Proposed National Instrument: NI - 62-101 - Control Block Distribution Issues
Proposed National Instrument: NI - 62-101 - Control Block Distribution Issues
NOTICE OF NATIONAL INSTRUMENT 62-101
CONTROL BLOCK DISTRIBUTION ISSUES
Substance and Purpose of Proposed National Instrument
Introduction
On October 20, 1995, the Ontario Securities Commission (the "Ontario Commission") published aproposed Rule, The Early Warning System and Related Take-Over Bid, Insider Trading andControl Block Distribution Issues(1) (the "Ontario Draft Rule") under the Securities Act (Ontario)(the "Ontario Act"). The Canadian Securities Administrators (the "CSA") have agreed to use theOntario Draft Rule as the basis for three national instruments that will regulate substantially thesame matters as the Ontario Draft Rule.
This Notice relates to proposed National Instrument 62-101 Control Block Distribution Issues(the "National Instrument"), which, in Ontario, amends and replaces part of the Ontario DraftRule. This Notice summarizes both the proposed National Instrument and the changes made fromthe Ontario Draft Rule. The CSA are publishing, concurrently with the proposed NationalInstrument, proposed National Instrument 62-102 Disclosure of Outstanding Share Data andproposed National Instrument 62-103 The Early Warning System and Related Take-Over Bid andInsider Reporting Issues. Those proposed National Instruments are also based on the OntarioDraft Rule.
The proposed National Instrument is an initiative of the CSA, and is expected to be adopted as arule in each of British Columbia, Alberta, Manitoba, Ontario, and Nova Scotia, as a Commissionregulation in Saskatchewan, and as a policy in all the other jurisdictions represented by the CSA.
The proposed National Instrument implements, in part, the recommendation of the CSA TaskForce on Operational Efficiencies that Canadian securities regulatory authorities increase thecoordination of regulation, including standardization of requirements.
During the comment period for the Ontario Draft Rule, which expired on January 22, 1996, theOntario Commission received submissions on the Ontario Draft Rule from a broad range ofcommenters. These comments were summarized, together with Ontario Commission staffresponses, in the Staff Notice Summary of Comments and Status Report on Proposed Changes tothe Early Warning System and Related Take-Over Bid, Insider Reporting and Control BlockIssues,(2) which was published on August 2, 1996 (the "1996 Ontario Staff Notice").
The Ontario Commission considered these comments with the other members of the CSA inconjunction with the development of the proposed National Instrument, which reflects thedecisions of the CSA in this regard. The proposed National Instrument has been reorganized toincrease clarity, and to conform to the style employed in other national instruments implementedby the CSA. In addition, a number of drafting changes to the Ontario Draft Rule have been madethroughout the proposed National Instrument to increase clarity.
Background
The proposed National Instrument concerns matters that the Ontario Commission first consideredin 1993 when it published a proposed refinement of the early warning, insider reporting, and take-over bid regimes on September 10, 1993(3). For a discussion of the background to the proposedNational Instrument, as well as general early warning issues, reference should be made to theNotice of proposed National Instrument 62-103.
The proposed National Instrument is based on the control block distribution exemption containedin section 7.1, on the exemption for pledgees relating to hold periods contained in subsections8.1(1) and (2), and on certain conditions for the exemption from insider reporting requirementscontained in subsection 10.1(1), all of the Ontario Draft Rule. Comments received on the OntarioDraft Rule, and the related responses of the Ontario Commission staff, were summarized in the1996 Ontario Staff Notice.
As with the disclosure of outstanding share data, the control block distribution relief wasproposed to be separated out from the main early warning instrument, so it has been moved intothe proposed National Instrument.
Purpose of the Proposed National Instrument
There are two purposes of the proposed National Instrument. One purpose is to set out a limitedexemption for eligible institutional investors from the prospectus requirements applicable tocontrol block distributions in order to facilitate the ability of those investors to dispose of theirsecurities of an issuer without having to comply with the provisions of securities legislation thatwould require a statement that the investor has no knowledge of undisclosed material informationconcerning the issuer, or that would impose subsequent hold periods. This relief is analogous tothe relief proposed to be provided to eligible institutional investors under proposed NationalInstrument 62-103.
