Notice and Proposed Rule: OSC Rule - 56-501 - Restricted Shares

 

Substance and Purpose of Proposed Rule

The purpose of the proposed Rule is to provide holders of restricted shares and prospectivepurchasers of restricted shares with similar rights to those previously available to them under OSCPolicy 1.3.

The Commission first published the proposed Rule for comment on October 20, 1995 at (1995),18 OSCB 4907. The Commission made the Rule and, on April 9, 1997 delivered the Rule to theMinister of Finance for approval under section 143.3 of the Securities Act. A copy of the Ruleas made by the Commission was published at (1997), 20 OSCB 1863. The Minister of Financesubsequently returned the Rule to the Commission for further consideration by the Commissionof its jurisdiction to make a rule that assigns voting rights to securities that are otherwise non-voting through the minority approval provisions contained in Part 3 of the Rule.

A summary of the Rule is contained in the Commission Notice at (1997), 20 OSCB 1863.

As a result of the Minister's request, staff's recommendations and further deliberations of theCommission, the Commission has amended the Rule and is republishing it for comment.

Changes Made to the Proposed Rule

The Rule, as made by the Commission, defined "minority approval" as

"approval of a proposed reorganization or stock distribution given

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

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

other than, in each case, the votes attaching at the time to securities held directly orindirectly by affiliates of the issuer and securities held directly or indirectly by controlpersons of the issuer.

The Commission proposes to amend this definition by defining "minority approval" to mean"approval of a proposed reorganization or stock distribution given at a meeting of shareholdersof an issuer called to consider the reorganization or stock distribution by a majority of the votescast by holders of voting shares and, if required by corporate law governing the issuer, by amajority of the votes cast by holders of a class of shares voting separately as a class other than,in both cases, the votes attaching at the time to securities held directly or indirectly by affiliatesof the issuer and securities held directly or indirectly by control persons of the issuer".

The effect of this change is that holders of restricted shares that are not entitled to vote undercorporate law will not, under the Rule, receive a vote on a proposed reorganization or stockdistribution and holders of restricted shares that are not given a class vote at corporate law willnot receive a class vote under the Rule.

The Commission has also modified the definition of "reorganization" by adding a paragraph (b).That paragraph addresses the situation where an issuer does not create a new class of restrictedshares but instead, if the issuer has one or more classes of restricted shares outstanding, amendsits constating documents to increase the number of authorized common shares or the number ofvotes attached to the common shares relative to the restricted shares. As a conforming change,where the Rule referred to a "reorganization that resulted in the creation of restricted shares", theCommission generally changed that wording to a "reorganization carried out by the issuer relatedto the restricted shares that are the subject of the stock distribution".

The Commission also narrowed subparagraph 2.3(1)4(ii) to refer to significant provisions underapplicable corporate and securities law rather than applicable law generally.

Finally, the Commission amended subsection 3.1(1) by changing the words "An issuer shall notfile a prospectus" to "The Director shall not issue a receipt for a prospectus".

Reasons for Changes

In light of the issue raised by the Minister of Finance, the Commission determined to delete therequirement that holders of shares that would not otherwise vote under corporate law be given aright to vote on a reorganization or stock distribution and that holders of restricted shares be givena class vote on a reorganization or stock distribution where they would not receive that right atcorporate law.

The Commission modified the definition of "reorganization" as the Commission accepted staff'srecommendation that the term "reorganization" should apply not only to the creation of restrictedshares but to an amendment to an issuer's constating documents that changes the relativeproportion of voting rights between the common shares and restricted shares.

The Commission narrowed subparagraph 2.3(1)4(ii) as it felt that applicable law was too broadand that references to applicable corporate and securities law was sufficient.

Finally, the Commission amended subsection 3.1(1) by referring to the Director not issuing areceipt for a prospectus as it felt that was the most appropriate language in this context.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule.Submissions received by June 21, 1999 will be considered.

Submissions should be made in duplicate to:

The Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

 

Questions may be referred to:

Joanne Peters
Senior Legal Counsel
Ontario Securities Commission
(416) 593-8134

 

Proposed Rule

The text of the proposed Rule follows.

DATED: May 21, 1999.

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ONTARIO SECURITIES COMMISSION RULE 56-501

 

 

RESTRICTED SHARES

 

PART 1 DEFINITIONS AND APPLICATION

1.1 Definitions

In this Rule

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

"CDN system" means the trade reporting and quotation system for over-the-countertrading 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 percentage of sharesowned, that are not less, on a per share basis, than the voting rights attaching toany other shares of an outstanding class of shares of the issuer, unless the Directormakes a determination under section 4.1 that the shares are restricted shares;

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

"equity shares" means shares of an issuer that carry a residual right to participatein the earnings of the issuer and, upon the liquidation or winding 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 to consider thereorganization or stock distribution by a majority of the votes cast by holders ofvoting shares and, if required by corporate law governing the issuer, by a majorityof the votes cast by holders of a class of shares voting separately as a class otherthan, in both cases, the votes attaching at the time to securities held directly orindirectly by affiliates of the issuer and securities held directly or indirectly bycontrol persons of the issuer;

