Commission Approval of Rule: OSC Rule - 56-501 - Restricted Shares
Commission Approval of Rule: OSC Rule - 56-501 - Restricted Shares
RESTRICTED SHARES
Notice of Rule
The Commission has made Rule 56-501 Restricted Shares (the "Rule") under section143 of the Securities Act (the "Act").
The Rule and the material required by the Act to be delivered to the Minister of Financewere delivered on August 11, 1999. If the Minister does not approve the Rule, rejectthe Rule or return it to the Commission for further consideration, the Rule will come intoforce on October 25, 1999. If the Minister approves the Rule, the Rule will come intoforce 15 days after it is approved.
Substance and Purpose of Rule
The purpose of the Rule is to provide holders of restricted shares and prospectivepurchasers of restricted shares with similar rights to those previously available to themunder OSC Policy 1.3. The Rule requires that holders of restricted shares andprospective purchasers of restricted shares be made aware that restricted shares haverights that differ from those attached to an issuer's common shares and that holders ofrestricted shares receive material sent to holders of common shares. The Rule alsoremoves prospectus exemptions and provides that the Director shall not issue a receiptfor a prospectus for a distribution of restricted shares unless shareholder approval, ona majority of the minority basis, was obtained for the distribution or the reorganizationthat resulted in the creation of the restricted shares.
The Commission first published the Rule for comment on October 20, 1995 at (1995),18 OSCB 4903. The Commission made the Rule and, on April 9, 1997 delivered theRule to the Minister of Finance for approval under section 143.3 of the Securities Act.A copy of the Rule as made by the Commission was published at (1997), 20 OSCB1863. The Minister of Finance subsequently returned the Rule to the Commission forfurther consideration by the Commission. The Rule was republished for comment onMay 21, 1999 at (1999), 22 OSCB 3123.
For a summary of the Rule, reference can be made to the Commission Notices at(1997), 20 OSCB 1863 and (1999), 22 OSCB 3123.
Summary of Written Comments Received by the Commission
The Commission received a comment on the version of the Rule that was published onMay 21, 1999 from Nicholas Dietrich of Smith Lyons. The commenter views severalaspects of the Rule as positive developments or improvements over Policy 1.3.
Text of Rule
The text of the Rule follows. The Rule is unchanged from the proposed Rule publishedon May 21, 1999.
DATED: August 13, 1999.
PART TITLE
PART 1 DEFINITIONS AND APPLICATION
1.1 Definitions
1.2 Application
PART 2 DISCLOSURE REQUIREMENTS
2.1 Content and Dissemination of Disclosure Documentation
2.2 Dealer and Adviser Documentation
2.3 Minimum Disclosure in Offering Documents and InformationCirculars
PART 3 PROSPECTUS RECEIPT REQUIREMENTS AND WITHDRAWAL OFPROSPECTUS EXEMPTIONS
3.1 Prospectus Receipt Not to be Issued
3.2 Prospectus Exemptions Not Available
PART 4 DETERMINATIONS AND EXEMPTIONS
4.1 Determination of Status
4.2 Exemption
PART 1 DEFINITIONS AND APPLICATION
1.1 Definitions
In this Rule
"CDN issuer" means an issuer, other than a reporting issuer, any of theequity shares of which are quoted on the CDN system, if the shares are notlisted or quoted on any other published market;
"CDN system" means the trade reporting and quotation system for over-the-counter trading operated by The Canadian Dealing Network Inc.;
"class" includes a series of a class;
"common shares" means equity shares to which are attached voting rightsexercisable in all circumstances, irrespective of the number or percentageof shares owned, that are not less, on a per share basis, than the votingrights attaching to any other shares of an outstanding class of shares of theissuer, unless the Director makes a determination under section 4.1 that theshares are restricted shares;
"control person" means, with respect to an issuer, any person, company orcombination of persons or companies holding a sufficient number of anysecurities of that issuer to affect materially the control of that issuer, and anyholding of any person, company or combination of persons or companiesholding more than 20 per cent of the voting rights attached to all of theoutstanding voting securities of an issuer shall, in the absence of evidenceto the contrary, be deemed to affect materially the control of that issuer;
"equity shares" means shares of an issuer that carry a residual right toparticipate in the earnings of the issuer and, upon the liquidation orwinding up of the issuer, in its assets;
"minority approval" means approval of a proposed reorganization or stockdistribution given at a meeting of shareholders of an issuer called toconsider the reorganization or stock distribution by a majority of the votescast by holders of voting shares and, if required by corporate law governingthe issuer, by a majority of the votes cast by holders of a class of sharesvoting separately as a class other than, in both cases, the votes attachingat the time to securities held directly or indirectly by affiliates of the issuerand securities held directly or indirectly by control persons of the issuer;
"non-voting shares" means restricted shares that do not carry the right tovote generally, except for a right to vote that is mandated in specialcircumstances by law;