The other purpose of the proposed National Instrument is to modify the application of holdperiods as they may apply to pledgees disposing of securities that form part of a control block.
The securities legislation of a number of jurisdictions makes unavailable prospectus exemptionsthat are ordinarily available to control block distributions if securities of the class being disposedof have been acquired by the seller within certain prescribed periods (usually 6 months).Uncertainty has existed concerning how these hold periods apply to distributions in which apledgee is selling securities that are part of a control block. Some market participants take theview that where the pledgee is selling securities under a power of sale, the "seller" for purposes ofsecurities legislation is the owner or pledgor of the securities, so that the sale does not result innew hold periods based on the pledgee's holdings. Other market participants take the view thatthe "seller" is the pledgee and have applied for relief from the securities regulatory authorities sothat the pledgee can sell without a hold period arising. Subsection 2.2(1) of the proposedNational Instrument would ensure that the relevant hold period would run from the time that thepledgor acquired the relevant securities.
In addition, the Canadian securities legislation of three jurisdictions (Newfoundland, Ontario andSaskatchewan) contains a provision imposing additional hold periods applicable to, among others,pledgees, that apply to securities acquired under specified exemptions and that run from the timethat any securities of the class to be distributed by a pledgee were acquired. Again, someuncertainty has arisen as to whether those hold periods and acquisitions should take into accountacquisitions by a pledgor. Subsection 2.2(2) of the proposed National Instrument ensures that thetime of acquisition by the pledgee of the securities being distributed is not relevant to thecalculation of the relevant hold period.
Summary of the Proposed National Instrument
This summary notes that certain changes have been made in the proposed National Instrumentfrom the Ontario Draft Rule.
The proposed National Instrument has been changed from the Ontario Draft Rule version toremove all specific references to the Ontario Act and the Ontario Regulation. However, forexplanatory purposes in this Notice, reference is occasionally made to provisions of the OntarioAct and the Ontario Regulation.
Part 1 DEFINITIONS
Part 1 sets out one definition specific to the operation of the proposed National Instrument, and itincludes an interpretative section. A number of other terms used in the proposed NationalInstrument are defined or interpreted in proposed National Instrument 62-103; those terms are"early warning requirements", "effective control", "eligible institutional investor", "joint actor",and "pledgee".
Section 1.1 Definitions
The term "control distribution" refers to a trade in securities of an issuer from the holding of aperson or company, or a combination of them, that holds a sufficient number of securities of theissuer to affect materially the control of the issuer.
Changes from the Ontario Draft Rule
This definition is new.
Section 1.2 Interpretation
Section 1.2 provides that terms defined or interpreted in proposed National Instrument 62-103and used in the proposed National Instrument have the respective meanings ascribed to them inNational Instrument 62-103.
Changes from the Ontario Draft Rule
Section 1.2 is new.
Part 2 PROSPECTUS EXEMPTION
Part 2 sets out the exemption from the prospectus requirement that is available for control blockdistributions. Part 2 also exempts pledgees of securities from control block distributionprospectus requirements.
Section 2.1 Prospectus Exemption
Subsection 2.1(1) exempts a control distribution made by an eligible institutional investor from theprospectus requirement if several conditions, contained in paragraphs 2.1(1)(a) through (e), aresatisfied.
Subparagraph 2.1(1)(a)(i) requires that the eligible institutional investor has issued and filed thenews releases and filed reports under the early warning requirements or Part 4 of NationalInstrument 62-103 for the reporting issuer, reflecting the current securityholding percentage ofthe eligible institutional investor in classes of voting and equity securities of the reporting issuer.Subparagraph 2.1(1)(a)(ii) requires that the eligible institutional investor does not have knowledgeof any material fact or material change pertaining to the reporting issuer that has not beengenerally disclosed. Subparagraph 2.1(1)(a)(iii) requires that the eligible institutional investordoes not receive in the ordinary course of its business and investment activities knowledge of thetype referred to in subparagraph 2.1(1)(a)(ii). Subparagraph 2.1(1)(a)(iv) requires that theeligible institutional investor, either alone or with any joint actors, does not possess effectivecontrol of the issuer of the securities.