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

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

"reorganization" means

(a) the creation of a class of shares that are restricted shares, either directly orthrough the creation of a class of subject securities, including by way of

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

(ii) a resolution of the board of directors of an issuer setting the termsof 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 shares outstanding, anamendment to an issuer's constating documents to increase

(i) the per share voting rights attached to an issuer's common shareswithout at the same time making a proportionate increase in the pershare voting rights attached to an existing class of restricted sharesof the issuer, or

(ii) the number of common shares authorized;

"restricted share term" means each of "non-voting shares", "subordinate votingshares", "restricted voting shares" and every other term designated by the Directorunder subsection 4.1(2);

"restricted shares" means

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

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

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

"stock distribution" means a distribution of restricted shares or subject securities,or securities that are directly or indirectly convertible into or exercisable orexchangeable for restricted shares or subject securities, whether in conjunction witha reorganization or otherwise, other than

(a) a distribution of previously unissued restricted shares by way of stockdividend in the ordinary course to shareholders instead of a cash dividendif at the time of distribution there is a published market for the restrictedshares, or

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

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

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

"U.S. issuer" has the meaning set out in 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 owned bypersons or companies that are not citizens or residents of Canada orthat are otherwise considered as a result of any law applicable to theissuer to be non-Canadians, but only to the extent 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 shares by aperson, company or combination of persons or companies, but onlyto the extent of the restriction.

(2) Section 2.1 does not apply to

(a) a U.S. issuer that has a class of securities registered under section12 of the 1934 Act; or

(b) an issuer if, as of a date not more than seven days before sendingany document referred to in section 2.1 to shareholders or, if thedocument is not required to be sent, not more than seven daysbefore the finalization of the document, the number of shares ofeach class of equity shares of the issuer held by registered holderswhose last address as shown on the books of the issuer is in Ontarioor beneficially owned by persons or companies in Ontario is lessthan two percent of the outstanding shares of the class.

(3) Sections 2.3, 3.1 and 3.2 do not apply to an issuer distributing securities inaccordance with National Instrument 71-101 Multijurisdictional DisclosureSystem.

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

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

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

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

the issuer expects that the number of shares of each class of equity sharesof the issuer held by registered holders whose last address as shown on thebooks of the issuer is in Ontario or beneficially owned by persons orcompanies in Ontario will be less than two percent of the outstanding sharesof the class after giving effect to the proposed stock 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 restricted shares,or securities that are directly or indirectly convertible into or exercisable orexchangeable for restricted shares or subject securities, outstanding, eachdocument referred to in subsection (2) shall

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

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

(c) describe any restrictions on the voting rights of restricted shares;

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

(e) if holders of restricted shares have no rights to participate if a take-over bid is made for securities of the issuer with voting rightssuperior to those attached to the restricted shares, contain astatement 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 by areporting issuer to any of its shareholders.

3. Any AIF prepared by a reporting issuer.

4. Any information circular or other document that is required by lawto be sent by a CDN issuer to any of its shareholders and any annualinformation form prepared by a CDN issuer.

(3) Interim financial statements and annual financial statements to whichsubsection (6) applies and any accompanying discussion by management ofthe financial statements need not include the descriptions referred to inparagraphs (1)(c), (1)(d) and (1)(e).

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

(5) Shares referred to in any of the documents described in subsection (4) shallnot be referred to by a term or defined term that includes "common", or"preference" or "preferred", unless the shares are common shares orpreference shares, respectively.

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

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

(8) A reporting issuer or CDN issuer that is required by Ontario securities lawto arrange for, or voluntarily makes arrangements for, the delivery of thedocuments referred to in subsection (7) to the beneficial owners of anyshares of a class of equity shares registered in the name of a registrant, shallmake similar arrangements for delivery of the documents to the beneficialowners of shares of a class of restricted shares registered in the name of aregistrant.

(9) Despite paragraph (1)(b), a document referred to in subsection (2) may inone place only in the document describe the restricted shares by the termused in the constating documents of the issuer, to the extent it differs fromthe appropriate restricted share term, if the description is not on the frontpage of the document and is in the same type face and type size as that usedgenerally in the document.

2.2 Dealer and Adviser Documentation

(1) If restricted shares and the appropriate restricted share term, or a codereference to restricted shares or the appropriate restricted share term, areincluded in a trading record published by The Toronto Stock Exchange,The Montreal Exchange, the Vancouver Stock Exchange, The AlbertaStock Exchange, the Winnipeg Stock Exchange or the CDN system, theappropriate restricted share term shall be included in

(a) any confirmation sent in accordance with section 36 of the Act inrespect 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 a registereddealer or adviser to a customer or potential customer that refer torestricted shares.

(2) Despite subsection (1), a registered dealer or adviser may use anabbreviation for the restricted share term in confirmations and statementsof transactions or security positions if an explanation of the abbreviation isgiven in the document.

