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

NOTICE OF PROPOSED CHANGES TO
PROPOSED RULE 61-501
AND PROPOSED COMPANION POLICY 61-501CP UNDER THE SECURITIES ACT
INSIDER BIDS, ISSUER BIDS, GOING PRIVATE TRANSACTIONS AND RELATED PARTY TRANSACTIONS
AND
RESCISSION OF OSC POLICY STATEMENT NO. 9.1
DISCLOSURE, VALUATION, REVIEW AND APPROVAL
REQUIREMENTS AND RECOMMENDATIONS FOR INSIDER BIDS, ISSUER BIDS,
GOING PRIVATE TRANSACTIONS ANDRELATED PARTY TRANSACTIONS

Substance and Purpose of the Proposed Rule and Proposed Companion Policy

Introduction

On May 31, 1996, the Commission published proposed Rule 61-501 (the "1996 proposed Rule") and proposed Companion Policy 61-501CP (the "1996 proposed Companion Policy") at (1996), 19 OSCB 2981. Part X of the notice that accompanied the 1996 proposedRule and 1996 proposed Companion Policy (the "1996 Notice") summarized and requested comment on 12 issues that were discussedin the 1996 Notice. Part X of the 1996 Notice also requested comment on six additional issues.

The Commission received comments on these issues, and the 1996 proposed Rule and the 1996 proposed Companion Policy, froma broad range of commenters. The list of commenters is contained in Appendix A of this Notice and a summary of their commentstogether with the Commission's response to those comments are contained in Appendix B of this Notice. As a result of commentsreceived, staff's recommendations and further deliberations of the Commission, the Commission has amended the 1996 proposedRule and 1996 proposed Companion Policy and is republishing the proposed Rule and proposed Companion Policy for comment.The republished versions of these instruments are referred to in this Notice as the "proposed Rule" and the "proposed CompanionPolicy".

This Notice summarizes changes of a substantive nature that have been made to the 1996 proposed Rule and the 1996 proposedCompanion Policy. Certain changes that are of a purely technical nature or designed to improve the clarity of the proposed Rule andproposed Companion Policy are not summarized in this Notice, but in most cases are referred to in footnotes in the proposed Ruleand proposed Companion Policy.

Terms used in the proposed Companion Policy that are defined or interpreted in the proposed Rule or definition instruments in forcein Ontario and not otherwise defined in the proposed Companion Policy should be read in accordance with the proposed Rule andthe definition instruments unless the context otherwise requires.

Substance and Purpose

The substance and purpose of the proposed Rule and the proposed Companion Policy is to reformulate OSC Policy Statement No.9.1 ("Policy 9.1") with respect to the regulation of insider bids, issuer bids, going private transactions and related party transactions.The protections afforded by Policy 9.1, including independent valuations, majority of minority approval and enhanced disclosure, alsoform the basis of the proposed Rule and the proposed Companion Policy. The 1996 proposed Rule has been revised to incorporatecertain changes resulting from a reconsideration by the Commission of the appropriate manner of regulating in this area, to addressprior interpretational difficulties and to increase the number of exemptions available in a manner consistent with previously granteddiscretionary relief. The proposed Companion Policy sets out the Commission's views on certain matters relating to the subject matterof the proposed Rule.

For additional information concerning the background of the proposed Rule and the proposed Companion Policy, reference shouldbe made to Appendix B of this Notice and to the 1996 Notice.

Summary of Changes to the Proposed Rule

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

The Commission notes that it sought comment in the 1996 Notice on the appropriate manner of regulating related party transactions.The possibilities suggested by the Commission ranged from regulating related party transactions through a rule to not regulatingrelated party transactions at all in a rule, but indicating in a policy that the Commission would monitor transactions involving relatedparties and rely on the Commission's public interest power to address abusive transactions. Ultimately, the Commission has decidedto regulate related party transactions by way of rule. A more detailed discussion of the Commission's approach in this area can befound in Appendix B of this Notice.

Definition of Affected Security for Going Private Transactions

The 1996 proposed Rule defined an affected security for a going private transaction as a participating security of the issuer in whichthe interest of a beneficial owner would be terminated by reason of the transaction. "participating security" was given the meaningin section 182 of the Regulation. That section defines participating security as a security that carries the right to participate in earningsto an unlimited degree, including a security that by its terms is convertible into or exchangeable for or carries the right to purchase sucha security.

The Commission has reconsidered the definition of "participating security" and determined that the going private transactionrequirements should apply to securities that are either fully participating as to earnings or in assets on liquidation or winding up.

The Commission has further determined that it is not appropriate for the going private transaction requirements of the proposed Ruleto apply to convertible or exchangeable securities, as there are too many variables involved to have a rule deal with all situationsappropriately, including: the type of security, whether it is "in the money" or "out of the money", whether the security is currentlyconvertible, the terms of the agreement between the issuer and the holder of the convertible security governing the convertible security,the appropriate voting regime, if any, to apply to holders of convertible securities and the possibility of holders of convertible securitiesexercising a veto right over the transaction. The Commission is of the view that it is more appropriate for the holders of convertibleor exchangeable securities to deal with the issue of their interests being eliminated in their agreement with the issuer, or, in egregioussituations, for the Commission to use its public interest power to intervene.

The Commission has modified the definition of "participating security" accordingly.

Definition of Affected Security for Related Party Transactions

The 1996 proposed Rule defined an affected security for a related party transaction as a security of a class of equity securities orvoting securities of the issuer. The Commission has determined that the protection afforded by the proposed Rule should not turn onthe vote attached to the security, but rather should be based on the equity participation of the security. The Commission has furtherdetermined that the related party transaction requirements of the proposed Rule should apply to securities that are either fullyparticipating as to earnings or in assets on liquidation or winding up. Accordingly, the Commission has modified the definition ofaffected security for a related party transaction to refer to participating securities.

Definition of Holder

In the 1996 proposed Rule, holder was defined as a beneficial owner and a person or company who "exercised control or directionover" the security, except where the context otherwise required and subject to certain instances where it meant registered owner.Holder is now defined in the proposed Rule as registered owner and, where the Commission intends that a section refer to beneficialowners or persons or companies who exercise control or direction, reference is now made specifically to those concepts.

Prior Valuation Exceptions

The Commission has modified the exclusions from the definition of "prior valuation" so that an exemption is available for any draft thatleads to a valuation or appraisal by the independent valuator that prepared the draft. Previously, this exemption required that thevaluator did not charge, had not been and was not to be paid a fee for the draft.

The Commission has not extended this exemption to drafts of valuations that have not lead to a formal valuation. The Commissionrecognizes that some of these valuations may not be relevant to the transaction at hand. However, if these valuations are "priorvaluations", the Commission believes they should be disclosed, with the issuer being free to explain why they are not relevant.

Quasi-Going Private Transactions

The 1996 proposed Rule contained a concept of quasi-going private transaction and generally regulated this type of transaction in amanner similar to the manner in which going private transactions are regulated.

The 1996 proposed Rule defined a quasi-going private transaction as a transaction with or materially involving a related party thatwould be a going private transaction but for the substitution of a securityholder's interest with an interest of equivalent value in aparticipating security of the issuer or a successor entity that is not substantially the same as the original issuer.

In light of the Commission's removal of the equivalent value exception from the definition of going private transaction, there is no longera need for the concept of quasi-going private transaction, since a transaction that was formerly a quasi-going private transaction wouldnow be caught by the definition of going private transaction. Accordingly, the Commission has deleted the definition of quasi-goingprivate transaction and any references to that term in the proposed Rule.