Paragraph 2.1(1)(b) requires that there are no directors or officers of the issuer of the securitieswho were, or could reasonably be seen to have been, selected, nominated, or designated by theeligible institutional investor or any joint actor.
Paragraph 2.1(1)(c) requires that the control distribution is made in the ordinary course ofbusiness or investment activity of the eligible institutional investor.
Paragraph 2.1(1)(d) requires that the securities would not be subject to any requirements ofsecurities legislation requiring them to be held for a specified time if the trade was not a controldistribution.
Paragraph 2.1(1)(e) requires that no unusual effort is made to prepare the market or to create ademand for the securities, and that no extraordinary commission is paid in respect of thedistribution.
Subsection 2.1(2) requires that an eligible institutional investor making a distribution in relianceon subsection (1) file a letter within 10 days after the distribution describing certain specifiedparticulars of the distribution.
Changes from the Ontario Draft Rule
Subsection 2.1(1) of the proposed National Instrument was published as section 7.1 of theOntario Draft Rule, although it has been substantially amended. There are three main changesmade to this provision in the proposed National Instrument from the Ontario Draft Rule.
First, the relief provided by section 2.1 is now available to eligible institutional investors thatsatisfy the conditions contained in the section. The Ontario Draft Rule would have provided therelief only to insiders of an issuer that were insiders only due to their holdings of securities. Thischange is consistent with the general changes made to proposed National Instrument 62-103, inwhich much of the relief proposed under that Instrument would be available only to eligibleinstitutional investors.
Second, the conditions to the relief have been changed. The conditions contained in the proposedNational Instrument generally correspond to the conditions to relief provided to eligibleinstitutional investors in National Instrument 62-103, and restrict the availability of the exemptionto eligible institutional investors that are current in their early warning system or Part 4 ofNational Instrument 62-103 filings and that, generally speaking, do not have inside informationabout, or control, the reporting issuer. In addition, distributions made in reliance on theexemption must be in the ordinary course of business or investment activity of the eligibleinstitutional investor. The Ontario Draft Rule required that the issuer of the securities had been areporting issuer for at least 18 months; that no unusual efforts were made to prepare the marketfor the securities or to create a demand for the securities and no extraordinary commission orconsideration is paid in respect of the distribution and the disclosure was made to the Commissionwithin 10 days of the distribution.
Third, the relief proposed in the Ontario Draft Rule would have limited use of the exemption todistributions of five percent of the securities of the issuer over any six or 12 month period,depending on whether the issuer was eligible to use the POP system. This restriction has beeneliminated on the basis that the distributions under this exemption are subject to hold periods inany event (as no distribution may be made under this provision unless the securities being soldwould be freely tradeable if the distribution was not a control distribution).
Section 2.2 Pledgees
Subsection 2.2(1) sets out an exemption from the hold period referred to in the provision ofsecurities legislation set out in Appendix B of the Instrument. These provisions would normallyrestrict the availability of an exemption from the prospectus requirement. This provisioneffectively ensures that for hold period purposes, a pledgee will be treated as selling "in the shoes"of a pledgor by ensuring that the pledgee distributing securities under clauses 72(7)(b) and (c) ofthe Ontario Act, and equivalent provisions in other jurisdictions, may take advantage of the timethat the pledgor of the securities in question held the securities.
Subsection 2.2(2) is similar in function to subsection 2.2(1). It ensures that the provision ofsecurities legislation set out in Appendix C of the Instrument applies to a distribution of securitiesby a pledgee as if the pledgee is the "seller" within the meaning of that provision and ensures thatthe securities being distributed are not subject to the hold periods provided for in the provision.The provision may otherwise restrict the availability of an exemption from the prospectusrequirement for a distribution of securities of a class by a pledgee.
Changes from the Ontario Draft Rule
Subsection 2.2(1) and (2) of the proposed National Instrument were published as subsections8.1(1) and (2), respectively, of the Ontario Draft Rule. The drafting of these provisions has beenextensively amended to eliminate specific references to provisions of the Ontario Act.