"preference shares" means shares to which are attached a preference orright over the shares of any class of equity shares of the issuer, but does notinclude equity shares;
"reorganization" means
(a) the creation of a class of shares that are restricted shares,either directly or through the creation of a class of subjectsecurities, including by way of
(i) an amendment to an issuer's constating documents,
(ii) a resolution of the board of directors of an issuersetting the terms of a series of shares of the issuer, or
(iii) a restructuring, recapitalization, reclassification,arrangement, amalgamation or merger, or
(b) if the issuer has one or more classes of restricted sharesoutstanding, an amendment to an issuer's constatingdocuments to increase
(i) the per share voting rights attached to an issuer'scommon shares without at the same time making aproportionate increase in the per share voting rightsattached to an existing class of restricted shares of theissuer, or
(ii) the number of common shares authorized;
"restricted share term" means each of "non-voting shares", "subordinatevoting shares", "restricted voting shares" and every other term designatedby the Director under subsection 4.1(2);
"restricted shares" means
(a) equity shares that are not common shares, and
(b) equity shares determined to be restricted shares undersubsection 4.1(1);
"restricted voting shares" means restricted shares that carry a right to votesubject to a restriction on the number or percentage of shares that may bevoted by a person, a company or any combination of persons andcompanies, except to the extent the restriction or limit is permitted orprescribed by statute and is applicable only to persons or companies thatare not citizens or residents of Canada or that are otherwise considered asa result of any law applicable to the issuer to be non-Canadians;
"stock distribution" means a distribution of restricted shares or subjectsecurities, or securities that are directly or indirectly convertible into orexercisable or exchangeable for restricted shares or subject securities,whether in conjunction with a reorganization or otherwise, other than
(a) a distribution of previously unissued restricted shares by wayof stock dividend in the ordinary course to shareholdersinstead of a cash dividend if at the time of distribution there isa published market for the restricted shares, or
(b) a stock split that takes the form of a distribution of previouslyunissued restricted shares by way of stock dividend to holdersof the same class of restricted shares if at the time ofdistribution there is a published market for the restrictedshares and the distribution is part of a concurrent distributionby way of stock dividend to holders of all equity shares underwhich all outstanding equity shares of the issuer are increasedin the same proportion;
"subject securities" means shares that have the effect, or would have theeffect if and when issued, of changing a class of outstanding equity sharesinto restricted shares;
"subordinate voting shares" means restricted shares that carry a right tovote, if there are shares of another class of shares outstanding that carry agreater right to vote on a per share basis; and
"U.S. issuer" has the meaning set out in National Instrument 71-101Multijurisdictional Disclosure System.
1.2 Application
(1) This Rule does not apply to
(a) shares of mutual funds;
(b) shares that carry a right to vote subject to a restriction on thenumber or percentage of shares that may be voted or ownedby persons or companies that are not citizens or residents ofCanada or that are otherwise considered as a result of any lawapplicable to the issuer to be non-Canadians, but only to theextent of the restriction; or
(c) shares that are subject to a restriction, imposed by any lawgoverning the issuer, on the level of ownership of the sharesby a person, company or combination of persons orcompanies, but only to the extent of the restriction.
(2) Section 2.1 does not apply to
(a) a U.S. issuer that has a class of securities registered undersection 12 of the 1934 Act; or
(b) an issuer if, as of a date not more than seven days beforesending any document referred to in section 2.1 toshareholders or, if the document is not required to be sent, notmore than seven days before the finalization of the document,the number of shares of each class of equity shares of theissuer held by registered holders whose last address as shownon the books of the issuer is in Ontario or beneficially ownedby persons or companies in Ontario is less than two percent ofthe outstanding shares of the class.
(3) Sections 2.3, 3.1 and 3.2 do not apply to an issuer distributingsecurities in accordance with National Instrument 71-101Multijurisdictional Disclosure System.
(4) Section 2.3 does not apply to an issuer if as of a date not more thanseven days before the date that the issuer finalizes the final offeringdocument or information circular being used in connection with thestock distribution or reorganization, the issuer expects that thenumber of shares of each class of equity shares of the issuer held byregistered holders whose last address as shown on the books of theissuer is in Ontario or beneficially owned by persons or companies inOntario will be less than two percent of the outstanding shares of theclass after giving effect to the proposed stock distribution orreorganization.
