commission to make rules requiring or respecting the media, format, preparation,form, content, execution, certification, dissemination and other use, filing and review of all documents required under or governed by the Act, the regulations orthe rules including preliminary prospectuses and prospectuses.

6. It was a condition of the exemption from the minority approval requirements in subsections 3.1(2) and 3.2(2) that at the time of the reorganization, the issuerwas a reporting issuer in Ontario or a CDN issuer. The Commission has broadened the exemption by referring to a "reporting issuer in any jurisdiction" as thatamendment is consistent with the policy rationale of the exemption and the inclusion of "CDN issuers" in the exemption.

7. Section 4.2, which contains the exemption clause, has been amended to remove the reference to the Commission.

Text of Rescission of OSC Policy Statement No. 1.3

The text of the rescission of OSC Policy Statement No. 1.3 is:

"OSC Policy Statement No. 1.3 entitled Restricted Shares is rescinded."

Rule

The text of the Rule follows.

DATED April 11, 1997.

ONTARIO SECURITIES COMMISSION RULERULE 56-501 - RESTRICTED SHARESTABLE OF CONTENTSPART 1 DEFINITIONS AND APPLICATION1.1 Definitions1.2 ApplicationPART 2 DISCLOSURE REQUIREMENTS2.1 Content and Dissemination of Disclosure Documentation2.2 Dealer and Adviser Documentation2.3 Minimum Disclosure in Offering Documents and Information CircularsPART 3 PROSPECTUS RECEIPT REQUIREMENTS ANDWITHDRAWAL OF PROSPECTUS EXEMPTIONS 3.1 Prospectus Receipt Not to be Issued3.2 Prospectus Exemptions Not AvailablePART 4 DETERMINATIONS AND EXEMPTIONS 4.1 Determination of Status4.2 ExemptionPART 1 DEFINITIONS AND APPLICATION

1.1 Definitions

In this Rule

"CDN issuer" means an issuer, other than a reporting issuer, any of the equity shares of which are quoted on the CDN system, if the shares are not listed orquoted on any other published market;

"CDN system" means the trade reporting and quotation system for over-the-counter trading operated by The Canadian Dealing Network Inc.;

"class" includes a series of a class;

"common shares" means equity shares to which are attached voting rights exercisable in all circumstances, irrespective of the number or percentage of sharesowned, that are not less, on a per share basis, than the voting rights attaching to any other shares of an outstanding class of shares of the issuer, unless theDirector makes a determination under section 4.1 that the shares are restricted shares;

"control person" means, with respect to an issuer, any person, company or combination of persons or companies holding a sufficient number of any securities ofthat issuer to affect materially the control of that issuer, and any holding of any person, company or combination of persons or companies holding more than 20per cent of the voting rights attached to all of the outstanding voting securities of an issuer shall, in the absence of evidence to the contrary, be deemed to affectmaterially the control of that issuer;

"equity shares" means shares of an issuer that carry a residual right to participate in the earnings of the issuer and, upon the liquidation or winding up of theissuer, in its assets;

"minority approval" means approval of a proposed reorganization or stock distribution given

(a) by a majority of the votes cast at a meeting of shareholders of an issuer called to consider the reorganization or stock distribution, and

(b) if the issuer has shares of a class of restricted shares outstanding before the reorganization or stock distribution, by a majority of the votes cast by the holdersof restricted shares voting separately as a class, whether or not they are otherwise entitled to vote,

other than, in each case, the votes attaching at the time to securities held directly or indirectly by affiliates of the issuer and securities held directly or indirectly bycontrol persons of the issuer;

"non-voting shares" means restricted shares that do not carry the right to vote generally, except for a right to vote that is mandated in special circumstances bylaw;

"preference shares" means shares to which are attached a preference or right over the shares of any class of equity shares of the issuer, but does not includeequity shares;

"reorganization" means the creation of a class of shares that are restricted shares, either directly or through the creation of a class of subject securities, includingby way of

(a) an amendment to an issuer's constating documents,

(b) a resolution of the board of directors of an issuer setting the terms of a series of shares of the issuer, or