Definition of Related Party

The Commission has deleted paragraph (h) from the definition of "related party" in the 1996 proposed Rule and section 9.1 of the 1996proposed Rule. The combined effect of those two provisions was that the Director could designate a person or company to be arelated party of an issuer. The Commission deleted those provisions as it felt that they were unnecessary. The Commission may useits power under section 127 of the Act if, in the Commission's opinion, a transaction that is not a related party transaction is contraryto the public interest.

Definition of Value

The 1996 proposed Rule contained a definition of value as meaning "except where the context otherwise requires, fair market valuedetermined as at the date of the first public announcement of the transaction". That definition has been deleted, as the proposed Ruleuses the term "fair market value" where necessary.

Definition of Going Private Transaction

The Commission has amended the definition of "going private transaction" to make it applicable only where the transaction is with orinvolving a person or company that is a related party of the issuer, if the related party (i) is not treated identically to all other beneficialowners in Canada of affected securities, (ii) receives, directly or indirectly, consideration of greater value than that paid to all otherbeneficial owners of affected securities, or (iii) upon completion of the transaction, beneficially owns, or exercises control or directionover, directly or indirectly, participating securities of a class other than the class of securities subject to the going private transaction.The Commission has made this change as it believes the proposed Rule should only apply to transactions that give rise to conflictof interest concerns.

The Commission has also deleted the portion of the definition of "going private transaction" in the 1996 proposed Rule that providedthat a transaction is not a going private transaction if an interest of equivalent value in a participating security of the issuer or asuccessor entity is substituted for the securityholder's interest. While the rationale is discussed in more detail in Item 8 of Part B ofAppendix B and in the footnote to the definition of going private transaction in the proposed Rule, essentially where there are conflictof interest concerns, the Commission believes that minority shareholders should have the protections of a formal valuation and majorityof the minority vote.

By virtue of the proposed Rule deleting the equivalent value exception from the definition of "going private transaction", the proposedRule may apply to transactions that may not be "going private transactions" under the Business Corporations Act (Ontario) (the"OBCA"). In the converse situation, where a transaction is a "going private transaction" under the OBCA but is not caught under theproposed Rule or is exempt under the proposed Rule, the Commission has provided relief in the proposed Rule from the OBCA.

Definition of Related Party Transaction

The Commission has added new paragraphs (b) and (e) to the definition of related party transaction to cover an issuer's joint purchaseor sale of an asset with a related party from or to a third party where the consideration paid or received by the issuer is greater or lessthan, as the case may be, the proportion of the asset purchased or sold by the issuer.

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

Liquidity Test

The Commission has modified the interpretation of "liquid market" in section 1.3 of the proposed Rule to add an aggregate tradingprice test of $15 million and a market value test of $75 million.

Insider Bids - Lock-up Agreements

The Commission has deleted paragraphs (b) and (c) in subsection 2.1(2) of the 1996 proposed Rule as those conditions are containedin subsections 97(1) and 97(2) of the Act. As a result, that subsection in the proposed Rule provides that, subject to one condition(instead of three conditions contained in the 1996 proposed Rule), a take-over bid is not an insider bid solely by reason of theapplication of the deemed beneficial ownership rules in the Act to an agreement to tender.

Valuation Exemption Based on Previous Arm's Length Negotiation - Insider Bids

This exemption in paragraph 3 of section 2.5 of the 1996 proposed Rule was predicated on a selling securityholder holding at leastfive percent of the outstanding securities and at least 20 percent of the securities of the class held by holders other than the offerorand persons or companies acting jointly or in concert with the offeror. The Commission has modified this exemption, which appearsin paragraph 3 of section 2.4 of the proposed Rule, to allow the 20 percent test to be satisfied based on the holdings of more than oneselling securityholder. The Commission also deleted the requirement in subparagraph 3(v) of section 2.5 in the 1996 proposed Rulethat the offeror make reasonable inquiry in order to be satisfied that no undisclosed material change or fact had occurred in respectof the offeree issuer at the time of the previous arm's length negotiation. Subparagraph 3(d) of section 2.4 of the proposed Rule nowonly refers to the offeror's actual knowledge.

Valuation Exemption for Non-Convertible Preferred Shares - Issuer Bids

Paragraph 3 of subsection 3.4(1) of the 1996 proposed Rule provided a valuation exemption in respect of an issuer bid for offereesecurities (i) that are neither equity securities nor voting securities, (ii) that are not convertible into equity securities or voting securities,(iii) that have never been in arrears on dividends, and (iv) for which there are no reasonable grounds for believing that there wouldbe arrears on dividends if the securities were not repurchased.

The Commission has reconsidered this exemption and determined that the proposed Rule should provide a valuation exemption forany issuer bid for securities that are not participating securities or convertible into participating securities. The Commission hasdetermined that a valuation should not be provided merely because the securities carry a vote, and should only be provided wherethe securities are participating securities. The Commission has further determined that the presence of arrears does not itself justifya valuation.

Transitional Provisions - Going Private Transactions

The Commission has added transitional relief in paragraph (d) of subsection 4.1(2) of the proposed Rule for going private transactionsannounced and not completed before the coming into force of the proposed Rule. As with the related party transaction transitionalrequirements in paragraph (h) of subsection 5.1(2) of the proposed Rule, the Commission has drafted the exclusion to clarify that itis only available if the transaction is completed substantially in accordance with the terms generally disclosed at the time thetransaction was announced or thereafter before the coming into force of the proposed Rule.

Transitional relief is not necessary for insider bids and issuer bids as the requirements in the proposed Rule relating to insider bidsand issuer bids are substantially similar to those found in Policy 9.1.

Exemption from 40 Day Requirement in OBCA for Going Private Transactions

The 1996 proposed Rule provided exemptions in certain circumstances for going private transactions from the valuation requirementand the minority approval requirement imposed by the OBCA. The proposed Rule continues these exemptions and provides a newexemption in section 4.3 from the timing requirement in the OBCA to send a management information circular in connection with agoing private transaction not less than 40 days before the date of the meeting called to consider the going private transaction.

Valuation Exemption for Second Step Going Private Transactions

The Commission has added a new exemption (paragraph 4 of section 4.5 of the proposed Rule) which provides a valuation exemptionfor a going private transaction following a formal bid where the going private transaction takes place no later than 120 days after theexpiry of the formal bid, the intent to effect the going private transaction was disclosed in the disclosure document for the formal bid,the consideration is at least equal in value and is in the same form as the consideration that was paid in the formal bid and, if the taxconsequences are different, they are appropriately described. This exemption applies regardless of whether the first step formal bidis an insider bid or made at arm's length.

Non-Redeemable Investment Funds

The 1996 proposed Rule provided that the going private transaction requirements and the related party transaction requirements didnot apply to non-redeemable investment funds. The Commission has reconsidered this matter and determined that an exemption fromthe valuation requirement should be provided to non-redeemable investment funds, but that there is no basis for an exemption fromthe minority approval and disclosure requirements. The Commission has modified the exemption accordingly.

Treatment of Lock-up Agreements for Minority Approval Purposes in Going Private Transactions

The 1996 proposed Rule provided that the shares of shareholders that effectively control the issuer and support the transaction,whether it be a one step going private transaction or a second step going private transaction, be excluded from the minority for votingpurposes in a going private transaction.

