Notice and Proposed Rule: OSC Rule - 45-502 - Dividend or Interest Reinvestment and Stock Dividend Plans

NOTICE OF PROPOSED RULE 45-502 UNDER

THE SECURITIES ACT

DIVIDEND OR INTEREST REINVESTMENT

AND STOCK DIVIDEND PLANS

Substance and Purpose of Proposed Rule

The substance and purpose of the proposed Rule is to provide for an exemption from the application of sections 25 and 53 of the Securities Act (the "Act") forthe issue of securities under dividend or interest reinvestment plans, and the cash payment option of dividend or interest reinvestment and stock dividend plans,subject to certain terms and conditions, and to provide for simplified reporting of, and fees for, exempt trades under these exemptions.

The proposed Rule replaces and expands upon the Rule In the Matter of Dividend Reinvestment and Stock Dividend Plans (1997), 20 OSCB 1218, which in turnincorporated the Blanket Ruling of the same name, (1993)16 OSCB 5928 as amended by an order dated April 26, 1994 (1994), 17 OSCB 1978, which replacedand updated a ruling dated October 27, 1983, 6 OSCB 3737, which in turn replaced and expanded upon a ruling dated March 18, 1982, 4 OSCB 511E. ThisBlanket Ruling exempted certain trades made pursuant to dividend or interest reinvestment and stock dividend plans which have a cash payment option from theapplication of the registration and prospectus requirements of the Act, subject to certain terms and conditions, and provided for simplified reporting of theexempt trades under such plans (the "Combined Plan Blanket Ruling").

The proposed Rule also incorporates and replaces the prospectus and registration exemptions for dividend and interest reinvestment plans contained in clauses14(e) and 151(a), respectively, of the Regulation.

Summary of Proposed Rule

Part 2 of the proposed Rule provides for exemptions from the registration and prospectus requirements of the Act for trades by an issuer by way of the issuanceof a security under a dividend or interest reinvestment plan. Part 1 of the proposed Rule defines a dividend or interest reinvestment plan as an arrangement underwhich a holder of publicly traded securities of an issuer is permitted to direct that the dividends or interest paid on those securities be applied to the purchasefrom the issuer of publicly traded equity securities of the issuer's own issue or of other securities of the issuer's own issue that are redeemable at the option of theholder. The proposed Rule clarifies that the exemptions are for trades by an issuer by way of the issuance of its securities and the registration exemption does notapply for trades in securities previously acquired in the secondary market.

Part 3 of the proposed Rule provides for exemptions from the registration and prospectus requirements of the Act for trades by an issuer by way of the issuanceof a security under the cash payment option of a combined plan if certain conditions are met. A combined plan is defined in Part 1 to be a dividend or interestreinvestment plan or a stock dividend plan that contains a cash payment option. The proposed Rule clarifies that the exemptions for the securities are for tradesby an issuer by way of the issuance of securities under the cash payment option of a combined plan. It also clarifies that the registration exemption does not applyfor trades in securities previously acquired in the secondary market.

By virtue of the definitions of "cash payment option", "combined plan" and "dividend or interest reinvestment plan", the exemptions for securities issued underthe cash payment option of dividend or interest reinvestment combined plans are for publicly traded equity securities and other securities of the issuer that areredeemable at the option of the holder. By virtue of the definitions of "cash payment option", "combined plan" and "stock dividend plan", there is no restrictionon the type of security which may be issued under the cash payment option of a stock dividend combined plan under the combined plan exemption. There is nochange in this regard from the provisions of clause 14(e) of the Regulation and the Combined Plan Blanket Ruling.