"restricted share term" means "non-voting shares", "subordinate voting shares", "restricted voting shares" and every other term designated by the Director undersubsection 4.1(2);

"restricted shares" means

(a) equity shares that are not common shares, and

(b) equity shares determined to be restricted shares under subsection 4.1(1);

"restricted voting shares" means restricted shares that carry a right to vote subject to a restriction on the number or percentage of shares that may be voted by aperson, a company or any combination of persons and companies, except to the extent the restriction or limit is permitted or prescribed by statute and isapplicable only to persons or companies that are not citizens or residents of Canada or that are otherwise considered as a result of any law applicable to the issuerto be non-Canadians;

"stock distribution" means a distribution of restricted shares or subject securities, or securities that are directly or indirectly convertible into or exercisable orexchangeable for restricted shares or subject securities, whether in conjunction with a reorganization or otherwise, but does not include

(a) a distribution of previously unissued restricted shares by way of stock dividend in the ordinary course to shareholders instead of a cash dividend if at the timeof distribution there is a published market for the restricted shares, or

(b) a stock split that takes the form of a distribution of previously unissued restricted shares by way of stock dividend to holders of the same class of restrictedshares if at the time of distribution there is a published market for the restricted shares and the distribution is part of a concurrent distribution by way of stockdividend to holders of all equity shares under which all outstanding equity shares of the issuer are increased in the same proportion;

"subject securities" means shares that have the effect, or would have the effect if and when issued, of changing a class of outstanding equity shares into restrictedshares;

"subordinate voting shares" means restricted shares that carry a right to vote, if there are shares of another class of shares outstanding that carry a greater right tovote on a per share basis; and

"U.S. issuer" has the meaning set out in the Rule In the Matter of Regulation 910, R.R.O. 1980, as amended and In the Matter of the MultijurisdictionalDisclosure System, and any successor rule to the Rule.

1.2 Application

(1) This Rule does not apply to

(a) shares of mutual funds;

(b) shares that carry a right to vote subject to a restriction on the number or percentage of shares that may be voted or owned by persons or companies that arenot citizens or residents of Canada or that are otherwise considered as a result of any law applicable to the issuer to be non-Canadians, but only to the extent ofthe restriction; or

(c) shares that are subject to a restriction, imposed by any law governing the issuer, on the level of ownership of the shares by a person, company or combinationof persons or companies, but only to the extent of the restriction.

(2) Section 2.1 does not apply to

(a) a U.S. issuer that has a class of securities registered under section 12 of the 1934 Act; or

(b) an issuer if, as of a date not more than seven days before sending any document referred to in section 2.1 to shareholders or if the document is not required tobe sent, not more than seven days before the finalization of the document, the number of shares of each class of equity shares of the issuer held by registeredholders whose last address as shown on the books of the issuer is in Ontario or beneficially owned by persons or companies in Ontario is less than two percent ofthe outstanding shares of the class.

(3) Sections 2.3, 3.1 and 3.2 do not apply to an issuer distributing securities in accordance with the Rule In the Matter of Regulation 910, R.R.O. 1980, asamended and In the Matter of the Multijurisdictional Disclosure System, and any successor rule to the Rule.

(4) Section 2.3 does not apply to an issuer if as of a date not more than seven days before the date that the issuer finalizes the final offering document orinformation circular being used in connection with the stock distribution or reorganization, the issuer expects that the number of shares of each class of equityshares of the issuer held by registered holders whose last address as shown on the books of the issuer is in Ontario or beneficially owned by persons or companiesin Ontario will be less than two percent of the outstanding shares of the class after giving effect to the proposed stock distribution or reorganization.

(5) Sections 3.1 and 3.2 do not apply to an issuer if,

(a) as of a date not more than seven days before the date that the issuer finalizes the final offering document or information circular, or

(b) as of a date not more than seven days before completion of the stock distribution if there is no offering document or information circular,

the issuer expects that the number of shares of each class of equity shares of the issuer held by registered holders whose last address as shown on the books ofthe issuer is in Ontario or beneficially owned by persons or companies in Ontario will be less than two percent of the outstanding shares of the class after givingeffect to the proposed stock distribution.