(5) Sections 3.1 and 3.2 do not apply to an issuer if,
(a) as of a date not more than seven days before the date that theissuer finalizes the final offering document or informationcircular; or
(b) as of a date not more than seven days before completion ofthe stock distribution if there is no offering document orinformation circular;
the issuer expects that the number of shares of each class of equityshares of the issuer held by registered holders whose last address asshown on the books of the issuer is in Ontario or beneficially ownedby persons or companies in Ontario will be less than two percent ofthe outstanding shares of the class after giving effect to the proposedstock distribution.
PART 2 DISCLOSURE REQUIREMENTS
2.1 Content and Dissemination of Disclosure Documentation
(1) Except as otherwise provided in this Rule, if an issuer has restrictedshares, or securities that are directly or indirectly convertible into orexercisable or exchangeable for restricted shares or subjectsecurities, outstanding, each document referred to in subsection (2)shall
(a) refer to restricted shares using a term or a defined term thatincludes the appropriate restricted share term;
(b) not refer to shares by a term or a defined term that includes"common", or "preference" or "preferred", unless the sharesare common shares or preference shares, respectively;
(c) describe any restrictions on the voting rights of restrictedshares;
(d) describe the rights to participate, if any, of holders of restrictedshares if a take-over bid is made for securities of the issuerwith voting rights superior to those attached to the restrictedshares; and
(e) if holders of restricted shares have no rights to participate if atake-over bid is made for securities of the issuer with votingrights superior to those attached to the restricted shares,contain a statement to that effect in bold-face type.
(2) The documents are the following:
1. Any information circular sent by a reporting issuer to any of itsshareholders.
2. Any document required by Ontario securities law to be sent bya reporting issuer to any of its shareholders.
3. Any AIF prepared by a reporting issuer.
4. Any information circular or other document that is required bylaw to be sent by a CDN issuer to any of its shareholders andany annual information form prepared by a CDN issuer.
(3) Interim financial statements and annual financial statements to whichsubsection (6) applies and any accompanying discussion bymanagement of the financial statements need not include thedescriptions referred to in paragraphs (1)(c), (1)(d) and (1)(e).
(4) Each reference to restricted shares in a news release, materialchange report or other document not referred to in subsection (2) thata reporting issuer or a CDN issuer sends to its shareholders shallinclude the appropriate restricted share term.
(5) Shares referred to in any of the documents described in subsection(4) shall not be referred to by a term or defined term that includes"common", or "preference" or "preferred", unless the shares arecommon shares or preference shares, respectively.
(6) Restricted shares shall be separately identified on any balance sheetcontained in financial statements sent by a reporting issuer or CDNissuer to any of its shareholders or made available to the publicunless there is only a one-line reference in the balance sheet to"capital", "shareholders' capital", "share capital", "equity capital" or alike term.
(7) All documents that a reporting issuer or a CDN issuer sends to theholders of any other class of its equity shares shall also be sent bythe issuer at the same time to the holders of its restricted shares.
(8) A reporting issuer or CDN issuer that is required by Ontario securitieslaw to arrange for, or voluntarily makes arrangements for, the deliveryof the documents referred to in subsection (7) to the beneficialowners of any shares of a class of equity shares registered in thename of a registrant, shall make similar arrangements for delivery ofthe documents to the beneficial owners of shares of a class ofrestricted shares registered in the name of a registrant.
(9) Despite paragraph (1)(b), a document referred to in subsection (2)may in one place only in the document describe the restricted sharesby the term used in the constating documents of the issuer, to theextent it differs from the appropriate restricted share term, if thedescription is not on the front page of the document and is in thesame type face and type size as that used generally in the document.
2.2 Dealer and Adviser Documentation
(1) If restricted shares and the appropriate restricted share term, or acode reference to restricted shares or the appropriate restricted shareterm, are included in a trading record published by The Toronto StockExchange, The Montreal Exchange, the Vancouver Stock Exchange,The Alberta Stock Exchange, the Winnipeg Stock Exchange or theCDN system, the appropriate restricted share term shall be includedin
(a) any confirmation sent in accordance with section 36 of the Actin respect of transactions in restricted shares;
(b) any statement of transactions or security positions sent by aregistered dealer to a customer that refers to restricted shares;and
(c) all recommendations, selling documents and other literatureprepared by or on behalf of a registered dealer or adviser andpublished by a registered dealer or adviser or sent by aregistered dealer or adviser to a customer or potentialcustomer that refer to restricted shares.