Section 3.1 provides for exemptions from the registration and prospectus requirements of the Act for a trade by an issuer by way of the issuance of a securityunder the cash payment option of a combined plan on certain conditions. The conditions are that (a) the issuer is either a reporting issuer under the Act, and tothe best of its belief not in default under the Act or regulations, or if not a reporting issuer, is an issuer of which the class of securities that are issuable under theplan is listed and posted for trading, traded, or quoted, on a specified stock exchange or market; and (b) one of (i) the aggregate number of securities issuedunder the cash payment option of the combined plan in the relevant financial year of the issuer before the trade, plus the aggregate number of securities issued inthe trade, does not exceed two percent of the number of the class of securities outstanding at the commencement of that financial year, (ii) at the time of thetrade, persons or companies whose last address as shown on the books of the issuer is in Ontario and who held securities of the class of securities (A) did nothold more than 10 percent of the outstanding securities of the class of securities, and (B) did not represent in number more than 10 percent of the total number ofholders of securities of the class of securities or (iii) at the time of the trade, persons or companies who are in Ontario and beneficially own securities of the classof securities (A) did not beneficially own more than 10 percent of the outstanding securities of the class of securities, and (B) did not represent in number morethan 10 percent of the total number of holders of securities of the class of securities.

This section makes a number of changes to the exemptions contained in the Combined Plan Blanket Ruling. The wording has been clarified to confirm that theregistration and prospectus exemptions are for trades under the cash payment option of a combined plan. The wording has also been clarified to confirm theexemptions are for trades in securities by an issuer by way of the issuance of its securities and does not apply to trades in securities previously acquired in thesecondary market. The London Stock Exchange Limited has been added to the list of stock exchanges and markets which were designated for the purposes ofthe Combined Plan Blanket Ruling. In addition, the de minimis percentage test contained in the Combined Plan Blanket Ruling has been reworded to implement a"registered shareholder" test and, as an alternative, a "beneficial ownership" test. These tests are similar to the tests used in proposed Rule 72-501 ProspectusExemption for First Trade in Certain Securities Over a Market Outside Ontario, Notice of which was republished (1997), 20 OSCB 2053. In addition, consistentwith the Commission's determination as to the appropriate percentage to reflect a de minimis market in Ontario, as reflected in proposed Rule 72-501, the deminimis percentage in the proposed Rule has been changed from five percent to 10 percent.

Part 4 provides that a person or company may trade a security acquired under an exemption contained in section 2.1 or 3.1 only (a) if the first trade is madeunder a prospectus for which a receipt has been obtained from the Director; (b) if the first trade is made under an exemption in Ontario securities law fromsection 53 of the Act; or (c) if (i) at the time of the trade, the issuer of the security is a reporting issuer and has been a reporting issuer for at least 12 months, (ii)in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the issuer is notin default under the Act or the regulations, (iii) disclosure to the Commission has been made of the trade under section 2.1 or section 3.1 in accordance with Part5, (iv) no unusual effort is made to prepare the market or to create a demand for the securities and no extraordinary commission or consideration is paid for thetrade and (v) the trade is not a control person distribution. (First trade relief will also be provided in proposed Rule 72-501 Prospectus Exemption For FirstTrade in Certain Securities Over A Market Outside Ontario, ibid. The Combined Plan Blanket Ruling set out a further exemption for first trades with the sameconditions as were contained in the Blanket Ruling In the Matter of First Trade in Securities Acquired Pursuant to Certain Exemptions (1994), 17 O.S.C.B.1978. This latter Blanket Ruling will be replaced by proposed Rule 72-501 Prospectus Exemption for First Trade in Certain Securities Over a Market OutsideOntario. As Rule 72-501 provides this further relief for the first trade in securities acquired under, inter alia, section 2.1 or 3.1 of proposed Rule 45-502, it wasappropriate to delete such first trade relief and related conditions from this proposed Rule 45-502, rather than reiterate this in the proposed Rule.)

