Proposed Rule and Proposed Companion Policy: OSC Rule - 61-501, 61-501CP - Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions

NOTICE OF PROPOSED CHANGES TO
PROPOSED RULE 61-501 AND
PROPOSED COMPANION POLICY 61-501CP
UNDER THE SECURITIES ACT
INSIDER BIDS, ISSUER BIDS, GOING PRIVATETRANSACTIONS AND
RELATED PARTY TRANSACTIONS

Substance and Purpose of the Proposed Rule andProposed Companion Policy

Introduction

On January 22, 1999, the Commission republished proposed Rule 61-501 (the "January proposed Rule") and proposed Companion Policy 61-501CP (the "January proposed Companion Policy") at (1999), 22 OSCB 493. The Notice thataccompanied the January proposed Rule and the Januaryproposed Companion Policy (the "January Notice") requested comment on both the January proposed Rule and the Januaryproposed Companion Policy. Proposed Rule 61-501 andproposed Companion Policy 61-501CP were publishedoriginally for comment on May 31, 1996 at (1996), 19 OSCB2981.

In response to the January 22, 1999 publication, the Commission received five submissions on the Januaryproposed Rule and the January proposed Companion Policy.

On May 14, 1999, Commission staff at (1999), 22 OSCB 2941requested comment on four specific aspects of the January proposed Rule and the January proposed Companion Policy.The Commission received six submissions in response to that request for comments.

A list of commenters is contained in Appendix A of this Notice,and a summary of their comments and the Commission'sresponse to those comments are contained in Appendix B ofthis Notice. As a result of comments received, staff'srecommendations and further deliberations of theCommission, the Commission has amended the Januaryproposed Rule and the January proposed Companion Policyand is republishing the proposed Rule and proposedCompanion Policy for comment. The republished versions ofthese instruments are referred to in this Notice as the"proposed Rule" and the "proposed Companion Policy".

This Notice summarizes changes of a substantive nature thathave been made to the January proposed Rule and theJanuary proposed Companion Policy. Certain changes thatare of a purely technical nature or designed to improve theclarity of the proposed Rule and proposed Companion Policyare not summarized in this Notice, but are generally referredto in footnotes in the proposed Rule and proposed CompanionPolicy.

Terms used in the proposed Companion Policy that aredefined or interpreted in the proposed Rule or in definitioninstruments in force in Ontario and not otherwise defined in theproposed Companion Policy should be read in accordancewith the proposed Rule and the definition instruments unlessthe context otherwise requires.

The Commission is also publishing for comment with theproposed Rule and proposed Companion Policy proposedamendments to certain by-laws of the Investment DealersAssociation of Canada (the "IDA") establishing valuationdisclosure standards for insider bids, issuer bids, going privatetransactions and related party transactions. Subsection 5.1(2)of the proposed Companion Policy refers to the disclosurestandards of the IDA as generally representing a reasonableapproach to meeting the applicable legal requirements. Theproposed amendments to the IDA by-laws being publishedwith this Notice are substantially similar to the proposeddisclosure standards of the IDA published with the 1996version of the proposed Rule and proposed Companion Policyat (1996), 19 OSCB 3036.

Substance and Purpose

The substance and purpose of the proposed Rule and theproposed Companion Policy are to reformulate OSC PolicyStatement No. 9.1 ("Policy 9.1") with respect to the regulationof insider bids, issuer bids, going private transactions andrelated party transactions. The protections afforded by Policy9.1, including independent valuations, majority of minorityapproval and enhanced disclosure, also form the basis of theproposed Rule and the proposed Companion Policy. Theproposed Companion Policy sets out the Commission's viewson certain matters relating to the subject matter of theproposed Rule. The January proposed Rule and Januaryproposed Companion Policy have been revised to incorporatecertain changes in response to comments received by theCommission.

For additional information concerning the background of theproposed Rule and the proposed Companion Policy, referenceshould be made to Appendix B of this Notice, the JanuaryNotice and the Notice accompanying the 1996 publication.

Summary of Changes to the January Proposed Rule

Changes of a substantive nature that have been made to theJanuary proposed Rule are summarized here.

Definitions of Interested Party and Going PrivateTransaction

The January proposed Rule defined "interested party" tomean, for a going private transaction, a related party of theissuer that is the subject of the going private transaction, if therelated party would

(i) be entitled to receive, directly or indirectly,consequent upon the transaction

(A) a consideration that is not identicalto that paid to all other beneficialowners in Canada of affectedsecurities of the same class, or

(B) consideration of greater value thanthat paid to all other beneficialowners of affected securities of thesame class, or

(ii) upon completion of the transaction,beneficially own, or exercise control ordirection over, participating securities of aclass other than affected securities.

The Commission has modified clause (i)(A) to clarify that thereference to consideration is on a per security basis andapplies to both the amount and type of consideration. TheCommission has made a similar modification to clause (e)(i)(A)of the definition of going private transaction in the Januaryproposed Rule and clause 8.2(a)(i)(A) of the January proposedRule dealing with approval in multi-step transactions.

The Commission has also added commentary on theinterpretation of the words "consideration of greater value" insection 2.13 of the proposed Companion Policy.

Definition of Market Capitalization

The Commission has deleted paragraph (c) of the definition ofmarket capitalization in the January proposed Rule, whichprovided that in certain circumstances, market capitalizationwas the amount of shareholders' equity attributable tooutstanding securities of a class on an issuer's most recentaudited balance sheet. The Commission has added a catch-all provision that provides that, if paragraphs (a) and (b) do notapply, the issuer's board of directors may determine marketcapitalization.

Definition of Prior Valuation

The definition of "prior valuation" in the January proposed Ruleexcluded certain valuations, appraisals and reports from thedefinition. In response to comments received regarding theappropriate exclusions from "prior valuation", the Commissionalso has added an exclusion from the definition for anunsolicited report concerning the issuer or its securitiesprepared by a person or company that has no material non-public information concerning the issuer or its securities.

The Commission also has amended paragraph (b) of thedefinition in the January proposed Rule (paragraph (c) of theproposed Rule) so that an internal valuation that is not madeavailable to, or prepared with the participation of the issuer'sboard of directors or any director or senior officer of aninterested party other than the issuer will not constitute a priorvaluation.

The Commission also has amended subparagraph (c)(ii) of thedefinition in the January proposed Rule (subparagraph (d)(ii)of the proposed Rule) to refer to clients of an affiliated entity orassociate of the analyst's employer.

The Commission also has added a new paragraph (e) to thedefinition so that it also exempts a valuation prepared inconnection with a transaction under which a person orcompany became an issuer insider.

Valuations for Insider Bids

The Commission has deleted subsection 2.3(3) of the Januaryproposed Rule, which provided that the offeror shall determinewho the valuator should be and supervise the preparation ofthe formal valuation if the insider bid is being made without theprior knowledge of all of the independent directors of theofferee issuer or if the offeror has a reasonable basis forconcluding that the insider bid is being regarded as a hostilebid by a majority of the independent directors. TheCommission is of the view that in all circumstances it shouldbe the independent committee of the target company in aninsider bid that determines who the valuator should be andsupervises the preparation of a formal valuation. TheCommission has indicated in the proposed Companion Policythat relief would be considered where the independentcommittee of the target company is not acting in a timelymanner.

Application to Going Private Transactions and RelatedParty Transactions

In light of the creation of the Canadian Venture Exchange, theCommission has deleted the references to quotations on theCanadian Dealing Network in paragraphs 4.1(2)(a), 5.1(2)(a)and 5.1(2)(j) of the January proposed Rule. The Commissionintends to consider the appropriate treatment of CanadianVenture Exchange issuers that are not reporting issuers aspart of its ongoing consideration of the exchangereconfiguration process.

Exemption from Valuation Requirement for Previous Arm'sLength Negotiations

The Commission has added commentary in the proposedCompanion Policy to clarify that the arm's length negotiationsupon which the exemption is premised must be between theselling securityholder and the party with whom it is negotiatingand has added commentary regarding situations where itwould not normally consider persons or companies to beacting at arm's length.

The Commission has also added commentary in the ProposedCompanion Policy regarding the interpretation of certainconditions to the exemption.

In the January proposed Rule, the arm's length test was basedupon one selling securityholder beneficially owning orexercising control and direction over five percent of theoutstanding securities of the issuer and one or more sellingsecurityholders beneficially owning or exercising control anddirection over at least 20 percent of the outstanding securitiesnot held by the offeror or persons or companies acting jointlyor in concert with the offeror. The Commission has raised thefive percent component of the test to 10 percent, except wherethe offeror owns 80 percent or more of the outstandingsecurities that are the subject of the insider bid or going privatetransaction. The Commission is of the view that the 10percent threshold will provide a better reflection of support forthe value negotiated.

The Commission has also modified the paragraph to clarifythat the offeror can rely on prior negotiations by anotherperson or company and has modified the 20 percentcomponent of the test to provide that it can be satisfied in oneor more transactions.

Exemption from Valuation Requirement for Auction

The exemption in the January proposed Rule turned on fullaccess to the issuer being given to all offerors and persons orcompanies in the case of an insider bid or a going privatetransaction. The Commission has changed the test in theproposed Rule from "full access" to "equal access". TheCommission has added, in addition to the reference in thisexemption to outstanding formal bids, references to goingprivate transactions and transactions that would be goingprivate transactions except that they come within the exceptionin paragraph (e) of the definition of going private transaction.

Exemption from Valuation Requirement for Second StepGoing Private Transactions

The Commission has modified this exemption in paragraph 4of section 4.5 of the proposed Rule so that it can be used byan affiliated entity of the offeror, provided that if securities ofthe offeror formed all or part of the consideration under thetake-over bid, the same consideration must be offered underthe going private transaction.

One of the conditions in the January proposed Rule for anexemption from the valuation requirement for second stepgoing private transactions was that if tax consequences oftendering to the formal bid were reasonably expected to bedifferent from the tax consequences arising from thesubsequent going private transaction, the disclosure documentfor the formal bid had to describe the tax consequences ofboth the formal bid and the subsequent going privatetransaction. The Commission has revised this so that the taxconsequences must only be described if known or reasonablyforeseeable and, if not known or reasonably foreseeable,securityholders must be advised that the tax consequencesmay be different. A similar modification has been made tosubparagraph (e)(vii) of section 8.2 of the proposed Ruledealing with minority approval of multi-step transactions.

Disclosure for Insider Bids, Issuer Bids, Going PrivateTransactions and Related Party Transactions

The Commission has added provisions to the proposed Rulerequiring disclosure of the background to a current offer ortransaction in the required disclosure document for a take-overbid, issuer bid, going private transaction and related partytransaction.

Related Party Transactions - Exclusions

The Commission has moved the exclusion in paragraph5.1(2)(k) of the January proposed Rule to a separatesubsection 5.1(3) of the proposed Rule. The Commission hasmodified the exclusion to provide that it is available only for theperson or company subject to the conflict of interest provisionsof the relevant statute. The effect of this is that the proposedRule applies to the person or company that is party to or isinvolved in the transaction that is not subject to the conflict ofinterest provisions.

Exemption from Valuation Requirement for FinancialHardship

The Commission has added as a condition to the exemptionin paragraph 8 of section 5.6 of the proposed Rule arequirement that the board of directors of the issuer, acting ingood faith, must determine, and at least two-thirds of theindependent directors of the issuer, acting in good faith, mustdetermine, that (a) the issuer is insolvent or in serious financialdifficulty; and (b) the transaction is designed to improve thefinancial position of the issuer.

Valuator - Independence

Subsection 6.1(4) of the January proposed Rule provided thata valuator that is paid jointly by the issuer and one or moreinterested parties to a transaction to prepare a formal valuationfor a transaction is not, by virtue of that fact alone, notindependent. In the proposed Rule, the Commission hasclarified that the payment need not be joint. If a related partyhas paid all of the valuator's fees, the valuator for thetransaction is not, by virtue of that fact alone, not independent.

Valuation of Non-cash Consideration

The January proposed Rule set out conditions under which aformal valuation of non-cash consideration is not required. Inthe proposed Rule, the Commission has added, as one suchcondition, a requirement that the valuator be of the opinion thata valuation of the non-cash consideration is not required.

Minority Approval

The Commission has broadened paragraph 8.1(3)(b) of theproposed Rule, so that the votes attached to shares owned byan interested party will not be excluded if the interested partyis being treated identically to all other holders in Canada ofaffected securities and does not receive, directly or indirectly,as a consequence of the transaction, consideration of greatervalue than that received by all other holders of affectedsecurities.

Summary of Changes to the January ProposedCompanion Policy

Valuations for Insider Bids

The Commission has added commentary to the proposedCompanion Policy to provide that, if an independent committeeof the offeree issuer is not acting in a timely manner in havinga formal valuation prepared, the offeror may seek relief fromthe requirement that it obtain a valuation. The Commissionalso has added commentary to the proposed CompanionPolicy regarding the ability of an independent committee toapply for relief from the valuation requirements in limitedcircumstances.

Independence of Valuator

The Commission has amended paragraph (b) of section 5.2 ofthe January proposed Companion Policy, which set out areasof concern regarding the independence of a valuator. TheCommission has deleted material involvement in anevaluation, appraisal or review of the financial condition of theissuer in certain circumstances and acting as lead or co-leadunderwriter of a distribution of securities by the issuer incertain circumstances as being areas of serious concern. Inthose instances, independence continues to be a question offact.

Valuation and Minority Approval Exemptions for RelatedParty Transactions

The Commission has added commentary in section 6.1 of theproposed Companion Policy regarding the ability of issuers incertain circumstances to rely on one or more exemptions in theproposed Rule in connection with a series of transactionsbetween the issuer and a related party.

Comments

Interested parties are invited to make written submissions withrespect to the proposed Rule and the proposed CompanionPolicy. Submissions received by January 10, 2000 will beconsidered.

Submissions should be made in duplicate to:

c/o John Stevenson, Secretary

Ontario Securities Commission

20 Queen Street West

Suite 800, Box 55

Toronto, Ontario M5H 3S8

A diskette containing the submissions (in DOS or Windowsformat, preferably WordPerfect) should also be submitted. Asthe Act requires that a summary of written comments receivedduring the comment period be published, confidentiality ofsubmissions cannot be maintained.

Questions may be referred to:

 

Stan Magidson
Director, Take-over/Issuer Bids,
Mergers & Acquisitions
Corporate Finance Branch
Ontario Securities Commission
(416) 593-8124

Proposed Rule, Proposed Companion Policy andProposed Amendments to IDA By-laws

The text of the proposed Rule, proposed Companion Policyand proposed amendments to the IDA By-laws follow. Theproposed Rule and proposed Companion Policy containfootnotes that are not part of the proposed Rule and proposedCompanion Policy but have been included to providebackground and explanation.

DATED: December 10, 1999

APPENDIX A

LIST OF COMMENTERS ON PROPOSED RULE

AND PROPOSED COMPANION POLICY

1. Simon Romano by letter dated March 26, 1999.

2. Toronto Society of Financial Analysts by letter datedApril 21, 1999.

3. RBC Dominion Securities Inc. by letter dated April 23,1999.

4. Canadian Bar Association (Ontario), SecuritiesSubcommittee, Business Law Section by letter datedApril 30, 1999.

5. Osler, Hoskin & Harcourt by letter dated May 18,1999.

6. Nicholas Dietrich by letter dated May 31, 1999.

7. Davies, Ward & Beck (Jean-Paul Bisnaire) by letterdated May 31, 1999.

8. James E. A. Turner by letter dated June 2, 1999.

9. Philip Anisman by letter dated June 3, 1999.

10. René Sorell by letter dated June 4, 1999.

11. John Stransman by letter dated June 8, 1999.

 

APPENDIX B
SUMMARY OF WRITTEN COMMENTS RECEIVED
ON THE JANUARY PROPOSED RULE AND THE
JANUARY PROPOSED COMPANION POLICY AND
RESPONSES OF THE COMMISSION

The Commission received 11 submissions with respect to theJanuary proposed Rule and the January proposed CompanionPolicy.

The Commission has considered the submissions receivedand thanks the commenters for providing their views.

The following is a summary of the comments received,together with the Commission's responses. Unless otherwiseprovided, references to section numbers are to sectionnumbers in the January proposed Rule and the Januaryproposed Companion Policy.

A. SUPPLEMENTARY REQUEST FOR COMMENTS

The comments received on the four specific topics addressedin the May 14, 1999 request for comments are as follows:

Question 1:

Do you agree that the Commission is correct in no longerseeking to regulate as a going private transaction a transactionin which shareholders do not receive a participating security of"equivalent value" in a continuing issuer but all shareholders,including any related party, are treated equally?

Comments

Five of the six commenters addressed this question. Four ofthe five agreed with the position taken by the Commission inthe January proposed Rule, which is to regulate conflict ofinterest situations and de-emphasize the "expropriation" theoryof going private transactions. One of the commenterssuggested that Commission staff clarify with the Director underthe Canada Business Corporations Act (the "CBCA") that theDirector will not amend the CBCA policy or seek to intervenein one-step arm's length squeeze out transactions.

One commenter did not agree with the position taken in theproposed Rule. The commenter preferred the approach underPolicy 9.1 whereby a transaction was not a "going privatetransaction" if shareholders received participating securities ofequivalent value in the issuer or a successor entity. Thecommenter stated that under Policy 9.1, issuers faced theparadoxical problem of paying for financial advice to supportreliance on an exemption from a rule which if followed in thefirst place would have given rise to a requirement to get muchthe same advice. The new definition of going privatetransaction introduces an unwarranted rigidity in that therelated party must receive not only consideration that isidentical in form to that received by all other beneficial ownersbut also must be able to demonstrate that the consideration itis receiving is of no greater value than that paid to all otherbeneficial owners. The old uncertainty about value thereforeremains. If the related party is a control person, thecommenter does not know how the test can ever be satisfiedsince, as a practical matter, the control block will always beworth more than the non-control block security. Thecommenter found the rationale provided in footnote 35 to theJanuary proposed Rule unconvincing and thought it carriedforward the mischief of the quasi-going private transactionapproach that was criticized by the community.

Response

The Commission continues to believe that the approach takenin the January proposed Rule is the correct one and that goingprivate transactions should only be regulated in a conflictsituation where related parties are not being treated identicallyto all shareholders. In most cases, it should be apparentwhether the related party is being treated identically to all othershareholders. To facilitate the determination, the Commissionhas modified the first part of the definition to make it clear thatthe test applies on a per security basis. The "greater value"test is necessary because of concerns relating to the receiptby the related party of a collateral benefit of the typeaddressed in subsection 97(2) of the Act.

Commission staff has advised staff of the Director under theCBCA of the position taken in the proposed Rule.

Question 2

Do you agree that a major shareholder that enters into a hardand irrevocable lock-up agreement to support a going privatetransaction but receives identical consideration to thatreceived by other shareholders should be entitled to vote itsshares as part of the minority in respect of the going privatetransaction in all cases? What about a soft lock-up?

Comments

All six commenters addressed this question. Five of the sixcommenters were of the view that a major shareholder thatenters into a lock-up agreement (whether hard or soft) tosupport a going private transaction but receives identicalconsideration to that received by other shareholders should beentitled to vote its shares as part of the minority in respect ofthe going private transaction. The commenters were of theview that permitting such shareholders to vote results in bidsbeing made that might not otherwise be made at all. Onecommenter indicated that he would require that: (i) the locked-up shareholder must have had full knowledge and access toinformation concerning the issuer and its securities; and (ii) nofactors peculiar to the locked-up shareholder, including non-financial factors, have had the effect of reducing the price thatwould otherwise have been considered acceptable by theselling shareholder.

One commenter indicated that seeking to make a distinctionbetween "hard" and "soft" lock-up agreements, orarrangements that do not amount to lock-up agreements at all,is a route that will involve Commission staff in the murky worldof assessing the quantum of break fees and toppingagreement sharing provisions, the "firmness" of fiduciary outsand no-shop provisions, the valuation of asset options and thelike.

A sixth commenter opposed allowing locked-up shares to becounted. That commenter was of the view that counting thevotes of a majority shareholder that enters into a lock-upagreement has the effect of permitting that shareholder toforce the minority to sell at a price determined by the majorityshareholder. Given the multiplicity of motivations that maylead a majority shareholder to enter into a transaction, thecommenter believed that the position originally adopted withrespect to Policy 9.1 and still followed by the QuebecSecurities Commission is the correct one.

A seventh commenter that responded to the January requestfor comments also endorsed the treatment in the Januaryproposed Rule of lock-up agreements and was of the view thatit represents a positive development that will ensure that thefocus of analysis is on whether the locked-up party is receivingpreferential treatment relative to other shareholders. Thecommenter noted that the January proposed Rule is designedto distinguish situations where a locked-up party may not beevaluating the merits of a transaction on the same footing asother shareholders. The commenter was of the view that thisis a sounder approach than an approach rooted in concernsabout whether the locked-up party has had an opportunity tonegotiate with respect to the price being offered. The fact thata party initiates or is involved in the process that gives rise tothe proposed transaction is not, on its own, sufficient reasonto exclude that party from a majority of the minority vote. Thecommenter was of the view that if additional safeguards aredesirable, these should not turn on whether the lock-upagreement is soft rather than hard. Instead they should berooted in concerns about whether shareholders voting on theoffer are similarly situated with respect to what they will receiveunder the terms of the offer.

Response

While the Commission recognizes that allowing locked-upshares to be counted may end or preclude an auction, theCommission continues to believe that the approach taken inthe January proposed Rule is the correct one and that locked-up shares should be counted, subject to the qualification thatthe locked-up shareholder (i) did not receive a considerationper security that is not identical in amount and type to that paidto all other beneficial owners in Canada of affected securitiesof the same class, (ii) did not receive consideration of greatervalue than that paid to all other beneficial owners of affectedsecurities of the same class, and (iii) upon completion of thetransaction, did not beneficially own, or exercise control ordirection over, participating securities of a class other thanaffected securities. The Commission does not propose todistinguish between hard and soft lock-up agreements. Inrespect of the comment that there be a requirement that thelocked-up shareholder have full knowledge and access toinformation and there have been no factors peculiar to thelocked-up shareholder that had the effect of reducing the price,the Commission believes those factors go more properly towhether a valuation exemption should be available than thequestion of whether locked-up shares should be counted.

Question 3:

Is there a better mechanism that can be used in insider bids toreduce the dependency that an insider has on the conduct ofthe Special Committee of the target company in thepreparation of the requisite valuation?

Comments

Five of the six commenters addressed this question.

One commenter indicated that he did not have a suggestionfor a better mechanism. However, it seemed to thatcommenter that the Commission and court decisions over thepast several years have imposed upon special committees astandard of conduct that is sufficiently high to protect minorityshareholders in insider bid transactions.

Another commenter was of the view that if the specialcommittee is unwilling to obtain a valuation within a reasonableperiod of time after being requested to do so by the insider,that the insider be permitted to commence its bid without avaluation. In such case, the bid would have to be open longenough to permit a valuation to be obtained and the specialcommittee would be obliged to do so.

Another commenter was of the view that the existingmechanism has worked reasonably well and that adiscretionary exemption may be available in othercircumstances. The existing mechanism makes most sensein circumstances in which there is a controlling or a significantshareholder. In that situation, issuers assume that the formalvaluation should be prepared under the supervision of thespecial committee and that valuation is usually prepared in atimely manner. The exceptions provided for in the Januaryproposed Rule deal with most of the circumstances where therequirement should not apply. In addition, the valuationexemption for lack of knowledge and access is also availableto a "technical" insider.

Another commenter noted that delays in the preparation of thevaluation effectively lengthen the deposit period, and operateas an extra defensive tactic uniquely available in the context ofinsider bids. If the Commission is unwilling to revisit theposition taken in the January proposed Rule, explicit languageshould be inserted in the insider bid provisions of the Rulemandating the earliest possible preparation of the valuation,and allowing a bidder to apply to the Commission for reliefwhere there is unreasonable delay. In circumstances wherethe insider's holding exceeds 33 percent and effectivelyrepresents a blocking position enabling the insider to inhibitcompetitive bids, the valuation should provide not only a rangethat ignores the "minority discount" but also the range givingeffect to the minority discount.

The commenter also noted another unresolved issuepresented by the use of valuations. Where a valuationproduces a range of values for the company that exceeds theprice offered for the shares of the company by any actual bid,can the valuation be said to be "wrong"? After all, thevaluation is intended to be a proxy for fair market valuation thatactually will be assigned to the company either by a single bidon the table or by the highest bid produced by any auctionprocess that results. In our system it is a paradox that thevaluation, which is a mere estimate of what the market willproduce, tends to overshadow the price assigned to a targetcompany by the marketplace.

Another commenter saw no reason why if a bidder wishes, itshould not have the option of launching its bid without anindependent valuation on the basis that the independentdirectors are required to include it in the directors' circular. Inthose circumstances, one might consider whether the biddershould be required to have a minimum 35 or 45 day bid periodand to bear the costs of the valuation.

Response

The Commission believes the mechanism in the Januaryproposed Rule generally works well. A bidder is required toprovide a valuation in its take-over bid circular in order to allowshareholders of the target corporation to properly assess theoffer. The valuation is prepared under the supervision of thetarget board.

The Commission, however, has decided to delete subsection2.3(3) of the January proposed Rule. That subsection allowedan offeror to determine who the valuator should be andsupervise the preparation of a valuation in certaincircumstances. The Commission is of the view that a "formalvaluation", which must be prepared in accordance with theprovisions of Part 6 of the proposed Rule, generally cannot beproperly prepared by an offeror without access to, andcooperation of, the offeree issuer. As a result, in allcircumstances under the proposed Rule, unless adiscretionary exemption is granted, it must be the independentcommittee of the target company in an insider bid thatdetermines who the valuator should be and supervises thepreparation of a formal valuation.

The Commission considered allowing a bidder to mail itscircular without a valuation if it kept its bid open for a specifiedperiod of time longer than 21 days and the target boardincluded a valuation in its circular. Ultimately, the Commissiondecided this was inappropriate because any period of timechosen by the Commission may be too short a period for theboard to have a valuation prepared or be unnecessarily long.

The Commission has added commentary to the proposedCompanion Policy to the effect that, if an independentcommittee of the offeree issuer is not acting in a timely mannerin having a formal valuation prepared, the offeror may seekrelief from the requirement that the offeror obtain a valuation.The Commission has also added commentary to the proposedCompanion Policy regarding the ability of an independentcommittee to apply for relief from the valuation requirementsin limited circumstances.

The Commission disagrees with the comment that a valuationshould provide a range that gives effect to a minority discount.The Commission believes it is unnecessary for the purpose ofthe valuation exercise. The Commission also accepts thatthere may be situations where a valuation is higher than anactual offer. A valuation is only an opinion, albeit one theCommission wants disseminated. Persons or companies arefree to reach their own views on values. If a valuation is higherthan an actual offer, that is not to say the valuation isnecessarily wrong, only that a person or company has notchosen to offer what the valuator believes the entity is worth onan en bloc basis.

Question 4:

Should the Commission mandate the use of specialcommittees in the context of going private transactions, relatedparty transactions and issuer bids, in addition to insider bids?

Comments

Five of the six commenters addressed this question. Onecommenter was of the view that while the use of specialcommittees in the context of those transactions might bedesirable, the commenter wondered whether as an alternativeto legislative mandate, allowing the common law to developwith respect to directors' fiduciary duties might be moreappropriate.

Three commenters who responded to this question did notbelieve that the Commission should mandate the use ofspecial committees and were of the view that the Januaryproposed Rule is appropriately drafted in this regard. Onecommenter noted that, in practice, the conflict of interestprovisions of corporate law and corporate practice generallywill mandate the use of what are de facto special committeesin most of these transactions since the directors representingan interested party are not allowed to vote. One commentersuggested that, in an accompanying policy, it may be madeclear that it is expected that the "interested party" will notparticipate in the process to be followed by the board of theissuer, without mandating the need for a special committee perse.

A fifth commenter noted that the January proposedCompanion Policy contains very strong language insubsections 6.1(6) and (7) that comes close to mandating theuse of special committees. While the use of such committeesunquestionably promotes the perception that interested partieshave been removed from the deliberations of the committeeitself and that an independent view is being brought to bear,recent court cases including especially the Schneider decisionsuggest that the language in subsection 6.1(7) may go too far.In particular, non-independent persons were allowed toparticipate in the deliberation and proceedings of the specialcommittee. The non-independent persons included seniormanagement as well as control people. The important thingfor the court was that ultimate responsibility resided with thespecial committee even though the special committeecommunicated information and elicited the views of non-independent parties.

A seventh commenter that responded to the January requestfor comments strongly supported the fact that the Januaryproposed Rule did not mandate the use of an independentcommittee except with respect to supervising valuations forcertain insider bids. The commenter agreed that the board ofdirectors is the appropriate forum to determine whether to forman independent committee in the circumstances of a particulartransaction.

Response

The Commission does not propose to change the provisionsof the January proposed Rule relating to special committees.The Commission disagrees with the commenter thatsubsections 6.1(6) and (7) of the January proposedCompanion Policy mandate the use of special committees.While the Commission believes that the statements in thosesubsections regarding the composition and function of specialcommittees are consistent with recent case law, theCommission has modified subsection 6.1(7) of the Januaryproposed Companion Policy (subsection 7.1(7) of theproposed Companion Policy) to clarify that non-independentboard members and other persons may act in accordance withinstructions received from the special committee and that inthe Commission's view, non-independent persons should notbe present at or participate in the decision-makingdeliberations of the special committee.

B. GENERAL COMMENTS

1. Harmonization Issues

Comments

One commenter referred to a May 1998 submission of theCanadian Counsel of Financial Analysts (the "CCFA")regarding going private transactions. That submissionsupported the development of uniform rules under provincialsecurities rules or policies relating to going privatetransactions, given the current overlapping jurisdictions of theCBCA and provincial and corporate regulations and securitiesrules and policies. The CCFA submission stated that, underour present multijurisdictional system, corporations that are notreporting issuers in Ontario or Quebec or incorporated inOntario generally are exempt from corporate or securitiespolicies on going private transactions. The CCFA was of theview that going private transactions are neither inherently goodnor bad, provided that sufficient disclosure is made.

Another commenter was of the view that the Commissionshould use its best efforts to harmonize the proposed Rule andproposed Companion Policy with changes to Policy Q-27 ofthe Commission des valeurs mobilières du Québec ("CVMQ")wherever possible.

Another commenter noted that a significant number oftransactions that would be subject to the Rule also would besubject to the requirements of Policy Q-27. Accordingly, to theextent that the provisions of Policy Q-27 and the Rule areinconsistent, issuers will have to comply with varyingregulatory regimes. The commenter urged the Commission toconsult with the CVMQ in this respect. If harmonization is notpossible, the commenter suggested that the Commissionshould advise the issuers of the circumstances whenexemptive relief may be made available to harmonize the Rulewith Policy Q-27.

A further commenter suggested that the Commission use itsefforts to influence the CVMQ to abandon its continuedhostility to allowing shareholders who enter into"understandings" with proponents of going private transactionsto be counted as part of the minority.

Response

The Commission believes that harmonization is desirable. TheCanadian Securities Administrators are continuing to discussharmonized regulation, but ultimately it is up to each individualprovince to decide what areas it wants to regulate and how itwishes to regulate in those areas.

2. Rule versus Alternative Approaches

The notice accompanying the 1996 proposed Rule requestedcomments on whether its approach in regulating related partytransactions by way of a comprehensive rule or through one oftwo alternative approaches was most appropriate. The firstalternative would involve a rule with a scope restricted tospecific types of related party transactions that have given riseto numerous complaints in the past ("quasi-going privatetransactions", as defined in the 1996 proposed Rule, anddispositions to a related party of a substantial part of anissuer's property) and also would include a companion policywarning of the Commission's concerns and ability to interveneon a public interest basis. The second alternative wouldrestrict regulation of related party transactions to the type ofpolicy suggested under the first alternative. The Januaryproposed Rule maintained the status quo and regulatedrelated party transactions by way of a comprehensive rule.

Comment

One commenter noted that there appeared to be substantialsupport for the alternative approaches summarized in thenotice to the 1996 proposed Rule and challenged theCommission's decision to regulate broadly through a rule. Thecommenter described the approach of the January proposedRule to related party transactions as an "extremely broad,vague, complex and long instrument, the costs of which, in thecommenter's view, likely outweigh the benefits". Thecommenter noted that Policy 9.1, when first adopted, was veryuseful in focusing attention on non-arm's length transactionsand the need for fairness. The commenter suggested that thisprocess has occurred and submitted that the Commissioncould relax its approach at this time. The commenter felt thatsimilar arguments might support the ability of independentdirectors to waive valuation and/or minority approvalrequirements.

The commenter felt that the Commission's approach does notproperly take into account several issues.

First, the Commission is mandated in paragraph 2.1 6 of theAct to have regard to the "fundamental principle" that businessand regulatory costs and other restrictions on the businessand investment activities of market participants should beproportionate to the significance of the regulatory objectivessought to be realized. The commenter noted that a test basedon "undue impediment" is very different than proportionality.

Second, the Commission is required to consider theanticipated costs and benefits in proposing rules. Thecommenter noted that such an extraordinary regulatoryapproach should be carefully reviewed from a costperspective. The commenter believed that every transactionwith even a trace of non-arm's lengthedness would berendered potentially invalid by the January proposed Rule.The commenter suggested that a saving provision such as thatcontained in subsection 16(3) of the CBCA may be necessaryto protect third parties, such as financiers.

Third, the commenter noted that recent published studiesshow that corporate concentration is diminishing in Canadianpublic companies, presumably because of the need for capitalin an increasingly complex and globalized world. Thesestudies, along with academic criticism, also weigh against arule-based approach.

Fourth, the commenter suggested that more detailed rulesthan our U.S. neighbours may contribute to the increasinglycommon phenomena of Canadian companies seeking to gopublic and raise capital south of the border.