Part 3 EXEMPTION
Part 3 permits the regulator or the securities regulatory authority, as appropriate, to grant anexemption to the proposed National Instrument.
Appendix A sets out the provisions of securities legislation that are equivalent to paragraph (c) ofthe definition of "distribution" contained in subsection 1(1) of the Ontario Act.
Appendix B sets out the provisions of securities legislation that are equivalent to subsection 25(1)of the Ontario Regulation, which will be replaced by subsection 3.11(1) of proposed Rule 45-501Exempt Distributions.
Appendix C sets out the provisions of securities legislation that are equivalent to subsection 25(2)of the Ontario Regulation, which will be replaced by subsection 3.11(2) of proposed Rule 45-501Exempt Distributions.
Changes from the Ontario Draft Rule
Appendices A, B and C are new, and have been added to replace references to specific provisionswith the generic language adopted in other national instruments.
Authority for Proposed National Instrument
In those jurisdictions in which the proposed National Instrument is to be adopted or made as arule or regulation, the securities legislation in each of those jurisdictions provides the securitiesregulatory authority with rule-making or regulation-making authority in respect to the subjectmatter of the proposed National Instrument.
In Ontario, the following provision of the Ontario Act provides the Ontario Commission with theauthority to make the proposed National Instrument. Paragraph 143(1)20 of the Ontario Actauthorizes the Ontario Commission to make rules in respect of exemptions from the prospectusrequirements, as well as for the removal of exemptions from those requirements. Paragraphs143(1)22 and 24 of the Ontario Act authorize the Ontario Commission to make rules in respect ofadditional continuous disclosure obligations. Paragraph 143(1)39 of the Ontario Act authorizesthe Ontario Commission to make rules requiring or respecting the media, format, preparation,form, content, execution, certification, dissemination and other use, filing and review of alldocuments required under or governed by the Ontario Act.
Alternatives Considered
In the October 1995 Notice accompanying the publication of the Ontario Draft Rule for comment,the Ontario Commission outlined the alternatives to the Ontario Draft Rule, being the 1993 and1994 Proposals, that it had considered. The available alternatives have not changed.
Unpublished Materials
In proposing the proposed National Instrument, the CSA have not relied on any significantunpublished study, report or other written materials.
Anticipated Costs and Benefits
The exemptions from the prospectus requirement provided by section 2.1 of the proposedNational Instrument form part of the general relief being provided to eligible institutional investorsin that Instrument and in National Instrument 61-103, which should serve to reduce compliancecosts for eligible institutional investors.
The relief provided by section 2.2 of the proposed National Instrument should facilitate thedisposition of securities by pledgees.
Amendment to Regulation - Ontario
In Ontario, the adoption of the proposed National Instrument does not require any Regulation tobe revoked or amended. Section 25 of the Regulation will be revoked in connection with theimplementation of Rule 45-501 Exempt Distributions.
Comments
Interested parties are invited to make written submissions with respect to the proposed NationalInstrument. Submissions received by December 7, 1998 will be considered.
Submissions should be sent to all of the Canadian securities regulatory authorities listed below incare of the Ontario Commission, in duplicate, as indicated below:
British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Department of Government Services and Lands, Newfoundland and Labrador
Registrar of Securities, Northwest Territories
Registrar of Securities, Government of the Yukon Territory
c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
Submissions should also be addressed to the Commission des valeurs mobilières du Québec asfollows:Claude St Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3
A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect)should also be submitted. As securities legislation in certain provinces requires that a summary ofwritten comments received during the comment period be published, confidentiality ofsubmissions cannot be maintained.
Questions may be referred to any of:
Brenda Leong
British Columbia Securities Commission
(604) 899-6647
David Sheridan
Alberta Securities Commission
(403) 297-2630
Barbara Shourounis
Saskatchewan Securities Commission
(306) 787-5645
Douglas Brown
Manitoba Securities Commission
(204) 945-0605
Tanis J. MacLaren
Ontario Securities Commission
(416) 593-8259
Fernand Lavigne
Commission des valeurs mobilières du Québec
(514) 873-5326
Bill Slattery
Nova Scotia Securities Commission
(902) 424-7355
Proposed National Instrument
The text of the proposed National Instrument follows, together with footnotes that are not part ofthe National Instrument, but have been included to provide background and explanation.