The Commission is now of the view that shares should not be excluded from the minority for voting purposes, regardless of the levelof share ownership of the shareholder or the circumstances in which the shares were tendered or are voted, so long as the shareholderdoes not (i) receive a consideration that is not available to other holders in Canada of affected securities of the same class, (ii) receiveconsideration of greater value than that paid to all other holders of affected securities of the same class, or (iii) upon completion ofthe transaction, beneficially own, or exercise control or direction over, participating securities of a class other than the class ofsecurities subject to the going private transaction. The Commission has modified the definition of "interested party", "minority approval"and subsection 8.2(1) of the 1996 proposed Rule accordingly.

Level of Minority Approval for Going Private Transactions

For going private transactions, the 1996 proposed Rule required either a two-thirds majority approval or simple majority approvaldepending on whether the consideration offered involved some non-cash consideration or the consideration offered was less than theper security value or the mid-point of the range of values based on a formal valuation. The 1996 proposed Rule required a simplemajority for all related party transactions, other than quasi-going private transactions.

The Commission has reconsidered its approach in respect of going private transactions and determined that tying the level of approvalto the form of consideration or the relationship of the consideration to the values determined under the valuation is inappropriate. TheCommission believes that a simple majority is the appropriate level and has modified the 1996 proposed Rule accordingly.

Going Private Transaction Not a Related Party Transaction

The Commission is of the view that a going private transaction carried out in accordance with the proposed Rule or exempt from theproposed Rule, or a transaction that comes within the exclusions in the definition of "going private transaction", should not be subjectto the related party transaction requirements of the proposed Rule. Accordingly, the Commission has provided for this in paragraphs(e) and (f) of subsection 5.1(2) of the proposed Rule.

Application of Related Party Transaction Requirements - Grandfathering

The Commission has clarified the exemptions in paragraphs (g) through (i) of subsection 5.1(2) of the proposed Rule so that they areavailable only if the transaction is completed in accordance with its terms. The Commission has also introduced a substantialityconcept into those same paragraphs to allow some modifications to the terms of a transaction.

Application of Related Party Transaction Requirements - Related Party Transactions Commenced Before the Proposed RuleComes into Force

The Commission has modified paragraph (h) of subsection 5.1(2) of the proposed Rule to clarify that the exclusion is only necessaryif the related party transaction was not completed before the coming into force of the proposed Rule.

Application of Related Party Transaction Requirements on Exercise of Retraction Rights

The Commission has added a reference to retractable securities in paragraph (j) of subsection 5.1(2) of the proposed Rule so thatthe proposed Rule does not apply to a related party transaction that is an issuance or transfer by an issuer of securities upon theexercise by a holder of a right to retract previously granted by the issuer and attached to a class of securities for which there is apublished market.

Ability of an Independent Committee to Waive Valuation or Minority Approval Requirements - Related Party Transactions

The 1996 proposed Rule proposed that an independent committee be given the discretion to waive the valuation requirement in certainrelated party transactions and also sought comment on whether an independent committee should be given the discretion to waivethe minority approval requirement.

The Commission has reconsidered this issue and has determined that it would not be appropriate to allow an independent committeeto waive the valuation requirement or the majority of the minority requirement. Accordingly, the Commission has deleted the provisionin the 1996 proposed Rule allowing an independent committee to waive the valuation requirement.

Elimination of Valuation Exemption based on Previous Arm's Length Negotiations -- Issuer Bids and Related PartyTransactions

The 1996 proposed Rule provided valuation exemptions for issuer bids and related party transactions in the "circumstances describedin paragraph 3 of section 2.5, with necessary modifications". That paragraph provided a valuation exemption for an offeror in an insiderbid in connection with previous arm's length negotiations with a selling securityholder.

The Commission has decided to eliminate this exemption insofar as it pertains to issuer bids, as the Commission does not believeit appropriate for an issuer, as opposed to a third party offeror, to have a valuation exemption based on negotiations with a sellingsecurityholder. The Commission also notes that it is difficult to envisage a situation in which the circumstances contemplated by theexemption would arise in practice in an issuer bid.

The Commission has decided to eliminate this exemption insofar as it pertains to related party transactions, as it is not necessary givenother exemptions in the proposed Rule.

Valuation and Minority Approval Exemptions for Related Party Transactions Based on Less than 25 Percent of MarketCapitalization

The Commission has clarified the exemption in paragraph 2 of section 5.6 of the proposed Rule so that only the part of a transactionthat involves the interested parties must be valued in its entirety.

Valuation and Minority Approval Exemptions for Related Party Pro Rata Transactions

Subsection 5.6(2) of the 1996 proposed Rule made the exemption for a dividend in specie or distribution of securities that would resultin a related party of the issuer holding 20 percent or more of the equity securities or voting securities of another issuer conditional onthe related party undertaking not to sell the shares by means of a private agreement take-over bid for a period of two years. TheCommission has eliminated this condition. The Commission is of the view that any abuses of this exemption can be dealt with usingits public interest power.

The Commission has also added an exception to the requirement in subparagraph 5(b) of section 5.6 of the proposed Rule to allowfor a stand-by subscription agreement in respect of a rights offering on the terms permitted by OSC Policy Statement No. 6.2. Thatparagraph provides an exemption if related parties are treated identically to all other holders in Canada of affected securities and donot receive, directly or indirectly, as a consequence of the transaction, consideration of greater value than that received on a pro ratabasis by all other holders of affected securities.

Valuation and Minority Approval Exemptions for Related Party Transactions for Public Offering of Securities

The exemption in paragraph 7 of subsection 5.6(1) of the 1996 proposed Rule provided an exemption for a public offering of securitiesto the extent the issuer met one of three conditions relating to (i) pro rata participation by all holders in Canada of affected securities,(ii) there being a liquid market and the related party contributing back to the issuer a certain amount based on the difference betweenthe offering price and the market price or, (iii) there being a liquid market and the offering price being not more than five percent lessthan the most recent closing price before pricing of the offering.

The Commission has deleted this exemption. The Commission is of the view that the exemption in the 1996 proposed Rule isimpractical. The Commission considered modifying the exemption so that it would only apply to a distribution under a prospectus andwould be conditional on the related party participating at the same price as under the offering and not increasing its ownership interestin the issuer. However, the Commission was not comfortable with this approach and, as a result, felt that at this time it is moreappropriate to deal with this issue in the context of applications for relief.

Valuation and Minority Approval Exemptions for Downstream Related Party Transactions

Paragraph 11 of subsection 5.6(1) of the 1996 proposed Rule provided an exemption for a transaction involving an issuer and oneor more subsidiaries of the issuer or between two or more subsidiaries of the same issuer if no related party of the issuer held morethan a nominal interest in securities of the subsidiary or received a benefit as a consequence of the transaction not available to othersecurityholders. The Commission has, in paragraph 10 of section 5.6 of the proposed Rule, extended the exemption to transactionsbetween an issuer and a "downstream" interested party (even where that interested party is not a subsidiary). The Commission hasdone this because the definition of related party captures "downstream" entities (not just downstream subsidiaries) and theCommission is of the view that in those circumstances there is no concern about a conflict of interest as regards the issuer unless thereis a common related party.