Part 5 of the proposed Rule provides for reporting of exempt trades under clause 72(5)(b) of the Act for securities acquired under the exemption contained insubclause 72(1)(f)(i) of the Act and reporting of exempt trades under clause 4.1(c)(iii) of the Rule for securities acquired under the exemptions contained insections 2.1 and 3.1 of the Rule. Section 5.l provides that the disclosure required for securities acquired under the exemptions contained in sections 2.1 and 3.1of the proposed Rule shall be made in accordance with Part 5 and the disclosure required for securities acquired under the exemption contained in subclause72(1)(f)(i) of the Act may be made in accordance with Part 5. Section 5.2 provides that a report may be made by the issuer by disclosing the date of the trade, thenumber of securities purchased and the purchase price paid or to be paid, either in an information circular or take-over bid circular filed in accordance with theregulations or a letter filed with the Commission by a person or company certifying that the person or the company has knowledge of the facts contained in theletter, if in either case the filing is effected before any resale of the securities. Section 5.3 provides that the disclosure may be made annually if the volume oftrading in securities issued in reliance on these exemptions does not exceed one percent of the securities of that class outstanding at the beginning of the calendarmonth in which the securities were issued. Section 5.4 provides that, if the volume of trading in securities issued in reliance on these exemptions exceeds thisthreshold, the issuer may file a report for that month. Section 5.5 clarifies that, for the purposes of sections 5.3 and 5.4, the report may be made in the form of aletter filed with the Commission by a person or company disclosing the date of the trade, the number of securities purchased and the purchase price paid or to bepaid and certifying the person or the company has knowledge of the facts contained in the letter.

Part 5 extends the simplified reporting for the disclosure of exempt trades under a combined plan contained in the Combined Plan Blanket Ruling to exempttrades made under the exemptions contained in subclause 72(1)(f)(i) of the Act and clause 14(e) of the Regulation (now section 2.1 of this Rule). It alsoincorporates and replaces the provisions of subsection 69(3) of the Regulation.

Part 6 provides for annual fees of $100 payable to the Commission for securities acquired under each of these exemptions. Under existing requirements,subsection 21(2) of Schedule 1 to the Regulation requires that a fee of $375 accompany a notice under clause 72(1)(h) of the Act in respect of a dividend orreinvestment plan or stock dividend plan but no fees are payable for securities issued under subclause 72(1)(f)(i) of the Act and clause 14(e) of the Regulation.

Part 7 provides that the Director may grant an exemption to the Rule in whole or in part, subject to such conditions or restrictions as may be imposed in theexemption.

Authority for Proposed Rule

The following provisions provide the Commission with authority to adopt the proposed Rule.

Paragraphs 8 and 20 of subsection 143(1) of the Act authorize the Commission to make rules which provide for exemptions from the registration and prospectusrequirements under the Act and for the removal of exemptions from those requirements.

Paragraph 11 of subsection 143(1) of the Act authorizes the Commission to make rules regulating the listing or trading of publicly traded securities includingrequiring reporting of trades and quotations.

Paragraph 13 of subsection 143(1) authorizes the Commission to make rules regulating trading or advising in securities to prevent trading or advising that isfraudulent, manipulative, deceptive or unfairly detrimental to investors.

Paragraph 39 of subsection 143(1) of the Act authorizes the Commission to make rules requiring or respecting the media, format, preparation, form, content,execution, certification, dissemination and other use, filing and review of all documents required under or governed by the Act, the regulations or the rules and alldocuments determined by the regulations or the rules to be ancillary to the documents, including, i. applications for registration and other purposes, ii.preliminary prospectuses and prospectuses, iii. interim financial statements and financial statements, iv. proxies and information circulars, and v. take-over bidcirculars, issuer bid circulars and directors' circulars.

Paragraph 43 of subsection 143(1) of the Act authorizes the Commission to make rules prescribing the fees payable to the Commission, including those for filing,for applications for registration or exemptions, for trades in securities, in respect of audits made by the Commission, and in connection with the administration ofOntario securities law.

Alternatives Considered

The Commission determined that the exemptions contained in the Combined Plan Blanket Ruling were useful and should be continued. The Combined PlanBlanket Ruling was incorporated by reference into a Rule which expires in 1998 and it is therefore appropriate that a Rule be implemented to replace it.

The Commission also determined that it would be useful to incorporate in the Rule the current exemption contained in clause 14(e) of the Regulation and therelated first trade restrictions contained in subsection 19(5) of the Regulation relating to securities issued by an issuer pursuant to a dividend or interestreinvestment plan, for ease of reference.