Finally, the commenter noted that Policy 9.1 has beeneffectively unenforceable except potentially through theCommission's general powers. The commenter suggestedthat, since there have been very few serious concerns withrelated party transactions in this regulatory context, a rule-making approach is not necessary.

Response

The Commission disagrees with the commenter and is of theview that the proposed Rule as drafted is the appropriatemanner in which to regulate related party transactions. Intaking the approach reflected in the proposed Rule andproposed Companion Policy, the Commission had due regardto the comments received (many of which supported theapproach taken), the purpose and principles section of the Actand the costs and benefits involved. The Commission is of theview that the business and regulatory costs and otherrestrictions on the business and investment activities of marketparticipants imposed by the proposed Rule are proportionateto the significance of the regulatory objectives sought to berealized.

The Commission finds unconvincing the commenter'sargument that nobody is complying with Policy 9.1, yet thereare few concerns. To the Commission's knowledge themajority of market participants are complying with Policy 9.1.

The Commission is not prepared to accept the commenter'ssuggestion regarding the inclusion of a saving provision in theproposed Rule. If the Commission were to add a savingprovision, it would not be unique to the proposed Rule. TheCommission is not prepared to adopt a saving provisionwithout a thorough review of the policy implications of doingso, its ability to do so, and whether a saving provision shouldmore appropriately be the purview of legislation. In any event,the Commission is not convinced that a breach of theproposed Rule would necessarily render a transaction invalid.The effect of a breach of the proposed Rule would requirecase by case consideration.

As discussed in the notice accompanying the Januaryproposed Rule, the Commission is not prepared to allowindependent directors to waive the valuation or minorityapproval requirements.

3. Beneficial Ownership, Control orDirection

Comment

One commenter noted that the concepts of beneficialownership, control or direction that appear in the Januaryproposed Rule cause substantial problems for institutionalinvestors. The commenter noted that this has been recognizedby the Commission in the context of its proposed rule relatingto the early warning system. The commenter was of the viewthat aggregation relief should apply to all, or most, uses ofthese terms, if such uses persist.

Response

Aggregation relief usually is most helpful in the context ofpassive investors. In the context of insider bids, proposedNational Instrument 62-103 The Early Warning System andRelated Take-over Bid and Insider Reporting Issues providesaggregation relief. In the context of issuer bids and goingprivate transactions, aggregation relief generally isinappropriate, since an issuer is undertaking the transaction.In any event, if securityholders become related partiesbecause of aggregation, no consequence should flow from thisin a going private transaction if these securityholders are beingtreated identically to all other securityholders. In respect ofrelated party transactions that are not otherwise exempt underthe proposed Rule, those are generally large transactionsinvolving persons or companies that clearly meet the definitionof "related party" and are not passive investors.

Accordingly, it is very remote that there would be a situationwhere aggregation relief would be appropriate. TheCommission is not aware of any situations under Policy 9.1where aggregation has been a problem.

4. Fees

Comment

One commenter was of the view that the Commission shouldsubstantially reduce the fees it charges and proposes tocharge in respect of take-over bids and transactions subject toproposed Rule 61-501. The commenter further suggestedthat, as only fees are authorized, the Re Eurig decisionsuggests that the Commission's approach may beconstitutionally invalid.

Response

On August 3, 1999, the Commission implemented a 10percent across-the-board reduction in all fees which it chargesto capital market participants. The Commission also iscurrently engaged in the development and implementation ofa completely re-engineered fee schedule.

The Commission is of the view that its fees are valid.

5. Status of Policy 9.1

Comment

One commenter was of the view that, by proposing to rescindPolicy 9.1, the Commission was suggesting that Policy 9.1 iscurrently in force. The commenter suggested that as it wasnot grandfathered in the rule-making process, and as it islegislative in nature, it would appear to be of no force andeffect at the present time.

Response

As the proposed Rule is replacing Policy 9.1 in its entirety,Policy 9.1 needs to be rescinded to eliminate any confusion asto the Policy's ongoing applicability.

6. Valuation Disclosure

Comment

One commenter disagreed with the Commission's decision towithhold from a board of directors the discretion to determinewhat information should be disclosed to a valuator. Thecommenter was of the view that this decision fails properly toconsider the adverse effects that disclosure of competitivelysensitive information could have and suggested that somediscretion would be appropriate in this context.

Response

The Commission continues to be of the view that a board ofdirectors should not have the discretion to determine whatinformation should be disclosed to a valuator. This couldseverely limit the benefit to shareholders that a valuationprovides.

7. Timing of Valuations in Insider Bids

Comment

One commenter noted that the Commission has recognizedthat a former director may be prevented by fiduciaryobligations from using information obtained as a director forvaluation purposes in the context of an insider bid withoutconsent. The commenter further noted that this may alsoapply to a current director.

Response

The Commission agrees with the commenter, but does notbelieve it is necessary to provide for this in the proposed Ruleor discuss this in the proposed Companion Policy. Thisconcern is one of the reasons the proposed Rule requires anindependent committee to supervise the preparation of avaluation in the case of an insider bid.

C. SPECIFIC COMMENTS

8. Subsection 1.1(1) of the January Proposed Rule -Definition of Bona Fide Lender

Comment

One commenter was of the view that the definition of "bonafide lender" should be based on a decision to realize, notmerely a legal entitlement, as in the U.S. approach to earlywarning requirements.

Response

The definition of "bona fide lender" was revised in the Januaryproposed Rule to be consistent with proposed NationalInstrument 62-103 The Early Warning System and RelatedTake-Over Bid and Insider Reporting Issues (1998), 21 OSCB5649. In any event, for the purposes of Rule 61-501, theCommission believes that legal entitlement is the appropriatetest and that a test based upon a decision to realize would betoo subjective.

9. Subsection 1.1(1) of the January Proposed Rule -Definition of Fair Market Value

Comment

One commenter did not understand why the January proposedRule referred to "maximum" monetary consideration in thedefinition of "fair market value". The commenter had thoughtthat there was a fairly universally accepted definition of fairmarket value, which is the amount that a willing buyer wouldpay to a willing seller with neither party under a compulsion toact. The commenter found the insertion of the term"maximum" confusing. Since the willingness of sellers as wellas buyers is always part of the equation, one might as wellqualify the definition by the word "minimum". The commenterdid not understand how one rationalizes the concept of"maximum" when there is a valuation range.

Response

The Commission agrees with the commenter and has deletedthe word "maximum".

10. Subsection 1.1(1) of the January Proposed Rule -Definition of Freely Tradeable

Comment

One commenter suggested that the definition of "freelytradeable" should be adjusted, since privately placed securitiesthat have been held for the applicable time referred to insubsection 72(4) of the Act, among others, could still besubject to a prospectus requirement due to the need to meetthe "ordinary course" requirements even though no furtherhold period applies. The commenter noted that section 2.2 ofthe January proposed Companion Policy would require acorresponding adjustment.

Response

A sale of privately placed securities that have been held for theapplicable time referred to in subsection 72(4) of the Act andthat otherwise satisfies the conditions in subsection 72(4) ofthe Act is not deemed to be a "distribution", and would not besubject to a prospectus requirement. The Commission hasmodified the definition of "freely tradeable" to clarify that the"no unusual effort" and "no extraordinary commission"provisions of subsection 72(4) do not apply in determiningwhether the securities are freely tradeable.

11. Subsection 1.1(1) of the January Proposed Rule -Definition of Hold

Comment

One commenter noted that the term "hold" is not defined,unlike the term "holder".

Response

The term hold appears in the phrase "hold securities sufficientto affect materially the control of a person or company", theinterpretation of which is addressed in subsection 1.1(2) of theproposed Rule. The term "hold" also appears in the de minimisexceptions from the application of the going private transactionand related party transaction requirements in paragraphs4.1(2)(c) and 5.1(2)(c) of the proposed Rule. In subsection1.1(2), the test is beneficial ownership, control or direction. Inparagraphs 4.1(2)(c) and 5.1(2)(c), the test is beneficialownership. Accordingly, the Commission is of the view that aseparate definition is not necessary.

12. Subsection 1.1(1) of the January Proposed Rule -Definition of Interested Party

Comments

One commenter suggested that, in subparagraph (c)(i) of thedefinition of "interested party" and similar provisions, theCommission should clarify that the "identical/not greater valuetest" relates only to a related party in its capacity as asecurityholder, so that other appropriate consideration (suchas that referred to in paragraph 104(2)(a) of the Act) is notprohibited.

Another commenter recommended retaining the currentlanguage in Policy 9.1 requiring the test to be on a "persecurity" basis. The commenter noted that it is quite likely thatan interested party could receive greater aggregateconsideration than other securityholders if the interested partyholds more securities than do other securityholders.

Response

The Commission does not propose to add a "securityholdercapacity" concept to the definition since doing so would defeatthe purpose of the definition and allow consideration of greatervalue to be provided to securityholders by providing it to themin another capacity. The wording in the definition waspurposely chosen to correspond to the language in subsection97(2) of the Act since market participants are familiar with thecollateral benefit test and the related jurisprudence.

The Commission has modified the language in clause (c)(i)(A)of the definition of interested party in the January proposedRule, clause (e)(i)(A) of the definition of going privatetransaction in the January proposed Rule and clause8.2(a)(i)(A) of the January proposed Rule, which deals withapproval in multi-step transactions, to refer to consideration ona per security basis.

13. Subsection 1.1(1) of the January Proposed Rule -Definition of Market Capitalization

Comment

One commenter noted that the definition of "marketcapitalization" contains a number of limitations under eachhead, which suggested to the commenter that there may wellbe cases that are not caught by any of the heads. Thecommenter provided the example of a situation where there isno published market and, as a result of an amalgamation,merger or other transaction, the issuer has no audited balancesheet. The commenter suggested that a catch-all provisiontherefore appears to be necessary, contrary to footnote 22 ofthe January proposed Rule.

Response

The Commission agrees with the commenter and has addedback a catch-all provision allowing the board of directors todetermine market capitalization. The Commission has decidedto delete paragraph (c) of the definition, which allowed marketcapitalization in certain circumstances to be based onshareholders' equity since the Commission is of the view thatthis would not necessarily make for a representative test indetermining whether the value of a transaction exceeded 25percent of market capitalization.

14. Subsection 1.1(1) of the JanuaryProposed Rule - Definition of MinorityApproval

Comment

One commenter strongly supported the requirement in Part 8to have all shareholders vote regarding the bid or transactionwith a simple majority of the minority required to approve thegoing private transaction or related party transaction.

Response

The Commission proposes to maintain a simple majorityrequirement for minority approval for both going privatetransactions and related party transactions.

15. Subsection 1.1(1) of the January Proposed Rule -Definition of Participating Security

Comment

One commenter recommended that the language ofsubsection 182(1) of the Regulation to the Act, which requiresthat a participating security carry a residual right to participatein earnings or assets "to an unlimited degree", be carriedforward into the definition of participating security.

Response

The Commission notes that there is no substantial differencebetween the commenter's suggested wording and thedefinition in the January proposed Rule, but is concerned thatthe commenter's wording would be more likely to lead toavoidance.

16. Subsection 1.1(1) of the JanuaryProposed Rule - Definition of PriorValuation

Comment

One commenter recommended that the exemptions from thedefinition of "prior valuation" be extended to prior drafts notleading to a final report, since significant difficulties could beencountered in obtaining from a valuator the right to use anddisclose such reports.

The commenter suggested that subparagraph (c)(ii) of thedefinition of "prior valuation" also should refer to clients of anaffiliated or associated entity of the analyst's employer.

A second commenter also noted that the definition of "priorvaluation" excludes any draft or preliminary report of avaluation or appraisal prepared for the issuer by anindependent valuator, which draft or report has resulted in avaluation or appraisal by that valuator. The commentersubmitted that any draft or preliminary report, whether or notit has resulted in a valuation or appraisal, should be excludedfrom the definition of "prior valuation". The commenterexpressed concern that to require a disclosure of certain draftvaluations will hamper issuers in obtaining valuation advice incircumstances other than in contemplation of a proposedtransaction governed by the Rule.

A third commenter believed that certain other situations shouldbe exempt from the definition in addition to those alreadyenumerated in the January proposed Rule. By not exemptingthese other situations, the commenter believed they would beconsidered to be prior valuations by default because they havenot been specifically exempted. Specifically, the commenterwas of the view that an exemption should be made for anyreport prepared for an issuer or interested party that either wasprepared on an unsolicited basis or prepared without thebenefit of non-public information regarding the issuer orinterested party. This would eliminate from the definition ofprior valuation the many business development presentationscompanies receive from investment bankers. The commenterwas of the view that it would be unfair to burden companieswith documents that could be considered "prior valuations" ifsuch documents were prepared on an unsolicited basis.Excluding such reports also would emphasize that a propervaluation cannot be completed unless the valuator has accessto non-public information, as has been the practice underPolicy 9.1. Any valuation not reflecting non-public informationcould be highly misleading and unhelpful to minorityshareholders particularly given the reliance of most valuationson long term forecasts that are almost never in the publicdomain.

A fourth commenter reiterated a point it made in connectionwith the 1996 draft. The commenter noted that anyinvolvement of a director or a senior officer of the issuer in thepreparation of the valuation would make the internal valuationexclusion in the definition unavailable. The commenterthought this would be unduly restrictive. The commenter wasof the view that disclosure of prior valuations is of dubioussignificance in most circumstances and saw no reason toexpose an issuer's working materials to public scrutiny merelybecause a director or senior officer has had some involvementin some of those materials. The effect would be a penalty onissuers that produce a certain type of work product and thecommenter submitted that this is poor public policy.

A fifth commenter noted that the definition of a "prior valuation"excepts only a report of a "market analyst or financial analyst"prepared by or for someone other than the issuer or aninterested party. The commenter suggested the categoriesgenerally contemplated by those terms should be madebroader. In addition, the commenter suggested that any reportprepared by someone other than the issuer or someone actingon behalf of the issuer or an interested party that is not basedon publicly disclosed information should not be considered aprior valuation for purposes of the Rule unless it is in respectof an asset that alone, or together with other assets that arethe subject of the valuation, is material to the issuer and thevalue of its securities. As an example, a lender to an issuermight well prepare a valuation or appraisal of the issuer'ssecurities or assets in the course of determining whether toprovide a loan to the issuer. It would not appear appropriatethat the issuer track down and attempt to obtain such avaluation. The commenter also recommended that theCompanion Policy clarify that "material" as it applies to suchasset or assets means an asset, alone or in aggregate withother assets that have been the subject of the prior valuationthat constitutes 25 percent of the market capitalization of theissuer.

Response

The Commission does not propose to extend the exemption forprior drafts, as doing so would facilitate avoidance.

The Commission has amended subparagraph (c)(ii) (now(d)(ii) in the proposed Rule) of the definition of prior valuationto refer to clients of an affiliated entity or associate of theanalyst's employer.

The Commission also has added an exclusion from thedefinition for an unsolicited report concerning the issuer or itssecurities prepared by a person or company that has nomaterial non-public information concerning the issuer or itssecurities. The Commission does not believe it necessary tomodify this exemption in the manner suggested by the fifthcommenter.

In respect of the fourth commenter's comments, theCommission has amended the exemption so that an internalvaluation that is not made available to, or prepared with theparticipation of, the issuer's board of directors or any directoror senior officer of an interested party (except a director orsenior officer of the issuer in the case of an issuer bid) will notconstitute a prior valuation.

Finally, the definition currently excludes a valuation orappraisal prepared by an interested party for the purpose ofdetermining the price at which to propose certain transactions,if the valuation is not made available to any independentdirectors of the issuer. The Commission has extended thisexemption to valuations prepared by a third party in connectionwith transactions that resulted in the third party becoming anissuer insider.

17. Subsection 1.1(1) of the January Proposed Rule -Definition of Related Party

Comment

One commenter questioned whether the terms "arrangement"and "understanding" in paragraph (f) of the definition of"related party" are too vague.

Another commenter was of the view that paragraph (f) of thedefinition of "related party" should be conformed to thelanguage used for Item 10 of Form 30 of the Regulation to theAct and should read "a person or company which performsmanagement functions of the issuer or the interested party toany substantial degree other than the directors or seniorofficers of the issuer or interested party under an agreement...".

Response

The Commission disagrees with the first commenter andbelieves that the words are not too vague. In respect of thesecond comment, the Commission has added the words "toany substantial degree" in paragraph (f) of the definition of"related party".

18. Subsection 1.1(3) of the January Proposed Rule -Definition of Going Private Transaction

The January proposed Rule amended the definition of "goingprivate transaction" to make it applicable only where thetransaction is with or involves a related party of the issuer, ifthe related party (i) is not treated identically to all otherbeneficial owners in Canada of affected securities, (ii)receives, directly or indirectly, consideration of greater valuethan that paid to all other beneficial owners of affectedsecurities, or (iii) upon completion of the transaction,beneficially owns, or exercises control or direction over,directly or indirectly, participating securities of a class otherthan the class of securities subject to the going privatetransaction.

Comments

One commenter suggested that two changes are required tothe "going private transaction" definition. First, the commenterwas of the view that affiliated entities of the related partyshould be excluded from both (i) the identical treatment, and(ii) the no greater value requirement, since often they will beshareholders. Secondly, the commenter was of the view thatthis should only apply to shareholders "in Canada", since non-Canadian (particularly U.S.) shareholders will not infrequentlyreceive different consideration that may on occasion be ofnominally greater value (value being an imprecise andsubjective matter). The commenter surmised that theCommission appeared to be concerned that including thewords "in Canada" may enable a non-Canadian related partyto obtain better value. The commenter believed that thisconcern is not well founded as the value received by therelated party, whether Canadian or non-Canadian, wouldsimply be measured against that received by Canadianshareholders.

Another commenter noted that the definition of "going privatetransaction" provides for an exclusion in subparagraph (e)(ii)of the definition where the related party "does not beneficiallyown or exercise control or direction over participatingsecurities of a class other than affected securities". Thecommenter noted that the reference to "class other thanaffected securities" would appear to provide that where arelated party retains securities of a class of "affectedsecurities" upon completion of a transaction such transactionwould not be a "going private transaction". The commenterhad difficulty in determining circumstances where a relatedparty would continue to hold securities of a class of affectedsecurities for the purposes of subparagraph (e)(ii) if it wasbeing treated identically to other holders of securities of aclass of affected securities for the purposes of subparagraph(e)(i). Accordingly, the commenter submitted that theexclusion in subparagraph (e)(ii) may be unnecessary.

While a third commenter agreed with the approach to goingprivate transactions reflected in the exclusion from thedefinition embedded in paragraph (e) of the definition, thecommenter found the drafting, involving as it does doublenegatives, confusing. The commenter believed the draftingwould be somewhat easier to follow if subparagraph (e)(i) weredrafted as follows:

"a transaction in which the related party

(i) is entitled to receive, directly orindirectly, upon completion of thetransaction only consideration thatis identical in amount and type persecurity to that paid to all otherbeneficial owners in Canada ofaffected securities of the sameclass."

The commenter was of the view that it is counter-intuitive tostipulate that the consideration will be identical and then tosuggest that it may be of greater value than that with which itis identical.

Response

The Commission has added affiliated entities of the relatedparty to paragraph (e) so that affiliated entities of the relatedparty also must be treated identically and not receiveconsideration of greater value.

The Commission is further of the view that it is insufficient tomeasure value against Canadian securityholders only. Thefirst commenter is incorrect in surmising that the Commissionappeared to be concerned that including the words "inCanada" in clause (e)(i)(B) may enable a non-Canadianrelated party to obtain better value. Clause (e)(i)(B) results ina transaction being a going private transaction if a relatedparty, wherever situated, receives consideration of greatervalue than that paid to other beneficial owners. Limiting clause(e)(i)(B) to Canada potentially would allow greaterconsideration to be paid to Canadian shareholders.

In respect of the second commenter's comment, subparagraph(e)(ii) of the definition is necessary since the Commission is ofthe view that, where there are two or more classes ofparticipating securities and a related party continues to holdany participating securities, whether or not affected securities,the transaction should be a going private transaction. Forexample if an issuer has multiple voting shares andsubordinate voting shares and a related party holds multiplevoting shares and no subordinate voting shares and thetransaction is designed to eliminate the subordinate votingshares, the transaction should be a going private transactionfor purposes of the Rule.

In respect of the third commenter's comment, the Commissionlimited "identical" consideration to Canada since it may benecessary to provide different consideration to securityholdersoutside of Canada. That is why the "greater value" test is alsonecessary. The Commission believes that clause (e)(i)(B) isnecessary to address the situation where, on the face of thetransaction, identical consideration is being provided but asecurityholder is receiving a collateral benefit. The wording inthe definition was chosen to correspond to the language insubsection 97(2) of the Act since market participants arefamiliar with the collateral benefit test and the relatedjurisprudence. Accordingly, the Commission is not preparedto accept the third commenter's drafting suggestion.

19. Subsection 1.1(3) of the JanuaryProposed Rule - Definition of Insider Bid

Comment

One commenter thought that the comment in footnote 40 ofthe January proposed Rule, which suggested that an offer maybe both an issuer bid and a take-over bid, seemed strange.

Response

The definition of insider bid in the 1996 proposed Ruleexcluded issuer bids unless paragraph 1.2(2)(b) applied. Theexclusion was deleted in the January proposed Rule, as beingunnecessary. To the extent that a take-over bid should becharacterized as an issuer bid, that result can be achievedthrough the indirect bid rules in the Act. The purpose offootnote 40 was not to state that an offer can be both an issuerbid and a take-over bid.

20. Subsection 1.1(3) of the January Proposed Rule -Definition of Related Party Transaction

The Commission added new paragraphs (b) and (e) to thedefinition of related party transaction in the January proposedRule to cover an issuer's joint purchase or sale of an assetwith a related party from or to a third party where theconsideration paid or received by the issuer is greater or lessthan, as the case may be, the proportion of the assetpurchased or sold by the issuer.

The Commission has also clarified in paragraphs (h) and (k)that a related party transaction includes an amendment to theterms of a security or guarantee.

Comments

One commenter was of the view that the new "jointtransaction" provisions in paragraphs (b) and (e) of thedefinition of "related party transaction" raise difficulties inassessing the 25 percent exemption. The commenterquestioned whether it would apply simply to the inequality, orto the entire transaction. The commenter suggested that theremay be very good reasons for such a situation, includingvariations in representations, warranties, indemnities,covenants, liabilities assumed, etc. The commenter was notconvinced that these additions are wise.

The commenter felt that specific references to amendments inrevised paragraphs (h) and (k) may suggest that amendmentsto other transactions, such as a purchase transaction, wouldnot be related party transactions. The commenter furtherquestioned whether the 25 percent test would apply to thevalue of the amendment alone, or the whole package.

The commenter was further of the view that paragraph (m) ofthe definition of "related party transaction" uses the term"related party" in several places where the term "issuer" seemsmore appropriate. The commenter also suggested thatparagraph (m) of the definition should refer not just to theexception in paragraph (e) of the definition of "going privatetransaction", but also to paragraphs (a) through (d) of thedefinition of going private transaction. The commenter notedthat in particular paragraph (d) should be included, since adissolution may be viewed as a merger.

Another commenter was of the view that paragraph (f) of thedefinition of "related party transaction" should be amended toread "proposes to lease or leases property to or from therelated party".

Response

The Commission believes that in applying the 25 percent testto a "joint transaction", the calculation must be based on thewhole transaction insofar as it involves the interested party, notjust the inequality amount. While there may be good reasonsfor an inequality situation covered by the "joint transaction"provisions in paragraphs (b) and (e) of the definition of "relatedparty transaction", ultimately, if there is an inequality and noexemption is available, the transaction should be put to theshareholders or relief can be sought. The Commissionbelieves that in determining proportionate contributions for thepurposes of paragraphs (b) and (e) of the definition of relatedparty transaction, assumption of debt can be taken intoaccount.

The Commission disagrees that the reference to amendmentsin paragraphs (h) and (k) of the definition of "related partytransaction" would suggest that amendments to transactionsdescribed in the other paragraphs of the definition would notbe caught. The lead-in words to the definition include otherrelated transactions which would catch amendments to relatedparty transactions. The word amendment was used inparagraphs (h) and (k) because of the particular types oftransactions described in those paragraphs.

In respect of whether the 25 percent test should apply to thevalue of the amendment alone, or the whole package, againthe Commission notes that the lead-in words to the definitioninclude other related transactions. As a result, if the value ofa transaction was under 25 percent of market capitalizationand the issuer and interested party then amended thetransaction to increase the value to over 25 percent of marketcapitalization, the Commission would normally consider thetwo transactions to be one related party transaction. Insituations where an issuer does not believe that this is theappropriate result, it may apply for discretionary relief.

Paragraph (m) of the definition applies to a situation where atransaction is a related party transaction for the upstreamissuer and a going private transaction for the downstreamissuer. The reference to "related party" in the definition is tothe downstream issuer for whom the transaction is a goingprivate transaction. Accordingly, the reference to the relatedparty, and not the issuer, in paragraph (m) of the definition of"related party transaction" is correct.

In respect of paragraph (m), the Commission does not refer toany exceptions other than paragraph (e) of the definition of"going private transactions" because it is not of the view thatthe occurrence of any of the other exceptions should result inthe transaction being a related party transaction for the issuer.

The Commission does not propose to make the suggestedchange regarding proposed leases. None of the otherparagraphs in the definition includes proposed transactions.

21. Subsections 1.1(1) and (3) - Interpretation of"involved" in Definitions

Comment

One commenter was of the view that the use of the words "oris involved in" in paragraph (d) of the definition of "interestedparty" is far too broad, given the definition of "related party".The commenter noted that, among others, directors andofficers with nominal shareholdings, even if treated identicallyto all other shareholders would appear to be caught asinterested parties. The commenter made a similar commentwith respect to the use of the term "involving" in the definitionsof "going private transaction" and "related party transaction".The commenter did not find that section 2.8 of the Januaryproposed Companion Policy assisted appreciably in removingthis uncertainty. The commenter suggested that the word"materially" might assist, as might unequal treatment concepts.

Response

The Commission intentionally used the words "involved in"because "between" would have been too limiting. In thecontext of going private transactions, if directors and officersare treated identically to all other shareholders, they will not becaught as interested parties. In the context of related partytransactions, the Commission has amended paragraph8.1(3)(b) of the proposed Rule so that shares held by aninterested party, e.g. a director or senior officer of the issuer,are not excluded if the director or senior officer is treatedidentically to other shareholders and does not receiveconsideration of greater value.

22. Section 1.2 of the January ProposedRule - Application of Part XX of the Act

Subsection 1.2(2) of the January proposed Rule provided thatfor the purposes of the definition of related party andsubsection 1.1(2), section 90 of the Act applies in determiningbeneficial ownership of securities. Subsection 1.1(2) providesan interpretation for what constitutes "affect materially thecontrol" for the purposes of the proposed Rule.

Comments

One commenter noted that paragraph 1.2(1)(b) should refer to"acting jointly or in concert", instead of "acting jointly and inconcert".

The commenter was of the view that the reference tosubsection 1.1(2) had the effect of broadening the concepts of:(i) a related party (even beyond a 10 percent holder); (ii) thepresumption of affecting materially control; and (iii) "control",as applicable in certain cases in subsection 1.5(3) of theJanuary proposed Rule. The commenter was of the view thatthe application of subsection 1.1(2) should be limited to insiderbids and issuer bids.

Response

The Commission agrees with the commenter that paragraph1.2(1)(b) should use "or" instead of "and".

The Commission is of the view that it is appropriate for section90 of the Act to apply in determining whether a person orcompany is a related party and to apply to subsection 1.1(2).The Commission sees no reason why the application ofsubsection 1.1(2) should be limited to insider bids and issuerbids. The Commission does not believe that the paragraph isby its terms applicable to subsection 1.5(3).

23. Section 1.3 of the January ProposedRule - Liquidity Test

The Commission had modified the interpretation of "liquidmarket" in section 1.3 of the January proposed Rule to add anaggregate trading price test of $15,000,000 and a marketvalue test of $75,000,000.

Comments

One commenter noted that the liquidity test set out in section1.3 of the January proposed Rule suggests that a marketcapitalization of $75,000,000 would be the minimum to meetthe definition of a liquid market. The commenter suggestedthat, with the volatility in today's markets, many companiesmay meet these requirements for one year and may not thesucceeding year. The commenter noted that this has beenparticularly true of resource companies, which populate theCanadian markets. The commenter suggested that to protectthe rights of all shareholders, the liquidity requirements shouldbe lowered, particularly since many issuer bids would beinitiated when the company's share price is relatively low andthus, potentially undervalued.

Another commenter noted that subparagraph 1.3(1)(a)(ii) leadsin with the words "at all times", but clauses (B), (C) and (D)refer to a period, not all times therein. The commenter furtherfelt that paragraph 1.3(1)(b) should apply if "any of" the testsset out in paragraph (a) are not met.

Response

In accordance with subparagraph (a)(iii) of subsection 1.3(1)of the January proposed Rule, the market value of a class ofsecurities on the published market on which that class isprincipally traded needs to have been at least $75,000,000only for the calendar month preceding the calendar month inwhich the transaction is agreed to, in the case of a relatedparty transaction, or in which the transaction is announced, inthe case of an insider bid, issuer bid, or going privatetransaction. Companies need not meet this requirement forthe entire 12 month period before the date the transaction isagreed to. The Commission recognizes the volatility thatexists in Canadian markets and is of the view that theproposed liquidity test is the appropriate objective measureand that to lower the test would be counter-productive toshareholders. The Commission notes that the proposed Rulestill contains an alternative test in paragraph (b) of subsection1.3(1) of the January proposed Rule, allowing for a liquidityopinion in circumstances when the test set out in paragraph (a)is not met.

The Commission is of the view that the $75,000,000 testneeds to be met in order to provide a valuation exemption. Ifan issuer cannot meet this test or the alternative test inparagraph 1.3(1)(b), the issuer cannot rely on a liquid marketvaluation exemption.

The Commission agrees with the comment regarding the lead-in words and has revised paragraph 1.3(1)(a) to reflect thatonly the test in clause (A) needs to be have been satisfied atall times during the period of 12 months before the date thetransaction is agreed to. The Commission also has changedthe word "price" in clause 1.3(1)(a)(ii)(D) to "value based onprice" to accord more closely with trading terminology.

The Commission has modified paragraph 1.3(1)(b) slightly toclarify that it applies if the test set out in paragraph (a) is notmet.

24. Paragraph 1.3(2)(b) of the JanuaryProposed Rule - Market Value of a Classof Securities

Comment

One commenter noted that paragraph 1.3(2)(b) of the Januaryproposed Rule relies on closing prices for part of thecalculation of market value of a class of securities but furthernoted that closing prices may not exist.

Response

The Commission agrees with the commenter and has modifiedthe calculation in a manner similar to that provided for insection 183 of the Regulation to the Act.

25. Section 1.5 of the January Proposed Rule -Subsidiary Entity and Affiliated Entity

Comment

One commenter found the use of the phrases "first mentioned"and "second mentioned" confusing in subsection 1.5(3) of theJanuary proposed Rule, which interprets the terms "subsidiaryentity" and "affiliated entity". The commenter suggestedalternative language.

Response

The Commission has added clarifying language and hasdeleted the phrase "second-mentioned".

26. Subsection 2.3(3) of the JanuaryProposed Rule - Appointment andSupervision of Valuators for Insider Bids

Subsection 2.3(3) of the January proposed Rule provided thatthe offeror shall determine who the valuator should be andsupervise the preparation of the valuation if the insider bid isbeing made without the knowledge of all of the independentdirectors of the offeree issuer or if the insider bid is beingregarded as hostile.

Comments

One commenter suggested that subsection 3 of subsection 2.3of the January proposed Rule should say "may" rather than"shall", as an insider offeror could still lack access in reality,despite being deemed to have access under subsection 2.4(2)of the January proposed Rule.

The commenter suggested that paragraph 2 of section 2.4, thevaluation exemption for lack of knowledge and access, shouldrelate to actual access and recognize the fiduciaryresponsibilities of target directors.

Response

As indicated previously, the Commission has decided to deletesubsection 2.3(3) of the January proposed Rule.

The Commission believes that the exemption in paragraph 2of section 2.4 turns on actual access and not the potential foraccess. The Commission does not believe it would beappropriate to make the inability to use information because ofa director's fiduciary duties grounds for an automaticexemption. The Commission has revised paragraph 2 ofsection 2.4 to refer to access to material non-publicinformation.

27. Paragraph 2.2(3)(b) of the JanuaryProposed Rule - Disclosure of PriorOffers for Insider Bids

Comments

One commenter suggested that the Commission should retainthe "bona fide" concept in paragraph 2.2(3)(b) of the Januaryproposed Rule, so as not to require an issuer to discussfrivolous offers.

The commenter noted that paragraph 2.3(3)(b) of the Januaryproposed Rule referred to the undefined term, "hostile bid", butthat target directors rarely refer to a bid as other than"unsolicited".

Response

The Commission has added the modifier "bona fide" before thewords "prior offer" in paragraph 2.2(3)(c) of the proposed Rule.

The Commission has deleted subsection 2.3(3).

28. Paragraph 3 of Section 2.4 and Paragraph 2 ofSection 4.5 of the January Proposed Rule -Valuation Exemption Based on Previous Arm'sLength Negotiations

The valuation exemption based on previous arm's lengthnegotiations is available for insider bids and going privatetransactions under the January proposed Rule and requiresthe consideration for the particular type of transaction to beequal in value to and in the same form as considerationagreed to in arm's length negotiations with one or more sellingsecurityholders, one of whom beneficially owns or exercisescontrol or direction over at least five percent of the outstandingsecurities of the class of offeree securities and one or more ofwhom beneficially own, or exercise control or direction over, inthe aggregate, at least 20 percent of the outstanding securitiesof the class of offeree securities beneficially owned, or overwhich control or direction is exercised, by persons orcompanies other than the interested party and persons orcompanies acting jointly or in concert with the interested party.