Independent Valuator - Presumptions

The 1996 proposed Rule contained a number of rebuttable presumptions in paragraphs (a) through (g) of subsection 6.1(3) relatingto independence of the valuator. The Commission moved three of these paragraphs from the 1996 proposed Rule to section 5.2 ofthe proposed Companion Policy, so that those paragraphs are now factors that may be relevant in determining as a factual matterwhether a valuator is independent. Specifically, the Commission has moved to the proposed Companion Policy paragraph (c) ofsubsection 6.1(3) relating to the valuator having a material financial interest in future business in respect of which an agreement,commitment or understanding exists involving an issuer or interested party. The Commission has also moved to the proposedCompanion Policy paragraph (e) of subsection 6.1(3) relating to the valuator having a material involvement in an evaluation, appraisalor review of the financial condition of the issuer or an interested party, or acting as a lead or co-lead underwriter of a distribution bythe issuer or an interested party within the preceding 24 months. As well, the Commission has moved to the proposed CompanionPolicy paragraph (f) of subsection 6.1(3) referring to the valuator or any of its affiliates being a lead or co-lead lender or manager ofa lending syndicate in respect of the transaction in question or a lender of a material amount of indebtedness where the interestedparty or the issuer is in financial difficulty and the transaction would reasonably be expected to have the effect of materially enhancingthe lender's position.

The Commission has determined that the remaining paragraphs in subsection 6.1(3) of the proposed Rule describe situations thatshould not be rebuttable presumptions and, accordingly, has clarified that a valuator is not independent in those situations.

The Commission has deleted the word "financial" from paragraph (b) of subsection 6.1(3) of the 1996 proposed Rule so that paragraph(b) of subsection 6.1(3) of the proposed Rule now includes the valuator or any of its affiliates acting as any type of advisor to theinterested party in respect of the transaction.

Subsection 6.1(4) of the 1996 proposed Rule provided that if a valuator is retained jointly by the issuer and one or more interestedparties to prepare a formal valuation in respect of a transaction, the valuator is presumed not to be independent for the purpose ofthe formal valuation if the valuator also provides any other advisory service to one or more interested parties in connection with thesame transaction. The Commission has modified this in subsection 6.1(4) of the proposed Rule to remove the reference to advisoryservices and to clarify that a valuator does not lose independence merely because an interested party pays part of the valuator's fees.The Commission believes that it is clear from paragraph (b) of subsection 6.1(3) and the change made to subsection 6.1(4) of theproposed Rule, that the provision of advisory services to an interested party in respect of a transaction results in the valuator not beingindependent in connection with that transaction.

Independent Valuator in Context of Issuer Bid

Subsection 6.1(6) of the 1996 proposed Rule provided that, for purposes of determining valuator independence, an interested partydid not include the issuer in the case of an issuer bid. The Commission has amended this so that subsection 6.1(5) of the proposedRule provides that a valuator that is retained by an issuer to prepare a formal valuation for an issuer bid is not, by that fact alone, notan independent valuator.

Formal Valuation Disclosure

Section 6.5 of the 1996 proposed Rule prescribed the disclosure requirements applicable to a valuation summary but did not prescribedisclosure requirements for formal valuations. The Commission has added such requirements to paragraph (e) of subsection 6.4(1)in the proposed Rule. That paragraph requires that the disclosure in the formal valuation be sufficient to allow the securityholders tounderstand the principal judgements and principal underlying reasoning of the valuator so as to form a reasoned judgement of thevaluation opinion or conclusion.

Summary of Formal Valuation

The proposed Rule now only requires the offeror or issuer to provide a valuation summary in accordance with section 6.5 where theformal valuation is not included in its entirety in the relevant disclosure document. Section 6.5 has been modified accordingly so asto only specify disclosure standards for a summary when a summary is required to be provided.

Independent Directors - Presumptions

The Commission has determined that the situations in subsection 7.1(2) of the 1996 proposed Rule should not be rebuttablepresumptions and, accordingly, has clarified in the proposed Rule that a director is not independent in those situations.

The Commission has amended paragraph (a) of subsection 7.1(2) by deleting the reference to a director not being independent ifduring the three years before the transaction the director was an employee, insider or associate of a person or company acting jointlyor in concert with an interested party. The Commission has also amended paragraphs (a) and (b) of subsection 7.1(2) by changingthe time periods from three years to 12 months as it felt that three years was unduly long. The Commission has deleted the word"financial" from paragraph (b) of subsection 7.1(2) for the same reason as explained above under "Independent Valuator -Presumptions".

 

The Commission has amended subsection 7.1(3) to provide that, for the purposes of section 7.1, in the case of an issuer bid, a directorof the issuer is not, by that fact alone, not independent of the issuer.

Summary of Changes to the Proposed Companion Policy

Issuer Bids

By virtue of section 92 of the Act, an offer to acquire securities of the issuer made by a wholly-owned subsidiary of the issuer wouldbe an issuer bid. The Commission has amended section 3.3 of the 1996 proposed Companion Policy (now subsection 2.4(2) of theproposed Companion Policy) to state that, in its view, a purchase made by a registered dealer that is a wholly-owned subsidiary entityof an issuer is not an issuer bid if the registered dealer is not acting at the direction of the issuer in making the purchases.

Independent Valuators

The Commission has added section 5.2 to the proposed Companion Policy. That section sets out factors that may be relevant to avaluator's independence. Most of these factors previously appeared as presumptions in the 1996 proposed Rule but, as indicatedabove, the Commission has moved these into the proposed Companion Policy. The Commission has also added as a factor, whether,during the 24 months immediately before the valuator was first contacted for the purpose of the formal valuation, the valuator or anaffiliated entity of the valuator had a material financial interest in transactions involving the interested party or the issuer.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule and the proposed Companion Policy.Submissions received by April 23, 1999 will be considered.

Submissions should be made in duplicate to:

c/o 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 Actrequires that a summary of written comments received during the comment period be published, confidentiality of submissions cannotbe maintained.

Questions may be referred to:

Stan Magidson

Director, Take-over/Issuer Bids,

Mergers & Acquisitions

Corporate Finance Branch

Ontario Securities Commission

(416) 593-8124

Regulations to be Amended or Revoked

In the 1996 Notice, the Commission indicated that it proposed to amend section 182 of the Regulation. After further consideration,the Commission proposes to revoke section 182 in its entirety. The Commission also now proposes to revoke subsection 46(1) ofSchedule 1 of the Regulation. The Commission still proposes to amend section 203.2 of the Regulation and subsections 1(1) and46(2) of Schedule 1 of the Regulation to change the references to Policy 9.1 to references to Rule 61-501.

Rescission of OSC Policy Statement No. 9.1

Policy 9.1 is replaced by the proposed Rule.

The text of the proposed rescission is:

"Ontario Securities Commission Policy Statement No. 9.1 Disclosure, Valuation, Review and Approval Requirements andRecommendations for Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions is rescindedeffective upon the date proposed Rule 61-501 comes into force."

Proposed Rule and Proposed Companion Policy

The text of the proposed Rule and proposed Companion Policy follows, together with footnotes that are not part of the proposed Ruleand proposed Companion Policy but have been included to provide background and explanation.

DATED: January 22, 1999

APPENDIX A
LIST OF COMMENTERS ON
PROPOSED RULE AND COMPANION POLICY

1. Anita I. Anand

2. Canadian Bankers' Association by letter dated November 1, 1996.

3. Canadian Institute of Chartered Business Valuators by letter dated September 27, 1996.

4. Davies Ward & Beck by letter dated October 11, 1996.

5. Fairvest Securities Corporation by letter dated December 10, 1996.

6. Gerry Finkle by letter dated June 1, 1996.

7. Investment Dealers Association of Canada by letter dated October 18, 1996.

8.* Leith Wheeler Investment Counsel Ltd. by letter dated January 6, 1997.

9. McCarthy Tetrault by letter dated October 4, 1996.

10. McMillan Binch by letter dated October 4, 1996.

11.* Montrusco Associates Inc. by letter dated January 24, 1997.