The Commission also determined it would be useful to extend the simplified reporting system to dividend or interest reinvestment plans and to stock dividendplans which do not have a cash payment option. In addition, for ease of reference, the Commission determined it would be useful to include in the proposed Rulethe method of reporting exempt trades provided by subsection 69(3) of the Regulation.

The Commission also determined that it would be appropriate to impose fees in respect of the exemptions contained in the Rule on a consistent basis analogousto those currently imposed under section 24 of Schedule 1 to the Regulation for reports of exempt trades under employee purchase plans or arrangements.

The Commission also considered whether it would be useful to include in the proposed Rule the provisions contained in the Rule In the Matter of DividendReinvestment Plans (1997), 20 OSCB 1218, incorporating the Blanket Ruling of the same name (1994), 17 OSCB 1178(the "Control Block Plan Ruling"). TheCommission determined that it would be more useful to include such provisions in proposed Rule 45-501 Exempt Distributions for ease of reference, as it iscontemplated that Rule 45-501 Exempt Distributions will incorporate and restate section 25 of the Regulation and the Control Block Plan Ruling provides anexception to section 25.

The Commission also considered whether to include in the Rule a provision to provide registration and prospectus exemptions for reinvestment plans providingfor the reinvestment by unit holders of closed-end investment trusts of distributions into additional units of the trust. These have been the subject of a number ofrecent specific exemption orders. The Commission has determined that, for the time being, each such reinvestment plan should be considered on the basis of itsown facts, allowing the Commission to impose such conditions as it may see fit in each such case.

The Commission is currently reviewing the establishment of requirements relating to direct purchase plans which would allow investors to purchase securitiesdirectly from the issuer without the requirement of the investor being a shareholder, or the issuer having a dividend reinvestment plan. While the Commission isconsidering this matter, however, it determined that the proposed Rule should be made, so to continue the benefits of the existing relief relating to dividend orinterest reinvestment and stock dividend plans and to make other appropriate changes as described above.

Unpublished Materials

In proposing the Rule, the Commission has not relied on any significant unpublished study, report or other written materials.

Anticipated Costs and Benefits

The Combined Plan Blanket Ruling has been useful to issuers, as it provided for exemptions from registration and prospectus requirements for trades made undercombined plans with a cash payment option and provided for simplified reporting of exempt trades under combined plans. The proposed Rule maintains theexemptions for combined plans.

The proposed Rule also clarifies and confirms that the exemptions for combined plans are restricted to trades by an issuer under the cash payment option by wayof the issuance of securities and that the exemptions for dividend or interest reinvestment plans are restricted to trades by way of the issuance of securities. It isnot anticipated by the Commission that these clarifications will adversely affect the operation of most existing plans.

In addition, for ease of reference, the proposed Rule includes the exemption for dividend or interest reinvestment plans, now contained in clause 14(e) of theRegulation and the related first trade restrictions, now contained in subsection 19(5) of the Regulation.

The proposed Rule also maintains the simplified reporting methods for exempt trades under combined plans. In addition, the simplified reporting requirementshave been clarified and organized and extended to dividend or interest reinvestment plans and to stock dividend plans. In addition, for ease of reference, themethod of reporting exempt trades provided by subsection 69(3) of the Regulation has been included in the proposed Rule.

Schedule 1 to the Regulation currently provides for fees for a number of prospectus exempt distributions. Under subsection 21(2) of Schedule 1 to theRegulation, a fee of $375 is to accompany a notice under clause 72(1)(h) for a dividend or interest reinvestment plan or a stock dividend plan. However,Schedule 1 does not provide for fees for exempt distributions by way of dividend or reinvestment plans or stock dividend plans under subclause 72(1)(f)(i) orclause 14(e) of the Regulation. By providing for an annual fee of $100 for securities acquired under the exemptions in the Rule, on the same basis as prospectusexempt distributions of securities under employee and similar plans, and by removing the $375 fee for dividend or interest reinvestment and stock dividend plansunder subsection 72(1)(h), the proposed Rule clarifies, simplifies, and provides for consistency in, the fees payable in this regard.