DATED: September 4, 1998.
CONTROL BLOCK DISTRIBUTION ISSUES
PART 1 DEFINITIONS
1.1 Definitions
1.2 Interpretation
PART 2 PROSPECTUS EXEMPTION
2.1 Prospectus Exemption
2.2 Pledgees
PART 3 EXEMPTION
3.1 Exemption
NATIONAL INSTRUMENT 62-101(4)CONTROL BLOCK DISTRIBUTION ISSUES
1.1 Definitions - In this Instrument "control distribution" means a trade to which the provisionsof securities legislation listed in Appendix A apply.
1.2 Interpretation - Terms defined or interpreted in National Instrument 62-103 The EarlyWarning System and Related Take-over Bid and Insider Reporting Issues and used in thisInstrument have the respective meanings ascribed to them in National Instrument 62-103.
PART 2 PROSPECTUS EXEMPTION
2.1 Prospectus Exemption
(1) The prospectus requirement(6) does not apply to a control distribution made by an eligibleinstitutional investor if
(a) the eligible institutional investor
(i) has issued and filed the news releases and filed reports under the early warningrequirements or Part 4 of National Instrument 62-103 for the reporting issuerreflecting the current securityholding percentage of the eligible institutionalinvestor in classes of voting and equity securities of the reporting issuer,
(ii) does not have knowledge of any material fact or material change with respect tothe reporting issuer that has not been generally disclosed,
(iii) does not receive in the ordinary course of its business and investmentactivities information of any material fact or material change with respect tothe reporting issuer that has not been generally disclosed, and
(iv) either alone or together with any joint actors, does not possess effectivecontrol of the issuer of the securities;
(b) there are no directors or officers of the reporting issuer who were, or couldreasonably be seen to have been, selected, nominated or designated by the eligibleinstitutional investor or any joint actor;
(c) the control distribution is made in the ordinary course of business or investmentactivity of the eligible institutional investor;
(d) if the trade was not a control distribution, the securities would not be subject to anyrequirements of securities legislation(7) requiring them to be held for a specified periodof time; and
(e) no unusual effort is made to prepare the market or to create a demand for thesecurities and no extraordinary commission or consideration is paid in respect of thecontrol distribution.
(2) An eligible institutional investor that makes a distribution in reliance on subsection (1)shall file a letter within 10 days after the distribution that describes the date and size ofthe distribution, the market on which it was made and the price at which the securitiesbeing distributed were sold.
2.2 Pledgees
(1) For purposes of a distribution of securities by a pledgee, the period of time referred to inthe provision of securities legislation set out in Appendix B(8) is considered to commenceon the date that the pledgor acquired the securities being distributed.(9)
(2) If a pledgee is distributing securities, then for the purposes of the provisions of securitieslegislation set out in Appendix C
- (a) a reference to a "seller" or "vendor" shall be construed as a reference to thepledgee; and
(b) the pledgee shall be considered to have held the securities being distributed for theapplicable time period provided for in that provision.
PART 3 EXEMPTION
3.1 Exemption
(1) The regulator(10) or the securities regulatory authority may grant an exemption to thisInstrument, in whole or in part, subject to such conditions or restrictions as may beimposed in the exemption.
(2) Despite subsection (1), in Ontario, only the regulator may grant such an exemption.