Comment

One commenter was of the view that the five percent and 20percent test may be inappropriate because, while a fivepercent holder clearly has a substantial stake and cantherefore reasonably be presumed willing to protect itsinterests, the 20 percent requirement produces a wide varietyof results, given that it is 20 percent of whatever percentage ofthe outstanding securities are not held by the offeror or thoseacting jointly or in concert with the offeror.

The commenter questioned why the exemption was not madeavailable for issuer bids and related party transactions.

The commenter also questioned whether the reference insubparagraph 2.4(3)(b)(i) of the January proposed Rule to"outstanding securities" was to the time of the previousnegotiation or currently.

The commenter further questioned whether the reference inparagraph 2.4(3)(e) of the January proposed Rule to "offeror's"knowledge was to the offeror at that time or the current offeror.The commenter also noted that if the latter was intended, theremay be an issue of the current offeror not then existing.

Response

The Commission recognizes that there will be a variety ofresults under the 20 percent branch of the test. TheCommission is not prepared to change the test to 20 percentof the outstanding securities as it would preclude an offerorthat owns more than 80 percent of the securities and locks upa certain percentage of shares from carrying out a transactionto acquire the minority's holdings without a valuation.

However, the Commission has reconsidered whether the fivepercent test is appropriate and determined that, in mostcircumstances, it is not. The test should be based on thelocked-up shareholder having a significant shareholding in theissuer. Accordingly, the Commission has determined that thethreshold should be raised to 10 percent. That thresholdcoupled with the 20 percent test should result in the locked-upshareholder having a significant shareholding in the issuer fornegotiations with it to constitute a proxy for value. TheCommission has left the threshold at five percent where theofferor owns 80 percent or more of the securities. TheCommission has also modified the paragraph to clarify that theofferor can rely on prior negotiations by another person orcompany and has modified the 20 percent component of thetest to provide that it can be satisfied in one or moretransactions.

The Commission did not extend this exemption to issuer bidsbecause it does not believe it is appropriate for an issuer, asopposed to a third party offeror, to have a valuation exemptionbased on negotiations with a selling securityholder. TheCommission did not extend the exemption to related partytransactions as it is generally not necessary, given theavailability of other exemptions in the January proposed Rule.For a more detailed explanation of the Commission's reasons,reference can be made to item 40 of Part B of Appendix B tothe Notice accompanying the January proposed Rule.

The Commission has clarified the reference to "outstandingsecurities" in subsection 2.4(2) of the proposed Rule.

With respect to the identity of the offeror in paragraph2.4(3)(d), the exemption is drafted on the basis that the offerorin the insider bid does not have to be the same person orcompany that was party to the previous negotiations.

29. Paragraph 4 of Section 2.4 of the JanuaryProposed Rule - Valuation Exemption forAuction - Insider Bids

Comments

One commenter was of the view that the auction exemption forinsider bids should be extended to include not just the situationwhere there are outstanding formal bids, but also where thereare outstanding going private transactions, similar toparagraph 3 of section 4.5 of the January proposed Rule, theauction exemption for going private transactions.

The commenter queried whether "outstanding" refers to theannouncement or the actual making of the bid.

The commenter also noted that until the January proposedRule, only equal access to the offeree issuer was required, notfull access. The commenter suggested that a board should beable to deny access to all, if it considers that appropriate. Thecommenter applied the same comment to the auctionexemption for going private transactions in paragraph4.5(3)(b).

Another commenter noted that the "auction" exemption inparagraph 4 of section 2.4 of the January proposed Ruleprovides that "at the time the bid is made, full access to theofferee issuer has been given not only to the offeror in theinsider bid but also to the other offerors". The commenternoted that access may be offered to offerors generally but astandstill provision may be required as the price of the access.In such cases, some offerors may choose access and othersmay not. In such a case, the commenter believes that equalaccess has been provided because it has been offeredwhether or not it has been accepted. The commentersuggested that the preferable drafting may be to provide that"the insider has not had access to confidential businessinformation of the issuer on terms preferable to those madeavailable to the other offerors". The commenter noted that thesame point would arise in respect of the auction exemptionfrom the valuation requirement in section 4.5 of the Januaryproposed Rule, dealing with going private transactions.

Response

The Commission has added to paragraph 4 of section 2.4 ofthe proposed Rule references to going private transactionsand transactions that would be going private transactionsexcept that they come within the exception in paragraph (e) ofthe definition of going private transaction.

The outstanding formal bids in question are bids that havebeen made.

The Commission has reconsidered the question of access anddetermined that equal access would be more appropriate. Inoriginally proposing full access, the Commission wasconcerned that an auction cannot be a proxy for value unlessall parties have full access to relevant information. However,the Commission is also concerned that if full access is the testand it was not provided to one or more bidders that did nothave to provide a valuation, a subsequent bidder that had toprovide a valuation would be at a severe time disadvantage.Ultimately, the Commission determined that that latter factorwas more important and has decided to adopt a test based on"equal access" and has revised paragraph 4 of section 2.4accordingly.

30. Section 3.4 of the January Proposed Rule - IssuerBid Valuation Exemptions

Comment

One commenter reiterated a point that it made in connectionwith the 1996 draft. Just as the Commission has adopted anexemption applicable to bids for non-participating securitiesthat are not convertible or exchangeable for participatingsecurities, the commenter also believed that the exemptionshould be available where there is a conversion feature but itis seriously and consistently out of the money. Realistically,such securities are not convertible. The commenter did notthink the drafting problems would be insuperable inrecognizing this exemption. For example, convertible orexchangeable securities could qualify for the exemption whereover a period of one or two years in the past, conversion wouldhave consistently entailed the loss of value of at least 10percent.

Response

The Commission remains concerned that conversion featureshave value even though they are far out of the money and thatit would be difficult to define in the proposed Rule when asecurity has been out of the money long enough or if there areother factors that would suggest that the securities likely wouldremain out of the money.

31. Paragraph 3.4(1)3 of the January Proposed Rule -Liquid Market Exemption

Comment

One commenter was of the view that the wording in thisexemption appears to make the obtaining of a liquidity opinionoptional. The commenter failed to see why boards of directorsshould have the right to determine liquidity on their ownwithout getting an expert opinion.

Response

Paragraph 3.4(1)3 of the proposed Rule provides a valuationexemption if a liquid market exists and certain other conditionsare satisfied, including that it is reasonable to conclude that,following completion of the bid, there will be a market that isnot materially less liquid than the market that existed beforethe bid. Under paragraph 1.3(1)(a) of the proposed Rule, aliquid market is considered to exist if certain volume tests aresatisfied or under paragraph 1.3(1)(b) if a liquidity opinion isobtained. The Commission is of the view that, if the conditionsin paragraph 1.3(1)(a) are met, an issuer is not required toobtain a liquidity opinion. Of course it is always open to aboard of directors to obtain an opinion if the board so desires.

32. Paragraphs 4.1(2)(c) and 5.1(2)(c) of theJanuary Proposed Rule - De MinimisOntario Holdings

Comment

One commenter questioned whether the two percent deminimis Ontario holdings exceptions for going privatetransactions and related party transactions should insteadrefer to 10 percent, as in Rule 45-503 Trades to Employees,Executives and Consultants.

Response

The Commission chooses its de minimis test according to whatit believes is appropriate in the context. No one percentage isappropriate in all cases. In Rule 45-503, the Commissiondetermined 10 percent to be appropriate. In Rule 56-501Restricted Shares, the Commission determined two percent tobe appropriate. In the context of the proposed Rule, theCommission has determined that two percent is theappropriate threshold at or below which the Rule should notapply.

33. Paragraph 4.2(2)(d) of the January Proposed Rule- Going Private Transactions

Comment

One commenter was of the view that the language inparagraph 4.2(2)(d) of the January proposed Rule concerningmeetings and information circulars should be more tightlydrafted so as to provide guidance as to what constitutes a"prior offer", perhaps by including the words "bona fide" priorto "prior offer". The term "prior offer", without furtherdescription or definition, could catch immaterial or confidentialmatters.

Response

The Commission has added a reference to "bona fide" beforethe word "offer". The Commission is of the view that anexception should not be made for confidential offers. As formateriality, the paragraph currently refers to related or relevantmatters.

34. Section 4.5 of the January Proposed Rule -Exemptions from Formal Valuation Requirement

Comments

One commenter was of the view that the references insubparagraphs 4.5 2(b)(i) and (ii) of the January proposedRule to "other transaction" also should refer to the "goingprivate transaction", as the commenter believed thatparagraph 4.5 2(b) of the January proposed Rule is meant toparallel subparagraphs 4.5 2(a)(i) and (ii). The commenterwas of the view that, as drafted, subparagraphs 4.5 2(b)(i) and(ii) of the January proposed Rule, by using only the language"the other transaction", appear to refer back only tosubparagraph 4.5 2(a)(ii).

The commenter also suggested deleting the word "reasonably"in subparagraph 4.5 2(c) after the word "transaction" as thereis reference to "reasonable" inquiry as well.

The commenter recommended deleting in paragraph 4.5 2(d)the words "and to the knowledge of the person or companyproposing the going private transaction, after reasonableinquiry, no selling securityholder knew". This requirement is achange from the requirements of Policy 9.1 and thecommenter did not believe it is appropriate. The commenternoted that presumably anything the seller knows may wellhave affected the price.

The commenter referred to the requirement in paragraph 4.53(b) that "full" access to the issuer has been given. Thecommenter suggested that this is too high a standard. InPolicy 9.1, the requirement is simply that the offeror has had"equal" access and the commenter recommended retainingthis standard.

The commenter was of the view that paragraph 4.5 4(e) doesnot reflect current practice and would prove very onerous tocomply with. There are a number of ways to structure asubsequent going private transaction and if the offeror had notclearly determined very early in the offer stage which goingprivate structure it intended to employ, the tax consequencesof all such structures would need to be discussed. Thecommenter believed it is unclear how this would constitutedisclosure of value to a shareholder. The commenterrecommended deleting this provision.

Another commenter noted that in subparagraph 4(a) of section4.5, the second step transaction may be effected by anaffiliated entity of the original bidder.

The commenter also suggested that the condition that thegoing private transaction take place no later than 120 daysafter the date of expiry of the formal bid, should instead applyat the date of sending the circular.

The commenter expressed concern over subparagraph 4(d) ofsection 4.5 of the January proposed Rule, since thatsubparagraph requires the consideration in the going privatetransaction to be in the same form as the consideration paidin the formal bid. The commenter noted that for tax reasons,often different forms of consideration are available as a routeto cash, such as redeemable preferred shares.

Concerning subparagraph 4(e) of the January proposed Rule,the commenter suggested that it should be clarified thatsubsequent changes in tax laws will not invalidate reliance onthis exemption. A similar comment applies to subparagraph8.2(e)(vi). The commenter further noted that an "if" should beadded to the beginning of both subparagraph 4(e) of section4.5 and subparagraph 8.2(e)(vi).

Response

The Commission has modified paragraph 2 of section 4.5 in amanner similar to paragraph 3 of section 2.4 of the proposedRule.

 

As a result of amendments to paragraph 4.5 2(b), it is clearthat it applies to the current going private transaction andtransactions agreed to within the previous 12 months.

Paragraph 4.5 2(c) contains a two pronged test. A person orcompany must make reasonable inquiry and have areasonable belief as a result of the inquiry. Accordingly, theCommission is of the view that the use of the word"reasonably" is necessary in paragraph 4.5 2(c) since the wordimports an objective requirement that is not satisfied by"reasonable inquiry".

The Commission does not propose to make the suggestedchange in paragraph 4.5 2(d). The test of the sellingsecurityholder's knowledge should be to the knowledge of theperson or company proposing the going private transactionafter reasonable inquiry. It would be open to the person orcompany to satisfy this requirement by obtaining appropriaterepresentations.

As discussed previously, the Commission believes that "equalaccess" is the appropriate standard and has changed thewords accordingly.

The Commission agrees with the first commenter thatparagraph 4(e) of section 4.5, as drafted may be onerous tocomply with since there are a number of ways to structure agoing private transaction. Accordingly, the Commission hasmodified this paragraph so that the tax consequences mustonly be described if known or reasonably foreseeable, and, ifnot known or reasonably foreseeable, securityholders must beadvised that the tax consequences may be different.

In respect of the comments made by the second commenter,the Commission has extended the exemption to an affiliatedentity of the offeror. However, if securities of the offerorformed all or part of the consideration under the take-over bid,that same consideration must be offered under the goingprivate transaction.

The Commission does not propose to have the 120 day periodapply at the date of sending the circular. The Commissionbelieves that 120 days is sufficient time to complete a goingprivate transaction and that if an issuer wishes a valuationexemption, the transaction needs to be completed within the120 days.

The Commission does not believe it necessary to change thereference to form of consideration. If redeemable preferenceshares are issued and immediately redeemed such that asecurityholder never receives the shares and immediatelyreceives cash, the Commission is of the view that the sameform of consideration is being provided. The Commission hasadded a provision to the proposed Companion Policy to thateffect.

Given the change to paragraph 4(e), it is not necessary toadopt the commenter's suggestion regarding change in taxlaws.

35. Paragraph 4.8(1)2 of the JanuaryProposed Rule - 90 Percent Exemptionfrom Minority Approval Requirement -Going Private Transactions

Comment

One commenter suggested that the exemption in paragraph 2of subsection 4.8(1) should make reference to "outstanding"securities at the designated time, similar to the reference tooutstanding securities in subsection 4.8(2).

Response

The Commission has added the word "outstanding" toparagraph 2 of subsection 4.8(1) of the proposed Rule.

36. Part 5 of the January Proposed Rule - RelatedParty Transactions

Comment

One commenter strongly supported the following aspects ofthe January proposed Rule applicable to related partytransactions: the uniform standard of minority approval, theelimination of the proposal from the 1996 draft to permitindependent directors to waive the valuation requirement, theexclusion of the application of the related party transactionrules to transactions where the issuer is not a reporting issuerand none of the affected securities are CDN-quoted, and thecodification of exemptions from the valuation and minorityapproval requirements that reflect situations that have arisenin practice or that were raised in response to the 1996 draft.

37. Subsection 5.1(2) of the JanuaryProposed Rule - Proposed Pre-1991Grandfathering Exception for RelatedParty Transactions

Comment

One commenter was of the view that a pre-1991grandfathering exception for related party transactions towhich an issuer was bound prior to the coming into force ofPolicy 9.1 on July 5, 1991 should be included in the proposedRule since for example, there may be a number of put rightsassociated with assets or in shareholders' agreements.

Response

The Commission has added back to the proposed Rule areference to pre-1991 transactions to avoid the need forissuers to apply for relief in the event any such transactionsremain uncompleted.

38. Subparagraph 5.1(2)(i)(ii) of the JanuaryProposed Rule - Exception fromApplication of Related Party TransactionRules

Comment

One commenter suggested that the exception in subparagraph5.1(2)(i)(ii) of the January proposed Rule should apply not justwhen disclosure of the terms of a transaction occurs before theissuer becomes a reporting issuer or a CDN-quoted issuer, butalso when the disclosure is at the same time as either of thoseoccurrences.

Response

The Commission agrees with the commenter and has modifiedsubparagraph 5.1(2)(j)(ii) of the proposed Rule accordingly.

39. Subsection 5.2(2) of the January Proposed Rule -Related Party Transactions - Disclosure

Comment

Subsection 5.2(2) of the January proposed Rule required anexplanation in a material change report and news release ofthe reasons why a period of fewer than 21 days between thetime of announcement of the completion of a transaction is"reasonable or necessary in the circumstances". Onecommenter believed that such disclosure should not bemandated since it fails to provide the marketplace with anyrelevant information. In circumstances where shareholderapproval is not required, which would be the onlycircumstances where the period of time between publicannouncement and completion could be fewer than 21 days,the commenter submitted there is no useful purpose to requiredisclosure in the public domain as to why the issuer believessuch timing was reasonable or necessary.

Response

The Commission believes that the disclosure is useful. Thematerial change report provides securityholders withinformation relating to the transaction. The Commission is ofthe view that securityholders should have a reasonable time toassimilate the details of a transaction and, if this time is notavailable, securityholders should be given an explanation asto why a material transaction needs to be completed in ashorter period of time than 21 days.

40. Paragraph 5.2(3)(f) of the JanuaryProposed Rule - Valuation Disclosure inMaterial Change Report for Related PartyTransaction

Comment

One commenter suggested that paragraph 5.2(3)(f) shouldpermit a summary to be included in the circular, and not onlythe entire valuation, in case it is excessively lengthy, withoutrequiring a summary in the material change report. Thecommenter also noted that the valuation may not be ready atsuch time.

Response

The Commission is of the view that the approach taken in theJanuary proposed Rule is appropriate. If an issuer does notwish to provide a summary of the valuation in the materialchange report, it must include the valuation in the disclosuredocument. The Commission is not persuaded that excessivelength is a reason for not including the full valuation.

The Commission has added subsection 5.2(4) to the proposedRule to address the situation where the valuation is not readyat the time of the material change report.

41. Section 5.3 of the January Proposed Rule -Sending of Material Change Report

Comment

One commenter is of the view that section 5.3 of the Januaryproposed Rule should be amended to add the introductoryphrase "unless subsection 5.4(2) applies". In the case wherean issuer is required to send an information circular toshareholders, the requirement to send a copy of the materialchange report seems unnecessary.

Response

The Commission is not prepared to make the changerequested. A considerable period of time can elapse betweenthe time a material change report is disseminated and aninformation circular is sent to shareholders. Accordingly, theCommission believes it is important for a securityholder tohave access to a material change report, if the securityholderso desires. Furthermore, the Commission believes that if asecurityholder wishes to have a copy of the material changereport, the issuer's obligation to provide such a report shouldnot turn on whether there is an information circular.

42. Paragraph 2 of Section 5.6 of the JanuaryProposed Rule - Valuation Exemption forRelated Party Transactions Based onFair Market Value Not More than 25Percent of Market Capitalization

Comments

One commenter noted that the word "entirety" is not used inthe exemption in paragraph 2 of section 5.6 of the Januaryproposed Rule.

The commenter also felt that it is not clear whether one can, orif not, why one cannot, couple exemptions. The commenterprovided the example that the issuance of non-convertible debtas contemplated in paragraph 11 of section 5.6 of the Januaryproposed Rule, as well as a 24.9 percent or less privateplacement of equity arguably would not be inappropriate, norwould a pro rata transaction coupled with a 24.9 percent orless private placement of equity or an asset resale transactioncoupled with a 24.9 percent or less private placement ofequity.

Response

The Commission did not use the word "entirety" as the 25percent test is based on the extent to which the transaction"involves all interested parties".

The Commission agrees that depending on the circumstances,it may be possible to couple exemptions. The Commissionmay intervene in situations if it believes that the exemptionsare being used in a manner prejudicial to the public interest.The Commission has added language to the proposedCompanion Policy (section 6.1) to that effect.

43. Paragraph 3 of Section 5.6 of the JanuaryProposed Rule - Amalgamation, Mergeror Arrangement Valuation Exemption forRelated Party Transactions

Comments

One commenter suggested that the reference in subparagraph3(a) of section 5.6 should be to "one or more" subsidiaries, asopposed to "a" wholly-owned subsidiary entity.

The commenter further suggested that in paragraph 3(a) andsubparagraph (b)(i) of section 5.6, the reference should be toa person or company or a related party of the issuer, insteadof to an interested party.

The commenter found it unclear in subparagraph 3(b)(i) ofsection 5.6 of the January proposed Rule whether oneincludes or excludes joint actors and presumed thatsubsection 1(6) of the Act applied here.

The commenter was also of the view that the reference tosubsection 1(6) in subparagraph 3(a) of section 5.6 does farmore than is suggested by footnote 119 of the Januaryproposed Rule and inappropriately ignores indirect holdings indetermining whether an entity is a "downstream entity".

Another commenter noted that subparagraph (3)(a) of section5.6 of the January proposed Rule provided an exemption fromthe valuation requirements for certain amalgamations, mergersor arrangements between an issuer or a wholly-ownedsubsidiary of the issuer and an interested party described inparagraph (c) of the definition of "related party" without takinginto account subsection 1(6) of the Act. Subsection 5.6(10) ofthe January proposed Rule contains a similar reference to"without taking into account subsection 1(6) of the Act".

As a result of those references, where an interested partyinvolved in a related party transaction is a "controllingshareholder" solely because it is deemed to own shares heldby an affiliate, the exemptions referred to in subsections 5.6(3)and 5.6(10) of the January proposed Rule would beunavailable. The commenter submitted that the distinctionbetween classes of controlling shareholders based on whethershare ownership is direct (where the exemption would beavailable) or indirect through a subsidiary or other affiliate(where the exemption would not be available) may beunnecessary. The commenter was of the view that, if theintent of the January proposed Rule was to permit transactionswith downstream subsidiaries but not corporations undercommon control, for the purposes of the exemption thereference to "without taking into account subsection 1(6) of theAct" should be amended to state "provided that a person shallnot be deemed to be a person described in paragraph (c) ofthe definition of "related party" by reason of being deemed tobeneficially own shares of an affiliate that is not a subsidiary".

Response

Under the Interpretation Act, a reference to the singularincludes the plural so that a reference to one subsidiary caninclude one or more subsidiaries. The Commission does notpropose to change the reference from a "wholly-ownedsubsidiary" to a "subsidiary" because if the subsidiary is notwholly-owned, it gives rise to conflict of interest concerns.

The January proposed Rule defines "interested party" tomean, for a related party transaction for the issuer, a relatedparty of the issuer that is a party to or is involved in the relatedparty transaction. Accordingly, "interested party" is the correctusage here.

Clause 3(b)(i) of section 5.6 of the January proposed Rule wasintended to include in the fair market value calculation both theissuer and persons or companies acting jointly or in concertwith the issuer. The Commission has amended thepunctuation in this clause to clarify this intention.

The Commission agrees with the comments made concerningthe reference to subsection 1(6) of the Act. The Commissionhas deleted the reference to that subsection and replaced itwith the words "without taking into account securitiesbeneficially owned by an affiliated entity of the issuer that isnot a subsidiary of the issuer".

44. Paragraph 4 of Section 5.6 of the JanuaryProposed Rule - Valuation Exemption forCertain Transactions in the OrdinaryCourse of Business - Related PartyTransactions

Paragraph 4 of section 5.6 of the January proposed Ruleprovided an exemption from the valuation requirement forrelated party transactions if the transaction was one of twotypes. Subparagraph (a) of the exemption recognizedpurchases and sales in the ordinary course of business of theissuer, of inventory consisting of personal property.Subparagraph (b) recognized leases of real or personalproperty under an agreement on reasonable commercial termsthat are not less advantageous to the issuer than if the leasewas with a person or company dealing at arm's length.

Comments

One commenter questioned whether subparagraph (a) should,in addition to recognizing purchases and sales of inventoryconsisting of personal property, include real property forissuers with real property as inventory.

The commenter also suggested that subparagraph (b) shouldcontain a materiality or similar qualifier to clarify thatconsideration of every clause is not necessary.

Response

The Commission is not prepared to extend the exemption insubparagraph (a) to purchases and sales of real property. TheCommission believes that, if real property is involved, theappropriate exemption should be the one based on 25 percentof market capitalization. The Commission is of the view thatif the value of a real property transaction exceeds 25 percentof an issuer's market capitalization and the issuer believes anexemption would be appropriate, the issuer should apply forrelief.

The Commission does not propose to add a materialityqualification to subparagraph (b). The test requiresconsideration of whether the agreement as a whole is onreasonable commercial terms that are not less advantageousthan if the lease was with an arm's length person or company.The Commission has clarified subparagraph (b) accordingly.

45. Paragraph 15 of Section 5.6 of theJanuary Proposed Rule - ValuationExemption for Asset Resales - RelatedParty Exemptions

Paragraph 15 of section 5.6 provides an exemption from thevaluation requirement for related party transactions where thesubject matter of the transaction was acquired in a prior arm'slength transaction not more than 12 months earlier and anindependent valuator provides a written opinion that, aftermaking such adjustments, if any, as the valuator considersappropriate in the exercise of the valuator's professionaljudgment, the consideration payable by the issuer is not morethan the value of the consideration paid by the interested partyin the prior arm's length transaction or the considerationreceived by the issuer is not less than the value of theconsideration paid by the issuer in the prior arm's lengthtransaction.

Comment

One commenter was of the view that the reference to"adjustments" in paragraph 15 of section 5.6 of the Januaryproposed Rule was unclear. The commenter questionedwhether the adjustments could bring "offside" values back"onside" for the purposes of the exemption.

Response

The Commission is of the view that the reference to"adjustments" is sufficiently clear, given that it is modified bythe requirement that the adjustments be made by a qualifiedvaluator, independent of all interested parties to thetransaction, as determined in accordance with section 6.1 ofthe proposed Rule and that the adjustments are only thosewhich the independent valuator considers appropriate in theexercise of the valuator's professional judgment. It is possiblethat an appropriate adjustment could result in either theconsequent availability or unavailability of the asset resalevaluation exemption.

46. Subsection 6.1(4) of the January Proposed Rule -Payment of Valuator

Subsection 6.1(4) of the January proposed Rule provided thata valuator that is paid jointly by the issuer and one or moreinterested parties to a transaction to prepare a formal valuationfor a transaction is not, by virtue of that fact alone, notindependent.

Comments

One commenter suggested that the retainer, not the payment,may be the joint action that is more important in determiningvaluator independence.

Another commenter was of the view that if the intention ofsubsection 6.1(4) of the January proposed Rule is only tomake it clear that the fact that a valuator is being paid jointly bythe issuer and one or more interested parties should not, inand of itself, constitute the valuator as lacking independence,the way in which this subsection is drafted is open to a muchbroader interpretation. The commenter suggested thatsubsection 6.1(4) of the January proposed Rule be redraftedsuch that the last lines read: "...transaction does not render thevaluator not independent by virtue only of the fact that the feeor payment to the valuator is being made by an interestedparty."

Response

The Commission considers joint payment to be a factor that isnot itself indicative of non-independence. Since an issuer orindependent committee is required to retain a valuator, it wouldbe inappropriate for an interested party (except in the case ofan issuer bid, where the interested party is the issuer) to retainthe valuator.

The Commission has clarified that the payment need not bejoint. If a related party has paid all of the valuator's fees, thevaluator for the transaction is not, by that fact alone, notindependent.

47. Subsection 6.1(5) of the January Proposed Rule -Independence of Valuator

Comment

One commenter noted that with the benefit of the commentaryaccompanying the January proposed Rule, it is clear that theproblem subsection 6.1(5) of the January proposed Rule isattempting to address is that paragraph 6.1(3)(b) of theJanuary proposed Rule, if strictly construed, would render notindependent every valuator who advises an issuer in respectof an issuer bid. This is because subsection 6.1(3) of theJanuary proposed Rule provides that a valuator is notindependent of an interested party "if ...the valuator acts as anadviser to the interested party in respect of the transaction".Every valuator could be construed as an adviser to the issuerwhich hired the valuator for purposes of the issuer bid and,since it is a requirement of the January proposed Rule that avaluator be hired, it would seem to follow, without the necessityof subsection 6.1(5) of the January proposed Rule, that avaluator in these circumstances is prima facie not, notindependent. Accordingly, in the view of the commenter,subsection 6.1(5) appears to be unnecessary. As drafted it isextremely unclear; at a minimum, an explanation of its purposeshould be included in the proposed Companion Policy.

Response

The Commission has clarified subsection 6.1(5) of theproposed Rule.

48. Subsection 6.3(2) of the January Proposed Rule -Exemption for Liquid Securities

Comment

One commenter agreed with the proposed exemption with thecaveat that, if the valuator has reason to believe that themarket price of the non-cash consideration does not representits fair market value, a valuation of the non-cash considerationshould be performed regardless of the exemption. Thecommenter disagreed with the Commission's response to thiscomment in the Notice accompanying the January proposedRule. First, a liquid market does not necessarily mean that anissuer's securities are trading at fair market value. If the non-cash consideration is common shares trading at multiples thatthe valuator believes to be non-sustainable, relying on themarket price may be inappropriate. Also, if the valuation isbeing performed before the transaction has been announcedand if announcement of the transaction is expected to have anegative impact on the value of the non-cash consideration,simply relying upon market price at the time of announcementwould be inappropriate. The commenter is of the view that itscomment does not negate the exemption since a valuatorwould presumably already be retained to value the target. Thecommenter is of the view that relying blindly on a liquid marketexemption, without the application of at least some judgmentby a valuator is very dangerous.

Response

The Commission agrees that there may be times where avaluation of the non-cash consideration would be appropriateeven if all the conditions in subsection 6.3(2) are satisfied.Accordingly, the Commission has added a further condition tosubsection 6.3(2) of the proposed Rule, namely that in theopinion of the valuator, a valuation of the non-cashconsideration is not required.

49. Subsection 6.4(1) of the January Proposed Rule -Preparation of Formal Valuation

Comments

One commenter suggested some changes to subsection6.4(1) of the January proposed Rule. As a general matter,since a valuation will be prepared by the valuator, the issuer orofferor is not in a position to "ensure" that the objectivesidentified in subparagraphs (a), (c) and (d) of subsection 6.4(1)of the January proposed Rule have, in fact, beenaccomplished. It would be preferable to delete the introductionto subsection 6.4(1) of the January proposed Rule and replaceit with a statement that "The following matters arerequirements of a formal valuation:....". Similarly, the Januaryproposed Companion Policy should be changed to state thatthe issuer or offeror required to obtain a formal valuationshould "use all reasonable efforts to ensure" that therequirements of the Rule are satisfied and should work incooperation with the valuer to that end.

The commenter noted that paragraph 6.4(1)(d) has beenamended to apply generally to formal valuations of allsecurities and mandates that no adjustment be made to reflectthe liquidity of the securities. One consequence of thatamendment relates to the formal valuation of any non-cashconsideration that is not exempt. For securities being offeredas non-cash consideration that constitute more than tenpercent of the class of securities of the issuer, it may well beappropriate in the formal valuation for purposes of determiningfair market value to reflect the liquidity of the securities and/orthe effect of the transaction upon the securities being offered.Therefore, while it may be appropriate in consideration of theunderlying purposes of the January proposed Rule to excludeliquidity, the effect of the transaction and the fact thatsecurities do not form part of a control block in the context ofacquisitions of securities under insider bids, issuer bids orgoing private transactions, different considerations may applyto the valuation of securities being offered as non-cashconsideration.

Another commenter suggested that in paragraph 6.4(1)(d) ofthe January proposed Rule, it may be appropriate andreasonable to apply liquidity, transaction-effecting and minorityinterest adjustments in a transaction where the securitiesbeing valued are not being acquired from minorityshareholders. The commenter provided the example thatwhere minority shareholders are offered securities inexchange, or where an issuer acquires securities from arelated party for cash, such adjustments may be appropriate.

The commenter was of the view that, in addition to referring tothe date in subparagraph (b)(i), paragraph 6.4(1)(c) shouldalso refer to subparagraph (b)(ii), which refers to the date thata disclosure document is filed.

The commenter questioned the reasoning for the differencebetween the use of the word "securityholders" in paragraph6.4(1)(e) and the use of "beneficial owners" in subsection6.5(1) of the January proposed Rule.

Response

The Commission agrees with the first commenter's commentsregarding the lead-in words to subsection 6.4(1) and hasmodified that subsection to impose the requirement directly onthe valuator. Subsection 5.1(5) of the January proposedCompanion Policy has also been revised accordingly.

In response to the two commenters who were of the view thatadjustments may be appropriate in certain circumstances,adjustments are very subjective and difficult to make and theCommission does not believe it should mandate the making ofadjustments. Moreover, the Commission does not believe thatit can set out in the proposed Rule all of the circumstances inwhich an adjustment would be appropriate. In any event, it isnot clear to the Commission why an adjustment would beappropriate for securities being issued as consideration in atransaction, when an adjustment is not permitted for thesecurities of an issuer that are being acquired. TheCommission also notes that it is always open to a valuator thathas complied with the proposed Rule to provide as asupplement to the valuation an analysis as to why a differentvalue, taking into account adjustments, would be appropriate.

The Commission has amended paragraph 6.4(1)(c) of theproposed Rule to refer to the earlier of the dates referred to inparagraph 6.4(1)(b).

The Commission has amended paragraph 6.4(1)(e) of theproposed Rule to refer to "beneficial owners".

50. Subsection 6.5(2) of the January Proposed Rule -Disclosure in Summary of Formal Valuation

Subsection 6.5(2) of the January proposed Rule provides thatin addition to the disclosure referred to in subsection 6.5(1), ifan issuer or offeror is required by the Rule to provide asummary of a formal valuation, the issuer or offeror shallensure that the summary contains specified disclosure.

Comment

One commenter suggested that subsection 6.5(2) shouldcontemplate this disclosure in a formal valuation as well as asummary.

Response

Apart from the requirements of section 6.4 of the proposedRule, the Commission does not propose to mandate in theproposed Rule the contents of a formal valuation.

51. Paragraphs 6.5(2)(d) and 6.8(1)(c) of the JanuaryProposed Rule - Sending of Valuations withoutCharge

Paragraphs 6.5(2)(d) and 6.8(1)(c) of the January proposedRule provided that a copy of a formal valuation or a priorvaluation, respectively, would be sent to any securityholderupon request and without charge.

Comment

One commenter was of the view that valuations should not berequired to be sent without charge, given SEDAR availability,particularly since a valuation may be a large document.

Response

Not all securityholders have access to SEDAR. Although avaluation may be a large document, the Commission is of theview that if a securityholder wants a copy of it, thesecurityholder should be able to acquire it without charge.