12.* The General Accident Assurance Company of Canada by letter dated January 14, 1997.

13. The Jim Pattison Group by letter dated September 30, 1996.

14. RBC Dominion Securities by letter dated September 30, 1996.

15.* Sceptre Investment counsel by letter dated January 2, 1997.

16. Phillippe Tardif by letter dated September 30, 1996.

17.* Task Force on the Churches and Corporate Responsibility by letter dated January 10, 1997.

18. Tory Tory DesLauriers and Binnington by letter dated November 7, 1996.

19. TransAlta Corporation by letter dated September 27, 1996.

20. Vancouver Stock Exchange by letter dated September 26, 1996.

* As these commenters generally supported the comments submitted by Fairvest Securities Corporation, reference is madeto Fairvest and them as one commenter in Appendix B.

 

APPENDIX B

 

SUMMARY OF WRITTEN COMMENTS RECEIVED

ON THE 1996 PROPOSED RULE

AND THE 1996 PROPOSED COMPANION POLICY

 

AND RESPONSES OF THE COMMISSION

The Commission received 20 submissions on the 1996 proposed Rule and the 1996 proposed Companion Policy.

The Commission considered the comments received and thanks all commenters for providing their comments.

The following is a summary of the comments received, together with the Commission's responses. Generally, this summary followsthe ordering in the 1996 Notice. Unless otherwise provided, references to section numbers in this Appendix are to section numbersin the 1996 proposed Rule and the 1996 proposed Companion Policy.

A. DISCUSSION OF GENERAL COMMENTS

1. Regulatory Treatment of Related Party Transactions

The 1996 proposed Rule proposed to regulate related party transactions in substantially the same manner as Policy 9.1 (although byrule) and, in doing so, attempted to clarify some areas of uncertainty in Policy 9.1 and provide a significantly larger number ofexemptions from the valuation and minority approval requirements than Policy 9.1. A number of the proposed exemptions codifiedcurrent staff practice.

The 1996 Notice sought comment on regulating related party transactions by way of rule or through two alternatives identified in the1996 Notice. The first alternative would involve a more focussed rule which would cover those particular transactions that have givenrise to a number of complaints over the years (quasi-going private transactions and dispositions to a related party of a substantial partof an issuer's property) and would also provide a companion policy warning of the Commission's concerns and ability to intervene ona public interest basis in the context of abusive transactions. The second alternative would restrict related party transaction regulationto the type of policy suggested under the first alternative.

Comments

Four commenters supported regulation of related party transactions through a rule and did not support adopting either of the twoalternatives discussed in the 1996 Notice. Of those commenters, one proposed modifying the 1996 proposed Rule to includerequirements aimed at increasing investor protection. Otherwise, in the view of that commenter, the cumulative effect of the changesproposed in the 1996 proposed Rule would be to "significantly reduce the protection now provided minority shareholders by Policy9.1 in connection with related party transactions". That commenter felt there was no principled basis for distinguishing betweendifferent types of related party transactions and that a policy would be ineffective.

Another of those commenters, commenting mainly with the junior markets in mind, supported regulating through the 1996 proposedRule as that commenter felt that the two alternatives were not broad enough to capture many transactions that have been the sourceof abuse. That commenter suggested that the addition of the exemptions contained in subparagraphs (b)(i) through (iv) of Schedule"B" to the 1996 Notice would provide issuers with relief where the costs of compliance may not be reasonable in the circumstances.

Another of those commenters encouraged tougher regulation of related party transactions and stated that independent directors andvaluators are not really independent from those they are being paid by.

Two commenters supported adoption of the first alternative approach discussed in the 1996 Notice.

Those commenters believed regulatory compliance should be imposed on those transactions that have raised concerns and, sincethe 1996 Notice indicated that the vast majority of complaints received involved those transactions covered in the first alternative, thefirst alternative should be adopted, leaving the threat of regulatory intervention, in other cases where there is abuse, as a sufficientthreat. In addition, those commenters felt that the first alternative approach would provide a clear set of rules, facilitate complianceand eliminate concerns of inadvertent non-compliance with the proposed Rule, which non-compliance could affect legal validity ofrelated party transactions with various potential consequences.

Another commenter supported the definition of "related party transaction" proposed in the first alternative approach but did not supportthe adoption of the proposed companion policy. That commenter felt that the definition of "related party transaction" in the 1996proposed Rule was too broad, potentially resulting in regulatory backlog and/or incentive for non-compliance. That commenter alsofelt that the "warning" contained in the proposed policy under the first alternative would create uncertainty, resulting in manyapplications to the Commission or unnecessary interference with transactions for fear of regulatory intervention. That commenternoted that the Commission has the jurisdiction to intervene without the policy and was of the view that the policy provided littleguidance and could unnecessarily alarm market participants.

Four commenters supported the second alternative approach of regulating related party transactions through a policy.

One of those commenters stated that the definitions of related party and related party transaction are very broad and will catch manytransactions. That commenter indicated that, in its experience under Policy 9.1, it has been able to advise clients that the concernsbehind the related party transaction rules are either relevant or not relevant to a particular transaction regardless of the precise wordingof Policy 9.1. In the view of that commenter, this produces transactions that are procedurally and substantively fair with less discussionwith staff than would otherwise be the case under the 1996 proposed Rule.

A second of those commenters stated that, in its view, the policy in Schedule "A" (which would be used in either of the alternatives)should be modified to:

i. provide that the board of directors should determine what protections (valuation, minority approval etc.) areappropriate in a particular transaction;

ii. not encourage discussion with the Director; and

iii. make clear the standard under which the Commission would invoke its public interest jurisdiction and intervene ina transaction, which standard should be consistent with that articulated in Commission decisions.

The commenter's reasons for its approach were that (i) a detailed policy has led to an overly technical approach (increasing the riskthat management will make determinations that the rules do not apply and bypass board review of potentially abusive transactions),(ii) directors should determine how the interests of shareholders are protected, (iii) institutional shareholders are increasingly activeand have a strong influence on issuer activity, and (iv) the Commission's public interest jurisdiction would allow it to properly dischargeits regulatory responsibilities.

The third of those commenters stated that regulation of related party transactions should be removed from the 1996 proposed Ruleand a policy should indicate the circumstances in which the Commission will exercise its cease-trade power regarding transactionsthat appear to be abusive or unfair. That commenter felt that corporate law statutes are the proper place for regulating suchtransactions.

Two commenters concurred with either of the two alternative approaches in recognition of the benefits of easing the burden ofregulatory compliance by focussing regulation only where complaints have been encountered.

Response

The Commission has not adopted either of the two proposed alternatives. In the Commission's view, the broad and detailed approachcontained in the proposed Rule is an appropriate approach and should not be relaxed. Because of the concentration of ownershipor control of Canadian corporations, there is at a minimum the perception of opportunities for self-dealing at the expense of the minorityshareholders in the context of related party transactions. Policy 9.1 has been in place in its current form since 1991 and, in theCommission's view, has struck a fairly good balance in its attempt to protect minority shareholder rights without unduly impeding theability of issuers to conduct their businesses. The proposed Rule proposes to clarify some ambiguities in Policy 9.1 and cut back onits breadth to the extent it seems reasonable, given the experience to date. The Commission is not convinced that a policy wouldprovide sufficient protection for minority shareholders.

In response to one commenter's suggestion that the Commission add certain exemptions contained in Schedule "B" to the 1996 Noticeto the definition of related party transaction contained in the 1996 proposed Rule, the Commission notes that the exemptions that werein that Schedule "B" were already built into the 1996 proposed Rule.