(2) Despite subsection (1), a registered dealer or adviser may use anabbreviation for the restricted share term in confirmations andstatements of transactions or security positions if an explanation ofthe abbreviation is given in the document.
2.3 Minimum Disclosure in Offering Documents and Information Circulars
(1) A preliminary prospectus, prospectus, rights offering circular,securities exchange take-over bid circular, securities exchange issuerbid circular or offering memorandum for a stock distribution, and aninformation circular concerning a proposed reorganization,
(a) prepared for a reporting issuer or a CDN issuer;
(b) prepared for an issuer that will, upon or in connection with thefiling of the document, become a reporting issuer; or
(c) that refers to an issuer intending to become a CDN issuerconcurrently with or following completion of the stockdistribution or reorganization
shall comply with the following requirements:
1. Each class of securities that is or may become restrictedshares shall be referred to using a term or a defined term thatincludes the appropriate restricted share term.
2. No shares may be referred to by a term or a defined term thatincludes "common", or "preference" or "preferred", unless theshares are common shares or preference shares, respectively.
3. The description on the front page of the document, if any,showing the number and class or classes of restricted sharesbeing distributed shall include the appropriate restricted shareterm in the same type face and type size as the rest of thedescription.
4. A detailed description shall be included, and a summary, if asummary is mandated by Ontario securities law or is otherwiseincluded, shall be cross-referenced to the detailed description,describing
(i) the voting rights attached to the restricted shares thatare the subject of the stock distribution orreorganization or that will result from the stockdistribution or reorganization either directly or followinga conversion, exchange or exercise, and the votingrights, if any, attached to the shares of any other classof shares of the issuer that are the same or greater ona per share basis than those attached to the restrictedshares that are the subject of the stock distribution orreorganization or that will result from the stockdistribution or reorganization either directly or followinga conversion, exchange or exercise;
(ii) any significant provisions under applicable corporateand securities law that do not apply to the holders ofthe restricted shares that are the subject of the stockdistribution or reorganization or that will result from thestock distribution or reorganization either directly orfollowing a conversion, exchange or exercise, but doapply to the holders of another class of equity shares,and the extent of any rights provided in the constatingdocuments or otherwise for the protection of holders ofthe restricted shares; and
(iii) any rights under applicable corporate law, in theconstating documents or otherwise, of holders ofrestricted shares that are the subject of the stockdistribution or reorganization or that will result from thestock distribution or reorganization either directly orfollowing a conversion, exchange or exercise, to attend,in person or by proxy, meetings of holders of equityshares of the issuer and to speak at the meetings to thesame extent that holders of equity shares are entitled.
5. If holders of restricted shares do not have all of the rightsreferred to in paragraphs 4(i), (ii) and (iii), the detaileddescription and summary referred to in paragraph 4 shallinclude, in bold-face type, a statement of the rights theholders do not have.
6. Restricted shares shall be separately identified on any balancesheet contained in any financial statements unless there isonly a one-line reference in the balance sheet to "capital","shareholders' capital", "share capital", "equity capital" or a liketerm.
(2) Despite paragraph 2 of subsection (1), a document referred to insubsection (1) may, in one place only in the document, describe therestricted shares by the term used in the constating documents of theissuer, to the extent it differs from the appropriate restricted shareterm, if the description is not on the front page of the document andis in the same type face and type size as that used generally in thedocument.
(3) If the document referred to in subsection (1) is a securities exchangetake-over bid circular, the references to the reporting issuer or CDNissuer in paragraphs (1)(a), (b) or (c) shall be read as references tothe offeror issuer.
PART 3 PROSPECTUS RECEIPT REQUIREMENTS AND WITHDRAWAL OFPROSPECTUS EXEMPTIONS
3.1 Prospectus Receipt Not to be Issued
(1) The Director shall not issue a receipt for a prospectus for a stockdistribution unless
(a) either
(i) the stock distribution received minority approval; or
(ii) all of the conditions set out in subsection (2) aresatisfied; and
(b) the information circular in connection with the shareholders'meeting held to obtain minority approval for the stockdistribution or each reorganization carried out by the issuerrelated to the restricted shares that are the subject of the stockdistribution,
(i) included, if known after reasonable inquiry,
(A) the name of each affiliate of the issuer that is orwas a beneficial owner of securities of the issuerand the number of securities beneficially owned,directly or indirectly, by the affiliate as of thedate of the information circular;
(B) the name of each control person and the numberof securities beneficially owned, directly orindirectly, by the control person as of the date ofthe information circular; and
(C) a statement of the number of votes attaching tothe securities that are or were not to be countedfor the purpose of the approval; and
(ii) if mailed after the coming into force of this Rule,described the purpose and business reasons for theuse of the restricted shares or subject securities.