PART 2 DISCLOSURE REQUIREMENTS

2.1 Content and Dissemination of Disclosure Documentation

(1) Except as provided in this Rule, if an issuer has restricted shares, or securities that are directly or indirectly convertible into or exercisable or exchangeable forrestricted shares or subject securities, outstanding, each document referred to in subsection (2) shall

(a) refer to restricted shares using a term or a defined term that includes the appropriate restricted share term;

(b) not refer to shares by a term or a defined term that includes "common", or "preference" or "preferred", unless the shares are common shares or preferenceshares, respectively;

(d) describe the rights, if any, of holders of restricted shares if a take-over bid is made for securities of the issuer with voting rights superior to those attached tothe restricted shares; and

(e) if holders of restricted shares have no rights if a take-over bid is made for securities of the issuer with voting rights superior to those attached to the restrictedshares, contain a statement to that effect in bold-face type.

(2) The documents are the following:

1. Any information circular sent by a reporting issuer to any of its shareholders.

2. Any document required by Ontario securities law to be sent by a reporting issuer to any of its shareholders.

3. Any AIF prepared by a reporting issuer under the requirements of Ontario securities law.

4. Any information circular or other document that is required by law to be sent by a CDN issuer to any of its shareholders and any annual information formprepared by a CDN issuer.

(3) Interim financial statements and annual financial statements to which subsection (6) applies and any accompanying discussion by management of the financialstatements need not include the descriptions referred to in paragraphs (1)(c), (1)(d) and (1)(e).

(4) Each reference to restricted shares in a news release, material change report or other document not referred to in subsection (2) that a reporting issuer or aCDN issuer sends to its shareholders shall include the appropriate restricted share term.

(5) Shares referred to in any of the documents described in subsection (4) shall not be referred to by a term or defined term that includes "common", or"preference" or "preferred", unless the shares are common shares or preference shares, respectively.

(6) Restricted shares shall be separately identified on any balance sheet contained in financial statements sent by a reporting issuer or CDN issuer to any of itsshareholders or made available to the public unless there is only a one-line reference in the balance sheet to "capital", "shareholders' capital", "share capital","equity capital" or a like term.

(7) All documents that a reporting issuer or a CDN issuer sends to the holders of any other class of its equity shares shall also be sent by the issuer at the sametime to the holders of its restricted shares.

(8) A reporting issuer or CDN issuer that is required by Ontario securities law to arrange for, or voluntarily makes arrangements for, the delivery of thedocuments referred to in subsection (7) to the beneficial owners of any shares of a class of equity shares registered in the name of a registrant, shall make similararrangements for delivery of the documents to the beneficial owners of shares of a class of restricted shares registered in the name of a registrant.

(9) Despite paragraph (1)(b), a document referred to in subsection (2) may in one place only in the document describe the restricted shares by the term used inthe constating documents of the issuer, to the extent it differs from the appropriate restricted share term, if the description is not on the front page of thedocument and is in the same type face and type size as that used generally in the document.

2.2 Dealer and Adviser Documentation

(1) If restricted shares and the appropriate restricted share term, or a code reference to restricted shares or the appropriate restricted share term, are included in atrading record published by The Toronto Stock Exchange, The Montreal Exchange, the Vancouver Stock Exchange, The Alberta Stock Exchange, the WinnipegStock Exchange or the CDN system

(a) any confirmation sent in accordance with section 36 of the Act in respect of transactions in restricted shares;

(b) any statement of transactions or security positions sent by a registered dealer to a customer that refers to restricted shares; and

(c) all recommendations, selling documents and other literature prepared by or on behalf of a registered dealer or adviser and published by a registered dealer oradviser or sent by a registered dealer or adviser to a customer or potential customer that refer to restricted shares

shall include the appropriate restricted share term.

(2) Despite subsection (1), a registered dealer or adviser may use an abbreviation for the restricted share term in confirmations and statements of transactions orsecurity positions if an explanation of the abbreviation is given in the document.