52. Section 6.8 of the January Proposed Rule -Disclosure of Prior Valuations

Comment

One commenter was of the view that subsection 6.8(2) of theJanuary proposed Rule should be reworded for clarity asfollows: "The person or company required to disclose priorvaluations shall make reasonable enquiry as to the existenceof any such prior valuations and the document in which suchperson or company would be required to disclose any priorvaluation, if one existed, shall include a statement to thateffect."

The commenter recommended redrafting paragraph 6.8(3)(b)of the January proposed Rule in an affirmative manner so thatpersons subject to confidentiality obligations that contain theusual "legal compulsion" can more clearly rely upon it withoutbeing in breach of their confidentiality obligations.

Another commenter was of the view that paragraph 6.8(3)(b)may go too far in ignoring obligations of confidentiality.

Response

The Commission believes that subsection 6.8(2) of theJanuary proposed Rule is sufficiently clear withoutmodification.

The Commission does not propose to redraft paragraph6.8(3)(b). That paragraph makes it clear that the requirementapplies irrespective of confidentiality obligations.

In the Commission's view, if confidentiality were always anexclusion, it would be too easy for disclosure of a priorvaluation to be subject to a confidentiality obligation, therebyresulting in the prior valuation's non-disclosure. The onusshould be to obtain the prior valuation and disclose it. If theexception to disclosure in subsection 6.8(3) is unavailable, andan issuer still does not believe disclosure is appropriate, theperson or company required to disclose the prior valuationmay apply for relief.

53. Paragraph 7.1(2)(a) of the January Proposed Rule- Independent Committees and IndependentDirectors

Comments

One commenter supported the initiative in paragraph 7.1(2)(a)of the January proposed Rule to shorten from three years to12 months the time period for determining whether a director'srelationships are relevant for purposes of determining thedirector's independence or non-independence. Thecommenter further supported the Commission's conclusionthat requiring disclosure of a director's commercial links orrelationships with an issuer and its controlling shareholderwould be too broad and potentially unclear and supported theCommission's conclusion not to include such mandateddisclosure in the Rule.

The commenter was concerned about the broadening of thedefinition of "adviser" in paragraph 7.1(2)(b) of the Januaryproposed Rule without further clarification. While thecommenter does not disagree with deleting the adjective"financial" and expanding the scope of relevant relationshipsto include any adviser, broadening the scope of the definitionin this manner results in any innocuous adviser relationshipsthat would not traditionally disqualify a director from beingindependent being caught by the definition. The commenterbelieves there is a need for another qualifier or adjective to theterm "adviser" such as "material", "significant" or "relevant" soas to ensure that non-material or innocuous adviserrelationships are not caught by the Rule. In addition, thecommenter believes the test must be that the adviserrelationship is not material/significant/relevant either to theadviser or the transaction.

The commenter also recommended that the January proposedCompanion Policy be amended to include a clearer discussionof how the Rule's provisions regarding non-independence ofthe directors interrelate. While the change in the Januaryproposed Rule from the 1996 draft replacing the rebuttablepresumptions as to independence or non-independence witha core set of conclusive determinations should add certaintyfor relationships that fall within the specific categories, itappears to add uncertainty for situations outside, or justoutside, the scope of the categories of conclusivedetermination, which remain governed by the "question of fact"standard. For example, does reducing the relevant time periodfor paragraphs 7.1(2)(a) and (b) of the January proposed Rulerelationships from five years to three years to 12 months nowstand for a policy shift implying the 12 months is the relevantstandard for all "question of fact" relationships? Does it implythat the relationships of 15 months that would otherwise fallwithin paragraphs 7.1(2)(a) or (b) should not be problematic?The commenter recommended that the Companion Policyexplain or clarify whether or how the new 12 month time periodrelates to "question of fact" relationships.

Response

In respect of the comment that the word adviser be qualified,the Commission notes that the adviser must be an adviser inconnection with the transaction. The Commission believesthat it would be remote for an innocuous relationship arising inconnection with a transaction to disqualify a director, and ifsuch a situation does arise and the issuer wants a director toserve on the committee, the issuer or its board of directorsmay apply for relief.

In respect of the commenter's last comment, the Commissiondoes not propose to make any changes. Subsection 7.1(1) ofthe proposed Rule makes it clear that subject to subsection7.1(2), the general test is a factual one. Subsection 7.1(2)sets out instances where a director is not independent. Thechange to 12 months in subsection 7.1(2) does not mean thatthat is the test for all relationships.

54. Section 8.1 of the January Proposed Rule -Minority Approval from Holders of AffectedSecurities

Comment

One commenter suggested that as the term "class" includes aseries, subsection 8.1(1) of the proposed Rule should make itclear that multi-series approval is being referred to, and thatseparate series approvals are only required in thecircumstances set forth in subsection 8.1(2). The commenternoted that a similar comment applies to the definition of"minority approval".

Response

Given that subsection 8.1(1) begins with the words "subject tosubsection (2)" and given that subsection (2) specificallyprovides when the holders of a series shall be entitled to voteseparately as a series, the Commission believes that theprovisions are sufficiently clear.

55. Section 9.1 of the January Proposed Rule -Review of Director's Decisions

Section 9.1 of the January proposed Rule provided that theDirector may grant an exemption to the Rule, in whole or inpart, subject to such conditions or restrictions as may beimposed in the exemption.

Comment

One commenter questioned whether it is entirely clear that thedenial of a discretionary exemption by the Director could beappealed to and overridden by the Commission undersubsection 8(2) of the Act. The commenter suggested that, ifit is not entirely clear, then the Commission should have anexemptive power as well.

Response

A "decision" is defined in subsection 1(1) of the Act to mean,"in respect of a decision of the Commission or a Director, adirection, decision, order, ruling or other requirement madeunder a power or right conferred by this Act or the regulations".

Subsection 8(2) of the Act provides that any person orcompany directly affected by a decision of the Director may, bynotice in writing sent by registered mail to the Commissionwithin 30 days after the mailing of the notice of the decision,request and be entitled to a hearing and review thereof by theCommission. Subsection 8(3) of the Act allows theCommission to confirm the decision under review or makesuch other decision as the Commission considers proper. Itis clear that subsection 8(2) applies and that a denial of anexemption by the Director could be reviewed.

56. Subsection 2.4(2) of the January ProposedCompanion Policy

Comments

One commenter acknowledged that the Commission's view, asset out in subsection 2.4(2) of the January proposedCompanion Policy, that a "purchase of securities of an issuermade by a registered dealer that is a wholly-owned subsidiaryentity of the issuer may not be an issuer bid if the registereddealer is not acting at the direction of the issuer in making thepurchases" may be, in theory, an appropriate conclusion.However, the commenter suggested that if any ownershipexists, particularly wholly-owned, it may be difficult toovercome the perception of lack of independent action orthought. The commenter felt that this issue should bereviewed.

Another commenter was of the view that subsection 2.4(2) ofthe proposed Companion Policy should not be limited toregistered dealers, since other affiliates may buy to managehedges, for indexing purposes, etc. The commentersuggested that the Commission should also clarify that section92 of the Act should be interpreted having regard to anofferor's purpose, as in the notice titled Staff Investigation inRespect of Loan by Stelco Inc. to controlling shareholder ofClarus Corporation (1991), 14 O.S.C.B. 1807.

Response

In response to the 1996 proposed Rule, one commenterexpressed concern that an unequal playing field could becreated among security dealers if this interpretation wereapplied in the case of dealers that are wholly-ownedsubsidiaries of reporting issuers, if they are acting in theircapacity as underwriter, or as agent for a bona fide purchaser,when purchasing securities of their parent. The Commissionis of the view that this concern is valid and that is the reasonfor the interpretation in subsection 2.4(2) of the Januaryproposed Companion Policy. By limiting the interpretation tothese circumstances, the Commission has attempted to limitany perceptions of lack of independent action or thought.

In response to the first comment, the Commission notes thatsubsection 2.4(2) of the January proposed Rule provided thata purchase of securities of an issuer made by a registereddealer that is a wholly-owned subsidiary entity of the issuer"may" not be an issuer bid if the registered dealer is not actingat the direction of the issuer in making the purchases. TheCommission is not saying that, depending on thecircumstances, such a purchase could never be an issuer bid.

The Commission has modified subsection 2.4(2) of theproposed Companion Policy to indicate that there may belimited circumstances in which purchases by a wholly-ownedsubsidiary of an issuer would not be an issuer bid. Thereference to a situation where the wholly-owned subsidiaryentity of the issuer is a registered dealer not acting at thedirection of the issuer in making the purchases is now given asan example.

The Commission does not propose to provide furtherinterpretation regarding section 92 of the Act in the proposedCompanion Policy.

57. Section 2.7 of the January Proposed CompanionPolicy - Transactions Carried out in Accordancewith Policy 9.1

Comment

One commenter interpreted section 2.7 of the Januaryproposed Companion Policy to effectively require "no-action"letters to be sought, which the commenter noted wouldincrease Commission staff workload and would beinappropriate.

Response

Section 2.7 of the January proposed Companion Policy doesnot require the seeking of "no-action" letters. Section 2.7 wasintended to clarify that a going private transaction or relatedparty transaction that is not, strictly speaking, being carried outin accordance with Policy 9.1, but which is being conducted inaccordance with a no-action letter, can still be exempted fromthe application of the Rule. The Commission has modified thewording slightly to clarify this.

58. Section 2.9 of the January Proposed CompanionPolicy - Amalgamations

Comment

One commenter questioned the purpose of subsection 2.9(1)of the January proposed Companion Policy, given theexemption from going private transactions contained inparagraph (e) of the definition of "going private transaction".The commenter also questioned whether section 2.9 shouldrefer to related party transactions and further questionedwhether a Rule would be required to achieve this result.

Response

Subsection 2.9(1) provides the Commission's views that wheretwo or more operating companies amalgamate andshareholders of the amalgamating corporations receive non-redeemable participating securities of the amalgamatedcorporation, the transaction is not a going private transactionsince the shareholders' interests in a participating security arenot being terminated. It is not connected to paragraph (e) ofthe definition of going private transaction, which relates to atransaction where shareholders' interests are beingterminated. The Commission is of the view that section 2.9need not refer to related party transactions and that thecommentary in section 2.9 does not need to be moved into theproposed Rule.

59. Section 4.2 of the January Proposed CompanionPolicy - Disclosure of Financial Information

Comment

One commenter noted that section 4.2 of the Januaryproposed Companion Policy should presumably refer to three,not five, years of historical financial information.

Response

The Commission agrees with the commenter and has modifiedsection 4.2 of the proposed Companion Policy to refer to threeyears.

60. Section 5.2 of the January Proposed CompanionPolicy - Independence of Valuator

Comment

One commenter had strong reservations regarding theinclusion of the items in section 5.2 of the January proposedCompanion Policy. The commenter's concern was that inpractice, all items in the January proposed Companion Policywill become automatic disqualifications for potential valuatorsbecause this will be the easy decision for independentcommittees and their counsel. As a result, otherwise qualifiedvaluators (in many cases the best qualified) would not beretained. The commenter did not believe this benefits minorityshareholders. The items in the January proposed CompanionPolicy suggest that valuators can be influenced by past orpotential future business arrangements with the issuer orinterested party that are unrelated to the transaction for whichthe valuation is being prepared. This directly calls intoquestion the integrity and ethics of the potential valuator. Thecommenter takes this issue very seriously since under nocircumstances would any reputable valuator deliver a valuationthat would compromise the valuator's reputation or integrity.The determination as to whether a conflict exists should be leftto the valuator and the independent committee to determinebased upon their business judgment. The commenter stronglyurged the Commission to concentrate on real issues ofindependence and leave any other potential issues to thebusiness judgment of independent committees. Highlightingbroadly defined "serious concerns" in the January proposedCompanion Policy will result in this opportunity to exercisebusiness judgment being taken away. The commenter'spreference would be to remove section 5.2 entirely, but, at aminimum, the commenter would suggest the followingchanges.

With respect to paragraph 5.2(b) of the January proposedCompanion Policy, the commenter failed to see how havingacted for the issuer makes the valuator not independent fromthe interested party. In fact, having acted for the issuer oftenmakes the valuator far more qualified to perform the valuationdue to its knowledge of the issuer. The commenter stronglyrecommended that references to the issuer be deleted fromparagraph 5.2(b) of the January proposed Companion Policy.The commenter also did not understand why subparagraph5.2(b)(i) of the January proposed Companion Policy isnecessary. Any potential conflict with respect to the interestedparty could be dealt with by retaining subparagraphs 5.2(b)(ii)and (b)(iii) of the January proposed Companion Policy. Withrespect to paragraph 5.2(c), the commenter believed that it isinappropriate to disqualify a valuator simply because its bankaffiliate is participating in financing of the transaction. Thesituation where the valuator provides financial advice to atarget company in an acquisition and the parent bank isproviding acquisition financing to the acquiror is acceptedpractice in Canada, given the limited number of players in theCanadian financial markets. In such a case, strict "firewall"procedures exist between the dealer and its bank parent andtarget companies do not view the situation as a conflict. Thissituation should not be raised as a "serious concern" under theJanuary proposed Companion Policy when countlesscompanies acting on their own business judgment have neverconsidered it to be a concern.

Another commenter strongly supported the amendments to theJanuary proposed Rule and the January proposed CompanionPolicy that clarify that a valuator is not independent in specifiedcircumstances in order to assure the objectivity and integrity ofthe valuator. The commenter encouraged the Commission tomaintain the highest level of diligence in monitoring theseissues before and after transactions are completed, especiallywith respect to what are now factors under section 5.2 of theJanuary proposed Companion Policy (and were previouslyrebuttable presumptions under subsection 6.1(3) of the 1996proposed Rule). The example given to support thecommenter's concern was that valuators that provide advicewithout a formal arrangement preceding their appointment maybe rewarded after the completion of the transaction if the termsare considered favourable by the issuer.

Response

The Commission is not prepared to eliminate section 5.2 of theCompanion Policy entirely. Independence, except in limitedinstances is largely a question of fact. The items listed in theCompanion Policy do raise serious concerns in the view of theCommission, but it is primarily up to a board of directors andits counsel to make the ultimate determination as to whetherthese matters are serious enough in the particularcircumstances to disqualify the valuator.

In considering the comments raised by the first commenter,the Commission has decided to delete the reference to theissuer in subparagraph 5.2(b)(i) of the January proposedCompanion Policy and to limit the reference to the issuer insubparagraphs 5.2(b)(ii) and (iii) of the January proposedCompanion Policy, to a situation where the appraisal,evaluation or review of the financial condition of the issuer oran affiliated entity or associated party of the issuer or theretention of the underwriter for the distribution was carried outat the direction or request of an interested party or paid for bythe interested party.

In respect of the second comment, while Commission staff willuse its best efforts to monitor this area, staff also relies to alarge extent on the issuer's board of directors and its counselto engage independent valuators. The Commission also relieson securityholders of an issuer to advise staff in circumstanceswhere the securityholders believe there is, or has been, non-compliance with the Rule.

ONTARIO SECURITIES COMMISSION RULE 61-501

INSIDER BIDS, ISSUER BIDS, GOING PRIVATETRANSACTIONS

AND RELATED PARTY TRANSACTIONS

TABLE OF CONTENTS

PART TITLE

PART 1 GENERAL PROVISIONS

1.1 Definitions

1.2 Application of Part XX of the Act

1.3 Liquid Market in a Class of Securities

1.4 Arm's Length Dealings

1.5 Interpretation

PART 2 INSIDER BIDS

2.1 Application

2.2 Disclosure

2.3 Formal Valuation

2.4 Exemptions from Formal ValuationRequirement

PART 3 ISSUER BIDS

3.1 Application

3.2 Disclosure

3.3 Formal Valuation

3.4 Exemptions from Formal ValuationRequirement

PART 4 GOING PRIVATE TRANSACTIONS

4.1 Application

4.2 Meeting and Information Circular

4.3 Conditions for Relief from Timing forOBCA Information Circular

4.4 Formal Valuation

4.5 Exemptions from Formal ValuationRequirement

4.6 Conditions for Relief from OBCAValuation Requirement

4.7 Minority Approval

4.8 Exemptions from Minority ApprovalRequirement

4.9 Conditions for Relief from OBCA MinorityApproval Requirement

PART 5 RELATED PARTY TRANSACTIONS

5.1 Application

5.2 Disclosure: News Release and MaterialChange Report

5.3 Copy of Material Change Report

5.4 Meeting and Information Circular

5.5 Formal Valuation

5.6 Exemptions from Formal ValuationRequirement

5.7 Minority Approval

5.8 Exemptions from Minority Approval

PART 6 FORMAL VALUATIONS AND PRIORVALUATIONS

6.1 Independence

6.2 Disclosure Re Valuator

6.3 Subject Matter of Formal Valuation

6.4 Preparation of Formal Valuation

6.5 Summary of Formal Valuation

6.6 Filing of Formal Valuation

6.7 Valuator's Consent

6.8 Disclosure of Prior Valuation

6.9 Filing of Prior Valuation

PART 7 INDEPENDENT DIRECTORS

7.1 Independent Directors

PART 8 MINORITY APPROVAL

8.1 From Holders of Affected Securities

8.2 Multi-Step Transactions

PART 9 EXEMPTION

9.1 Exemption

ONTARIO SECURITIES COMMISSION RULE 61-501

INSIDER BIDS, ISSUER BIDS, GOING PRIVATETRANSACTIONS

AND RELATED PARTY TRANSACTIONS⁽¹⁾

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions⁽²⁾

(1) In this Rule

"affected security" means,

(a) for a going private transaction of an issuer,a participating security of the issuer in whichthe interest of a beneficial owner would beterminated by reason of the transaction, and

(b) for a related party transaction of an issuer,a participating security of the issuer;

"bona fide lender" means a person or companythat

(a) holds securities sufficient to affect materiallythe control of an issuer

(i) solely as collateral for debt under awritten pledge agreement entered intoby the person or company as a lender,or

(ii) solely as collateral acquired under awritten agreement by the person orcompany as an assignee or transfereeof the debt and collateral referred to insubparagraph (i),

(b) is not yet legally entitled to dispose of thesecurities for the purpose of applyingproceeds of realization in repayment of thesecured debt, and

(c) was not a related party of the issuer at thetime the pledge agreement referred to insubparagraph (a)(i) or the assignment ortransfer referred to in subparagraph (a)(ii)was entered into;

"class" includes a series of a class;

"disclosure document" means,

(a) for an insider bid,

(i) a take-over bid circular sent to holdersof offeree securities, or

(ii) if the insider bid takes the form of astock exchange insider bid, thedisclosure document sent to holders ofofferee securities that is deemed to bea take-over bid circular undersubsection 131(10) of the Act,

(b) for an issuer bid,

(i) an issuer bid circular sent to holders ofofferee securities, or

(ii) if the issuer bid takes the form of astock exchange issuer bid, thedisclosure document sent to holders ofofferee securities that is deemed to bean issuer bid circular under subsection131(10) of the Act,

(c) for a going private transaction, aninformation circular sent to holders ofaffected securities, or, if no informationcircular is required, another document sentto holders of affected securities inconnection with a meeting of holders ofaffected securities, and

(d) for a related party transaction,

(i) an information circular sent to holdersof affected securities,

(ii) if no information circular is required,another document sent to holders ofaffected securities in connection with ameeting of holders of affectedsecurities, or

(iii) if no information circular or document isrequired, a material change report filedfor the transaction;

"fair market value" means, except as provided inparagraph 6.4(1)(d), the ⁽³⁾monetary considerationthat, in an open and unrestricted market, aprudent and informed buyer would pay to aprudent and informed seller, each acting at arm'slength with the other and under no compulsion toact;

"formal valuation" means, for a transaction, avaluation prepared in accordance with Part 6that contains a qualified and independentvaluator's opinion as to a value or range ofvalues representing the fair market value of thesubject matter of the valuation;

"freely tradeable" means, in respect ofsecurities, that

(a) the securities are not non-transferable,

(b) the securities are not subject to any escrowrequirements,

(c) the securities do not form part of theholdings of any person or company orcombination of persons or companiesreferred to in paragraph (c) of the definitionof "distribution" in the Act,

(d) the securities are not subject to any ceasetrade order imposed by a Canadiansecurities regulatory authority,

(e) all hold periods imposed by Canadiansecurities legislation before the securitiescan be traded without a prospectus or inreliance on a prospectus exemption haveexpired, and

(f) any period of time for which the issuer hasto have been a reporting issuer before thesecurities can be traded without aprospectus or in reliance on a prospectusexemption has passed;⁽⁴⁾

"holder" of a security or "securityholder" meansa person or company that is the registeredholder of the security;

"independent committee" means, for an issuer,a committee consisting exclusively of one ormore independent directors of the issuer;

"independent director" means, for an issuer inrespect of a transaction, a director of the issuerwho

(a) is not an interested party in the transaction,and

(b) is independent, as determined inaccordance with section 7.1;

"independent valuator" means, for a transaction,a valuator that is independent of all interestedparties in the transaction, as determined inaccordance with section 6.1;

"interested party" means,

(a) for an insider bid, the offeror,

(b) for an issuer bid,

(i) the issuer, and

(ii) any person or company, other than abona fide lender, that, whether alone orjointly or in concert with others, holdsor would reasonably be expected tohold, upon successful completion ofthe issuer bid, securities of the issuersufficient to affect materially its control,

(c) for a going private transaction, a relatedparty of the issuer that is the subject of thegoing private transaction, if the related partywould

(i) be entitled to receive, directly orindirectly, consequent upon thetransaction

(A) a consideration per security that isnot identical in amount and type tothat paid to all other beneficialowners in Canada of affectedsecurities of the same class, or

(B) consideration of greater value thanthat paid to all other beneficialowners of affected securities of thesame class, or

(ii) upon completion of the transaction,beneficially own, or exercise control ordirection over, participating securitiesof a class other than affectedsecurities, and

(d) for a related party transaction in respect ofthe issuer, a related party of the issuer thatis a party to or is involved in the relatedparty transaction,

"issuer insider" means, for an issuer

(a) every director or senior officer of the issuer,

(b) every director or senior officer of a companythat is itself an issuer insider or subsidiaryentity of the issuer, and

(c) a person or company who beneficially owns,directly or indirectly, voting securities of theissuer or who exercises control or directionover voting securities of the issuer, or acombination of both, carrying more than 10percent of the voting rights attached to allvoting securities of the issuer for the timebeing outstanding other than votingsecurities beneficially owned by the personor company as underwriter in the course ofa distribution;

"market capitalization" of an issuer means, for atransaction, the aggregate market price of alloutstanding securities of all classes of equitysecurities of the issuer, the market price of theoutstanding securities of a class being

(a) in the case of equity securities of a class forwhich there is a published market, theproduct of

(i) the number of securities of the classoutstanding as at the close of businesson the last business day of thecalendar month preceding the calendarmonth in which the transaction isagreed to or, if no securities of theclass were outstanding on that day, onthe first business day after that day thatsecurities of the class becameoutstanding, so long as that dayprecedes the date the transaction isagreed to, and

(ii) the market price of the securities on thepublished market on which the class ofsecurities is principally traded at thebusiness day referred to insubparagraph (i), as determined inaccordance with subsections 183(1),(2) and (4) of the Regulation,

(b) in the case of equity securities of a class forwhich there is no published market but thatare currently convertible into a class ofequity securities for which there is apublished market, the product of

(i) the number of equity securities intowhich the convertible securities wereconvertible as at the close of businesson the last business day of thecalendar month preceding the calendarmonth in which the transaction isagreed to or, if no convertible securitieswere outstanding or convertible on thatday, on the first business day after thatday that the convertible securitiesbecame outstanding or convertible, solong as that day precedes the date thetransaction is agreed to, and

(ii) the market price of the securities intowhich the convertible securities wereconvertible, on the published market onwhich the class of securities isprincipally traded, at the business dayreferred to in subparagraph (i), asdetermined in accordance withsubsections 183(1), (2) and (4) of theRegulation,⁽⁵⁾ and

(c) in the case of equity securities of a class notreferred to in paragraphs (a) or (b), theamount determined by the issuer's board ofdirectors in good faith to represent themarket price of the outstanding securities ofthat class;⁽⁶⁾

"minority approval" means, for a going privatetransaction or related party transaction inrespect of an issuer, approval of the proposedtransaction by a majority of the votes cast byholders of each class of affected securitiesspecified by section 8.1 at a meeting ofsecurityholders of that class called to considerthe transaction;

"OBCA" means the Business Corporations Act;

"offeree security" means a security that issubject to an insider bid or an issuer bid;

"participating security" means a security of anissuer that carries a residual right to participatein the earnings of the issuer or, upon theliquidation or winding up of the issuer, in itsassets;

"prior valuation" means a valuation or appraisalof an issuer or its securities or material assets,whether or not prepared by an independentvaluator, that, if disclosed, would reasonably beexpected to affect the decision of a beneficialowner to vote for or against a transaction, or toretain or dispose of affected securities or offereesecurities, other than

(a) any draft or preliminary report of a valuationor appraisal prepared for the issuer byan independent valuator, which draft orreport has resulted in a valuation orappraisal by that valuator,

(b) a report of a valuation or appraisal preparedfor the issuer by another person orcompany, if

(i) the report was not solicited by theissuer, and

(ii) the person or company preparing thereport did so without knowledge of anymaterial non-public informationconcerning the issuer, its securities orany of its material assets,⁽⁷⁾

(c) in respect of a transaction involving anissuer, an internal valuation or appraisalprepared for the issuer in the ordinarycourse of business that has not been madeavailable to, and has been prepared withoutthe participation of

(i) the board of directors of the issuer ⁽⁸⁾, or

(ii) any director or senior officer of aninterested party⁽⁹⁾, except a director orsenior officer of the issuer in the caseof an issuer bid,

(d) a report of a market analyst or financialanalyst that

(i) has been prepared by or for and at theexpense of a person or company otherthan the issuer, an interested party, oran associate or affiliated entity of theissuer or an interested party, and

(ii) is either generally available to clients ofthe analyst or of the analyst's employeror of an affiliated entity or associate ofthe analyst's employer or, if not, is notbased, so far as the person orcompany required to disclose a priorvaluation is aware, on any materialnon-public information concerning theissuer, its securities or any of itsmaterial assets,

(e) a valuation or appraisal prepared by aperson or company or a person or companyretained by the person or company, for thepurpose of assisting the person or companyin determining the price at which to proposea transaction that resulted in the person orcompany becoming an issuer insider, if thevaluation or appraisal is not made availableto any of the independent directors of theissuer⁽¹⁰⁾, or

(f) a valuation or appraisal prepared by aninterested party or a person or companyretained by the interested party, for thepurpose of assisting the interested party indetermining the price at which to propose atransaction that, if pursued, would be aninsider bid, going private transaction orrelated party transaction, if the valuation orappraisal is not made available to any of theindependent directors of the issuer;

"related party" of an issuer or of an interestedparty in connection with a transaction, as thecase may be, means a person or company,other than a bona fide lender, that, at therelevant time and after reasonable inquiry, isknown by the issuer, the interested party or adirector or senior officer of the issuer orinterested party to be

(a) a person or company, whether alone orjointly or in concert with others, that holdssecurities of the issuer or of the interestedparty sufficient to affect materially thecontrol of the issuer or of the interestedparty,

(b) a person or company in respect of which aperson or company referred to in paragraph(a), whether alone or jointly or in concertwith others, holds securities sufficient toaffect materially the control of the first-mentioned person or company referred to inthis paragraph (b),

(c) a person or company in respect of whichthe issuer or the interested party, whetheralone or jointly or in concert with others,holds securities sufficient to affect materiallythe control of the person or company,

(d) a person or company that beneficially owns,or exercises control or direction over, votingsecurities of the issuer or of the interestedparty carrying more than 10 percent of thevoting rights attached to all of the issuedand outstanding voting securities of theissuer or of the interested party,

(e) a director or senior officer

(i) of the issuer or of the interested party,or

(ii) of a related party within the meaning ofparagraph (a), (b) (c), (d), (f) or (g) ofthe issuer or of the interested party,

(f) a person or company that manages ordirects, to any substantial degree⁽¹¹⁾, theaffairs or operations of the issuer or theinterested party under an agreement,arrangement or understanding between theperson or company and the issuer or theinterested party, including the generalpartner of an issuer or interested party thatis a limited partnership, and

(g) an affiliated entity of, a person controlling,or a company controlled by, any of thepersons or companies described inparagraphs (a) through (f);

"stock exchange insider bid" means an insiderbid described in subclause (b)(i) of the definitionof "formal bid" in subsection 89(1) of the Act;

"stock exchange issuer bid" means an issuer biddescribed in subclause (b)(i) of the definition of"formal bid" in subsection 89(1) of the Act; and

"valuation date" means, in respect of atransaction, the effective date of a formalvaluation for the transaction.

(2) For the purposes of this Rule, a person orcompany, whether alone or jointly or in concertwith others, that beneficially owns, or exercisescontrol or direction over, voting securities towhich are attached more than 20 percent of thevotes attached to all of the outstanding votingsecurities of another person or company, isconsidered, in the absence of evidence to thecontrary, to hold securities sufficient to affectmaterially the control of that person or company.

(3) For the purposes of the Act, the regulations andthe rules,

"going private transaction" means anamalgamation, arrangement, consolidation,amendment to the terms of a class ofparticipating securities of the issuer or any othertransaction with or involving a person orcompany that is a related party of the issuer atthe time the transaction is agreed to, as aconsequence of which the interest of a beneficialowner of a participating security of the issuer inthat security may be terminated without thebeneficial owner's consent, other than

(a) an acquisition of a participating security ofan issuer under a statutory right ofcompulsory acquisition,

(b) a share consolidation that does not havethe effect of terminating the interests of thebeneficial owners of participating securitiesof an issuer in those securities without theirconsent except to an extent that is nominalin the circumstances,

(c) a redemption of, or other compulsorytermination of, a beneficial owner's interestin a participating security of an issuer inaccordance with and under the termsattached to the class of securities of whichthe participating security forms a part,

(d) a proceeding under the liquidation ordissolution provisions of the statute underwhich the issuer is organized or is governedas to corporate law matters, or

(e) a transaction in which the related party oran affiliated entity of the related party

(i) is only entitled to receive, directly orindirectly, consequent upon thetransaction a consideration per securitythat is identical in amount and type tothat paid to all other beneficial ownersin Canada of affected securities of thesame class,

(ii) is not entitled to receive, directly orindirectly, consequent upon thetransaction consideration of greatervalue than that paid to all otherbeneficial owners of affected securitiesof the same class, and

(iii) upon completion of the transactiondoes not beneficially own or exercisecontrol or direction over participatingsecurities of a class other than affectedsecurities;

"insider bid" means a take-over bid made by

(a) an issuer insider of the offeree issuer,

(b) an associate or affiliated entity of the issuerinsider,

(c) an associate or affiliated entity of theofferee issuer, or

(d) an offeror acting jointly or in concert with aperson or company referred to inparagraphs (a), (b) or (c); and

"related party transaction" means, in respect ofan issuer, a transaction between or involving theissuer and a person or company that is a relatedparty of the issuer at the time the transaction isagreed to, whether or not there are also otherparties to the transaction, as a consequence ofwhich, either by itself or together with otherrelated transactions between or involvingthe issuer and the related party or a personor company acting jointly or in concert withthe related party, whether or not there arealso other parties to the transaction, theissuer directly or indirectly

(a) purchases or acquires an asset from therelated party for valuable consideration,

(b) purchases or acquires, jointly or in concertwith the related party, an asset from a thirdparty if the proportion of the asset acquiredby the issuer is less than the proportion ofthe consideration paid by the issuer,

(c) assumes or otherwise becomes subject toa liability of the related party,

(d) sells, transfers or disposes of an asset tothe related party,

(e) sells, transfers or disposes of, jointly or inconcert with the related party, an asset to athird party if the proportion of theconsideration received by the issuer is lessthan the proportion of the asset sold,transferred or disposed of by the issuer,

(f) leases property to or from the related party,

(g) issues a security to the related party orsubscribes for a security of the relatedparty,

(h) amends or agrees to the amendment of theterms of a security of the issuer if thesecurity is beneficially owned or is one overwhich control or direction is exercised by therelated party, or agrees to the amendmentof the terms of a security of the related partyif the security is beneficially owned by theissuer or is one over which the issuerexercises control or direction,

(i) borrows money from or lends money to therelated party,

(j) releases, cancels or forgives a debt orliability owed by the related party,

(k) provides a guarantee or collateral securityfor a debt or liability of the related party, oramends or agrees to the amendment of theterms of the guarantee or security,

(l) is a party to an amalgamation, arrangementor merger with the related party, other thana transaction referred to in paragraph (m),or

(m) participates in a transaction with the relatedparty that is a going private transaction inrespect of the related party or would be agoing private transaction in respect of therelated party except that it comes within theexception in paragraph (e) of the definitionof going private transaction.

1.2 Application of Part XX of the Act

(1) For the purposes of this Rule,

(a) "formal bid" and "offeror" have therespective meanings ascribed to thoseterms in subsection 89(1) of the Act; and

(b) "acting jointly or in concert" has themeaning ascribed to that phrase in section91 of the Act.

(2) For the purposes of the definition of related partyand subsection 1.1(2), section 90 of the Actapplies in determining beneficial ownership ofsecurities.