(2) The conditions are as follows:
1. Each reorganization carried out by the issuer related to therestricted shares that are the subject of the stock distributionreceived minority approval.
2. At the time of each reorganization referred to in paragraph 1,the issuer was either a reporting issuer in any jurisdiction or aCDN issuer.
3. If any proposed uses for the restricted shares were describedin the information circular sent to shareholders in connectionwith the shareholders' meeting held to approve areorganization referred to in paragraph 1, the reason for thestock distribution is not inconsistent with those uses.
(3) An issuer shall disclose in a preliminary prospectus and prospectusto which subsection (1) applies either that the stock distribution hasreceived minority approval by the issuer's shareholders or that all theconditions in subsection (2) are satisfied.
(4) Subsection (1) does not apply if
(a) the reorganization took place before December 21, 1984; or
(b) the stock distribution is
(i) of securities of an issuer that was a private companyimmediately before the filing of the preliminaryprospectus or prospectus for the stock distribution; or
(ii) a subsequent distribution by an issuer described inclause (i) of securities of the same class as wereoffered under the prospectus described in clause (i).
3.2 Prospectus Exemptions Not Available
(1) The prospectus exemptions under Ontario securities law are notavailable for a stock distribution of securities of
(a) a reporting issuer or CDN issuer;
(b) an issuer if the issuer will become a reporting issuer as aresult of the stock distribution; or
(c) an issuer if it is represented in any offering documentationused in connection with the stock distribution that the issuerintends to become a CDN issuer concurrently with or followingcompletion of the stock distribution;
unless
(d) either
(i) the stock distribution received minority approval, or
(ii) all of the conditions set out in subsection (2) aresatisfied, and
(e) the information circular in connection with the shareholders'meeting held to obtain minority approval for the stockdistribution or each reorganization carried out by the issuerrelated to the restricted shares that are the subject of the stockdistribution,
(i) included, if known after reasonable inquiry,
(A) the name of each affiliate of the issuer that is orwas a beneficial owner of securities of the issuerand the number of securities beneficially owned,directly or indirectly, by the affiliate as of thedate of the information circular;
(B) the name of each control person and the numberof securities beneficially owned, directly orindirectly, by the control person as of the date ofthe information circular; and
(C) a statement of the number of votes attaching tothe securities that are or were not to be countedfor the purpose of the approval, and
(ii) if mailed after the coming into force of this Rule,described the purpose and business reasons for theuse of the restricted shares or subject securities.
(2) The conditions are as follows:
1. Each reorganization carried out by the issuer related to therestricted shares that are the subject of the stock distributionreceived minority approval.
2. At the time of each reorganization referred to in paragraph 1,the issuer was either a reporting issuer in any jurisdiction or aCDN issuer.
3. If any proposed uses for the restricted shares were describedin the information circular sent to shareholders in connectionwith the shareholders' meeting held to approve areorganization referred to in paragraph 1, the reason for thestock distribution is not inconsistent with those uses.
(3) Subsection (1) does not apply to a stock distribution if
(a) the reorganization took place before December 21, 1984, or
(b) the stock distribution is
(i) of securities of an issuer that was a private companyimmediately before the completion of the stockdistribution; or
(ii) a subsequent distribution by an issuer described inclause (i) of securities of the same class that were thesubject of the stock distribution described in clause (i).
PART 4 DETERMINATIONS AND EXEMPTIONS
4.1 Determination of Status
(1) The Director may determine that equity shares of an issuer arerestricted shares for purposes of this Rule, if one of the followingfactors is present:
1. There is another class of shares that, in view of theconsideration and time at which the shares were or are beingissued, carries a disproportionate vote per share relative to theequity shares.
2. The conditions of the equity shares, the conditions of otherclasses of shares or the issuer's constating documents haveprovisions that tend to nullify or significantly restrict the votingrights or voting interests of the equity shares.
3. There is another class of equity shares, the shares of whichare entitled to participate in earnings or assets to asubstantially lesser extent, on a per share basis, than theextent to which the first class of equity shares is entitled toparticipate.
(2) If the Director determines that equity shares are restricted shares, theDirector may also determine the appropriate restricted share term tobe used to designate the shares, taking into account the votingattributes attached to the shares and the term that will best describethe attributes.
4.2 Exemption
The Director may grant an exemption to this Rule, in whole or in part, subjectto such conditions or restrictions as may be imposed in the exemption.