2.3 Minimum Disclosure in Offering Documents and Information Circulars

(1) A preliminary prospectus, prospectus, rights offering circular, securities exchange take-over bid circular, securities exchange issuer bid circular or offeringmemorandum for a stock distribution, and an information circular concerning a proposed reorganization

(a) prepared for a reporting issuer or a CDN issuer;

(b) prepared for an issuer that will, upon or in connection with the filing of the document, become a reporting issuer; or

(c) that refers to an issuer intending to become a CDN issuer concurrently with or following completion of the stock distribution or reorganization

shall comply with the following requirements:

1. Each class of securities that is or may become restricted shares shall be referred to using a term or a defined term that includes the appropriate restricted shareterm.

2. No shares may be referred to by a term or a defined term that includes "common", or "preference" or "preferred", unless the shares are common shares orpreference shares, respectively.

3. The description on the front page of the document, if any, showing the number and class or classes of restricted shares being distributed shall include theappropriate restricted share term in the same type face and type size as the rest of the description.

4. A detailed description shall be included, and a summary, if a summary is mandated by Ontario securities law or is otherwise included, cross-referenced to thedetailed description, describing

(i) the voting rights attached to the restricted shares that are the subject of the stock distribution or reorganization or that will result from the stock distributionor reorganization either directly or following a conversion, exchange or exercise and the voting rights, if any, attached to the shares of any other class of sharesof the issuer that are the same or greater on a per share basis than those attached to the restricted shares that are the subject of the stock distribution orreorganization or that will result from the stock distribution or reorganization either directly or following a conversion, exchange or exercise;

(ii) any significant provisions under applicable law that do not apply to the holders of the restricted shares that are the subject of the stock distribution orreorganization or that will result from the stock distribution or reorganization either directly or following a conversion, exchange or exercise, but do apply to theholders of another class of equity shares, and the extent of any rights provided in the constating documents or otherwise for the protection of holders of therestricted shares; and

(iii) any rights under applicable corporate law, in the constating documents or otherwise of holders of restricted shares that are the subject of the stockdistribution or reorganization or that will result from the stock distribution or reorganization either directly or following a conversion, exchange or exercise, toattend, in person or by proxy, meetings of holders of equity shares of the issuer and to speak at the meetings to the same extent that holders of equity shares areentitled.

5. If holders of restricted shares do not have all of the rights referred to in paragraphs 4(i), (ii) and (iii), the detailed description and summary referred to inparagraph 4 shall include, in bold-face type, a statement of the rights the holders do not have.

6. Restricted shares shall be separately identified on any balance sheet contained in any financial statements unless there is only a one-line reference in the balancesheet to "capital", "shareholders' capital", "share capital", "equity capital" or a like term.

(2) Despite paragraph 2 of subsection (1), a document referred to in subsection (1) may, in one place only in the document, describe the restricted shares by theterm used in the constating documents of the issuer, to the extent it differs from the appropriate restricted share term, if the description is not on the front pageof the document and is in the same type face and type size as that used generally in the document.

(3) If the document referred to in subsection (1) is a securities exchange take-over bid circular, the reporting issuer or CDN issuer referred to in paragraphs(1)(a), (b) or (c) is the offeror issuer.

PART 3 PROSPECTUS RECEIPT REQUIREMENTS AND WITHDRAWAL OF PROSPECTUS EXEMPTIONS

3.1 Prospectus Receipt Not to be Issued

(1) An issuer shall not file a prospectus for a stock distribution unless

(a) either

(i) the stock distribution received minority approval by the issuer's shareholders; or

(ii) all of the conditions set out in subsection (2) are satisfied; and

(b) the information circular in connection with the shareholders' meeting held to obtain minority approval for the stock distribution or the reorganization thatresulted in the creation of the restricted shares,

(i) included, if known after reasonable inquiry,

(A) the name of each affiliate of the issuer that is or was a beneficial owner of securities of the issuer and the number of securities beneficially owned, directly orindirectly, by the affiliate as of the date of the information circular;

(B) the name of each control person and the number of securities beneficially owned, directly or indirectly, by the control person as of the date of the informationcircular; and

(C) a statement of the number of votes attaching to the securities that are or were not to be counted for the purpose of the approval; and

(ii) if mailed after the coming into force of this Rule, described the purpose and business reasons for the use of the restricted shares or subject securities.