1.3 Liquid Market in a Class of Securities

(1) For the purposes of this Rule, a liquid market ina class of securities of an issuer in respect of atransaction involving an issuer exists at aparticular time only

(a) if

(i) there is a published market for theclass of securities,

(ii) during the period of 12 months beforethe date the transaction is agreed to inthe case of a related party transactionor 12 months before the date an insiderbid, issuer bid, or going privatetransaction is announced, in the caseof an insider bid, issuer bid, or goingprivate transaction

(A) the number of outstandingsecurities of the class was at alltimes at least 5,000,000, excludingsecurities beneficially owned,directly or indirectly, or over whichcontrol or direction was exercised,by related parties and securitiesthat were not freely tradeable,

(B) the aggregate trading volume ofthe class of securities on thepublished market on which thatclass is principally traded was atleast 1,000,000 securities,

(C) there were at least 1,000 trades insecurities of the class on thepublished market on which thatclass is principally traded, and

(D) the aggregate trading value basedon the price of the trades referredto in clause (C) was at least$15,000,000, and

(iii) the market value of the class ofsecurities on the published market onwhich that class is principally traded, asdetermined in accordance withsubsections (2) and (3), was at least$75,000,000 for the calendar monthpreceding the calendar month

(A) in which the transaction is agreedto, in the case of a related partytransaction, or

(B) in which the transaction isannounced, in the case of aninsider bid, issuer bid or goingprivate transaction, or

(b) if the test set out in paragraph (a) is notmet,

(i) there is a published market for theclass of securities,

(ii) a qualified person or company that isindependent of all interested parties tothe transaction, as determined inaccordance with section 6.1, providesan opinion to the issuer that there is aliquid market in the class at the datethe transaction is agreed to in the caseof a related party transaction or at thedate the transaction is announced inthe case of an insider bid, issuer bid orgoing private transaction, and

(iii) the opinion is included in a disclosuredocument for the transaction, togetherwith a statement that the publishedmarket on which the class is principallytraded has sent a letter to the Directorindicating concurrence with the opinionor providing a similar opinion.

(2) For the purpose of determining whether anissuer satisfies the market value requirement ofsubparagraph (1)(a)(iii), the market value of aclass of securities for the calendar month iscalculated by multiplying

(a) the number of securities of the classoutstanding as at the close of business onthe last business day of the calendar month;by

(b) if

(i) the published market provides aclosing price for the securities, thearithmetic average of the closing pricesof the securities of that class on thepublished market on which that class isprincipally traded for each of thetrading days during the calendarmonth, or

(ii) the published market does not providea closing price, but provides only thehighest and lowest prices of securitiestraded on a particular day, thearithmetic average of the simpleaverages of the highest and lowestprices of the securities of that class onthe published market on which thatclass is principally traded for each ofthe trading days for which thesecurities traded during the calendarmonth.

(3) For the purposes of subsection (2), in calculatingthe number of securities of the class, an issuershall exclude those securities of the class thatwere beneficially owned, directly or indirectly, orover which control or direction was exercised, byrelated parties and securities that were not freelytradeable.

(4) An issuer that relies on an opinion referred to inparagraph (1)(b) shall cause the letter referred toin subparagraph (1)(b)(iii) to be providedpromptly to the Director.

1.4 Arm's Length Dealings

(1) It is a question of fact whether two or morepersons or companies act, negotiate or deal witheach other at arm's length.

(2) Despite subsection (1), an issuer does not act,negotiate or deal at arm's length with a relatedparty of the issuer and an interested party doesnot act, negotiate or deal at arm's length with arelated party of the interested party.

1.5 Interpretation

(1) In this Rule, a person or company is consideredto be an affiliated entity of another person orcompany if one is a subsidiary entity of the otheror if both are subsidiary entities of the sameperson or company, or if each of them iscontrolled by the same person or company.

(2) In this Rule, a person or company is consideredto be a subsidiary entity of another person orcompany if

(a) it is controlled by

(i) that other, or

(ii) that other and one or more persons orcompanies, each of which is controlledby that other, or

(iii) two or more persons or companies,each of which is controlled by thatother; or

(b) it is a subsidiary entity of a person orcompany that is that other's subsidiaryentity.

(3) In this Rule for the purposes of interpreting theterms "subsidiary entity" and "affiliated entity", aperson or company is considered to becontrolled by another person or company if

(a) in the case of a person or company

(i) the other person or companybeneficially owns or exercises controlor direction over voting securities of thefirst-mentioned person or companycarrying more than 50 percent of thevotes for the election of directors, and

(ii) the votes carried by the securities areentitled, if exercised, to elect a majorityof the directors of the first-mentionedperson or company;

(b) in the case of a partnership that does nothave directors, other than a limitedpartnership, the other person or companybeneficially owns or exercises control ordirection over more than 50 percent of theinterests in the partnership; or

(c) in the case of a limited partnership, theother person or company is the generalpartner.⁽¹²⁾

(4) For the purposes of this Rule, a person orcompany is considered to be a wholly-ownedsubsidiary entity of an issuer if the issuer owns,directly or indirectly, all the voting and equitysecurities and securities convertible orexchangeable into voting and equity securities ofthe person or company.

PART 2 INSIDER BIDS

2.1 Application

(1) This Part applies to every insider bid, except aninsider bid that is exempt from Part XX of the Actunder

(a) clause 93(1)(a) of the Act, unless it is astock exchange insider bid;

(b) clauses 93(1)(b) through (f) of the Act; or

(c) a decision made by the Commission underclause 104(2)(c) of the Act, unless thedecision otherwise provides.

(2) Despite subsection (1), this Part does not applyto a take-over bid that is an insider bid by reasonsolely of the application of section 90 of the Actto an agreement between the offeror and asecurityholder of the offeree issuer that offereesecurities beneficially owned by thesecurityholder, or over which the securityholderexercises control or direction, will be tendered tothe bid, if

(a) the securityholder is not acting jointly or inconcert with the offeror; and

(b) the general nature and material terms of theagreement to tender are disclosed in anews release and report filed under section101 of the Act or are otherwise generallydisclosed.

(3) Despite subsection (1), this Part does not applyto an MJDS take-over bid circular, an MJDSdirectors' circular, or an MJDS director's orofficer's circular, in respect of an insider bid,unless securityholders of the offeree issuerwhose last address as shown on the books ofthe issuer is in Canada, as determined inaccordance with subsections 12.1(2) through (4)of National Instrument 71-101 TheMultijurisdictional Disclosure System, hold 20percent or more of the class of securities that isthe subject of the bid.⁽¹³⁾

(4) For the purpose of subsection (3), the terms"MJDS take-over bid circular", "MJDS directors'circular" and "MJDS director's or officer'scircular" have the meaning ascribed to thoseterms in National Instrument 71-101.

2.2 Disclosure

(1) An offeror shall disclose in a disclosuredocument for an insider bid

(a) the background to the insider bid ⁽¹⁴⁾; and

(b) in accordance with section 6.8, every priorvaluation in respect of the offeree issuer

(i) that has been made in the 24 monthsbefore the date of the insider bid, and

(ii) the existence of which is known afterreasonable inquiry to the offeror or anydirector or senior officer of the offeror.

(2) An offeror shall include in the required disclosuredocument for a stock exchange insider bid thedisclosure required by Form 33 of theRegulation, appropriately modified.

(3) The board of directors of an offeree issuer shall

(a) disclose in the directors' circular for aninsider bid in accordance with section 6.8every prior valuation in respect of theofferee issuer not disclosed in thedisclosure document for the insider bid

(i) that has been made in the 24 monthsbefore the date of the insider bid, and

(ii) the existence of which is known afterreasonable inquiry to the offeree issueror to any director or senior officer of theofferee issuer;

(b) disclose in the directors' circular adescription of the background to the insiderbid to the extent the background has notbeen disclosed in the disclosure documentfor the insider bid;

(c) disclose in the directors' circular any bonafide prior offer that relates to the offereesecurities or is otherwise relevant to theinsider bid, which offer was received by theissuer during the 24 months before theinsider bid was publicly announced, and adescription of the offer and the backgroundto the offer; and

(d) include in the directors' circular a discussionof the review and approval process adoptedby the board of directors and theindependent committee, if any, of theofferee issuer for the insider bid, includingany materially contrary view or abstentionby a director and any material disagreementbetween the board and the independentcommittee.

2.3 Formal Valuation

(1) Subject to section 2.4, the offeror in an insiderbid shall

(a) obtain, at its own expense, a formalvaluation;

(b) provide the disclosure required by section6.2;

(c) disclose, in accordance with section 6.5, asummary of the formal valuation in thedisclosure document for the insider bid,unless the formal valuation is included in itsentirety in the disclosure document; and

(d) comply with the other provisions of Part 6applicable to it relating to formalvaluations.⁽¹⁵⁾

(2) An independent committee of the offeree issuershall, and the offeror shall enable theindependent committee to

(a) determine who the valuator will be; and

(b) supervise the preparation of the formalvaluation.⁽¹⁶⁾

2.4 Exemptions from Formal Valuation Requirement

(1) Section 2.3 does not apply to an offeror inconnection with an insider bid in any of thefollowing circumstances if the facts supportingreliance upon an exemption are disclosed in thedisclosure document for the insider bid:

1. Discretionary Exemption - The offeror has beengranted an exemption from section 2.3 undersection 9.1.

2. Lack of Knowledge and Representation - Theofferor does not have and has not had within thepreceding 12 months any board or managementrepresentation in respect of the offeree issuerand has no knowledge of any material non-public information concerning the offeree issueror its securities.⁽¹⁷⁾

3. Previous Arm's Length Negotiations ⁽¹⁸⁾ - If

(a) the consideration under the insider bid is atleast equal in value to and is in the sameform as the highest consideration agreed towith one or more selling securityholders ofthe offeree issuer in arm's lengthnegotiations

(i) in connection with the making of theinsider bid,

(ii) in connection with another transactioninvolving securities of the class ofofferee securities, if the agreement wasentered into not more than 12 monthsbefore the date of the first publicannouncement of the bid, or

(iii) in connection with two or moretransactions or a combination oftransactions referred to insubparagraphs (i) and (ii),

(b) at least

(i) one of the selling securityholders partyto an agreement referred to insubparagraph (a)(i) or (ii) beneficiallyowns or exercises control or directionover, or beneficially owned or exercisedcontrol or direction over, and agreed tosell,⁽¹⁹⁾

(A) at least five percent of theoutstanding securities of the classof offeree securities, asdetermined in accordance withsubsection (2), if the offerorbeneficially owned, directly orindirectly, 80 percent or more ofthe outstanding securities of theclass of offeree securities, asdetermined in accordance withsubsection (2), or

(B) at least 10 percent of theoutstanding securities of the classof offeree securities⁽²⁰⁾, asdetermined in accordance withsubsection (2), if the offerorbeneficially owned, directly orindirectly, less than 80 percent ofthe outstanding securities of theclass of offeree securities, asdetermined in accordance withsubsection (2), and

(c) one or more of the selling securityholdersparty to any of the transactions referred toin paragraph (a) beneficially owns orexercises control or direction over, orbeneficially owned or exercised control ordirection over, and agreed to sell, in theaggregate, at least 20 percent of theoutstanding securities of the class of offereesecurities, as determined in accordancewith subsection (3), beneficially owned, orover which control or direction is exercised,by persons or companies other than theofferor and persons or companies actingjointly or in concert with the offeror,

(d) the offeror reasonably believes, afterreasonable inquiry, that at the time of eachof the agreements referred to in paragraph(a)

(i) each selling securityholder party to theagreement had full knowledge andaccess to information concerning theofferee issuer and its securities, and

(ii) any factors peculiar to a sellingsecurityholder party to the agreement,including non-financial factors, thatwere considered relevant by thatselling securityholder in assessing theconsideration did not have the effect ofreducing the price that would otherwisehave been considered acceptable bythat selling securityholder,

(e) at the time of each of the agreementsreferred to in paragraph (a), the offeror didnot know, and to the knowledge of theofferor, after reasonable inquiry, no sellingsecurityholder party to the agreement knew,of any material non-public information⁽²¹⁾ inrespect of the offeree issuer or the offereesecurities that,

(i) was not disclosed generally, and

(ii) if disclosed, could have reasonablybeen expected to affect the agreedconsideration,

(f) any of the agreements referred to inparagraph (a) was entered into with aselling securityholder by a person orcompany other than the offeror, the offerorreasonably believes, after reasonableinquiry, that at the time of that agreement,the person or company did not know of anymaterial non-public information in respect ofthe offeree issuer or the offeree securitiesthat

(i) was not disclosed generally, and

(ii) if disclosed, could have reasonablybeen expected to affect the agreedconsideration, and⁽²²⁾

(g) the offeror does not know, after reasonableinquiry, of any material non-publicinformation in respect of the offeree issueror the offeree securities since the time ofeach of the agreements referred to inparagraph (a) that has not been disclosedgenerally and could reasonably be expectedto increase the value of the offereesecurities.

4. Auction - If

(a) the insider bid is publicly announced ormade while

(i) one or more formal bids for securitiesof the same class that are the subjectof the insider bid have been made andare outstanding,

(ii) one or more going private transactionsfor securities of the same class that arethe subject of the insider bid andascribe a per security value to thosesecurities are outstanding, or

(iii) one or more transactions areoutstanding that

(A) would be going privatetransactions in respect ofsecurities of the same class thatare the subject of the insider bidexcept that they come within theexception in paragraph (e) of thedefinition of going privatetransaction, and

(B) ascribe a per security value tothose securities,⁽²³⁾

(b) at the time the insider bid is made, theofferee issuer has provided equal access⁽²⁴⁾to the offeree issuer and informationconcerning the offeree issuer and itssecurities, to the offeror in the insider bid, allother offerors and all other persons orcompanies that proposed the transactionsdescribed in subparagraph (ii) or (iii) ofparagraph (a), and

(c) the offeror, in the disclosure document forthe insider bid,

(i) includes all material non-publicinformation concerning the offereeissuer and its securities that is knownto the offeror after reasonable inquirybut has not been generally disclosed,together with a description of thenature of the offeror's access to theissuer; and

(ii) states that the offeror does not know,after reasonable inquiry, of anymaterial non-public informationconcerning the offeree issuer and itssecurities other than information thathas been disclosed undersubparagraph (i) or that has otherwisebeen generally disclosed.

(2) For the purpose of paragraph 3(b)⁽²⁵⁾ ofsubsection (1), the number of outstandingsecurities of the class of offeree securities

 

(a) is calculated at the time of the agreementreferred to in subparagraph 3(a)(i) or (ii) ofsubsection (1), if the offeror knows thenumber of securities of the classoutstanding at that time; or

(b) if paragraph (a) does not apply, isdetermined based upon the informationmost recently provided by the offeree issuerin a material change report or under section2.1 of National Instrument 62-102Disclosure of Outstanding Share Data,immediately preceding the date of theagreement referred to in subparagraph3(a)(i) or (ii) of subsection (1).

(3) For the purpose of paragraph 3(c) of subsection(1), the number of outstanding securities of theclass of offeree securities

(a) is calculated at the date of the last of theagreements referred to in paragraph 3(a) ofsubsection (1), if the offeror knows thenumber of securities of the classoutstanding at that time; or

(b) if paragraph (a) does not apply, isdetermined based upon the informationmost recently provided by the offeree issuerin a material change report or under section2.1 of National Instrument 62-102,immediately preceding the date of the lastof the agreements referred to in paragraph3(a) of subsection (1).

PART 3 ISSUER BIDS

3.1 Application

(1) This Part applies to every issuer bid, except anissuer bid that is exempt from Part XX of the Actunder

(a) clauses 93(3)(a) through (d) and (f) through(i) of the Act;

(b) clause 93(3)(e) of the Act, unless it is astock exchange issuer bid; or

(c) a decision made by the Commission underclause 104(2)(c) of the Act, unless thedecision otherwise provides.

(2) Despite subsection (1), this Part does not applyto a MJDS issuer bid circular, unlesssecurityholders of the offeree issuer whose lastaddress as shown on the books of theissuer is in Canada, as determined inaccordance with subsections 12.1(2)through (4) of National Instrument 71-101,hold 20 percent or more of the class ofsecurities that is the subject of the bid.⁽²⁶⁾

(3) For the purpose of subsection (2), the term"MJDS issuer bid circular" has the meaningascribed to that term in National Instrument 71-101.

3.2 Disclosure

(1) An issuer shall

(a) include in a disclosure document for anissuer bid the disclosure required by item 16of Form 32 of the Regulation, to the extentapplicable;

(b) disclose in the disclosure document adescription of the background to the issuerbid;⁽²⁷⁾

(c) disclose in the disclosure document inaccordance with section 6.8 every priorvaluation in respect of the offeree issuer

(i) that has been made in the 24 monthsbefore the date of the issuer bid, and

(ii) the existence of which is known afterreasonable inquiry to the issuer or toany director or senior officer of theissuer;

(d) disclose in the disclosure document anybona fide prior offer that relates to theofferee securities or is otherwise relevant tothe issuer bid, which offer was received bythe issuer during the 24 months before theissuer bid was publicly announced, and adescription of the offer and the backgroundto the offer;

(e) include in the disclosure document adiscussion of the review and approvalprocess adopted by the board of directorsand the independent committee, if any, ofthe issuer for the issuer bid, including anymaterially contrary view or abstention by adirector and any material disagreementbetween the board and the independentcommittee; and

(f) include in the disclosure document

(i) a statement of the intention, if known tothe issuer after reasonable inquiry, ofevery interested party to accept or notto accept the issuer bid; and

(ii) a description of the effect that theissuer anticipates the issuer bid, ifsuccessful, will have on the direct orindirect voting interest in the issuer ofevery interested party.⁽²⁸⁾

(2) An issuer shall include in the required disclosuredocument for a stock exchange issuer bid theapplicable disclosure required by Form 33 of theRegulation.

3.3 Formal Valuation

(1) Subject to section 3.4, an issuer that makes anissuer bid shall

(a) obtain a formal valuation;

(b) provide the disclosure required by section6.2;

(c) disclose, in accordance with section 6.5, asummary of the formal valuation in thedisclosure document for the issuer bid,unless the formal valuation is included in itsentirety in the disclosure document;

(d) if there is an interested party other than theissuer, state in the disclosure documentwho will pay or has paid for the valuation;and

(e) comply with the other provisions of Part 6applicable to it relating to formalvaluations.⁽²⁹⁾

(2) The board of directors of the issuer or anindependent committee of the board shall

(a) determine who the valuator will be; and

(b) supervise the preparation of the formalvaluation.

3.4 Exemptions from Formal Valuation Requirement -Section 3.3 does not apply to an issuer in connectionwith an issuer bid in any of the followingcircumstances if the facts supporting reliance uponan exemption are disclosed in the disclosuredocument for the issuer bid:

1. Discretionary Exemption - The issuer hasbeen granted an exemption fromsection 3.3 under section 9.1.

2. Bid for Non-Convertible Securities - Theissuer bid is for securities that are notparticipating securities and that are not,directly or indirectly, convertible into orexchangeable for participating securities.

3. Liquid Market - The issuer bid is made forsecurities for which

(a) a liquid market exists,⁽³⁰⁾

(b) it is reasonable to conclude that,following the completion of the bid,there will be a market for beneficialowners of the securities who do nottender to the bid that is not materiallyless liquid than the market that existedat the time of the making of the bid,and

(c) if an opinion referred to insubparagraph (b)(ii) of subsection1.3(1) is provided, the person orcompany providing the opinion reachesthe conclusion described insubparagraph 3(b) of this section 3.4and so states in its opinion.

PART 4 GOING PRIVATE TRANSACTIONS

4.1 Application

(1) Subject to subsection (2), this Part applies toevery going private transaction.

(2) This Part does not apply to a going privatetransaction

(a) if the issuer is not a reporting issuer;⁽³¹⁾

(b) if the issuer is a mutual fund;

(c) if

(i) persons or companies

(A) whose last address as shown onthe books of the issuer is inOntario do not hold more than twopercent of each class of theoutstanding affected securities ofthe issuer, or

(B) who are in Ontario and whobeneficially own affected securitiesof the issuer do not beneficiallyown more than two percent ofeach class of the outstandingaffected securities of the issuer,and

(ii) all documents concerning thetransaction that are sent generally toother holders of affected securities ofthe issuer are concurrently sent to allholders of the securities whose lastaddress as shown on the books of theissuer is in Ontario; or

(d) if the transaction

(i) was announced before the coming intoforce of this Rule,

(ii) has not been completed before thecoming into force of this Rule,

(iii) is being carried out in accordance withthe guidelines of Ontario SecuritiesCommission Policy 9.1, and

(iv) is completed substantially inaccordance with the terms generallydisclosed at the time the transactionwas announced or thereafter before thecoming into force of this Rule.

4.2 Meeting and Information Circular

(1) If minority approval is required to be obtained fora going private transaction, the issuer shall

(a) call a meeting of holders of affectedsecurities; and

(b) send an information circular to holders ofaffected securities.

(2) An issuer shall include in the information circularreferred to in paragraph (1)(b)

(a) the disclosure required by Form 33 of theRegulation, to the extent applicable and withnecessary modifications;

(b) the disclosure required by item 16 of Form32 of the Regulation, to the extentapplicable, together with a description ofrights that may be available tosecurityholders opposed to the transactionand of legal developments, if any, relating tothe type of transaction;

(c) a description of the background to the goingprivate transaction;⁽³²⁾

(d) disclosure in accordance with section 6.8 ofevery prior valuation in respect of the issuer

(i) that has been made in the 24 monthsbefore the date of the informationcircular, and

(ii) the existence of which is known afterreasonable inquiry to the issuer or toany director or senior officer of theissuer;

(e) disclosure of any bona fide prior offer thatrelates to the subject matter of or isotherwise relevant to the transaction, whichoffer was received by the issuer during the24 months before the transaction waspublicly announced, and a description of theoffer and the background to the offer; and

(f) a discussion of the review and approvalprocess adopted by the board of directorsand the independent committee, if any, ofthe issuer for the transaction, including anymaterially contrary view or abstention by adirector and any material disagreementbetween the board and the independentcommittee.

(3) If, after sending the information circular referredto in paragraph (1)(b) and before the date of themeeting, a change occurs that, if disclosed,would reasonably be expected to affect thedecision of a beneficial owner of affectedsecurities to vote for or against the going privatetransaction or to retain or dispose of affectedsecurities, the issuer shall promptly disseminatedisclosure of the change

(a) in a manner that the issuer reasonablydetermines will inform beneficial owners ofaffected securities of the change; and

(b) sufficiently in advance of the meeting thatthe beneficial owners of affected securitieswill be able to assess the impact of thechange.

(4) If subsection (3) applies, the issuer shall file acopy of the information disseminatedcontemporaneously with its dissemination.

4.3 Conditions for Relief from Timing for OBCAInformation Circular

(1) The conditions for the granting of an exemptionfrom the requirement in subsection 190(3) of theOBCA to send a management informationcircular not less than 40 days before the date ofa meeting called to consider a "going privatetransaction" as defined in the OBCA are that

(a) Part 4 does not apply to the transaction byreason of subsection 4.1(2);

(b) the transaction is not a going privatetransaction as defined in subsection 1.1(3);or

(c) the transaction is carried out in accordancewith Part 4.

(2) If any one of the conditions in subsection (1)applies, an issuer that proposes to carry out atransaction that is a "going private transaction"as defined in the OBCA

(a) is exempt from the 40 day requirement insubsection 190(3) of the OBCA in respectof a meeting called to consider a "goingprivate transaction" as defined in the OBCA;and

(b) is not required to make an application undersubsection 190(6) of the OBCA for therequisite exemption.

4.4 Formal Valuation

(1) Subject to section 4.5, an issuer whose affectedsecurities are the subject of a proposed goingprivate transaction shall

(a) obtain a formal valuation;

(b) provide the disclosure required by section6.2;

(c) disclose, in accordance with section 6.5, asummary of the formal valuation in thedisclosure document for the going privatetransaction, unless the formal valuation isincluded in its entirety in the disclosuredocument;

(d) state in the disclosure document for thegoing private transaction who will pay or haspaid for the valuation; and

(e) comply with the other provisions of Part 6applicable to it relating to formalvaluations.⁽³³⁾

(2) The board of directors of the issuer or anindependent committee of the board shall

(a) determine who the valuator will be; and

(b) supervise the preparation of the formalvaluation.

4.5 Exemptions from Formal Valuation Requirement

(1) Section 4.4 does not apply to an issuer inconnection with a going private transaction inany of the following circumstances if the factssupporting reliance upon an exemption aredisclosed in the disclosure document:

1. Discretionary Exemption - The issuer has beengranted an exemption from section 4.4 undersection 9.1.

2. Previous Arm's Length Negotiations ⁽³⁴⁾ - If

(a) the consideration under the going privatetransaction is at least equal in value to andis in the same form as the highestconsideration agreed to with one or moreselling securityholders of the issuer in arm'slength negotiations

(i) in connection with the going privatetransaction,

(ii) in connection with another transactioninvolving securities of the class ofaffected securities, if the agreementwas entered into not more than 12months before the date of the firstpublic announcement of the goingprivate transaction, or

(iii) in connection with two or moretransactions or a combination oftransactions referred to insubparagraphs (i) and (ii),

(b) at least

(i) one of the selling securityholders partyto an agreement referred to insubparagraph (a)(i) or (ii) beneficiallyowns or exercises control or directionover, or beneficially owned or exercisedcontrol or direction over, and agreed tosell,⁽³⁵⁾

(A) at least five percent of theoutstanding securities of the classof affected securities, asdetermined in accordance withsubsection (2), if the person orcompany proposing the goingprivate transaction beneficiallyowned, directly or indirectly, 80percent or more of the outstandingsecurities of the class of affectedsecurities, as determined inaccordance with subsection (2),or

(B) at least 10 percent of theoutstanding securities of the classof affected securities⁽³⁶⁾, asdetermined in accordance withsubsection (2), if the person orcompany proposing the goingprivate transaction beneficiallyowned, directly or indirectly, lessthan 80 percent of the outstandingsecurities of the class of affectedsecurities, as determined inaccordance with subsection (2),and

(c) one or more of the selling securityholdersparty to any of the transactions referred toin paragraph (a) beneficially owns orexercises control or direction over, orbeneficially owned or exercised control ordirection over, and agreed to sell, in theaggregate, at least 20 percent of theoutstanding securities of the class ofaffected securities, as determined inaccordance with subsection (3), beneficiallyowned or over which control or direction isexercised by persons or companies otherthan an interested party and persons orcompanies acting jointly or in concert withan interested party,

(d) the person or company proposing the goingprivate transaction reasonably believes,after reasonable inquiry, that at the time ofeach of the agreements referred to inparagraph (a)

(i) each selling securityholder party to theagreement had full knowledge of andaccess to information concerning theissuer and its securities,

(ii) any factors peculiar to a sellingsecurityholder party to the agreement,including non-financial factors, thatwere considered relevant by the sellingsecurityholder in assessing theconsideration did not have the effect ofreducing the price that would otherwisehave been considered acceptable bythat selling securityholder,

(e) at the time of each of the agreementsreferred to in paragraph (a), the personor company proposing the goingprivate transaction did not know, and tothe knowledge of the person orcompany proposing the going privatetransaction, after reasonable inquiry,no selling securityholder party to theagreement knew, of any material non-public information in respect of theissuer or the affected securities that

(i) was not disclosed generally, and

(ii) if disclosed, could have reasonablybeen expected to affect the agreedconsideration,

(f) any of the agreements referred to inparagraph (a) was entered into with aselling securityholder by a person orcompany other than the person or companyproposing the going private transaction, theperson or company proposing the goingprivate transaction reasonably believes,after reasonable inquiry, that at the time ofthat agreement, the person or company didnot know of any material non-publicinformation in respect of the issuer or theaffected securities that,

(i) was not disclosed generally, and

(ii) if disclosed, could have reasonablybeen expected to affect the agreedconsideration, and

(g) the person or company proposing the goingprivate transaction, after reasonable inquiry,does not know of any material non-publicinformation in respect of the issuer or theaffected securities since the time of each ofthe agreements referred to in paragraph (a)that has not been disclosed generally andcould reasonably be expected to increasethe value of the affected securities.

3. Auction - If

(a) the going private transaction is publiclyannounced while

(i) one or more going private transactionsfor the affected securities that ascribea per security value to those securitiesare outstanding,

(ii) one or more transactions areoutstanding that

(A) would be going privatetransactions in respect of theaffected securities, except thatthey come within the exception inparagraph (e) of the definition ofgoing private transaction, and

(B) ascribe a per security value tothose securities, or

(iii) one or more formal bids for the affectedsecurities have been made and areoutstanding, and

(b) at the time the disclosure document for thegoing private transaction has been sent, theissuer has provided equal access to theissuer and information concerning theissuer and its securities, to the person orcompany proposing the going privatetransaction, the persons or companies thathave proposed the other transactionsdescribed in clauses (i) or (ii) ofsubparagraph (a) or that have made theformal bids.

4. Second Step Going Private Transaction - If

(a) the going private transaction in respect ofthe offeree issuer is being effected by aperson or company or an affiliated entity ofthe person or company⁽³⁷⁾ following a formalbid by the person or company and is inrespect of the outstanding securities of thesame class that were the subject of the bid,

(b) the going private transaction is completedno later than 120 days after the date ofexpiry of the formal bid,

(c) the intent to effect the going privatetransaction was disclosed in the disclosuredocument for the formal bid,

(d) the consideration per security paid by theperson or company or the affiliated entity ofthe person or company in the going privatetransaction

(i) is at least equal in value to theconsideration per security that waspaid by the person or company in theformal bid, and

(ii) is in the same form as theconsideration per security that waspaid by the person or company in theformal bid, and if the consideration paidconsisted of securities of the person orcompany, consists of the samesecurities, and

(e) the disclosure document for the formal bid

(i) described the tax consequences ofboth the formal bid and the subsequentgoing private transaction, if, at thetime of making the formal bid, thetax consequences arising from thesubsequent going privatetransaction

(A) were known or reasonablyforeseeable to the person orcompany that made the formal bid,and

(B) were reasonably expected to bedifferent from the taxconsequences of tendering to theformal bid, or

(ii) disclosed that the tax consequences ofthe formal bid and the subsequentgoing private transaction may bedifferent, if, at the time of making theformal bid, the person or company thatmade the formal bid did not know orcould not reasonably foresee the taxconsequences arising from thesubsequent going private transaction.⁽³⁸⁾

5. Non-redeemable Investment Fund - The issueris a non-redeemable investment fund that

(a) at least once each quarter calculates andpublicly disseminates the net asset value ofits securities, and

(b) at the time of announcing the going privatetransaction, publicly disseminates the netasset value of its securities as at thebusiness day before announcing the goingprivate transaction.

(2) For the purposes of paragraph 2(b) ofsubsection (1), the number of outstandingsecurities of the class of affected securities

(a) is calculated⁽³⁹⁾ at the time of the agreementreferred to in subparagraph 2(a)(i) or (ii) ofsubsection (1), if the person or companyproposing the going private transactionknows the number of securities of the classoutstanding at that time; or

(b) if paragraph (a) does not apply, determinedbased upon the information most recentlyprovided by the issuer of the affectedsecurities, in a material change report orunder section 2.1 of National Instrument 62-102, immediately preceding the date of theagreement referred to in subparagraph2(a)(i) or (ii) of subsection (1).

(3) For the purposes of paragraph 2(c) ofsubsection (1), the number of outstandingsecurities of the class of affected securities

(a) is calculated at the date of the last of theagreements referred to in paragraph 2(a) ofsubsection (1), if the person or companyproposing the going private transactionknows the number of securities of the classoutstanding at that time; or

(b) if paragraph (a) does not apply, isdetermined based upon the informationmost recently provided by the issuer of theaffected securities in a material changereport or under section 2.1 of NationalInstrument 62-102, immediately precedingthe date of the last of the agreementsreferred to in paragraph 2(a) of subsection(1).

4.6 Conditions for Relief from OBCA ValuationRequirement

(1) The conditions for the granting of an exemptionfrom the requirements of subsection 190(2) andclauses 190(3)(a) and (c) of the OBCA for atransaction that is a "going private transaction"as defined in the OBCA are that

(a) Part 4 does not apply to the transaction byreason of subsection 4.1(2);

(b) the transaction is not a going privatetransaction as defined in subsection 1.1(3);

(c) section 4.4 does not apply by reason ofsection 4.5; or

(d) the issuer complies with section 4.4.

(2) If any one of the conditions referred to insubsection (1) applies, an issuer that proposesto carry out a transaction that is a "going privatetransaction" as defined in the OBCA

(a) is exempt from the requirements ofsubsection 190(2) and clauses 190(3)(a)and (c) of the OBCA; and

(b) is not required to make an application undersubsection 190(6) of the OBCA for therequisite exemptions.

4.7 Minority Approval - Subject to section 4.8, no goingprivate transaction shall be carried out in respect ofan issuer unless minority approval for the goingprivate transaction has been obtained under Part 8.

4.8 Exemptions from Minority Approval Requirement

(1) Section 4.7 does not apply to a going privatetransaction in any of the following circumstancesif the facts supporting reliance upon anexemption are disclosed in the disclosuredocument for the going private transaction:

1. Discretionary Exemption - The issuer has beengranted an exemption from section 4.7 undersection 9.1.

2. 90 Percent Exemption - Subject to subsection(2), one or more interested parties beneficiallyowns 90 percent or more of the outstanding⁽⁴⁰⁾securities of a class of affected securities at thetime that the going private transaction isproposed and either

(a) an appraisal remedy is available to holdersof the class of affected securities under thestatute under which the issuer is organizedor is governed as to corporate law matters,or

(b) if the appraisal remedy referred to insubparagraph (a) is not available, holders ofthe class of affected securities are given anenforceable right that is substantiallyequivalent to the appraisal remedy providedfor in subsection 185(4) of the OBCA andthat is described in the disclosure documentfor the going private transaction.

(2) If there are two or more classes of affectedsecurities, paragraph 2 of subsection (1) appliesonly to a class for which the interested partybeneficially owns or the interested partiesbeneficially own 90 percent or more of theoutstanding securities of the class.

4.9 Conditions for Relief from OBCA MinorityApproval Requirement

(1) The conditions for the granting of an exemptionfrom the requirements of clauses 190(3)(b) and(d) and subsection 190(4) of the OBCA for atransaction that is a "going private transaction"as defined in the OBCA are that

(a) Part 4 does not apply to the transaction byreason of subsection 4.1(2);

(b) the transaction is not a going privatetransaction as defined in subsection 1.1(3);

(c) section 4.7 does not apply by reason ofsection 4.8; or

(d) the issuer complies with section 4.7.