2.3 Minimum Disclosure in Offering Documents and Information Circulars

(1) A preliminary prospectus, prospectus, rights offering circular, securitiesexchange take-over bid circular, securities exchange issuer bid circular oroffering memorandum for a stock distribution, and an information circularconcerning 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 stock distributionor reorganization

shall comply with the following requirements:

1. Each class of securities that is or may become restricted shares shallbe referred to using a term or a defined term that includes theappropriate 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, showingthe number and class or classes of restricted shares being distributedshall include the appropriate restricted share term in the same typeface and type size as the rest of the description.

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 that are thesubject of the stock distribution or reorganization or that willresult from the stock distribution or reorganization eitherdirectly or following a conversion, exchange or exercise,and the voting rights, if any, attached to the shares of anyother class of shares of the issuer that are the same orgreater on a per share basis than those attached to therestricted shares that are the subject of the stock distributionor reorganization or that will result from the stockdistribution or reorganization either directly or following aconversion, exchange or exercise;

(ii) any significant provisions under applicable corporate andsecurities law that do not apply to the holders of therestricted shares that are the subject of the stock distributionor reorganization or that will result from the stockdistribution or reorganization either directly or following aconversion, exchange or exercise, but do apply to theholders of another class of equity shares, and the extent ofany rights provided in the constating documents or otherwisefor the protection of holders of the restricted shares; and

(iii) any rights under applicable corporate law, in the constatingdocuments or otherwise, of holders of restricted shares thatare the subject of the stock distribution or reorganization orthat will result from the stock distribution or reorganizationeither directly or following a conversion, exchange orexercise, to attend, in person or by proxy, meetings ofholders of equity shares of the issuer and to speak at themeetings to the same extent that holders of equity shares areentitled.

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

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

(2) Despite paragraph 2 of subsection (1), a document referred to in subsection(1) may, in one place only in the document, describe the restricted sharesby the term used in the constating documents of the issuer, to the extent itdiffers from the appropriate restricted share term, if the description is noton the front page of the document and is in the same type face and type sizeas that used generally in the document.

(3) If the document referred to in subsection (1) is a securities exchange take-over bid circular, the references to the reporting issuer or CDN issuer inparagraphs (1)(a), (b) or (c) shall be read as references to the 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) are satisfied;and

(b) the information circular in connection with the shareholders'meeting held to obtain minority approval for the stock distributionor each reorganization carried out by the issuer related to therestricted shares that are the subject of the stock distribution,

(i) included, if known after reasonable inquiry,

(A) the name of each affiliate of the issuer that is or wasa beneficial owner of securities of the issuer and thenumber of securities beneficially owned, directly orindirectly, by the affiliate as of the date of theinformation circular;

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

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

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

(2) The conditions are as follows:

1. Each reorganization carried out by the issuer related to the restrictedshares that are the subject of the stock distribution received minorityapproval.

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

3. If any proposed uses for the restricted shares were described in theinformation circular sent to shareholders in connection with theshareholders' meeting held to approve a reorganization referred toin paragraph 1, the reason for the stock distribution is notinconsistent with those uses.

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

(4) Subsection (1) does not apply if

(a) the reorganization 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 preliminary prospectusor prospectus for the stock distribution; or

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

3.2 Prospectus Exemptions Not Available

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

(a) a reporting issuer or CDN issuer;

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

(c) an issuer if it is represented in any offering documentation used inconnection with the stock distribution that the issuer intends tobecome a CDN issuer concurrently with or following completion ofthe stock distribution;

unless

(d) either

(i) the stock distribution received minority approval, or

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

(e) the information circular in connection with the shareholders'meeting held to obtain minority approval for the stock distributionor each reorganization carried out by the issuer related to therestricted shares that are the subject of the stock distribution,

(i) included, if known after reasonable inquiry,

(A) the name of each affiliate of the issuer that is or wasa beneficial owner of securities of the issuer and thenumber of securities beneficially owned, directly orindirectly, by the affiliate as of the date of theinformation circular;

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

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

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

(2) The conditions are as follows:

1. Each reorganization carried out by the issuer related to the restrictedshares that are the subject of the stock distribution received minorityapproval.

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

3. If any proposed uses for the restricted shares were described in theinformation circular sent to shareholders in connection with theshareholders' meeting held to approve a reorganization referred toin paragraph 1, the reason for the stock distribution is notinconsistent 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 stock distribution;or

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

PART 4 DETERMINATIONS AND EXEMPTIONS

4.1 Determination of Status

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

1. There is another class of shares that, in view of the considerationand time at which the shares were or are being issued, carries adisproportionate vote per share relative to the equity shares.

2. The conditions of the equity shares, the conditions of other classesof shares or the issuer's constating documents have provisions thattend to nullify or significantly restrict the voting rights or votinginterests of the equity shares.

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

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

4.2 Exemption

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

 

ONTARIO SECURITIES COMMISSION RULE 56-501

 

 

RESTRICTED SHARES

 

 

TABLE OF CONTENTS

 

PART TITLE PAGE

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 andInformation Circulars

PART 3 PROSPECTUS RECEIPT REQUIREMENTS ANDWITHDRAWAL OF PROSPECTUS 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