2. Treatment of Lock-up Agreements for Minority Approval Purposes in Going Private Transactions (Paragraph (b) ofSubsection 8.2(1) and Paragraph 2 of Subsection 8.4(1))

Policy 9.1 currently excludes from the minority vote (i) in a second step transaction (such as a going private transaction following anarm's length take-over bid), any shares tendered in the first step transaction under a lock-up, and (ii) in a one step going privatetransaction, any shares of a shareholder that affects materially the control of the issuer and has entered into an understanding tosupport the transaction.

The 1996 proposed Rule departed from Policy 9.1 and proposed that only the shares of shareholders who effectively control the issuerand support the transaction (whether it be a one step going private transaction or a second step going private transaction) be excludedfrom the minority vote. This is the same standard applicable in the OBCA.

Comment was sought on the appropriate treatment of lock-up agreements for the purpose of minority approval in the context of oneand two step transactions.

Comments

One commenter agreed with the treatment in the 1996 proposed Rule.

Four of the commenters suggested revising the 1996 proposed Rule to provide that as long as the parties to a lock-up agreement areacting at arm's length with each other and the "locked-up" shareholder is being treated identically to other shareholders, the agreementshould not disenfranchise the "locked-up" shareholder (nor exclude shares it tendered to a previous bid) from the minority vote evenif the shareholder effectively controlled the issuer prior to the transaction. Those commenters noted that excluding locked-up sharesmay serve as a disincentive to a person or company making a bid. Those commenters felt that the locked-up shareholders end upnegotiating on behalf of the minority and it is unfair to exclude the locked-up shareholders' shares.

One of the four commenters stated that a lock-up that reserves to the agreeing shareholder the right to tender to or vote in favour ofanother transaction with a greater consideration should not result in disenfranchisement. That commenter also noted that a simpleunderstanding should not be sufficient to disenfranchise the votes. In the absence of a binding commitment or agreement, theshareholder is always entitled to change its mind.

A fifth commenter felt that the only circumstance in which a locked-up shareholder should be restricted from voting in the minority iswhen it is acting jointly or in concert with the offeror. That commenter felt that the opportunity to negotiate should not disqualify thelocked-up shareholder and it is inappropriate to attempt to protect the minority from the pricing decision of the locked-up shareholder.That commenter was of the view that it is unnecessary to condition the provision on all shareholders being treated identically becausethe Act already provides that requirement in the take-over bid rules.

A sixth commenter indicated that if the approach in the 1996 proposed Rule is adopted, that commenter would support the inclusionin the proposed Companion Policy of a provision to the effect that the Executive Director will be favourably disposed to grantingdiscretionary relief in cases of lock-up agreements that meet certain defined criteria: for example, that contain a functional "competingbid" clause, provide a "window shopping" exception to any "no-shop" prohibition, and do not contain any preclusive financial penaltiesfor terminating the "lock-up" (a reasonable "topping fee" and expense reimbursement provision would not be considered to have sucha preclusive effect). In its view, such a provision would be consistent with past decisions under Policy 9.1 and would provide guidancefor circumstances involving a controlling shareholder.

A seventh commenter was in favour of retaining the approach currently in Policy 9.1. That commenter was of the view that lock-upagreements entered into by non-controlling shareholders have the same effect on minority shareholders as lock-ups entered into bycontrolling shareholders. The commenter noted that an offeror will only seek to negotiate lock-up agreements with shareholdersholding sufficient shares to enable the offeror to obtain control of the target. If their shares are later counted toward minority approval,their decision to sell determines that other shareholders must also sell their shares at the same price. This approach supported bythe commenter is based on the following views: locked-up shareholders cannot be counted on to represent the interests of othershareholders; the inability of an offeror to ensure the votes under a lock-up can be subsequently voted would not necessarily lead theofferor to forgo the opportunity to acquire control; and the proposal is contrary to the 90 percent squeeze out threshold provided inthe OBCA.

Response

Traditionally, the reason for excluding locked up shares has been that lock-up/support arrangements may effectively preclude orseverely limit an auction process, thereby removing any practical alternatives from other shareholders.

The proposal in the 1996 proposed Rule represented a more uniform and flexible approach than that currently in Policy 9.1, as itrecognized that disenfranchisement represents a significant imposition on the rights of substantial shareholders whose actions maybe of benefit to the minority. It recognized that support/lock-up arrangements generally serve to reduce risk to the offeror who mightotherwise be reluctant to make an offer, thereby bringing offers to minority shareholders that might not otherwise appear. In addition,a substantial shareholder can bring to the negotiations a sophisticated and informed party with negotiating power, looking for the bestprice, whereas the minority have only the opportunity to withhold approval with no certainty of obtaining a better offer.

The Commission notes that staff have over the past two years provided no-action letters in connection with proposed take-over bidsinvolving lock-up/support arrangements where comfort was sought that the shares subject to the lock-up/support arrangements wouldnot be disenfranchised in a second step transaction. In each of these cases, the subject shareholders were at arm's length to thebidders and were treated identically to the remaining minority.

The Commission recognizes that the proposal in the 1996 proposed Rule is somewhat of a compromise position, chosen partly in anattempt to be consistent with the OBCA requirements and partly because it is a middle ground approach. On further reflection, theCommission has determined that consistency with the OBCA should not be a strong reason for adopting a particular approach. TheCommission has further considered whether any locked-up shares should be excluded and, if so, whether a line should or should notbe drawn at disenfranchising only a controlling shareholder (and not any other shareholder) that enters a lock-up/support arrangement.

The Commission continues to believe that, at a minimum, shares held by non-controlling shareholders should not be excluded. Inconsidering how shares held by controlling shareholders should be treated the Commission recognizes that to permit a controllingshareholder to enter into a lock-up/support arrangement without having the subject shares excluded from the minority vote couldconceivably lead to situations where the lock-up/support arrangement severely limits or ends an auction process. However, theCommission also recognizes that there is a fundamental question of why a controlling shareholder receiving the same considerationas others should not be able to do what it wants with its shares regardless of the impact it will have on the ultimate outcome of thetransaction. Since the shareholder can control the outcome by voting its shares at a shareholders' meeting (for a going privatetransaction) or tendering its shares to a take-over bid, why should the shareholder be prevented from locking-up its shares orsupporting an acquiror prior to the shareholders' meeting or the expiry of the take-over bid, as the case may be?

After considering the opposing positions, the Commission believes that an offeror should not be precluded from voting, in a secondstep transaction, shares tendered under a lock-up agreement or counting the votes of locked-up shares in a one step transaction,regardless of the level of share ownership of the shareholder, so long as the shareholder (i) is not receiving a consideration that isnot identical to that paid to all other beneficial owners in Canada of affected securities of the same class, or, (ii) is not receivingconsideration of greater value than that paid to all other beneficial owners of affected securities of the same class, or, (iii) uponcompletion of the transaction, does not beneficially own, or exercise control or direction over, participating securities of a class otherthan affected securities. In those circumstances, the Commission does not accept the distinction between shares tendered by acontrolling shareholder and shares tendered by other shareholders.

Accordingly, the Commission has modified the definition of "interested party" and sections 8.1 and 8.2 of the 1996 proposed Rule toprovide that the votes attaching to securities are only excluded if the securityholder receives a consideration that is not identical to thatpaid to other beneficial owners in Canada of affected securities of the same class, or receives consideration of greater value than thatpaid to all other beneficial owners of affected securities of the same class or, upon completion of the transaction, beneficially ownsor exercises control or direction over, participating securities of a class other than affected securities.