(2) If any one of the conditions referred to insubsection (1) applies, an issuer that proposesto carry out a transaction that is a "going privatetransaction" as defined in the OBCA

(a) is exempt from the requirements of clauses190(3)(b) and (d) and subsection 190(4) ofthe OBCA; and

(b) is not required to make an application undersubsection 190(6) of the OBCA for therequisite exemptions.

PART 5 RELATED PARTY TRANSACTIONS

5.1 Application

(1) Subject to subsection (2), this Part applies toevery related party transaction.

(2) This Part does not apply to a related partytransaction

(a) if the issuer is not a reporting issuer;⁽⁴¹⁾

(b) if the issuer is a mutual fund;

(c) if

(i) persons or companies

(A) whose last address as shown onthe books of the issuer is inOntario do not hold more than twopercent of each class of theoutstanding affected securities ofthe issuer, or

(B) who are in Ontario and whobeneficially own affected securitiesof the issuer do not beneficiallyown more than two percent ofeach class of the outstandingaffected securities of the issuer,and

(ii) all documents concerning thetransaction that are sent generally toother holders of affected securities ofthe issuer are concurrently sent to allholders of the securities whose lastaddress as shown on the books of theissuer is in Ontario;

(d) that is a statutory amalgamation between

(i) the issuer and one or more of itswholly-owned subsidiary entities, butno other person or company, or

(ii) two or more wholly-owned subsidiaryentities of the issuer, but no otherperson or company;

(e) that is a going private transaction in respectof the issuer carried out in accordance withPart 4 or exempt from Part 4 undersubsection 4.1(2);

(f) that would be a going private transaction inrespect of the issuer except that it comeswithin the exceptions in paragraphs (a)through (e) of the definition of going privatetransaction;

(g) that

(i) is part of a series of relatedtransactions that the issuer or apredecessor of the issuer negotiated atarm's length with a person or companythat became a related party of theissuer only as a consequence of one ofthe transactions in the series of relatedtransactions, and

(ii) the issuer is obligated to and doescomplete the transaction substantiallyin accordance with the termsnegotiated at arm's length;

 

(h) that was agreed to by the issuer or apredecessor of the issuer before July 5,1991, if the issuer is obligated to completethe transaction in accordance with the termsagreed to and generally disclosed at thattime or thereafter before the coming intoforce of this Rule;⁽⁴²⁾

(i) that

(i) was agreed to by the issuer or apredecessor of the issuer after July 5,1991 but before the coming into forceof this Rule,

(ii) has not been completed before thecoming into force of this Rule,

(iii) is being carried out in accordance withthe guidelines of Ontario SecuritiesCommission Policy 9.1, and

(iv) the issuer is obligated to and doescomplete the transaction substantiallyin accordance with the terms agreed toand generally disclosed at the time thetransaction was agreed to or thereafterbefore the coming into force of thisRule;

(j) if

(i) the transaction was agreed to by theissuer or a predecessor of the issueron or before the date that the issuerbecame a reporting issuer⁽⁴³⁾, and

(ii) the issuer is obligated to and doescomplete the transaction substantiallyin accordance with the terms agreed toand generally disclosed at the time thetransaction was agreed to or thereafteron or before the date that the issuerbecame a reporting issuer;

(k) if the transaction represents an issuance ortransfer by an issuer of securities upon theexercise by a holder of a right to purchase,convert, exchange or retract previouslygranted by the issuer, which right isattached to a class of securities for whichthere is a published market, and the issueris obligated to complete the transaction;

(l) that is carried out by an issuer to which theRule In the Matter of Certain Trades inSecurities of Junior Resource Issuers(1997), 20 OSCB 1218, as amended by(1999), 22 OSCB 2152, or any successor tothat Rule applies, in accordance with thatRule or any successor to that Rule; or

(m) that is a distribution

(i) of the securities of an issuer and is arelated party transaction in respect ofthe issuer solely because theinterested party is an underwriter of thedistribution, and

(ii) carried out in compliance with, or underan exemption from, the requirements of

(A) until Multilateral Instrument 33-105Underwriting Conflicts comes intoforce, Part XIII of the Regulation,and

(B) after Multilateral Instrument 33-105 comes into force, thatMultilateral Instrument.⁽⁴⁴⁾

(3) This Part does not apply to a person or companythat is subject to the requirements of Part IX ofthe Loan and Trust Corporations Act, Part XI ofthe Bank Act (Canada), Part XI of the InsuranceCompanies Act (Canada), or Part XI of the Trustand Loan Companies Act (Canada), and theperson or company complies with thoseprovisions.⁽⁴⁵⁾

5.2 Disclosure: News Release and Material ChangeReport

(1) An issuer shall include in a material changereport required to be filed under the Act for arelated party transaction⁽⁴⁶⁾

(a) a description of the transaction and itsmaterial terms;

(b) the purpose and business reasons for thetransaction;

(c) the anticipated effect of the transaction onthe issuer's business and affairs;

(d) a description of

(i) the interest in the transaction of everyinterested party and the issuer insiders,associates, affiliated entities and otherrelated parties of the interested party,

(ii) the effect of the transaction on everyperson or company referred to insubparagraph (i), and

(iii) the nature of any benefit that willaccrue as a consequence of thetransaction to every person orcompany referred to in subparagraph(i);

(e) if subsection 5.4(2) does not apply to theissuer, a discussion of the review andapproval process adopted by the board ofdirectors, and the independent committee,if any, of the issuer for the transaction,including any materially contrary view orabstention by a director and any materialdisagreement between the board and theindependent committee;

(f) a summary in accordance with section 6.5of the formal valuation, if any, obtained forthe transaction, unless the formal valuationis included in its entirety in the materialchange report or will be included in itsentirety in another disclosure document forthe transaction;

(g) disclosure in accordance with section 6.8 ofevery prior valuation in respect of the issuerthat has been made in the 24 monthsbefore the date of the material changereport

(i) that relates to the subject matter of oris otherwise relevant to the transaction,and

(ii) the existence of which is known afterreasonable inquiry to the issuer or toany director or senior officer of theissuer; and

(h) the general nature and material terms ofany agreement entered into by the issuer,or a related party of the issuer, with aninterested party, or a person or companyacting jointly or in concert with an interestedparty, in connection with the transaction.

(2) If a material change report is filed by a reportingissuer less than 21 days before the expecteddate of closing of the transaction, the issuer shallexplain in the news release required to be issuedunder the Act and material change report whythe shorter period is reasonable or necessary inthe circumstances.

(3) Despite paragraph (1)(f), if an issuer is requiredto include a summary of the formal valuation inthe material change report and the formalvaluation is not available at the time the issuerfiles the material change report, the issuer shallfile a supplementary material change reportcontaining the disclosure required by paragraph(1)(f) as soon as the formal valuation isavailable.⁽⁴⁷⁾

5.3 Copy of Material Change Report - An issuer shallsend a copy of any material change report preparedby it in respect of the related party transaction to anysecurityholder of the issuer upon request and withoutcharge.

5.4 Meeting and Information Circular

(1) If minority approval is required to be obtained fora related party transaction, the issuer shall

(a) call a meeting of holders of affectedsecurities; and

(b) send an information circular to holders ofaffected securities.

(2) An issuer shall include in the information circularreferred to in paragraph (1)(b)

(a) the disclosure required by Form 33 of theRegulation, to the extent applicable and withnecessary modifications;

(b) the disclosure required by item 16 of Form32 of the Regulation, to the extentapplicable, together with a description ofrights that may be available tosecurityholders opposed to the transactionand of legal developments, if any, relating tothe type of transaction;

(c) a description of the background to therelated party transaction;⁽⁴⁸⁾

(d) disclosure in accordance with section 6.8 ofevery prior valuation in respect of the issuerthat relates to the subject matter of or isotherwise relevant to the transaction

(i) that has been made in the 24 monthsbefore the date of the informationcircular, and

(ii) the existence of which is known afterreasonable inquiry to the issuer or toany director or senior officer of theissuer;

(e) disclosure of any bona fide prior offer thatrelates to the subject matter of or isotherwise relevant to the transaction, whichwas received by the issuer during the 24months before the transaction was publiclyannounced, and a description of the offerand the background to the offer; and

(f) a discussion of the review and approvalprocess adopted by the board of directorsand the independent committee, if any, ofthe issuer for the transaction, including anymaterially contrary view or abstention by adirector and any material disagreementbetween the board and the independentcommittee.

(3) If, after sending the information circular referredto in paragraph (1)(b) and before the date of themeeting, a change occurs that would, ifdisclosed, reasonably be expected to affect thedecision of a beneficial owner of affectedsecurities to vote for or against the related partytransaction or to retain or dispose of affectedsecurities, the issuer shall promptly disseminatedisclosure of the change

(a) in a manner that the issuer reasonablydetermines will inform beneficial owners ofaffected securities of the change; and

(b) sufficiently in advance of the meeting thatthe beneficial owners of affected securitieswill be able to assess the impact of thechange.

(4) If subsection (3) applies, the issuer shall file acopy of the information disseminatedcontemporaneously with its dissemination.

5.5 Formal Valuation

(1) Subject to section 5.6, an issuer involved in arelated party transaction shall

(a) obtain a formal valuation;

(b) provide the disclosure required by section6.2;

(c) disclose, in accordance with section 6.5, asummary of the formal valuation in thedisclosure document for the related partytransaction, unless the formal valuation isincluded in its entirety in the disclosuredocument;

(d) state in the disclosure document for therelated party transaction who will pay or haspaid for the valuation; and

(e) comply with the other provisions of Part 6applicable to it relating to formalvaluations.⁽⁴⁹⁾

(2) The board of directors of the issuer or anindependent committee of the board shall

(a) determine who the valuator will be; and

(b) supervise the preparation of the formalvaluation.

5.6 Exemptions from Formal Valuation Requirement -Section 5.5 does not apply to an issuer in connectionwith a related party transaction in any of the followingcircumstances if the facts supporting reliance uponan exemption are disclosed in both the materialchange report referred to in section 5.2 and theinformation circular referred to in paragraph (b) ofsubsection 5.4(1):

1. Discretionary Exemption - The issuer has beengranted an exemption from section 5.5 undersection 9.1.

2. Fair Market Value not more than 25 Percent ofMarket Capitalization - The transaction

(a) is not an amalgamation or merger, whetherby way of arrangement or otherwise, and

(b) is one in which at the date the transaction isagreed to

(i) neither the fair market value of thesubject matter of, nor the fair marketvalue of the consideration for, thetransaction, insofar as it involves allinterested parties, is greater than 25percent of the issuer's marketcapitalization, or

(ii) if either of the values referred to inclause (i) is not readily determinable,the board of directors of the issuer,acting in good faith, determines that thevalue referred to in clause (i) that is notreadily determinable, is not greaterthan 25 percent of the issuer's marketcapitalization.

3. Amalgamation, Merger or Arrangement -The transaction is

(a) an amalgamation, merger orarrangement between an issuer or awholly-owned subsidiary entity of theissuer, and an interested partydescribed in paragraph (c) of thedefinition of related party without takinginto account securities beneficiallyowned by an affiliated entity of theissuer that is not a subsidiary entity ofthe issuer⁽⁵⁰⁾, and

(b) one in which, as at the date thetransaction is agreed to

(i) neither the fair market value of thesecurities of the interested partybeneficially owned by persons orcompanies other than the issuerand persons or companies actingjointly or in concert with the issuer,before the transaction, nor the fairmarket value of the considerationto be received by those persons orcompanies under the transaction,is greater than 25 percent of theissuer's market capitalization, or

(ii) if either of the values referred to inclause (i) is not readilydeterminable, the board ofdirectors of the issuer, acting ingood faith, determines that thevalue referred to in clause (i) thatis not readily determinable is notgreater than 25 percent of theissuer's market capitalization.

4. Certain Transactions in the Ordinary Courseof Business - The transaction is

(a) a purchase or sale, in the ordinarycourse of business of the issuer, ofinventory consisting of personalproperty under an agreement that hasbeen approved by the board ofdirectors of the issuer and theexistence of which has been generallydisclosed, or

(b) a lease of real or personal propertyunder an agreement on reasonablecommercial terms that, considered asa whole,⁽⁵¹⁾ are not less advantageous tothe issuer than if the lease was with aperson or company dealing at arm'slength with the issuer and the existenceof which has been generally disclosed.

5. Pro Rata Transaction - If

(a) the transaction consists of

(i) a rights offering made to holders ofaffected securities,

(ii) a dividend paid in cash or insecurities of the issuer or adividend in specie to holders ofaffected securities,

(iii) a distribution of assets of theissuer directly or indirectly toholders of affected securities, or

(iv) a reorganization of one or moreclasses of an issuer's affectedsecurities to which subparagraphs(i), (ii) and (iii) do not apply, and

(b) the interested party is treatedidentically to all other holders inCanada of affected securities and doesnot receive, directly or indirectly, as aconsequence of the transactionconsideration of greater value thanthat received on a pro rata basisby all other holders of affectedsecurities, except that in the caseof a rights offering made to holdersof affected securities, aninterested party may provide astand-by commitment, and take upsecurities under the stand-bycommitment, in accordance withthe terms of Commission PolicyNo. 6.2 Rights Offerings or asuccessor rule.

 

6. Negotiated Transaction with Arm's LengthControlling Shareholder - The interestedparty beneficially owns, or exercises controlor direction over, voting securities of theissuer that carry fewer voting rights than thevoting securities beneficially owned, or overwhich control or direction is exercised, byanother securityholder of the issuer whoseholding affects materially the control of theissuer and who, in the circumstances of thetransaction

(a) is not also an interested party in thetransaction,

(b) is dealing at arm's length with theinterested party,

(c) supports the transaction, and

(d) is treated identically to all other holdersin Canada of affected securities anddoes not receive, directly or indirectly,as a consequence of the transaction abenefit that is not also received on apro rata basis by all other holders ofaffected securities.

7. Bankruptcy, Insolvency or Reorganization -If

(a) the transaction is subject to courtapproval under

(i) the Bankruptcy and Insolvency Act(Canada) or the Companies'Creditors Arrangement Act(Canada),

(ii) section 191 of the CanadaBusiness Corporations Act(Canada), or

(iii) bankruptcy or insolvency laws ofanother jurisdiction or foreignjurisdiction that are applicable tothe transaction,

(b) the issuer advises the court of therequirements of this Rule, and

(c) the court does not require compliancewith section 5.5.

8. Financial Hardship - If

(a) the issuer is insolvent or in seriousfinancial difficulty,

(b) the transaction is designed to improvethe financial position of the issuer,

(c) paragraph 7 is not applicable, and

(d) the board of directors of the issuer,acting in good faith, determines, andnot less than two-thirds of theindependent directors of the issuer,acting in good faith, determine, that

(i) paragraphs (a) and (b) apply,⁽⁵²⁾and

(ii) the terms of the transaction arereasonable in the circumstancesof the issuer.

9. Transaction with Wholly-owned SubsidiaryEntity - The transaction is between

(a) an issuer and one or more wholly-owned subsidiary entities of the issuerand no other person or company,

(b) an issuer that is, directly or indirectly, awholly-owned subsidiary entity ofanother issuer and that issuer and noother person or company,⁽⁵³⁾ or

(c) two or more wholly-owned subsidiaryentities of the issuer and no otherperson or company.

10. Transaction with an Interested Partyinvolving another Related Party - Ifparagraph 9 does not apply, the transactionis between an issuer and an interestedparty described in paragraph (c) of thedefinition of related party, without taking intoaccount securities beneficially owned by anaffiliated entity of the issuer that is not asubsidiary entity of the issuer⁽⁵⁴⁾ if, to theknowledge of the issuer after reasonableinquiry, no other related party of the issuerother than a wholly-owned subsidiary entityof the issuer either

(a) beneficially owns, or exercises controlor direction over, other than throughthe related party's interest in the issuer,securities in the interested party that

(i) constitute more than five percent⁽⁵⁵⁾of the securities of a class of theinterested party, or

(ii) could reasonably be expected toresult in the related partyexercising control or influence overthe issuer so as to benefit theinterested party, or

(b) receives, directly or indirectly, as aconsequence of the transaction, otherthan through the security holdingreferred to in paragraph (a), a benefitthat is not also received on a pro ratabasis by all other holders of affectedsecurities.

11. Loan on Commercial Terms - Thetransaction is

(a) a loan, or the creation of, or anadvance under, a credit facility

(i) that is obtained by the issuer froman interested party on reasonablecommercial terms that are not lessadvantageous to the issuer than ifthe loan or credit facility wereobtained from a person orcompany dealing at arm's lengthwith the issuer, and

(ii) that is not, directly or indirectly,convertible into or exchangeablefor participating securities or votingsecurities of the issuer or asubsidiary entity of the issuer andis not otherwise participating innature or accompanied by rights toacquire participating or votingsecurities of the issuer or asubsidiary entity of the issuer, and

(iii) for which neither principal norinterest is payable, directly orindirectly, in participatingsecurities or voting securities ofthe issuer or a subsidiary entity ofthe issuer⁽⁵⁶⁾, or

(b) a payment in cash by the issuer to thatinterested party as payment under theloan or credit facility referred to inparagraph (a).

12. Amalgamation with No Adverse Effect onIssuer or Minority - The transaction is astatutory amalgamation between the issueror a wholly-owned subsidiary entity of theissuer and an interested party that isundertaken in whole or in part for the benefitof another related party, if

(a) the transaction does not and will nothave any adverse tax or otherconsequences to the issuer, acompany resulting from theamalgamation or beneficial owners ofaffected securities generally,

 

(b) no material actual or contingent liabilityof the interested party with which theissuer or a wholly-owned subsidiaryentity of the issuer is amalgamating willbe assumed by the issuer, the wholly-owned subsidiary entity of the issuer ora successor to the issuer,

(c) the related party agrees to indemnifythe issuer against any and all liabilitiesof the interested party with which theissuer, or a wholly-owned subsidiaryentity of the issuer is amalgamating,

(d) after the transaction, the nature andextent of the equity participation ofholders of affected securities in theamalgamated entity will be the sameas, and the value of their equityparticipation will not be less than, thevalue of their interest in the issuerbefore the transaction, and

(e) the related party pays for all of thecosts and expenses of or relating to orresulting from the transaction.⁽⁵⁷⁾

13. Transaction Size - The transaction is one inwhich, at the date the transaction is agreedto

(a) neither the fair market value of thesubject matter of, nor the fair marketvalue of the consideration for, thetransaction is $500,000 or more, or

(b) if either of the values referred to insubparagraph (a) is not readilydeterminable, the board of directors ofthe issuer that is the subject of therelated party transaction, acting in goodfaith, determines that the value referredto in subparagraph (a) that is notreadily determinable is less than$500,000.

14. Distribution of Listed Securities - Thetransaction involves a distribution by anissuer of its securities to an interested partyfor cash consideration, if

(a) the securities have been listed andposted for trading on The TorontoStock Exchange, The MontrealExchange or the Canadian VentureExchange or any predecessor marketto those stock exchanges for the 12months immediately preceding the datethat the transaction is agreed to,

(b) a liquid market for the securitiesexists,⁽⁵⁸⁾

(c) neither the issuer nor, to the knowledgeof the issuer after reasonable inquiry,the interested party has knowledge ofany material non-public informationconcerning the issuer or its securitiesthat has not been generally disclosed,and the disclosure document for therelated party transaction includes astatement to that effect, and

(d) the disclosure document for the relatedparty transaction includes a descriptionof the effect of the distribution on thedirect or indirect voting interest of theinterested party.

15. Asset Resale - The subject matter of therelated party transaction was acquired bythe issuer or an interested party, as thecase may be, in a prior transaction with aperson or company acting at arm's lengththat was agreed to not more than 12months before the date that the relatedparty transaction is agreed to and aqualified valuator, independent of allinterested parties to the transaction, asdetermined in accordance with section 6.1,provides a written opinion that, after makingsuch adjustments, if any, as the valuatorconsiders appropriate in the exercise of thevaluator's professional judgment

(a) the value of the consideration payableby the issuer for the subject matter ofthe related party transaction is notmore than the value of theconsideration paid by the interestedparty in the prior arm's lengthtransaction, or

(b) the value of the consideration to bereceived by the issuer for the subjectmatter of the related party transactionis not less than the value of theconsideration paid by the issuer in theprior arm's length transaction.

16. Non-redeemable Investment Fund - Theissuer is a non-redeemable investment fundthat

(a) at least once each quarter calculatesand publicly disseminates the net assetvalue of its securities, and

(b) at the time of announcing the relatedparty transaction, publicly disseminatesthe net asset value of its securities asat the business day before announcingthe related party transaction.

5.7 Minority Approval - Subject to section 5.8, an issuershall not carry out a related party transaction unlessminority approval for the related party transaction hasbeen obtained under Part 8.

5.8 Exemptions from Minority Approval

(1) Section 5.7 does not apply to an issuer inconnection with a related party transaction in anyof the following circumstances if the factssupporting reliance upon an exemption aredisclosed in both the material change reportreferred to in section 5.2 and the informationcircular referred to in paragraph (b) ofsubsection 5.4(1):

1. Discretionary Exemption - The issuer hasbeen granted an exemption from section 5.7under section 9.1.

2. Fair Market Value not more than 25 Percentof Market Capitalization - Thecircumstances described in paragraph 2 or3 of section 5.6.

3. Other Transactions Exempt from FormalValuation - The circumstances described inparagraph 4, 5, 6, 9, 10, 11 or 12 of section5.6.

4. Bankruptcy - The circumstances describedin subparagraphs 7(a) and 7(b) of section5.6, if the court does not require compliancewith section 5.7.

5. Financial Hardship - The circumstancesdescribed in paragraph 8 of section 5.6, ifthere is no other requirement, corporate orotherwise, to hold a meeting to obtain anyapproval of the holders of any class ofaffected securities.

6. 90 Percent Exemption - Subject tosubsection (2), one or more interestedparties beneficially owns 90 percent ormore of the outstanding securities of aclass of affected securities at the timethat the related party transaction isproposed and either

(a) an appraisal remedy is available toholders of the class of affectedsecurities under the statute underwhich the issuer is organized or isgoverned as to corporate law matters,or

(b) if the appraisal remedy referred to insubparagraph (a) is not available,holders of the class of affectedsecurities are given an enforceableright that is substantially equivalent tothe appraisal remedy provided for insubsection 185(4) of the OBCA andthat is described in an informationcircular or other document sent tosecurityholders in connection with ameeting to approve the going privatetransaction.

(2) If there are two or more classes of affectedsecurities, paragraph 6 of subsection (1) appliesonly to a class for which the interested partybeneficially owns, or the interested partiesbeneficially own, 90 percent or more of theoutstanding securities of the class.

PART 6 FORMAL VALUATIONS AND PRIOR VALUATIONS

6.1 Independence

(1) Every formal valuation required by this Rule fora transaction shall be prepared by anindependent valuator for the transaction havingappropriate qualifications.

(2) Subject to subsections (3), (4) and (5), it is aquestion of fact as to whether

(a) a valuator is independent of an interestedparty;

(b) a person or company is independent of aninterested party, for the purpose ofsubparagraph (b)(ii) of subsection 1.3(1);and

(c) a valuator or a person or company referredto in paragraph (b) has appropriatequalifications.

(3) A valuator or a person or company referred to inparagraph (2)(b) is not independent of aninterested party in connection with a transactionif

(a) the valuator or the person or company or anaffiliated entity of either of them is an issuerinsider, associate or affiliated entity of theinterested party;

(b) except in the circumstances described inparagraph (e), and subject to subsection(5), the valuator or the person or companyor an affiliated entity of either of them actsas an adviser to the interested party inrespect of the transaction;

(c) the compensation of the valuator or theperson or company or an affiliated entity ofeither of them depends in whole or in partupon an agreement, arrangement orunderstanding that gives the valuator orperson or company or affiliated entity ofeither of them a financial incentive inrespect of the conclusions reached in theformal valuation or opinion or the outcomeof the transaction;

(d) the valuator or the person or company or anaffiliated entity of either of them is

(i) a manager or co-manager of asoliciting dealer group formed inrespect of the transaction, or

(ii) a member of the soliciting dealergroup, if the valuator or person orcompany or affiliated entity of either ofthem, in its capacity as a solicitingdealer, performs services beyond thecustomary soliciting dealer's function orreceives more than the per security orper securityholder fees payable toother members of the group;

(e) the valuator or the person or company is theindependent auditor of the issuer or of aninterested party, or the valuator or person orcompany is an affiliated entity of the auditor,unless neither the valuator nor the personor company nor an affiliated entity of eitherof them will be the independent auditor ofthe issuer or an interested party uponcompletion of the transaction and that facthas been publicly disclosed; or

(f) the valuator or the person or company or anaffiliated entity of either of them has amaterial financial interest in the completionof the transaction.

(4) A valuator or a person or company referred to inparagraph (2)(b) that is paid by one or moreinterested parties to a transaction or is paidjointly by the issuer and one or more interestedparties to a transaction to prepare a formalvaluation for a transaction or to provide theopinion referred to in subparagraph (b)(ii) ofsubsection 1.3(1) for a transaction is not, byvirtue of that fact alone, not independent.⁽⁵⁹⁾

(5) For the purpose of paragraph (3)(b), a valuatoror a person or company referred to in paragraph(2)(b) that is retained by an issuer to prepare aformal valuation for an issuer bid or to providethe opinion referred to in subparagraph (b)(ii) ofsubsection 1.3(1) for an issuer bid is not, byvirtue of that fact alone, considered to be anadviser to the interested party in respect of thetransaction.⁽⁶⁰⁾

6.2 Disclosure Re Valuator - An issuer or offerorrequired to obtain a formal valuation in respect of atransaction or that relies on an opinion referred to insubparagraph (b)(ii) of subsection 1.3(1) orparagraph 15 of section 5.6 shall include in thedisclosure document for the transaction

(a) a statement that the valuator or the personor company has been determined to bequalified and independent;

(b) a description of any past, present oranticipated relationship between thevaluator or the person or company and theissuer or an interested party that may berelevant to a perception of lack ofindependence;

(c) a description of the compensation paid or tobe paid to the valuator or the person orcompany;

(d) a description of any other factors relevant toa perceived lack of independence of thevaluator or the person or company;

(e) the basis for determining that the valuator orthe person or company is qualified; and

(f) the basis for determining that the valuator orthe person or company is independent,despite any perceived lack ofindependence, including the amount of thecompensation or other factors referred to inparagraphs (b) and (d).

6.3 Subject Matter of Formal Valuation

(1) An issuer or offeror required to obtain a formalvaluation under this Rule shall provide thevaluation in respect of

(a) the offeree securities, in the case of aninsider bid or issuer bid;

(b) the affected securities, in the case of agoing private transaction;

(c) the subject matter of the transaction, in thecase of a related party transaction; and

(d) except as provided in subsection (2), anynon-cash consideration being offered in orforming part of the transaction.

(2) A formal valuation of non-cash consideration isnot required if

(a) the non-cash consideration consists ofsecurities of a class of an issuer for which aliquid market exists;⁽⁶¹⁾

(b) the securities offered as non-cashconsideration

(i) constitute 10 percent or less of theaggregate number of securities of theclass that are issued and outstandingimmediately before the distribution ofthe securities offered as non-cashconsideration, and

(ii) are freely tradeable;

(c) the valuator is of the opinion that a valuationof the non-cash consideration is notrequired;⁽⁶²⁾ and

(d) the issuer or offeror required to obtain theformal valuation states in the disclosuredocument for the transaction that the issueror offeror has no knowledge of any materialnon-public information concerning theissuer or its securities that has not beengenerally disclosed.

6.4 Preparation of Formal Valuation

(1) A person or company preparing a formalvaluation under this Rule shall⁽⁶³⁾

(a) prepare the formal valuation in a diligentand professional manner;

(b) prepare the formal valuation as of aneffective date that is not more than 120days before the earlier of

(i) the date that a disclosure document forthe transaction is first sent tosecurityholders, if applicable, and

(ii) the date that a disclosure document isfiled;

(c) make appropriate adjustments in the formalvaluation for material intervening events ofwhich it is aware between the effective dateof the valuation and the earlier of the datesreferred to in paragraph (b);

(d) in determining fair market value ofsecurities, not include in the formalvaluation a downward adjustment to reflectthe liquidity of the securities, the effect ofthe transaction on the securities or the factthat the securities do not form part of acontrolling interest; and

(e) provide sufficient disclosure in the formalvaluation to allow the beneficial owners ofthe securities to understand the principaljudgments and principal underlyingreasoning of the valuator so as to form areasoned judgment of the valuation opinionor conclusion.

(2) National Instrument 52-101 Future OrientedFinancial Information does not apply to a formalvaluation for which financial forecasts andprojections are relied upon and disclosed.⁽⁶⁴⁾

6.5 Summary of Formal Valuation

(1) An issuer or offeror that is required by this Ruleto provide a summary of a formal valuation shallensure that the summary provides sufficientdetail to allow the beneficial owners of thesecurities to understand the principal judgmentsand principal underlying reasoning of thevaluator so as to form a reasoned judgment ofthe valuation opinion or conclusion.

(2) In addition to the disclosure referred to insubsection (1), if an issuer or offeror is requiredby this Rule to provide a summary of a formalvaluation, the issuer or offeror shall ensure thatthe summary

(a) discloses

(i) the valuation date, and

(ii) any distinctive material benefit thatmight accrue to an interested party asa consequence of the transaction,including the earlier use of available taxlosses, lower income taxes, reducedcosts or increased revenues;

(b) if the formal valuation differs materially froma prior valuation, explains the differencesbetween the two valuations or, if it is notpracticable to do so, the reasons why it isnot practicable to do so;

(c) indicates an address where a copy of theformal valuation is available for inspection;and

(d) states that a copy of the formal valuationwill be sent to any securityholder uponrequest and without charge.

6.6 Filing of Formal Valuation

(1) An issuer or offeror required to obtain a formalvaluation in respect of a transaction shall file acopy of the formal valuation

(a) concurrently with the sending of thedisclosure document for the transaction tosecurityholders; or

(b) concurrently with the filing of a materialchange report for a related party transactionfor which no disclosure document is sent tosecurityholders, or if the formal valuation isnot available at the time of filing the materialchange report, as soon as the formalvaluation is available.

(2) If the formal valuation is included in its entirety ina disclosure document, an issuer or offerorsatisfies the requirement in subsection (1) byfiling the disclosure document.

6.7 Valuator's Consent - An issuer or offeror required toobtain a formal valuation shall

(a) obtain the valuator's consent to its filing andto the inclusion of the formal valuation ordisclosure of a summary of the formalvaluation in the disclosure document for thetransaction for which the formal valuationwas obtained; and

(b) include in the disclosure document astatement signed by the valuatorsubstantially as follows:

We refer to the formal valuation dated, which we prepared for (indicatename of the person or company) for(briefly describe the transaction forwhich the formal valuation wasprepared). We consent to the filing ofthe formal valuation with the OntarioSecurities Commission and theinclusion of [a summary of the formalvaluation/the formal valuation] in thisdocument.

6.8 Disclosure of Prior Valuation

(1) A person or company required to disclose a priorvaluation shall, in the document in which theperson or company is required to disclose theprior valuation

(a) disclose sufficient detail to enable beneficialowners of securities to understand the priorvaluation and its relevance to the presenttransaction;

(b) indicate an address where a copy of theprior valuation is available for inspection;and

(c) state that a copy of the prior valuation willbe sent to any securityholder upon requestand without charge.

(2) If there are no prior valuations, the existence ofwhich is known after reasonable inquiry, theperson or company preparing the document inwhich the person or company would be requiredto disclose the prior valuation, if one existed,shall include a statement to that effect in thedocument.

(3) Despite anything to the contrary contained in thisRule, disclosure of a prior valuation is notrequired in a document if

(a) the contents of the prior valuation are notknown to the person or company requiredunder this Rule to disclose the priorvaluation;

(b) the prior valuation is not reasonablyobtainable by the person or companyreferred to in paragraph (a), irrespective ofany obligations of confidentiality; and

(c) the document contains statements inrespect of the prior valuation substantially tothe effect of paragraphs (a) and (b).

6.9 Filing of Prior Valuation - An issuer or offerorrequired to disclose a prior valuation shall file a copyof the prior valuation concurrently with the filing of thedocument to which the prior valuation relates.

PART 7 INDEPENDENT DIRECTORS

7.1 Independent Directors

(1) Subject to subsections (2) and (3), it is aquestion of fact as to whether a director of anissuer is independent.

(2) A director of an issuer is not independent inconnection with a transaction if

(a) the director is currently, or has been at anytime during the 12 months before the dateof the transaction, an employee, issuerinsider or associate of an interested party oran affiliated entity of an interested party,other than solely in his or her capacity as adirector of the issuer;

(b) the director is currently, or has been at anytime during the 12 months before the dateof the transaction, an adviser to aninterested party in connection with thetransaction,⁽⁶⁵⁾ an employee, issuer insider orassociate of any person or company actingas an adviser to an interested party inconnection with the transaction or anaffiliated entity of the adviser, other thansolely in his or her capacity as a director ofthe issuer;

(c) the director has a material financial interestin an interested party or an affiliated entityof an interested party or it is anticipated thatthe director will, in the event that thetransaction is successful, be provided withthe opportunity to obtain a material financialinterest in an interested party, an affiliatedentity of the interested party, or in theissuer; or

(d) the director would reasonably be expectedto receive a benefit as a consequence ofthe transaction that is not also received ona pro rata basis by all other beneficialowners in Canada of affected securities.

(3) For the purposes of this section, in the case ofan issuer bid, a director of the issuer is not, bythat fact alone, not independent of the issuer.

PART 8 MINORITY APPROVAL

8.1 From Holders of Affected Securities

(1) Subject to subsection (2), if minority approval isrequired for a going private transaction or relatedparty transaction, it shall be obtained from theholders of every class of affected securities ofthe issuer, in each case voting separately as aclass.