APPENDIX A
| JURISDICTION | SECURITIES LEGISLATIONREFERENCE |
| ALBERTA | Clause 1(f)(iii) of the Securities Act(Alberta) |
| BRITISHCOLUMBIA | Paragraph (c) of the definition of "distribution" contained in subsection1(1) of the Securities Act (BritishColumbia) |
| MANITOBA | Paragraph 1(b) of the definition of "primary distribution to the public" contained in subsection 1(1) of the Securities Act (Manitoba) |
| NEWFOUNDLAND | Clause 2(1)(l)(iii) of the SecuritiesAct (Newfoundland) |
| NOVA SCOTIA | Clause 2(1)(l)(iii) of the SecuritiesAct (Nova Scotia) |
| ONTARIO | Paragraph (c) of the definition of "distribution" contained in subsection1(1) of the Securities Act (Ontario) |
| PRINCE EDWARDISLAND | Clause 1(b.1) of the Securities Act(Prince Edward Island) |
| SASKATCHEWAN | Subclause 2(1)(r)(iii) of TheSecurities Act, 1988 (Saskatchewan) |
NATIONAL INSTRUMENT 62-101
APPENDIX B
| JURISDICTION | SECURITIES LEGISLATION REFERENCE |
| ALBERTA | Subparagraph 112(1)(d)(iii) of the Securities Act(Alberta) |
| BRITISHCOLUMBIA | Subparagraph 128(d)(iii) of the Securities Rules(British Columbia) |
| NEWFOUNDLAND | Subsection 73(18) of the Securities Act(Newfoundland) |
| ONTARIO | Subsection 3.11(1) of Rule 45-501 ExemptDistributions |
| SASKATCHEWAN | Subclause 81(10)(b)(iii) of The Securities Act,1988 (Saskatchewan) |
NATIONAL INSTRUMENT 62-101
APPENDIX C
| JURISDICTION | SECURITIES LEGISLATIONREFERENCE |
| NEWFOUNDLAND | Subsection 73(19) of the Securities Act(Newfoundland) |
| ONTARIO | Subsection 3.11(2) of Rule 45-501Exempt Distributions |
| SASKATCHEWAN | Subclause 81(10)(b)(iv) of TheSecurities Act, 1988 (Saskatchewan) |
Footnotes
1. (1995), 18 OSCB 4893.
2. (1996), 19 OSCB 4221.
3. (1993), 16 OSCB 4539.
4. This National Instrument is expected to be adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, asa Commission regulation in Saskatchewan, and as a policy in all other jurisdictions represented by the Canadian Securities Administrators.
5. A national definition instrument has been adopted as National Instrument 14-101 Definitions. It contains definitions of certain terms usedin more than one national instrument. National Instrument 14-101 also provides that a term used in a national instrument and defined inthe statute relating to securities of the applicable jurisdiction, the definition of which is not restricted to a specific portion of the statute, willhave the meaning given to it in that statute, unless the context otherwise requires. National Instrument 14-101 also provides that aprovision or a reference within a provision of a national instrument that specifically refers by name to a jurisdiction, other than the localjurisdiction, shall not have any effect in the local jurisdiction, unless otherwise stated in the provision.
6. The term "prospectus requirement" is proposed to be defined in National Instrument 14-101 Definitions. The proposed definition is "therequirement in securities legislation that prohibits a person or company from distributing a security unless a preliminary prospectus andprospectus for the security have been filed and receipts obtained for them".
7. The term "securities legislation" is defined in National Instrument 14-101 Definitions as meaning the particular statute and legislativeinstruments of the local jurisdiction set out in an appendix to that instrument and will generally include the statute, regulations and, in somecases, the rules, forms, rulings and orders relating to securities in the local jurisdiction.
8. The provisions listed in Appendix B are the provisions that would restrict the availability of an exemption from the prospectus requirementfor a distribution by a pledgee unless the pledgee has held the securities to be distributed for a specified length of time; these provisions arethe equivalent of subsection 25(1) of the Regulation to the Securities Act (Ontario) which will be replaced by section 3.11 of Ontario Rule45-501 Exempt Distributions.
9. This provision permits the aggregation of the time that the securities in question were held by the pledgee and the pledgor, for purposes ofcalculating the hold period contained in the referenced provision of securities legislation.
10. The term "regulator" is defined in National Instrument 14-101 Definitions as meaning, in a local jurisdiction, the person set out in anappendix to that instrument opposite the name of the local jurisdiction. The term "local jurisdiction" is defined in National Instrument 14-101 Definitions as "in a national instrument adopted or made by a Canadian securities regulatory authority, the jurisdiction in which theCanadian securities regulatory authority is situate". The term "Canadian securities regulatory authorities" is defined in NationalInstrument 14-101 Definitions as meaning the securities commissions or similar regulatory authorities set out in an appendix to thatinstrument.