3. Ability of an Independent Committee to Waive Valuation or Minority Approval Requirements in Related PartyTransactions (Paragraph 2 of Subsection 5.6(1))

The 1996 proposed Rule proposed that an independent committee be given the discretion to waive the valuation requirement in arelated party transaction (other than a quasi-going private transaction or substantial asset sale). This was a departure from Policy 9.1which does not give an independent committee any such discretion.

Comment was sought on whether, in the context of these related party transactions, an independent committee should be given thediscretion to waive the valuation requirement and whether it should also be given the discretion to waive the minority approvalrequirement.

Comments

Two commenters felt that independent committees should not be given the discretion to waive valuation and minority approvalrequirements.

One of those commenters felt that the only benefit would be the reduction in compliance costs, but that the downside would be thesignificant pressure that independent committees would feel from related parties to waive these requirements.

The second of the two commenters also felt the proposed valuation exemption would be inappropriate. Instead, the commenterthought it should be necessary to fit within one of the automatic exemptions or obtain a discretionary exemption from the Director, asthere is no principled basis for distinguishing between types of related party transactions in determining whether independentcommittees be given discretion. Furthermore, it was of the view that the exemption should not be extended to minority approvalrequirements, as otherwise minority shareholders would lack any real bargaining position, and it is difficult to see any basis on whichdirectors could determine that shareholders do not need to vote.

A third commenter suggested that an independent committee be given discretion to waive the formal valuation requirement, but notthe minority approval requirement. That commenter felt that permitting a waiver of the valuation requirement may save substantialtime and costs in certain instances where an independent committee has considered the matter. However, the independentcommittee's opinion should not be substituted for the shareholders' right to decide the fairness of a transaction. The commenterconcluded that, as there is potential for abuse given the pressure often brought to bear on independent committees, the minorityapproval requirement would act as a good discipline on a committee considering the valuation issue.

Two other commenters felt that discretion to waive the valuation and minority approval requirements should be given to the board ofdirectors (or to the independent committee, if a board has constituted one), with the exception of going private transactions (and inthe view of one of the commenters quasi-going private transactions) which should always be subject to minority approval. Thosecommenters felt that directors are capable of exercising their fiduciary duties appropriately and their discretion would always be subjectto the Commission's public interest jurisdiction.

One commenter supported the 1996 proposed Rule's introduction of the discretion to waive valuation requirements for most relatedparty transactions and believed it should be extended to permit waiver of the majority of the minority vote and to permit independentcommittees to waive valuation requirements in going private transactions and quasi-going private transactions.

Response

The Commission reconsidered the issue of allowing an independent committee to waive the valuation requirement and determinedthat it would be inappropriate. The Commission is concerned about the pressure that will be brought to bear on directors to waive thevaluation requirement. The Commission is also of the view that, without a valuation, shareholders will not be able to make a reasoneddecision concerning the transaction they are being asked to consider. Accordingly, this exemption does not appear in the proposedRule. For the same reason, the Commission is not prepared to extend the exemption to allow an independent committee to waivethe minority approval requirement.

4. Level of Minority Approval for Related Party Transactions and Going Private Transactions (Section 8.3)

For going private transactions, the 1996 proposed Rule adopted the requirement in Policy 9.1, which is either a two-thirds or simplemajority of minority approval. The two-thirds approval level is required where the consideration to be received by minority shareholderstakes the form of some non-cash consideration or where the consideration being offered is less than the per security value or the mid-point of the range of values based on a formal valuation.

The 1996 proposed Rule departed from Policy 9.1 in that it only required a simple majority for all related party transactions (other thanquasi-going private transactions) regardless of the form of consideration to be received by minority shareholders or the value of theconsideration offered as against the values under the valuation. Comment was sought on the appropriateness of the proposed levelsof minority approval for the different types of transactions under the 1996 proposed Rule.

Comments

Seven of the commenters felt that a uniform standard should be adopted for all of the types of transactions covered by the 1996proposed Rule and that a majority of the minority would be sufficient. Those commenters were of the view that anything more wouldgive the minority inappropriate veto power. Further, they felt it would be inappropriate to link the level of approval to either the resultsof the valuation or the form of consideration being offered. Relating the level of approval to the results of a valuation would, in theirview, place undue reliance on that opinion (which is highly dependent on the valuator's professional judgment), put inappropriatepressures on valuators and often result in valuation ranges that are negotiated between the valuator and the interested party. Thosecommenters thought the valuation process should establish a more level playing field in terms of access to information for minorityshareholders, rather than a negotiating lever to attract the highest possible price. They noted that relating the level to the form ofconsideration would create a bias in favour of cash irrespective of the quality of paper offered.

Another commenter felt that the 1996 proposed Rule should retain the minority approval levels in Policy 9.1. That commenter felt thatif the Commission is concerned that a minority approval level dependent upon the results of a valuation may give rise to inappropriatepressures on valuators, then the Commission should be concerned about the whole valuation process itself. That commenter alsonoted that there may be circumstances in which a greater majority than a simple majority would be appropriate and would provide agreater assurance of fairness to minority shareholders.

Response

The Commission agrees with the seven commenters that tying the level of approval to the form of consideration or to the relationshipof the consideration to the range of values is inappropriate. The Commission agrees that there should be a uniform standard for alltransactions and that a simple majority is the appropriate level. The Commission has amended the definition of "minority approval"accordingly.

5. Disclosure of Smaller Related Party Transactions (Section 3.9 of the 1996 Proposed Companion Policy)

Policy 9.1 currently requires disclosure in proxy circulars of any related party transactions which individually or in the aggregate arematerial to the issuer. Section 3.9 of the 1996 proposed Companion Policy contained a similar provision to the disclosure requirementin Policy 9.1 and also referred issuers to section 3840 of the Handbook of The Canadian Institute of Chartered Accountants. Commentwas sought on whether the proposed disclosure requirement for smaller related party transactions is sufficient or whether theCommission should expressly require more detailed and specific disclosure of such transactions on an annual basis in the proposedRule.

Comments

Two commenters felt that the current proposal is sufficient.

One commenter was of the view that the 1996 proposed Companion Policy would reduce the requirements in Policy 9.1. Thatcommenter felt that at the least, the disclosure contemplated in the 1996 proposed Companion Policy should be required in theproposed Rule. The commenter suggested that the proposed Rule require annual disclosure of the aggregate value of (i) all relatedparty transactions, and (ii) related party transactions not previously disclosed. The commenter thought the proposed Rule should alsorequire review of all related party transactions by an independent committee of directors, and disclosure of the processes generallyfollowed by the issuer with respect to related party transactions. Such disclosure should be supplemented by a more detaileddescription of transactions in which the issuer diverged from its normal procedures.

Response

The Commission is of the view that the current proposal, which appears in section 4.3 of the proposed Companion Policy, is sufficient.The Commission believes that there is no need to supplement the proposed Companion Policy and the CICA requirements throughrequirements in the proposed Rule.

6. Valuation Disclosure (Subsection 6.5(1) of the 1996 Proposed Rule and Section 3.7 of the 1996 Proposed CompanionPolicy)

Section 6.5 of the 1996 proposed Rule prescribed the disclosure requirements applicable to a valuation summary. Section 3.7 of the1996 proposed Companion Policy expressed the Commission's view of the required level of disclosure and referred to the proposedvaluation disclosure standards of the Investment Dealers' Association of Canada (the "IDA") and of the Canadian Institute of CharteredBusiness Valuators (the "CICBV") as being reasonable. Comment was sought on the appropriateness of the proposed valuationdisclosure provisions of the 1996 proposed Rule and the 1996 proposed Companion Policy.