(2) If minority approval is required for a going privatetransaction or a related party transaction and thetransaction would affect a particular series of aclass of affected securities of the issuer in amanner different from other securities of theclass, then the holders of the series shall beentitled to vote separately as a series.

(3) In determining minority approval for a goingprivate transaction or a related party transaction,an issuer shall exclude the votes attachedto affected securities that, to the knowledgeof the issuer or any interested party or theirrespective directors or senior officers, afterreasonable inquiry, are beneficially ownedor over which control or direction isexercised by

(a) the issuer;

(b) subject to section 8.2, an interested party,unless, in the context of a related partytransaction, the interested party is treatedidentically to all other holders in Canada ofaffected securities and does not receive,directly or indirectly, as a consequence ofthe transaction, consideration of greatervalue than that received by all other holdersof affected securities;⁽⁶⁶⁾

(c) a related party of an interested party, unless

(i) the related party is a director of theissuer who is independent of theinterested party, or

(ii) in the context of a related partytransaction, the related party andinterested party are treated identicallyto all other holders in Canada ofaffected securities and do not receive,directly or indirectly, as a consequenceof the transaction, consideration ofgreater value than that received by allother holders of affected securities; and

(d) a person or company acting jointly or inconcert with a person or company referredto in paragraph (b) or (c) in respect of thetransaction.

8.2 Multi-Step Transactions - Despite paragraphs (b)and (c) of subsection 8.1(3), the votes attached tosecurities tendered to a formal bid may be includedas votes in favour of a subsequent going privatetransaction in the determination of whether therequisite minority approval has been obtained if

(a) the securityholder tendering the securities

(i) did not receive

(A) a consideration per security that isnot identical in amount and type tothat paid to all other beneficialowners in Canada of affectedsecurities of the same class, or

 

(B) consideration of greater value thanthat paid to all other beneficialowners of affected securities of thesame class, or

(ii) upon completion of the transaction, didnot beneficially own, or exercise controlor direction over, participatingsecurities of a class other than affectedsecurities;

(b) the going private transaction is completedno later than 120 days after the date ofexpiry of the formal bid;

(c) the going private transaction is proposed bythe offeror who made the formal bid or anaffiliated entity of the offeror⁽⁶⁷⁾ and involvesthe outstanding securities of the same classthat were the subject of the formal bid andthat were not acquired by the offeror underthe formal bid;

(d) the consideration per security in thesubsequent going private transaction is

(i) at least equal in value to theconsideration per security in the formalbid paid by the offeror, and

(ii) in the same form as the considerationper security in the formal bid, and if theconsideration paid consisted ofsecurities of the person or company,consists of the same securities; and

(e) the disclosure document for the formal bid

(i) disclosed the intent to effect thesubsequent transaction,

(ii) contained a summary of a formalvaluation of the securities inaccordance with the applicableprovisions of Part 6, or contained thevaluation in its entirety, if the offeror inthe formal bid was subject to and notexempt from the requirement to obtaina formal valuation,

(iii) identified the securities, if known to theofferor after reasonable inquiry, thevotes attached to which would berequired to be excluded in thedetermination of whether the requisiteminority approval of the subsequenttransaction had been obtained,

(iv) stated that the subsequent transactionwould be subject to minority approval,

(v) identified each class of securities, theholders of which would be entitled tovote separately as a class on thesubsequent transaction,

(vi) described the tax consequences ofboth the formal bid and the subsequentgoing private transaction, if, at the timeof making the formal bid, the taxconsequences arising from thesubsequent going private transaction

(A) were known or reasonablyforeseeable to the offeror, and

(B) were reasonably expected to bedifferent from the taxconsequences of tendering to theformal bid, and

(vii) disclosed that the tax consequences ofthe formal bid and the subsequentgoing private transaction may bedifferent, if, at the time of making theformal bid, the offeror did not know orcould not reasonably foresee the taxconsequences arising from thesubsequent going private transaction.⁽⁶⁸⁾

PART 9 EXEMPTION

9.1 Exemption - The Director may grant an exemption tothis Rule, in whole or in part, subject to suchconditions or restrictions as may be imposed in theexemption.

ONTARIO SECURITIES COMMISSION

COMPANION POLICY 61-501CP

TO ONTARIO SECURITIES COMMISSION RULE 61-501

INSIDER BIDS, ISSUER BIDS, GOING PRIVATETRANSACTIONS

AND RELATED PARTY TRANSACTIONS

TABLE OF CONTENTS

PART TITLE

PART 1 GENERAL

1.1 General

PART 2 DEFINITIONS AND INTERPRETATION

2.1 Director

2.2 Freely Tradeable

2.3 Jointly or in Concert

2.4 Issuer Bid

2.5 Director for Purposes of Section 1.3

2.6 Going Private Transactions Carried out inAccordance with Part 4

2.7 Related Party Transactions Carried out inAccordance with Policy 9.1

2.8 Persons or Companies Involved in aTransaction

2.9 Amalgamations

2.10 Same Consideration

2.11 Arm's Length

2.12 Previous Arm's Length Negotiations

2.13 Collateral Benefit

PART 3 MAJORITY OF THE MINORITY APPROVAL

3.1 Majority of the Minority Approval

PART 4 DISCLOSURE

4.1 Form 33 Disclosure

4.2 Disclosure of Financial Information

4.3 Disclosure of Smaller Related

Party Transactions

PART 5 VALUATIONS

5.1 Formal Valuations

5.2 Independent Valuators

PART 6 RELATED TRANSACTIONS

6.1 Related Transactions

PART 7 ROLE OF DIRECTORS

7.1 Role of Directors

ONTARIO SECURITIES COMMISSION

COMPANION POLICY 61-501CP

TO ONTARIO SECURITIES COMMISSION RULE 61-501

INSIDER BIDS, ISSUER BIDS, GOING PRIVATETRANSACTIONS

AND RELATED PARTY TRANSACTIONS

PART 1 GENERAL

1.1 General - The Commission regards it as essential, inconnection with the disclosure, valuation, review andapproval processes followed for insider bids, issuerbids, going private transactions and related partytransactions, that all securityholders be treated in amanner that is fair and that is perceived to be fair. Inthe view of the Commission, issuers and others whobenefit from access to the capital markets assume anobligation to treat securityholders fairly and thefulfilment of this obligation is essential to theprotection of the public interest in maintaining capitalmarkets that operate efficiently, fairly and withintegrity.

The Commission does not consider that insider bids,issuer bids, going private transactions and relatedparty transactions are inherently unfair. It recognizes,however, that these transactions are capable of beingabusive or unfair, and has made Rule 61-501 (the"Rule") to regulate these transactions.

This Policy expresses the Commission's views oncertain matters related to the Rule.

PART 2 DEFINITIONS AND INTERPRETATION

2.1 Director - The term "director" is used frequently inthe Rule. By virtue of Rule 14-501 Definitions, theterm has the meaning in section 1 of the Act. TheCommission is of the view that, by virtue of thisdefinition, in appropriate circumstances a director ofa general partner in a limited partnership can beconsidered to be a director of the limited partnership.

2.2 Freely Tradeable - In order for securities to be"freely tradeable" for purposes of the Rule, all holdperiods imposed by Ontario securities law must haveexpired, any period of time under Ontario securitieslaw for which an issuer must be a reporting issuermust have passed and the other conditions of thedefinition must be met. Securities that can only bedistributed under a prospectus or in reliance on aprospectus exemption, including any exemption inOntario securities law applicable to control persondistributions, would not be considered to be freelytradeable.

2.3 Jointly or in Concert

(1) The Act sets out certain circumstances wherethe presumption will arise that parties are actingjointly or in concert. Paragraph (b) of subsection1.2(1) of the Rule provides that the term "actingjointly or in concert" has the meaningascribed to it in section 91 of the Act. TheCommission is of the view that, for aninsider bid, an offeror and an insider may beviewed as acting jointly or in concert if anagreement, commitment or understandingbetween an offeror and an insider providesthat the insider shall not tender to the offeror provides the insider with an opportunitynot offered to all securityholders to maintainor acquire a direct or indirect equity interestin the offeror, the issuer or a material assetof the issuer.

(2) Concern has been expressed that agreementsby a shareholder to tender into a proposed take-over bid or to vote in favour of a proposedtransaction, which are commonly referred to aslock-up agreements, may result in the sellingshareholder being seen to be acting jointly or inconcert with an acquiror. While the language ofsection 91 of the Act is broad, and the particularfacts of any case must be considered, theCommission is of the view that an ordinary lock-up agreement with an identically treatedshareholder should not in and of itself generallyresult in arm's length parties being seen to beacting jointly or in concert.

2.4 Issuer Bid

(1) The term "issuer bid" is defined in NationalInstrument 14-101 Definitions as having themeaning ascribed to that term in securitieslegislation (in Ontario, subsection 89(1) of theAct). Subject to subsection (2), the Commissionis of the view that, by virtue of the provisions ofsection 92 of the Act, an offer to acquiresecurities of the issuer made by a wholly-ownedsubsidiary entity of the issuer would be an issuerbid.

(2) The Commission is of the view that there may belimited circumstances in which a purchase ofsecurities of an issuer made by a wholly-ownedsubsidiary entity of the issuer may not be anissuer bid. An example of one such situation iswhere the wholly-owned subsidiary entity of theissuer is a registered dealer and the registereddealer is not acting at the direction of the issuerin making the purchases, e.g., a registereddealer acting in its capacity as an underwriter oragent for a purchaser other than the issuer.

2.5 Director for Purposes of Section 1.3 -Subparagraph (b)(iii) of subsection 1.3(1) of the Ruleand subsection 1.3(4) of the Rule require certainletters to be sent to the Director for purposes ofsatisfying the liquid market test. Those letters shouldbe sent to the Director, Take-over/Issuer Bids,Mergers and Acquisitions, Corporate FinanceBranch.

2.6 Going Private Transactions Carried Out inAccordance with Part 4 - Paragraph (c) ofsubsection 4.3(1) of the Rule provides an exemptionfrom the 40 day delivery requirement in the OBCA ifthe going private transaction is carried out inaccordance with Part 4 of the Rule. Paragraph (e) ofsubsection 5.1(2) of the Rule provides that Part 5 ofthe Rule does not apply to a related party transactionthat is a going private transaction carried out inaccordance with Part 4 of the Rule. If the issuerrelies on or obtains an exemption from the valuationor majority of the minority requirements in Part 4 ofthe Rule, the Commission still views the going privatetransaction as being carried out in accordance withPart 4 of the Rule.

2.7 Related Party Transactions Carried Out inAccordance with Policy 9.1 - Paragraph (d) ofsubsection 4.1(2) of the Rule provides that Part 4 ofthe Rule does not apply to a going private transactionthat was announced before the coming into force ofthe Rule and, among other things, is being carriedout in accordance with the guidelines of OntarioSecurities Commission Policy 9.1. Paragraph (i) ofsubsection 5.1(2) provides a similar exemption forrelated party transactions. The Commission is of theview that the transaction is being carried out inaccordance with the guidelines of Ontario SecuritiesCommission Policy 9.1

(1) if Policy 9.1 is being complied with, or

(2) if all or any part of a transaction is not beingcarried out in accordance with Policy 9.1, thetransaction is being carried out in accordancewith a "no-action letter" granted by staff.

2.8 Persons or Companies Involved in a Transaction -In the definitions of "interested party", "going privatetransaction" and "related party transaction", the Rulerefers to a person or company involved in atransaction or a transaction involving a person orcompany. In those situations, the Rule sets outcertain consequences for the person or company(e.g., disclosure, exclusion for minority approvalpurposes). The Commission is of the view that adirector or senior officer of an issuer is not involvedin a transaction merely because the director or seniorofficer is acting in that capacity in negotiating orapproving the transaction.

2.9 Amalgamations

(1) Generally, a transaction is a going privatetransaction if the interest of a beneficial owner ofa participating security of an issuer may beterminated without the beneficial owner'sconsent as a consequence of the transaction, arelated party of the issuer is involved in thetransaction and the transaction does not comewithin the exceptions to the definition of goingprivate transaction in the Rule. The Commissionis of the view that in the normal situation, wheretwo or more operating corporations amalgamateand shareholders of the amalgamatingcorporations receive non-redeemableparticipating securities of the amalgamatedcorporation, a beneficial owner's interest ina participating security is not beingterminated and therefore the transaction isnot a going private transaction.

(2) An amalgamation between a corporation andone or more related parties of the corporation isa related party transaction for all of theamalgamating corporations.

(3) Exemptions from the valuation and minorityapproval requirements of the Rule may beavailable under paragraphs 3 and 10 of section5.6 and paragraphs 2 and 3 of subsection 5.8(1)of the Rule for an upstream corporationamalgamating with a downstream corporation.Those exemptions are not available for thedownstream corporation. Similarly, thoseexemptions are not available for amalgamatingcorporations that are related parties because ofa common controlling shareholder.

(4) Paragraph 5 of section 5.6 and paragraph 3 ofsubsection 5.8(1) contain an exemption from thevaluation requirement and minority approvalrequirement for certain transactions, including areorganization of one or more classes of anissuer's affected securities if certain conditionsare satisfied. A reorganization, as referred to inthose paragraphs, is a reorganization of capitaland would not encompass an amalgamation ofthe issuer with another issuer.⁽⁶⁹⁾

2.10 Same Consideration - One of the conditions to thevaluation for second step going private transactionsexemption in paragraph 4 of section 4.5 is that theconsideration per security paid in the going privatetransaction is in the same form as the considerationper security paid in the formal bid. The Commissionis aware that often in going private transactions, theconsideration takes the form of redeemablepreference shares, which are immediately redeemedfor cash. The Commission is of the view that wherethe cash paid on redemption is the same as the cashconsideration paid on the formal bid, theconsideration in the going private transaction is in thesame form as the consideration paid in the formalbid.

2.11 Arm's Length - Section 1.4 of the Rule provides thatit is a question of fact whether two or more personsor companies act, negotiate or deal with each otherat arm's length. The Commission is of the view thatpersons or companies related to each other by bloodor marriage would not normally be considered to bedealing with each other at arm's length. TheCommission also notes that in the case of theexemptions in paragraph 3 of subsection 2.4(1) andparagraph 2 of subsection 4.5(1), the arm's lengthrelationship must be with the selling securityholder.The existence of an arm's length relationship with theissuer alone does not satisfy the relevant condition inthe exemption.⁽⁷⁰⁾

2.12 Previous Arm's Length Negotiations - TheCommission notes that the previous arm's lengthnegotiation exemption is based on the view that suchnegotiations can be a substitute for a valuation. Animportant requirement for the exemption to beavailable is that the offeror or proponent of the goingprivate transaction, as the case might be, engages in"reasonable inquiries" to determine whether variouscircumstances exist. In the Commission's view, if anofferor cannot satisfy this requirement, throughreceipt of representations of the parties directlyinvolved or some other suitable method, the offeror orproponent of the transaction is not entitled to rely onthis exemption.⁽⁷¹⁾

 

2.13 Collateral Benefit

(1) A number of provisions in the Rule turn onwhether a particular securityholder is receivingconsideration of greater value than that receivedby or paid to other securityholders.

(2) The Commission notes that the words"consideration of greater value" are found insubsection 97(2) of the Act, which subsectioncontains what is commonly referred to as the"collateral benefit rule".

(3) Decisions considering subsection 97(2) of theAct may be of assistance in interpreting therelevant provisions in the Rule.⁽⁷²⁾

(4) The Commission is of the view that asecurityholder does not receive consideration ofgreater value than another securityholder merelyas a result of holding more shares than anothersecurityholder.

PART 3 MAJORITY OF THE MINORITY APPROVAL

3.1 Majority of the Minority Approval - While the Ruleprovides, in a number of circumstances, for minorityapproval, the Commission recognizes that such arequirement may give rise to abuses. As the purposeof the Rule is to ensure fair treatment of minoritysecurityholders, unjustifiable minority tactics in asituation involving a minimal minority position maycause the Director to grant an exemption from therequirement to obtain minority approval.

PART 4 DISCLOSURE

4.1 Form 33 Disclosure

(1) Form 32 of the Regulation (the form for a take-over bid circular) requires for an insider bid, andsubsection 2.2(2) of the Rule requires for a stockexchange insider bid, the disclosure required byForm 33 of the Regulation, appropriatelymodified. In the view of the Commission, Form33 disclosure would generally include, inaddition to Form 32 disclosure, disclosure withrespect to the following items, with necessarymodifications, in the context of an insider bid ora stock exchange insider bid:

1. Item 10 Reasons for Bid

2. Item 14 Acceptance of Bid

3. Item 15 Benefits from Bid

4. Item 17 Other Benefits to Insiders, Affiliatesand Associates

5. Item 18 Arrangements Between Issuer andSecurity Holder

6. Item 19 Previous Purchases and Sales

7. Item 21 Valuation

8. Item 24 Previous Distribution

9. Item 25 Dividend Policy

10. Item 26 Tax Consequences

11. Item 27 Expenses of Bid

(2) Paragraph (a) of subsection 4.2(2) of the Ruleand paragraph (a) of subsection 5.4(2) of theRule require, for a going private transaction anda related party transaction, respectively, thedisclosure required by Form 33 of theRegulation, to the extent applicable and withnecessary modifications. In the view of theCommission, Form 33 disclosure wouldgenerally include disclosure with respect to thefollowing items, with necessary modifications, inthe context of those transactions:

1. Item 5 Consideration Offered

2. Item 10 Reasons for Bid

3. Item 11 Trading in Securities to be Acquired

4. Item 12 Ownership of Securities of Issuer

5. Item 13 Commitments to Acquire Securitiesof Issuer

6. Item 14 Acceptance of Bid

7. Item 15 Benefits from Bid

8. Item 16 Material Changes in the Affairs ofIssuer

9. Item 17 Other Benefits to Insiders, Affiliatesand Associates

10. Item 18 Arrangements Between Issuer andSecurity Holder

11. Item 19 Previous Purchases and Sales

12. Item 20 Financial Statements

13. Item 21 Valuation

14. Item 22 Securities of Issuer to beExchanged for Others

15. Item 23 Approval of Bid

16. Item 24 Previous Distribution

17. Item 25 Dividend Policy

18. Item 26 Tax Consequences

19. Item 27 Expenses of Bid

20. Item 28 Judicial Developments

21. Item 29 Other Material Facts

22. Item 30 Solicitations

4.2 Disclosure of Financial Information - TheCommission is of the view that, in order to providesecurityholders with sufficiently detailed informationto form a reasoned judgment, a disclosure documentdelivered to securityholders in respect of transactionssubject to and not exempt from the formal valuationrequirements of the Rule should contain, unless suchinformation would be irrelevant or unavailable,summary disclosure of comparative historical annualfinancial information over the previous three⁽⁷³⁾ yearsand of historical interim financial information for themost recent period and the comparative period in theprevious year, together with summary informationconcerning key financial statement ratios andstatistics and key operating statistics over the sameperiods. This disclosure would be in addition to anydisclosure required under Ontario securities law orreferred to in Staff Accounting Communique No. 7:Financial Disclosure in Information Circulars, or otherStaff Accounting Communiques or any successorinstruments.

4.3 Disclosure of Smaller Related PartyTransactions -The Commission is of the view thattransactions involving related parties, and beneficialownership by an issuer of, or an issuer's exercise ofcontrol or direction over, securities of related partiesother than the issuer's subsidiary entities, should bedisclosed to securityholders if they are material eitherindividually or in the aggregate, in order to providesecurityholders with sufficiently detailed informationto form a reasoned judgment regarding such mattersas the election of directors. If such transactions orownership do not otherwise require immediatedisclosure, annual disclosure may suffice. Issuersare referred, without limitation, to item 8 of Form 30of the Regulation and other similar informationcircular requirements, as well as to section 3840 ofthe Handbook.

PART 5 VALUATIONS

5.1 Formal Valuations

(1) The Rule requires formal valuations in a numberof circumstances. The Commission is of theview that a conclusory statement of opinion as tothe value or range of values of the subjectmatter of the formal valuation does not by itselfachieve this purpose.

(2) The disclosure standards proposed by theInvestment Dealers Association of Canada andAppendix A to Standard #110 of the CanadianInstitute of Chartered Business Valuators eachgenerally represent a reasonable approachto meeting the applicable legalrequirements. Specific disclosurestandards, however, cannot be construedas a substitute for the professionaljudgment and responsibility of the valuatorand, on occasion, additional disclosure maybe necessary.

(3) A person or company required to have a formalvaluation prepared should, at the request of thevaluator, promptly furnish the valuator withaccess to the person or company's managementand advisers and to all material information in itspossession relevant to the formal valuation. Thevaluator is expected to use that access toperform a comprehensive review and analysis ofinformation upon which the formal valuation isbased. The valuator should form its ownindependent views of the reasonableness of thisinformation, including any forecasts orprojections or other measurements of theexpected future performance of the enterprise,and of any of the assumptions upon which it isbased, and adjust the information accordingly.

(4) The disclosure in the valuation of the scope ofreview should include a description of anylimitation on the scope of the review and theimplications of the limitation on the valuator'sconclusion. Scope limitations should not beimposed by the issuer, an interested party or thevaluator, but should be limited to those beyondtheir control that arise solely as a result ofunusual circumstances. In addition, it isinappropriate for any interested party to exerciseor attempt to exercise any influence over avaluator.

(5) The person or company responsible forobtaining a formal valuation should work incooperation with the valuator to ensure that therequirements of the Rule are satisfied.

(6) Subsection 2.3(2) of the Rule provides that inthe context of an insider bid, an independentcommittee of the offeree issuer shall, and theofferor shall enable the independent committeeto, determine who the valuator will be andsupervise the preparation of the formalvaluation. The Commission is aware that anindependent committee could attempt to use thisrequirement as a means to delay or impede aninsider bid viewed by them as unfriendly. In asituation where an offeror is of the view that anindependent committee is not acting in a timelymanner in having the formal valuation prepared,the offeror may seek relief under section 9.1 ofthe Rule from the requirement that the issuerobtain a valuation.

(7) Similarly, in circumstances where anindependent committee is of the view that a bidthat has been announced will not actually bemade or that the bid is not being made in goodfaith, an independent committee may apply forrelief from the requirement that the independentcommittee determine the valuator and supervisethe preparation of the valuation.

(8) Subsection 6.4(2) of the Rule provides thatNational Instrument 52-101 Future-OrientedFinancial Information does not apply to a formalvaluation for which financial forecasts andprojections are relied upon and disclosed.National Instrument 52-101 will replace NationalPolicy No. 48 Future-Oriented FinancialInformation. Until such time, National Policy No.48 does not apply to a formal valuation for whichfinancial forecasts and projections are reliedupon and disclosed.⁽⁷⁴⁾

5.2 Independent Valuators - While, except in certainprescribed situations, the Rule provides that it is aquestion of fact as to whether a valuator or a personor company providing the opinion referred to insubparagraph (b)(ii) of subsection 1.3(1) isindependent, situations have been identified in thepast that raise serious concerns for the Commissionand that must be disclosed and assessed formateriality. In determining the independence of thevaluator or person or company from the interestedparty, a number of factors may be relevant, includingwhether

(a) the valuator or the person or company or anaffiliated entity of either of them has a materialfinancial interest in future business in respect ofwhich an agreement, commitment orunderstanding exists involving the issuer, aninterested party of the issuer or an associate oraffiliated entity of the issuer or interested party;

(b) during the 24 months before the valuator orperson or company was first contacted for thepurpose of the formal valuation or opinion, thevaluator or the person or company or anaffiliated entity of either of them

(i) had a material involvement in an evaluation,appraisal or review of the financial conditionof an interested party or an associate oraffiliated entity of the interested party,

(ii) had a material involvement in an evaluation,appraisal or review of the financial conditionof an issuer or an associate or an affiliatedentity of the issuer, if the evaluation,appraisal or review was carried out at thedirection or request of the interested partyor paid for by the interested party,⁽⁷⁵⁾

(iii) acted as a lead or co-lead underwriter of adistribution of securities by theinterested party, or acted as a lead orco-lead underwriter of a distribution ofsecurities by the issuer if the retentionof the underwriter was carried out atthe direction or request of theinterested party or paid for by theinterested party, or

(iv) had a material financial interest intransactions involving the interested party orthe issuer; or

(c) the valuator or the person or company or anaffiliated entity of either of them is

(i) a lead or co-lead lender or manager of alending syndicate in respect of thetransaction in question, or

(ii) is a lender of a material amount ofindebtedness in a situation where aninterested party or the issuer is in financialdifficulty and the transaction wouldreasonably be expected to have the effectof materially enhancing the lender'sposition.

PART 6 RELATED TRANSACTIONS

6.1 Related Transactions

(1) The definition of "related party transaction" insubsection 1.1(3) of the Rule refers to otherrelated transactions between the issuer and therelated party.

(2) Depending on the circumstances, it may bepossible for an issuer to rely on one or moreexemptions in the Rule in connection with aseries of transactions between the issuer and arelated party.

(3) The Commission will intervene if it believes thatone or more exemptions are not capable ofbeing relied upon such that a part or all of thetransaction is not exempt from the proposedRule or if a transaction is being structured orcarried out in series or stages to take advantageof individual exemptions that could not be reliedupon if the transaction was carried out in onestep.⁽⁷⁶⁾

PART 7 ROLE OF DIRECTORS

7.1 Role of Directors

(1) Paragraphs (d) of subsection 2.2(3), (e) ofsubsection 3.2(1), (f) of subsection 4.2(2), (e) ofsubsection 5.2(1) and (f) of subsection 5.4(2) ofthe Rule require that the relevant disclosuredocuments include a discussion of the reviewand approval process adopted by the board ofdirectors and the independent committee, if any,of the issuer for the relevant transaction,including any materially contrary view orabstention by a director and any materialdisagreement between the board and theindependent committee.

(2) An issuer involved in any of the types oftransactions regulated by the Rule shouldprovide sufficient information to beneficialowners of securities to enable them to make aninformed decision. Accordingly, directors shoulddisclose their reasonable beliefs as to thedesirability or fairness of the proposedtransaction and make useful recommendationswith regard to the transaction. A statement thatthe directors are unable to make or are notmaking a recommendation with respect to thetransaction, without detailed reasons, generallywould be viewed as insufficient disclosure.

(3) In reaching a conclusion as to the fairness of atransaction, the directors should disclose inreasonable detail the material factors on whichtheir beliefs regarding the transaction are based.The disclosure disseminated by the directorsshould discuss fully the background ofdeliberations by the directors and any specialcommittee and any analysis of expert opinionsobtained.

(4) The factors that are important in determining thefairness of a transaction to beneficial owners ofsecurities and the weight to be given to thesefactors in a particular context will vary with thecircumstances. Normally the factors consideredshould include whether or not the transaction issubject to minority approval, whether or not thetransaction has been reviewed and approved bya special committee and, if there has been aformal valuation, whether the considerationoffered is fair in relation to the valuationconclusions arrived at through the application ofthe valuation methods considered relevant forthe subject matter of the formal valuation. Astatement that the directors have no reasonablebelief as to the desirability or fairness of thetransaction or that the transaction is fair inrelation to values arrived at through theapplication of valuation methods consideredrelevant, without more, generally would beviewed as insufficient disclosure.

(5) The directors of an issuer involved in an issuerbid, insider bid, going private transaction orrelated party transaction generally are in thebest position to assess the formal valuation to beprovided to securityholders. Accordingly, theCommission is of the view that, in dischargingtheir duty to securityholders, the directors shouldconsider the formal valuation and all priorvaluations disclosed and discuss them fullyin the applicable disclosure document.

(6) To safeguard against the potential for unfairadvantage accruing to an interested party as aresult of that party's conflict of interest orinformational or other advantage in respect ofthe proposed transaction, it is good practice fornegotiations respecting a transaction involvingan interested party to be carried out by orreviewed and reported upon by a specialcommittee of disinterested directors. Followingthis practice normally would assist in addressingthe Commission's interest in maintaining capitalmarkets that operate efficiently, fairly and withintegrity. While the Rule only mandatesindependent committees in limitedcircumstances, the Commission is of the viewthat it generally would be appropriate for, andthat corporate law may require, issuers involvedin a material transaction to which the Ruleapplies to constitute an independent committeeof the board of directors to participate in thetransaction. The Commission also wouldencourage independent committees to select thevaluator, to supervise any formal valuationinvolved and to review the disclosure respectingthe formal valuation.

(7) A special committee should, in theCommission's view, include only directors whoare independent from the interested party.While a special committee may invite non-independent board members and other personspossessing specialized knowledge to meet with,provide information to, and carry out instructionsfrom, the committee, in the Commission's viewnon-independent persons should not be presentat or participate in the decision-makingdeliberations of the special committee.

INVESTMENT DEALERS ASSOCIATION OF CANADA -PROPOSED BY-LAW ENACTMENT ESTABLISHINGVALUATION DISCLOSURE STANDARDS FOR INSIDERBIDS, ISSUER BIDS, GOING PRIVATE TRANSACTIONSAND RELATED PARTY TRANSACTIONS

I. INTRODUCTION

The Investment Dealers Association of Canada (the"Association" or "IDA") has developed disclosure standards forformal valuations and fairness opinions prepared in connectionwith transactions currently regulated by Ontario SecuritiesCommission (the "OSC") Policy Statement No. 9.1 ("Policy9.1"). These transactions consist of insider bids, issuer bids,going private transactions and related party transactions. IDAmember firms undertaking formal valuations and fairnessopinions in connection with these transactions would besubject to the new disclosure standards. A BusinessValuations Committee (the "Committee") of the Association willbe appointed for the purpose of recommending interpretationsof the disclosure standards and providing assistance andadvice to the Association and securities regulators in this area.The IDA is currently discussing with OSC staff the basis onwhich members of this Committee would also be available toassist OSC staff in assessing disclosure deficiencies in formalvaluations prepared either by IDA member firms or by non-IDAmember firms.

The proposed By-law amendments will establish disclosurestandards appropriate for formal valuations and fairnessopinions prepared by IDA member firms in connection with theaforementioned transactions and will provide for theappointment of the Committee. The disclosure standards willnot apply to business valuations or fairness opinions preparedin other contexts. A related change to the IDA's Constitutionwill enable the Association to assist OSC staff in assessing thequality of disclosure in formal evaluations prepared by IDAmember firms and by valuators who are not members of theIDA.

The Association has determined that the entry into forceof the proposed amendments would be in the publicinterest. Comments are sought on the proposed By-lawamendments. Comments should be made in writing. Onecopy of each comment letter should be delivered within 30days of the publication of this notice, addressed to theattention of the Association Secretary, Investment DealersAssociation of Canada, Suite 1600, 121 King Street West,Toronto, Ontario, M5H 3T9 and one copy addressed to theattention of the Manager, Document Management, MarketOperations, Ontario Securities Commission, 20 Queen StreetWest, Toronto, Ontario, M5H 3S8.

Questions may be referred to:

Ian Russell

Senior Vice-President, Capital Markets

Investment Dealers Association of Canada

(416) 865-3036

II. REGULATORY ISSUE

The OSC has proposed reformulating Policy 9.1 into a newOSC Rule and Companion Policy. The new OSC Rule willcarry forward the requirement that a formal valuation beprepared in connection with the transactions governed by thenew Rule. In the Companion Policy, the OSC will endorse thedisclosure standards of the Association contained in theproposed By-law amendments as generally representing areasonable approach to meeting the applicable legalrequirements of the OSC for formal valuations. At this time, theOSC has stated that it is not proposing to regulate fairnessopinion disclosure, choosing instead to gain experience withthe practical operation of the IDA's fairness opinion disclosurestandards contained in the proposed By-law amendments.

The purpose of the proposed By-law amendments is to setforth certain disclosure requirements and recommendations forformal valuations and fairness opinions (referred to collectivelyas "Professional Opinions") prepared by IDA member firms foruse in connection with those transactions governed by the newOSC Rule. The amendments prescribe a general overalldisclosure standard for Professional Opinions, set forth certaincore disclosure requirements and describes the type and levelof financial and valuation information that needs to bedisclosed, depending upon the type of Professional Opinionand the approach and methodologies adopted. The By-lawamendments are also intended to provide guidance anddirection to IDA member firms in satisfying the valuationrequirements of the new OSC Rule.

III. PROPOSED BY-LAWS

As proposed, By-law 29.14 sets out the definitions of termsused in subsequent By-laws including the definition of FairnessOpinion, Formal Valuation and Professional Opinion. By-law29.15 states that a Member of the Association may onlyprepare Professional Opinions in accordance with thestandards set out in By-laws 29.14 through 29.24. By-law29.16 states that the new rules apply only to SubjectTransactions, that is, insider bids, issuer bids, going privatetransactions and related party transactions as they are definedin securities law. By-law 29.17 states that the valuer has aduty to use professional judgment and that compliance withAssociation standards is not a substitute for the valuer's ownjudgment.

By-law 29.18 states that the Professional Opinion shoulddisclose enough information to enable the shareholders anddirectors of the issuer to understand the valuer's principaljudgments and underlying reasoning so as to form a reasonedview on the valuer's conclusions. By-law 29.19 states that thevaluer should consider the level of disclosure described in theBy-laws when considering the disclosure of matters notspecifically addressed in the By-laws.

By-law 29.20 details the core disclosure required in aProfessional Opinion that is a Formal Valuation including: theidentity and credentials of the valuer, including relevantexperience; the financial terms of the valuer's retainer; adescription of any relationship between the valuer and theissuer or any interested party; the subject matter and effectivedate of the valuation; the scope and purpose of the valuation;the scope of review conducted and any limitations thereon; ageneral description of the business, assets or securities beingvalued; definitions of terms of value used; the valuationapproach and methodologies considered and key assumptionsmade; and a discussion of any prior offers, prior valuations ormaterial expert reports considered.