(2) The conditions are as follows:

1. The reorganization that resulted in the creation of the restricted shares received minority approval.

2. At the time of the reorganization referred to in paragraph 1, the issuer was either a reporting issuer in any jurisdiction or a CDN issuer.

3. If any proposed uses for the restricted shares were described in the information circular sent to shareholders in connection with the shareholders' meeting heldto approve the reorganization referred to in paragraph 1, the reason for the stock distribution is not inconsistent with those uses.

(3) An issuer shall disclose in a preliminary prospectus and prospectus to which subsection (1) applies either that the stock distribution has received minorityapproval by the issuer's shareholders or that all the conditions in subsection (2) are satisfied.

(4) Subsection (1) does not apply if

(a) the reorganization that resulted in the creation of the restricted shares took place before December 21, 1984; or

(b) the stock distribution is

(i) of securities of an issuer that was a private company immediately before the filing of the preliminary prospectus or prospectus for the stock distribution; or

(ii) a subsequent distribution by an issuer described in clause (i) of securities of the same class as were offered under the prospectus described in clause (i).

3.2 Prospectus Exemptions Not Available

(1) The prospectus exemptions under Ontario securities law are not available for a stock distribution of securities of

(a) a reporting issuer or CDN issuer;

(b) an issuer if the issuer will become a reporting issuer as a result of the stock distribution; or

(c) an issuer if it is represented in any offering documentation used in connection with the stock distribution that the issuer intends to become a CDN issuerconcurrently with or following completion of the stock distribution;

unless

(d) either

(i) the stock distribution received minority approval by the issuer's shareholders, or

(ii) all of the conditions set out in subsection (2) are satisfied, and

(e) the information circular in connection with the shareholders' meeting held to obtain minority approval for the stock distribution or the reorganization thatresulted in the creation of the restricted shares,

(i) included, if known after reasonable inquiry,

(B) the name of each control person and the number of securities beneficially owned, directly or indirectly, by the control person as of the date of the informationcircular; and

(C) a statement of the number of votes attaching to the securities that are or were not to be counted for the purpose of the approval, and

(ii) if mailed after the coming into force of this Rule, described the purpose and business reasons for the use of the restricted shares or subject securities.

(2) The conditions are as follows:

1. The reorganization that resulted in the creation of the restricted shares received minority approval.

2. At the time of the reorganization referred to in paragraph 1, the issuer was either a reporting issuer in any jurisdiction or a CDN issuer.

(3) Subsection (1) does not apply to a stock distribution if

(a) the reorganization that resulted in the creation of the restricted shares took place before December 21, 1984, or

(b) the stock distribution is

(i) of securities of an issuer that was a private company immediately before the completion of the stock distribution; or

(ii) a subsequent distribution by an issuer described in clause (i) of securities of the same class that were the subject of the stock distribution described in clause(i).

PART 4 DETERMINATIONS AND EXEMPTIONS

4.1 Determination of Status

(1) The Director may determine that equity shares of an issuer are restricted shares for purposes of this Rule, if one of the following factors is present:

1. There is another class of shares that, in view of the consideration and time at which the shares were or are being issued, carries a disproportionate vote pershare relative to the equity shares.

2. The conditions of the equity shares, the conditions of other classes of shares or the issuer's constating documents have provisions that tend to nullify orsignificantly restrict the voting rights or voting interests of the equity shares.

3. There is another class of equity shares, the shares of which are entitled to participate in earnings or assets to a substantially lesser extent, on a per share basis,than the extent to which the first class of equity shares is entitled to participate.

(2) If the Director determines that equity shares are restricted shares, the Director may also determine the appropriate restricted share term to be used todesignate the shares, taking into account the voting attributes attached to the shares and the term that will best describe the attributes.

4.2 Exemption

The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.