Based on the foregoing, the Commission believes that the benefits of the proposed Rule justify the costs.

Regulations to be Revoked or Amended

The Commission will request that the Lieutenant-Governor-in-Council revoke clause 14(e), subsection 19(5) and subsection 69(3) of the Regulation andsubsection 21(2) of Schedule 1 to the Regulation and will also request The Lieutenant-Governor-in-Council to amend subsection 21(1) of Schedule 1 to theRegulation to delete the exception for notices in respect of a dividend or interest investment plan or a stock dividend plan.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by December 22, 1997 will be considered.

Submissions should be made in duplicate to:

Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario
M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Act requires that a summary ofwritten comments received during the comment period be published, confidentiality of submissions received cannot be maintained.

Questions may be referred to:

Cynthia Rogers
Legal Counsel
Ontario Securities Commission
(416) 593-8261

Proposed Rule

The text of the proposed Rule follows, together with footnotes that are not part of the proposed Rule but have been included to provide background andexplanation.

DATED: September 19, 1997

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Proposed Rule - Rule 45-502

 

ONTARIO SECURITIES COMMISSION RULE

RULE 45-502

DIVIDEND OR INTEREST REINVESTMENT

AND STOCK DIVIDEND PLANS1

PART 1 DEFINITIONS AND INTERPRETATION2

1.1 Definitions - In this Rule

"cash payment option" means a provision in a plan that allows the participants to make cash payments to purchase securities of an issuer from the issuer, inaddition to the securities

(a) purchased using the amount of the dividend or interest payable to the participant; or

(b) acquired as a stock dividend or other distribution out of earnings or surplus;

"class of securities" means a class or a series of a class of securities that are issuable under a plan;

"combined plan" means a plan that contains a cash payment option;

"dividend or interest reinvestment plan"3 means an arrangement under which a holder of publicly traded securities of an issuer is permitted to direct that thedividends or interest paid on those securities be applied to the purchase from the issuer of publicly traded equity securities4 of the issuer's own issue or othersecurities of the issuer's own issue that are redeemable at the option of the holder;

"plan" means a dividend or interest reinvestment plan or a stock dividend plan; and

"stock dividend plan" means an arrangement under which securities of an issuer are issued by the issuer to holders of securities of the issuer as a stock dividendor other distribution out of earnings or surplus5.

1.2 Interpretation - The term "special relationship", when used in reference to a person or company in a special relationship with a reporting issuer, shall beinterpreted in accordance with subsection 76(5) of the Act.

PART 2 EXEMPTION FOR TRADES UNDER A DIVIDEND OR INTEREST REINVESTMENT PLAN6

2.1 Exemption for Trades Under a Dividend or Interest Reinvestment Plan - Sections 25 and 53 of the Act do not apply to a trade by an issuer by way of theissuance7 of a security under a dividend or interest reinvestment plan.

PART 3 EXEMPTION FOR TRADES UNDER THE CASH PAYMENT OPTION OF A COMBINED PLAN8

3.1 Exemption for Trades Under the Cash Payment Option of a Combined Plan - Sections 25 and 53 of the Act do not apply to a trade by an issuer by way of theissuance9 of a security10 under the cash payment option of a combined plan

(a) if the issuer is11

(i) a reporting issuer12 and, to the best of its belief13, not in default under the Act or the regulations, or

(ii) an issuer, other than a reporting issuer, of which the class of securities is listed and posted for trading, traded, or quoted, on14

(A) The Montreal Exchange,
(B) the Alberta Stock Exchange,
(C) the Vancouver Stock Exchange,
(D) the New York Stock Exchange,
(E) the American Stock Exchange,
(F) the Nasdaq Stock Market, or
(G) the London Stock Exchange Limited; and

 