By-law 29.21 details the disclosure required for a ProfessionalOpinion that is a Fairness Opinion which includes many of thesame requirements in By-law 29.20 and additionalrequirements to disclose the factors the Member consideredimportant in its fairness analysis and the supporting reasonsfor the Member's opinion as to the financial fairness of thetransaction.

By-law 29.22 states that where concern is expressed to aMember that the information to be disclosed is competitively orcommercially sensitive, the Member may seek a decision onthe issue from a special committee of the issuer's independentdirectors. This committee will weigh the benefit of disclosureagainst the sensitivity of the information and decide whetherthe information should be disclosed.

By-law 29.23 sets out the financial and valuation informationrequired to be disclosed in a Formal Valuation including:annual and interim financial information; a discussion ofmaterial items and changes in the issuer's financialstatements; future-oriented financial information ("FOFI") reliedupon and key FOFI assumptions; key economic assumptionsused; the valuation approach and methodologies adopted andreasons therefor; a comparison of the valuation calculationsand conclusions under the methodologies considered andrelative importance of each; and presentation of the valuer'sconclusions. The By-law details specific information to bedisclosed with respect to the discounted cash flow approach,asset based valuation approach, comparable transactionapproach and comparable trading approach. By-law 29.24states that a Fairness Opinion must include a generaldescription of the valuation analysis performed by the opinionprovider. Due to the difference in scope and objectives of aFairness Opinion, specific conclusions as to quantifiable valueare not required to be reached or disclosed. However, theopinion provider must give specific reasons and supportinganalysis for its fairness conclusion.

By-law 29.25 establishes a Business Valuation Committee ofthe Association, to be appointed by the Board, composed ofemployees of Members with expertise in valuations. TheCommittee will make recommendations to the Boardinterpreting these disclosure requirements and will provideassistance to securities regulators in this area.

Finally, the amendment to the Association's Constitution isdesigned to clarify that the Association's objectives include theestablishment and enforcement of standards which relate to"capital market participants" rather than just to Members. Theamendment is necessary due to the fact that the proposedBusiness Valuations Committee may be asked by OSC staffto review valuation disclosure prepared by valuers who are notIDA Members.

IV. COMMENTARY

The proposed By-law amendments establish detaileddisclosure standards for formal valuations and fairnessopinions undertaken by members in connection with an insiderbid, issuer bid, going private transaction or related partytransaction. The By-law amendments arise as part of a jointeffort by the OSC and the Association to better regulatevaluation disclosure. As part of this effort, the Association hasproposed these formal regulations to govern disclosurestandards for Policy 9.1 valuations and related fairnessopinions and to establish the IDA Business ValuationsCommittee to provide expert advice to the Association and theOSC on valuations carried out pursuant to the new OSC Rulethat will replace Policy 9.1.

 

BY-LAW 29

 

Enact new By-laws 29.14 through 29.25 reading as follows:

"Disclosure Standards for Formal Valuations andFairness Opinions

29.14 In these By-laws 29.14 to 29.25 unless thecontext otherwise requires, the expression:

"Applicable Securities Laws" means:

(i) Ontario Securities Commission Rule 61-501relating to Insider Bids, Issuer Bids, GoingPrivate Transactions and Related PartyTransactions; and

(ii) section 190 of the Business Corporations Act(Ontario);

"Association Standards" means the disclosurestandards specified in By-laws 29.14 through 29.24;

"Fairness Opinion" means a report of a Valuer thatcontains the Valuer's opinion as to the fairness, from afinancial point of view, of a transaction;

"Formal Valuation" means a report of a Valuer thatcontains the Valuer's opinion as to the value or rangeof values of the subject matter of the valuation;

"Professional Opinion" means a Formal Valuation ora Fairness Opinion;

"Subject Transaction" means an insider bid, issuerbid, going private transaction or related partytransaction as each such term is defined in ApplicableSecurities Laws; and

"Valuer" means the person who provides aProfessional Opinion.

The terms "disclosure document", "interestedparty" and "prior valuation" as used in these By-laws29.14 to 29.25 have the same respective meanings asin Applicable Securities Laws.

29.15 No Member shall prepare a Professional Opinionin connection with a Subject Transaction unless it complieswith Association Standards.

29.16 Association Standards apply only to ProfessionalOpinions that are prepared either pursuant to a requirement ofApplicable Securities Laws or for the express purpose ofpublication, in whole or in part (including summaries thereof),in a disclosure document to be filed with any Canadiansecurities regulatory authority or delivered to security holdersin connection with their consideration of the SubjectTransaction. For greater certainty, Association Standards donot apply to Professional Opinions (i) rendered in connectionwith transactions other than the Subject Transactions, whetheror not they are reproduced or summarized in a disclosuredocument, or (ii) reproduced or summarized in a disclosuredocument in response to a legal or regulatory requirement forthe disclosure of prior valuations in respect of an issuer.

29.17 The requirements relating to the preparation anddisclosure of Professional Opinions prescribed herein shall notbe a substitute for the professional judgment and responsibilityof the Valuer. Compliance with the Association Standards,without the Valuer also exercising professional judgment andresponsibility regarding disclosure in a Professional Opinion,shall not be considered compliance with AssociationStandards. Professional judgment and responsibility may, inappropriate cases, justify a departure from the strictapplication of the requirements under the AssociationStandards.

29.18 Professional Opinions prepared in connectionwith the Subject Transactions shall contain disclosuresufficient to enable the directors and security holders of theparticular issuer to understand the principal judgments andprincipal underlying reasoning of the Valuer in its ProfessionalOpinion so as to form a reasoned view on the valuationconclusion or the opinion as to fairness expressed therein.

29.19 A Valuer shall consider the level of disclosuredescribed in By-laws 29.20 through 29.24 when consideringthe appropriate level of disclosure in a Professional Opinionconcerning valuation methodologies or matters not specificallyaddressed in such By-laws but that are important in reachinga valuation or fairness conclusion.

29.20 A Professional Opinion that is a Formal Valuationprepared by a Member shall disclose the following information:

1. the identity and credentials of theMember, including the generalexperience of the Member in valuingother businesses in the same or similarindustries as the business or issuer inquestion or similar transactions to theSubject Transaction, the Member'sunderstanding of the specific marketablesecurities involved in the SubjectTransaction and the internal proceduresfollowed by the Member to ensure thequality of the Professional Opinion;

2. the date the Valuer was first contacted inrespect of the Subject Transaction andthe date that the Valuer was retained;

3. the financial terms of the Valuer'sretainer;

4. a description of any past, present oranticipated relationship between theValuer and any interested party or theissuer which may be relevant to theValuer's independence for purposes ofthe Applicable Securities Laws;

5. the subject matter of the FormalValuation;

6. the effective date of the Formal Valuation;

7. a description of any specific adjustmentsthat have been made in the Valuer'sconclusions by reason of an event oroccurrence after the effective date;

8. the scope and purpose of the FormalValuation, including the followingstatement:

"This formal valuation has been preparedin accordance with the DisclosureStandards for Formal Valuations andFairness Opinions of the InvestmentDealers Association of Canada but theAssociation has not been involved in thepreparation or review of this valuation.";

9. a description of the scope of the reviewconducted by the Valuer, including asummary of the type of informationreviewed and relied upon (such as thedocuments reviewed, individualsinterviewed, facilities visited, other expertreports considered and managementrepresentations concerning informationrequested and furnished to the Valuer);

10. a description of any limitation on thescope of review and the implications ofsuch limitation on the Valuer'sconclusions;

11. a description of the business, assets orsecurities being valued sufficient to allowthe reader to understand the valuationrationale and approach and the variousfactors influencing value that wereconsidered;

12. definitions of the terms of value used inthe formal valuation (such as "fair marketvalue", "market value" and "cashequivalent value");

13. the valuation approach andmethodologies considered, including therationale for valuing the business as agoing concern or on a liquidation basisand the reasons for selecting a particularvaluation methodology and a summary ofthe key factors considered in selectingthe valuation approach andmethodologies considered;

14. the key assumptions made by the Valuer;

15. any distinctive material value that theValuer has determined might accrue toan interested party, whether this value isincluded in the value or range of valuesarrived at for the subject matter of theformal valuation and the reasons for itsinclusion or exclusion;

16. a discussion of any prior bona fide offersor prior valuations or other material expertreports considered by the Valuerpertaining to the subject matter of thetransaction and, where the formalvaluation differs materially from any suchprior valuation, an explanation of thematerial differences where reasonablypracticable to do so based on theinformation contained in the priorvaluation or, if it is not reasonablypracticable to do so, the reasons why it isnot reasonably practicable to do so; and

17. the valuation conclusions reached andany qualifications or limitations to whichsuch conclusions are subject.

29.21 A Professional Opinion that is a Fairness Opinionprepared by a Member shall disclose the following information:

1. the identity and credentials of theMember, including the generalexperience of the Member in providingFairness Opinions in connection withtransactions similar to the SubjectTransaction, the Member's understandingof the specific marketable securitiesinvolved in the Subject Transaction andthe internal procedures followed by theMember to ensure the quality of theProfessional Opinion;

2. the date the Member was first contactedin respect of the Subject Transaction andthe date that the firm was retained;

3. the financial terms of the Member'sretainer;

4. a description of any past, present oranticipated relationship between theMember and any interested party whichmay be relevant to the Member'sindependence for purposes of providingthe Fairness Opinion;

5. the scope and purpose of the FairnessOpinion, including the followingstatement:

"This fairness opinion has been preparedin accordance with the DisclosureStandards for Formal Valuations andFairness Opinions of the InvestmentDealers Association of Canada but theAssociation has not been involved in thepreparation or review of this fairnessopinion.";

6. the effective date of the Fairness Opinion;

7. a description of the scope of the reviewconducted by the Member, including asummary of the type of informationreviewed and relied upon (such asthe documents reviewed,individuals interviewed, facilitiesvisited, other expert reportsconsidered and managementrepresentations concerninginformation requested andfurnished to the Member);

8. a description of any limitation on thescope of review and the implications ofsuch limitation on the Member's opinionor conclusion;

9. a description of the relevant business,assets or securities sufficient to allow thereader to understand the rationale of theFairness Opinion and the approach andvarious factors influencing financialfairness that were considered;

10. a description of the valuation or appraisalwork performed or relied upon in supportof the Member's opinion or conclusion;

11. a discussion of any prior bona fide offeror prior valuation or other material expertreport considered by the Member incoming to the opinion or conclusioncontained in the Fairness Opinion;

12. the key assumptions made by theMember;

13. the factors the Member consideredimportant in performing its fairnessanalysis;

14. the statement of opinion or conclusion asto the fairness, from a financial point ofview, of the Subject Transaction and thesupporting reasons; and

15. any qualifications or limitations to whichthe opinion or conclusion is subject.

29.22 If concern is expressed to a Member regardingthe proposed disclosure in a Professional Opinion ofcompetitively or commercially sensitive information regardingan interested party or issuer, the Member may seek a decisionof the special committee of the issuer's independent directors(the "special committee") as to whether the perceiveddetriment to an interested party, the issuer or its securityholders of the disclosure of such information in theProfessional Opinion outweighs the benefit of disclosure ofsuch information to the readers of the Professional Opinion.Compliance with any such decision of a special committeeshall also constitute compliance with the AssociationStandards in respect of the matters that are the subject of thedecision.

29.23 A Professional Opinion that is a Formal Valuationprepared by a Member in connection with a SubjectTransaction shall disclose the following:

1. Annual Financial Information. Unlessotherwise disclosed through theCanadian continuous disclosureobligations of the issuer or in a disclosuredocument published in connection withthe transaction to which the ProfessionalOpinion applies, the Professional Opinionshall disclose a summary of selectedmaterial financial information derivedfrom the most recent year-end balancesheet and income statement andstatement of changes in financial positionfor the most recently completed fiscalyear as well as from the balance sheet,income statement and statement ofchanges in financial position for theimmediately preceding fiscal year.

2. Interim Financial Information. Unlessotherwise disclosed through theCanadian continuous disclosureobligations of the issuer or in a disclosuredocument published in connection withthe transaction to which the ProfessionalOpinion applies, the Professional Opinionshall disclose a summary of selectedmaterial financial information derivedfrom the most recent interim balancesheet (if any), income statement andstatement of changes in financial positionfor the current fiscal year and thecomparable statements for the sameinterim period of the immediatelypreceding fiscal year.

3. Discussion of Historical FinancialStatements or Financial Position. TheProfessional Opinion shall includecomment on material items or changes inthe issuer's financial statements togetherwith appropriate commentary on itemswhich may have particular relevance tothe Professional Opinion. Examples ofsuch items include unusual capitalstructures, unrecognized tax-losscarryforwards and redundant assets.

4. Future-Oriented Financial Information.To the extent that the Valuer has reliedupon future-oriented financial information("FOFI"), the Valuer shall disclose theFOFI, at least in summary form, unlessotherwise determined by a decision of thespecial committee referred to in By-law29.22. To the extent that the FOFI reliedupon by the Valuer varies materially fromthe FOFI provided to the Valuer by theissuer or the interested party, the Valuershall disclose the nature and extent ofsuch differences and the rationale of theValuer supporting its judgments.

5. FOFI Assumptions. To the extent thatFOFI is relied upon (whether or not theFOFI itself is disclosed), key financialassumptions (such as sales,growth rates, operating profitmargins, major expense items,interest rates, tax rates,depreciation rates, etc.), togetherwith a brief statement supportingthe rationale for each specificassumption, shall also bedisclosed, unless otherwisedetermined by a decision of thespecial committee referred to inBy-law 29.22.

6. Economic Assumptions. Any keyeconomic assumptions having a materialimpact on the Professional Opinion shallbe disclosed, noting the authoritativesource used by the Valuer, includinginterest rates, exchange rates andgeneral economic prospects in therelevant markets.

7. Valuation Approach, Methodologiesand Analysis. The Professional Opinionshall set out the valuation approach andmethodologies adopted by the Valuer,together with the principal judgmentsmade in selecting a particular approachor methodology, a comparison ofvaluation calculations and conclusionsarrived at through the different methodsconsidered and the relative importance ofeach methodology in arriving at theoverall valuation conclusion. Dependingupon the valuation techniques used bythe Valuer, the specific informationreferred to in items 8 through 12 belowshall be disclosed.

8. Discounted Cash Flow Approach. TheProfessional Opinion shall include adiscussion of all relevant qualitative andquantitative judgments used to calculatediscount rates, multiples andcapitalization rates. If the Capital AssetPricing Model is used, disclosure shallinclude the basis for determining thediscount rate including the risk-free rate,market risk premium, beta, tax rates anddebt-to-equity capital structure assumed.The Valuer shall also disclose the basisfor the determination of theterminal/residual value together with theunderlying assumptions made. Thesource of the financial data which formedthe basis of the discounted cash flowanalysis, summary of major assumptions(if not already disclosed) and the detailsand sources of any economic statistics,commodity prices and market forecastsused in the valuation approach shall alsobe disclosed. In addition, a summary ofthe sensitivity variables considered andthe general results of the application ofsuch sensitivity analysis shall bedisclosed along with an explanation ofhow such sensitivity analysis was used inthe determination of the range ofvaluation estimates resulting from thediscounted cash flow approach. Wherethe nature of the FOFI and the subjectmatter of the valuation make it reasonablypracticable and meaningful to do so,selected quantitative sensitivity analysesperformed by the Valuer shall bedisclosed to illustrate the effects ofvariations in the key assumptions on thevaluation results. In determining whetherquantitative sensitivity analyses would bemeaningful to the reader of theProfessional Opinion, the Valuer shallconsider whether such analysesadequately reflects the Valuer's judgmentconcerning the inter-relationship of thekey underlying assumptions.

9. Asset Based Valuation Approach. TheProfessional Opinion shall separatelydisclose the values of each significantasset and liability including off-balancesheet items (unless otherwise determinedby a decision of the special committeereferred to in By-law 29.22). If aliquidation-based valuation approach hasbeen utilized, the Professional Opinionshall set out the liquidation values foreach significant asset and liabilitytogether with summary estimates forsignificant liquidation costs.

10. Comparable Transaction Approach.The Professional Opinion shall disclose(preferably in tabular form) a list ofrelevant transactions involvingbusinesses the Valuer considers similaror comparable to the business beingvalued. Adequate disclosure shallinclude the date of the transaction, a briefdescriptive note, and relevant multiplesimplicit in the transaction which mayinclude earnings before interest and taxes("EBIT"), earnings before interest, taxesdepreciation and amortization("EBITDA"), earnings, cash flow and bookvalue multiples and take-over premiumpercentages. In the body of theProfessional Opinion there shall be adiscussion of such transactions togetherwith an explanation as to how suchtransactions were used by the Valuer inarriving at a valuation conclusion withregard to the comparable transactionapproach.

11. Comparable Trading Approach. TheProfessional Opinion shall disclose(preferably in tabular form) a list ofrelevant publicly traded companies theValuer considers similar or comparable tothe business being valued. Adequatedisclosure shall include the date ofthe market data, the relevant fiscalperiods for the comparablecompany, a brief descriptive noteregarding the comparablecompany and relevant multiplesimplicit in the trading data whichmay include EBIT, EBITDA,earnings, cash flow and bookvalue multiples. In the body of theProfessional Opinion there shallbe a discussion as to thecomparability of such companies,together with an explanation as tohow such data was used by theValuer in arriving at a valuationconclusion with regard to thecomparable trading approach.

12. Valuation Conclusions. The Valuershall develop a final valuation range byusing a single valuation methodology orsome combination of value conclusionsdetermined under differentmethodologies/approaches. TheProfessional Opinion shall include acomparison of the valuation rangesdeveloped under each methodology anda discussion of the reasoning in supportof the Valuer's final conclusion.

29.24 A Professional Opinion that is a Fairness Opinionprepared by a Member in connection with a SubjectTransaction shall include the following:

1. Fairness Opinion Valuation Analyses.While it is generally acknowledged thatboth the scope and the objectives of aFairness Opinion differ from those of aFormal Valuation (whether or not theFairness Opinion is delivered in atransaction where a Formal Valuationexemption is being relied upon), aFairness Opinion shall include a generaldescription of any valuation analysisperformed by the opinion provider orspecific disclosure of a valuation opinionof another Valuer which is being reliedupon. However, the opinion provider isnot required to reach or disclose specificconclusions as to a valuation range orranges in a Fairness Opinion.

2. Fairness Conclusions. The specificreasons for the conclusion that theSubject Transaction is fair or not fair tosecurity holders, from a financial point ofview, shall be set out in the conclusionsection of the Professional Opinion.Support for each of these specificreasons shall be contained in the body ofthe Professional Opinion in sufficientdetail to allow the reader of the opinion tounderstand the principal judgments andprincipal underlying reasoning of theopinion provider in reaching its opinion asto the fairness of the transaction.

29.25 There shall be a Business Valuations Committeeof the Association appointed by the Board of Directors,membership in which shall be restricted to persons in theemploy of Members who prepare Professional Opinions andsimilar documents and persons with similar responsibilities.The Business Valuations Committee shall makerecommendations to the Board of Directors on interpretationsof By-laws 29.14 through 29.24 and the Committee orindividual Members thereof shall provide advice andassistance to the Board of Directors and securities regulatoryauthorities with respect to Professional Opinions. TheBusiness Valuations Committee may make such rules relatingto the organization and operation of the Committee as aredeemed necessary and as are approved by the Board ofDirectors."

 

INTERPRETATION NOTES

 

The Association has recently passed By-laws 29.14 through29.24 dealing with Disclosure Standards for Formal Valuationsand Fairness Opinions.

In certain situations the requirements specified in thedisclosure standards require interpretation.

1. By-law 29.17

By-law 29.17 specifies that the specific requirements ofthe By-law relating to the preparation and disclosure ofProfessional Opinions is not a substitute for the professionaljudgment and responsibility of the Valuer. In certaincircumstances professional judgment and responsibility mayjustify a departure from the strict application of therequirements. Accordingly, By-law 29.17 expresslyacknowledges the important role of professional judgment andresponsibility of the Valuer in Formal Valuation and FairnessOpinion disclosure.

2. By-law 29.18

By-law 29.18 requires that Professional Opinions mustcontain disclosure sufficient to enable the directors andsecurity holders of the particular issuer to understand theprincipal judgments and principal underlying reasoning of theValuer in its Formal Valuation or Fairness Opinion, as the casemay be, so as to form a reason to view on the valuationconclusion or the opinion as to fairness expressed therein.This does not mean that Valuers are required to provide thelevel of detail necessary to enable the reader to perform his,her or its own valuation of the subject matter of the transactionor analysis of the financial fairness of the transaction.

3. By-law 29.23

The Association Standards describe the type and levelof financial and valuation information that is required to bedisclosed in Formal Valuations depending upon the valuationapproach and the methodologies applied. In proposing thesestandards the Association recognizes that no set of disclosurestandards can be constructed to suit all circumstances orcombinations of circumstances that may arise nor is there anysubstitute for the exercise of professional judgment indetermining what constitutes appropriate disclosure in aparticular case.

These disclosure standards would not apply toimmaterial items. While materiality should be a matter ofprofessional judgment in the specific circumstances theAssociation believes that, as a general rule, the decision todisclose specific financial or valuation information in a FormalValuation should be judged in relation to the significance of thefinancial valuation disclosure to the readers of the ProfessionalOpinion and whether the omission of the disclosure wouldmaterially affect the reader's understanding of the principaljudgments and underlying reasoning of the Valuer.

The Association also recognizes that, in the normalcourse of an engagement, Valuers have access to significantamounts of non-public information (whether from external orinternal sources) which is essential in developing the Valuer'sconclusions. Since appropriate disclosure of financial andvaluation information is highly desirable in allowing the usersof the Professional Opinion to understand the principaljudgments and underlying reasoning of the Valuer in its FormalValuation, the Association Standards provide that non-disclosure of material non-public financial and valuationinformation obtained from the issuer or interested party or theirrespective affiliates, agents or advisors, should be limited tothose occasions when the perceived detriment to theinterested party, the issuer or its security holders of thedisclosure of such information outweighs the benefit of thedisclosure of such information to the intended recipients of theProfessional Opinion, as determined by a decision of thespecial committee referred to in By-law 29.22. Where theinformation is derived from other sources, the Valuer shouldmake the determination as to whether such information shouldbe disclosed based on its professional judgment having regardto confidentiality and other relevant considerations.

4. By-law 29.24

Due to the fundamental differences between FairnessOpinions and Formal Valuations in both their scope andobjectives and in recognition of the fact that Fairness Opinionsare not furnished in response to a legal or regulatoryrequirement, the Association is of the view that the type andlevel of disclosure of financial and valuation information andanalysis in a Fairness Opinion should be left to theprofessional judgment of the opinion provider. By-law 29.24,however, requires certain additional requirements for orcommentary on disclosure in Fairness Opinions.

 

INVESTMENT DEALERS ASSOCIATION OF CANADA

 

 

AMENDMENT TO CONSTITUTION

 

Amend paragraph 2(c) of the Constitution as follows (changesare marked):

"(c) To establish, and enforce compliance with,standards and requirements relating to capital marketparticipants for the protection of Members, their clients and thepublic;"

Footnotes

---

 

1. ¹ The proposed Rule is derived from Ontario SecuritiesCommission Policy Statement No. 9.1 (1991), 14 OSCB3345, as amended (1992), 15 OSCB 2921 ("Policy 9.1")and the Rule In the Matter of Going Private Transactions(1997), 20 OSCB 1219, as amended by (1998), 21 OSCB2337, (1998), 21 OSCB 7751 and (1999), 22 OSCB 6302(the "Going Private Rule"). The provisions of the GoingPrivate Rule have been incorporated into the proposedRule. The Going Private Rule will expire on the cominginto force of the proposed Rule. The proposed Rule wasfirst published for comment on May 31, 1996 (1996), 19OSCB 2981 (the "1996 proposed Rule") and wasrepublished for comment on January 22, 1999 (1999), 22OSCB 493 (the "January proposed Rule").

The Commission proposes to delete section 182 of theRegulation, which contains definitions, as well as formalvaluation and related requirements, in respect of insiderbids, issuer bids and take-over bids to be followed bygoing private transactions, since any relevant definitionsor requirements have been incorporated into the proposedRule. The Rule In the Matter of Insider Bids, Issuer Bidsand Take-Over Bids in Anticipation of Going PrivateTransactions (1997), 20 OSCB 1219 as amended by(1998), 21 OSCB 2338, (1998), 21 OSCB 7752 and(1999), 22 OSCB 6303, which contains exemptions fromthe requirements in section 182, will expire on the cominginto force of the proposed Rule.

2. ² A general definition rule has been adopted as Rule 14-501 Definitions ("Rule 14-501"). It contains definitions ofcertain terms used in more than one rule. Rule 14-501also provides, among other things, that terms used in arule and defined in section 1 of the Securities Act orsubsection 1(2) of the Regulation will have the respectivemeanings given to them in the Securities Act orRegulation, as appropriate. Rule 14-501 alsoincorporates terms defined in National Instrument 14-101Definitions ("NI14-101"). NI14-101 contains, among otherthings, definitions for terms used in more than onenational instrument.

3. The word "maximum" has been deleted as beingunnecessary.

4. The definition has been modified to make it clear that theconditions in subsections 72(4) and (5) of the Act relatingto "no unusual effort" and "no extraordinary consideration"do not apply.

5. Subparagraphs (a)(ii) and (b)(ii)have been modified torefer to the market on which the securities of the class areprincipally traded.

6. Paragraph (c) has been added as a catch-all. A differentversion of paragraph (c) that appeared in the Januaryproposed Rule and referred to shareholders' equity of aclass has been deleted as being an inappropriate test.

7. This is a new exception to cover unsolicited reports basedon the issuer's public disclosure record.

8. The reference to senior officers has been deleted.Reference is now made to the board of directors as awhole.

9. Reference is also now made to any senior officer of aninterested party. An exception in clause (ii) has beenadded for a director or senior officer of the issuer in thecase of an issuer bid.

10. This is a new exception to address valuations preparedfor persons or companies that, as a result of thetransaction, became issuer insiders.

11. The words "to any substantial degree" have been added.

12. Subsection (3) has been amended to clarify the wording.

13. Subsection (3) is new and provides an exemption forMJDS take-over bids in addition to that in Rule 71-801Implementing the Multijurisdictional Disclosure System.

14. Paragraph (a) is new. It requires a description of thebackground to the insider bid to be included in the take-over bid circular.

15. Paragraph (d) has been inserted to refer to the otherprovisions of Part 6 relating to formal valuations.

16. Subsection 2.3(3) of the January proposed Rule, whichdealt with the circumstances in which the offeror coulddetermine who the valuator should be and supervise thepreparation of the formal valuation, has been deleted forthe reasons given in the Notice accompanying this Rule.

17. The reference to access has been deleted and the words"material fact or material change" changed to "materialnon-public information".

18. Paragraph 3 has been modified to contemplate relianceby the offeror on negotiations by another person orcompany, and in the case of the 20 percent threshold tocontemplate a series of transactions.

19. The words "and agreed to sell" have been added inparagraphs (b) and (c) to clarify that the minimumstipulated percentages must be acquired.

20. The threshold has been raised from five to 10 percent,except where the offeror owns 80 percent or more of theoutstanding securities of the class of offeree securities.

21. The words "material non-public information" are used inplace of "material fact" or "material change".

22. Paragraph (f) has been added to address a situationwhere the offeror is relying on an agreement by anotherperson or company.

23. This has been modified to include going privatetransactions and certain exempt going privatetransactions.

24. Full access has been changed to equal access.

25. Subsections (2) and (3) have been added to clarify themethod of calculating the percentages necessary forreliance on the previous arm's length negotiationsexemption.

26. Subsection (2) is new and provides an exemption forMJDS issuer bids in addition to that in Rule 71-801Implementing the Multijurisdictional Disclosure System.

27. Paragraph (b) is new. It requires a description of thebackground to the issuer bid to be included in thedisclosure document.

28. In the January proposed Rule, this disclosure was onlyrequired if the issuer relied on the exemption in paragraph3 of subsection 3.4(1). This has now been made requireddisclosure for all issuer bids.

29. Paragraph (e) has been inserted to refer to the otherprovisions of Part 6 relating to formal valuations.

30. The words "at the time of the making of the bid" havebeen deleted given that the time periods in relation toissuer bids are set out in paragraph 1.3(1)(a).

31. In light of the creation of the Canadian Venture Exchange,the condition that none of the affected securities arequoted on The Canadian Dealing Network has beendeleted. The Commission intends to consider theappropriate treatment of Canadian Venture Exchangeissuers that are not reporting issuers as part of itsongoing consideration of the exchange reconfigurationprocess.

32. Paragraph (c) is new. It requires a description of thebackground to the going private transaction to be includedin the information circular.

33. Paragraph (e) has been inserted to refer to the otherprovisions of Part 6 relating to formal valuations.

34. Paragraph 2 has been modified to contemplate relianceby the person or company proposing the going privatetransaction on negotiations by another person orcompany, and in the case of the 20 percent threshold tocontemplate a series of transactions.

35. The words "and agreed to sell" have been added inparagraphs (b) and (c) to clarify that the minimumstipulated percentages must be acquired.

36. The threshold has been raised from five to 10 percent,except where the offeror owns 80 percent or more of theoutstanding securities of the class of offeree securities.

37. This has been modified to extend the exemption toaffiliated entities of the offeror. However, paragraph (d)provides that if the original consideration consisted ofsecurities of the offeror, so must the follow-upconsideration.

38. This paragraph has been modified to recognize that it isnot always possible to describe the tax consequences ofa second step going private transaction at the time of theformal bid.

39. Subsections (2) and (3) have been added to clarify themethod of calculating the percentages necessary forreliance on the previous arm's length negotiationsexemption.

40. The word "outstanding" has been added to conform tosubsection (2).

41. In light of the creation of the Canadian Venture Exchange,the condition that none of the affected securities arequoted on The Canadian Dealing Network has beendeleted. The Commission intends to consider theappropriate treatment of Canadian Venture Exchangeissuers that are not reporting issuers as part of itsongoing consideration of the exchange reconfigurationprocess.

42. This exception previously appeared in the 1996 proposedRule and has been re-inserted.

43. In light of the creation of the Canadian Venture Exchange,the condition that the transaction was agreed to beforeany of the affected securities became quoted on TheCanadian Dealing Network has been deleted. TheCommission intends to consider the appropriate treatmentof Canadian Venture Exchange issuers that are notreporting issuers as part of its ongoing consideration ofthe exchange reconfiguration process.

44. This has been modified slightly to deal with the cominginto force of the Multilateral Instrument.

45. This subsection appeared in the January proposed Ruleas paragraph 5.1(2)(k). It now appears as a separatesubsection so as to apply to the issuer subject to thelegislation rather than the transaction as a whole as thelatter formulation would exempt all parties to thetransaction.

46. Paragraph (1) of the January proposed Rule has beendeleted as a result of the change made to paragraph5.1(2)(a) of the proposed Rule.

47. Subsection (3) is new and contemplates a situation wherea formal valuation is not available at the time the materialchange report has to be filed.

48. Paragraph (c) is new. It requires a description of thebackground to the related party transaction to be includedin the information circular.

49. Paragraph (e) has been inserted to refer to the otherprovisions of Part 6 relating to formal valuations.

50. The wording in subparagraph (a) has been changed to nolonger refer to subsection 1(6) of the Act, in response tocomments.

51. The words "considered as a whole" have been added.

52. The requirement that the board of directors and two-thirdsof the independent directors determine that paragraphs(a) and (b) apply is new.

53. Paragraph (b) has been added to provide relief for thewholly-owned subsidiary.

54. The wording in paragraph 10 has been changed to nolonger refer to subsection 1(6) of the Act, in response tocomments.

55. The reference to "nominal interest" in the Januaryproposed Rule has been changed to 5 percent.

56. This is new to clarify that principal or interest paymentscannot be in participating or voting securities.

57. References have been added in paragraph 12 to a wholly-owned subsidiary entity of the issuer.

58. The words "at the time that the transaction is agreed to"have been deleted as being unnecessary given thechange to the definition of liquid market.

59. Subsection (4) has been modified to clarify that thepayment need not be joint. If a related party has paid allof the valuator's fees, the valuator for the transaction isnot, by that fact alone, not independent.

60. Subsection (5) has been modified to clarify its intent.

61. The words "at the time that the transaction is agreed to"have been deleted.

62. This condition is new.

63. Subsection (1) has been modified to impose therequirement directly on the valuator. As a result, thewords "of which it is aware" have been added toparagraph (c).

64. Subsection 6.4(3) of the January proposed Rule which,provided that "if, for an insider bid, an independentcommittee supervises the formal valuation the offereeissuer shall be responsible for satisfying the requirementsof Part 6 and the offeror shall make reasonable efforts toensure those requirements are satisfied" has beendeleted as being unnecessary. For an insider bid, theindependent committee must supervise the valuation, andthe obligations of the offeror are set out in Part 6.

65. The words "an adviser to an interested party in connectionwith the transaction" have been added to deal with thesituation where the director advises directly.

66. Paragraph (b) has been broadened so that the votesattached to shares owned by an interested party will notbe excluded if the interested party is being treatedidentically to other shareholders and does not receiveconsideration of greater value. A similar change hasbeen made to paragraph (c).

67. Reference to an affiliated entity has been added as it maybe the entity carrying out the going private transaction.

68. This paragraph has been modified to recognize that it isnot always possible to describe the tax consequences ofa second step going private transaction at the time of theformal bid.

69. Subsection (4) is new.

70. This has been added for clarification purposes.

71. Subsection 2.12 is new.

72. Subsection 2.13 is new.

73. The Commission has changed the reference from fiveyears to three years.

74. The reference to National Policy No. 48 has been addedbecause National Instrument 52-101 is not yet in force.

75. This has been modified so as to add the condition ofinvolvement by the interested party.

76. Section 6.1 has been added in response to a comment.