(b)15 if

(i) the aggregate number of securities issued under the cash payment option of the combined plan in the relevant financial year of the issuer before the trade, plusthe aggregate number of securities issued in the trade, does not exceed two percent of the number of the securities of the class of securities outstanding at thecommencement of that financial year,

(ii)16 at the time of the trade, persons or companies whose last address as shown on the books of the issuer is in Ontario and who held securities of the class ofsecurities

(A) did not hold more than 10 percent of the outstanding securities of the class of securities, and

(B) did not represent in number more than 10 percent of the total number of holders of securities of the class of securities; or

(iii) at the time of the trade, persons or companies who are in Ontario and who beneficially own securities of the class of securities

(A) did not beneficially own more than 10 percent of the outstanding securities of the class of securities, and

(B) did not represent in number more than 10 percent of the total number of holders of securities of the class of securities.

PART 4 FIRST TRADE IN SECURITIES ACQUIRED UNDER SECTION 2.1 OR 3.1

4.1 First Trade in Securities Acquired Under Section 2.1 or 3.117 - A person or company may trade a security acquired under an exemption contained in section2.1 or 3.1 only

(a) if the first trade is made under a prospectus for which a receipt has been obtained from the Director;

(b) if the first trade is made under an exemption in Ontario securities law18 from section 53 of the Act19; or

(c) if

(i) at the time of the trade, the issuer of the security is a reporting issuer and has been a reporting issuer for at least 12 months,

(ii) in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the issuer isnot in default under the Act or the regulations,

(iii) disclosure to the Commission has been made of the trade under section 2.1 or section 3.1 in accordance with Part 5,

(iv) no unusual effort is made to prepare the market or to create a demand for the securities and no extraordinary commission or consideration is paid for thetrade, and

(v) the trade is not a control person distribution.

PART 5 REPORTS OF EXEMPT TRADES20

5.1 Reports - The disclosure required by clause 4.1(c)(iii) for securities acquired under the exemptions contained in sections 2.1 and 3.1 shall, and the disclosurerequired by clause 72(5)(b) of the Act for securities acquired under the exemption contained in subclause 72(1)(f)(i) of the Act may21, be made by the issuer inaccordance with this Part.

5.2 Report Before Resale22 - A report may be made by the issuer by disclosing the date of the trade, the number of securities purchased and the purchase pricepaid or to be paid, in

(a) an information circular or take-over bid circular filed in accordance with the regulations; or

(b) a letter filed23 by a person or company certifying that the person or the company has knowledge of the facts contained in the letter

if in either case the filing is effected before any resale of the securities acquired under the exemptions referred to in section 5.124.

5.3 Annual Reports25 - A report may26 be made by the issuer when the plan is commenced and not less frequently than annually after the first report, if thevolume of trading in securities of the class of securities issued in reliance on the exemptions contained in subclause 72(1)(f)(i) of the Act and sections 2.1 and 3.1does not exceed one percent of the securities of that class that were outstanding at the beginning of the calendar27 month in which the securities were issued.

5.4 Monthly Reports - If the volume of trading in securities issued in reliance on the exemptions contained in subclause 72(1)(f)(i) of the Act and sections 2.1 and3.1 in any one calendar month does exceed one percent of the securities of the class of securities that were outstanding at the beginning of the calendar month inwhich the securities were issued, a report may be made by the issuer for that calendar month, within 10 days after the end of the month.

5.5 Form of Report - For the purposes of sections 5.3 and 5.4, the report may be made in the form of a letter filed28 disclosing the date of the trade, the numberof securities purchased and the purchase price paid or to be paid, and certifying that the person or the company has knowledge of the facts contained in the letter.

PART 6 FEES

6.1 Fees29 - The issuer shall pay a fee of $100.00 for securities issued under each of the exemptions contained in subclause 72(1)(f)(i) of the Act and sections 2.1and 3.1

(a) on the date the plan is commenced; and

(b) on each anniversary of the date of commencement of the plan, if securities were issued or distributed in Ontario under the plan during the twelve-monthperiod preceding the date of the anniversary.

PART 7 EXEMPTION

7.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in theexemption.30