Comments

Two commenters supported the proposal in the 1996 proposed Rule and 1996 proposed Companion Policy.

One commenter felt that the 1996 proposed Rule was deficient because it did not prescribe a general disclosure standard for formalvaluations, only for summaries. That commenter felt that the following test of overall disclosure adequacy should be added to theproposed Rule:

Disclosure should be sufficient to allow the directors and securityholders of the issuer to understand the principal judgmentsand principal underlying reasoning of the valuator in its formal valuation so as to form a reasoned view on the conclusionexpressed in the formal valuation.

That commenter felt that using a disclosure standard for valuation summaries that is the same as that used for valuation reports isunworkable and a summary should have a more modest disclosure objective. That commenter was also concerned with the practiceof summarizing valuation reports. Where the complete valuation report accompanies the disclosure document sent to shareholdersand has been prepared in accordance with recognized standards, the commenter was of the view that a statement as to the valuationconclusions should be a sufficient summary in the disclosure document. However, if those circumstances are not present, it felt thata summary should be provided in the disclosure document which describes the formal valuation in sufficient detail to permitsecurityholders to form a reasoned view with respect to the formal valuation.

One commenter felt that the current provision in Policy 9.1 (subsection 24.5(3)), as carried forward in the 1996 proposed CompanionPolicy, should be contained in the proposed Rule instead. That provision requires that the prescribed disclosure entail a sufficientlydetailed review of all material factors contained in the formal valuation so that the reader can understand the valuator's thoughtprocesses and assumptions in arriving at its opinion. As well, the commenter thought the provisions of the 1996 proposed CompanionPolicy, which require disclosure of a limitation on the scope of the valuator's review and its implications for the valuator's conclusion,should be in the proposed Rule. The commenter noted that the 1996 proposed Rule does not prescribe the contents of a formalvaluation report or specify a standard for its preparation. It felt that the approach taken by the Commission of subdelegating disclosurestandards to the CICBV and the IDA should be contained in the proposed Rule, which should provide that a summary of a formalvaluation shall be prepared in accordance with their disclosure standards and any applicable provisions of the proposed Rule. Thiswould encourage vigorous enforcement of the disclosure standards by the CICBV and IDA.

Another commenter agreed with the proposed valuation disclosure provisions of the 1996 proposed Rule and the 1996 proposedCompanion Policy, except it felt no summary should be required if the valuation is provided to shareholders, and the board of directorsshould be given the authority to determine what information should be disclosed (the 1996 proposed Companion Policy suggests thediscretion is only given with respect to "additional" information).

One commenter was of the view that, in practice, the process that covers related party type transactions heavily favours the relatedparty. The commenter's concern was that there are no competitive forces at work to ensure that "fair value" is achieved and thecontrolling shareholder has a virtual monopoly on the most important information that shareholders need in order to make an informeddecision as to "fair value".

That commenter was of the view that the position of the minority shareholders would be best protected by full and complete accessto pertinent valuation data when a controlling shareholder initiates a transaction because there will be no competition. In its view, toestablish a legislative and policy framework that ignores or diminishes the minority's access to information would leave the affectedshareholders facing incredibly costly legal remedies and begs the question as to why the controlling shareholder should refuse to sharekey information with the parties they claim to be treating "fairly". The commenter indicated that, in its experience, a fairness opiniondoes not provide it with enough information. The commenter also indicated that it is extremely uncomfortable relying solely onvaluations prepared for "independent" directors as strong biases exist in virtually all situations with the bias being in favour of thecheque writer.

Response

The Commission agrees with the comment that the proposed Rule should prescribe a general disclosure standard for valuations inaddition to summaries of valuations. Accordingly, the Commission has added a general standard to paragraph (e) of subsection 6.4(1)of the proposed Rule.

The Commission is not prepared to insert into the proposed Rule the provisions of section 5.1 of the proposed Companion Policyrequiring disclosure of limitations on the scope of the valuator's review.

The Commission feels that subdelegation of disclosure standards as suggested by one commenter is not workable at this point, asnot all valuators will be members of the bodies described in the proposed Companion Policy and therefore not subject to their rulesand sanctions for non-compliance. Further, the Commission has not formally approved these standards and recognizes that they maynot be the only standards that can be suitably followed.

The Commission agrees with the comments that no summary should be required if a formal valuation is provided in the disclosuredocument and has modified the 1996 proposed Rule accordingly. If a formal valuation is not included in the disclosure document theCommission requires the disclosure of a summary, with the disclosure standard conforming to that for valuations.

The Commission disagrees with the suggestion that the board of directors be given authority to determine what information shouldbe disclosed. The Commission is of the view that it is important to have a minimum set of standards in this area. Further, boards orpossibly independent committees may be subject to pressure from sizeable shareholders in respect of the disclosure.

The Commission believes that the proposed Rule strikes an appropriate balance between the controlling party and the minorityshareholder, as it provides the minority shareholder with a basis upon which to determine whether the transaction is fair or whetherto pursue other remedies available to the minority shareholder. In the proposed Rule, the Commission requires in many cases thata valuation be prepared and specifies the type of disclosure expected. The Commission is not prepared to insert into the proposedRule a requirement that the minority shareholder be given full and complete access to the pertinent valuation data that the valuatoris using in preparing the valuation. The Commission does not believe this is practical or warranted.

7. Limitation of Application of Going Private Transaction and Related Party Transaction Provisions to Reporting Issuersand CDN-quoted Issuers (Paragraph (a) of Section 4.1 and Paragraph (a) of Subsection 5.1(2))

Policy 9.1 currently applies to all issuers if they have accessed the Ontario capital markets by prospectus or under certain privateplacement exemptions. The 1996 proposed Rule did not apply to non-reporting issuers where the only access to Ontario investorshad been by private placement unless such issuers were CDN-quoted. Comment was sought on the appropriateness of the limitationson the application of the going private transaction and related party transaction elements of the 1996 proposed Rule to reportingissuers and CDN-quoted issuers.

Comments

Three of the commenters felt that the proposal to limit the application of going private transaction and related party transactionprovisions to reporting issuers and CDN-quoted issuers is appropriate. One of those commenters was of the view that all CDN issuersshould be required to be reporting issuers.

One commenter supported the thrust of this change, but believed the proposed Rule should retain a de minimis exemption for non-reporting issuers, whether or not their shares are quoted on CDN.

Another commenter felt that the application of the proposed Rule to CDN-quoted issuers may not be workable in all cases. CDN-quoted issuers that are not reporting issuers in Ontario are generally not subject to Ontario securities law and it would be difficult toenforce their compliance with the proposed Rule. As an alternative, the commenter suggested it might be preferable to arrange withCDN to require that non-reporting issuers, as a condition of being quoted on CDN, contractually agree to comply with the proposedRule.

One commenter noted that there was no factual basis compelling either position and, as a result, it would be inadvisable for theCommission to exclude issuers that have sold securities in Ontario under a private placement exemption from the proposed Rule'sapplication. At the most, the commenter thought exemptions from the valuation and minority approval requirements and possibly theobligation to publish a press release should be provided for those issuers, so that the Commission would retain authority to requirecompliance with the proposed Rule in specific instances of unfair going private transactions or related party transactions by denyingthe exemption.

Response

The Commission does not propose to make any changes in this area. The limitations are now contained in paragraph (a) of subsection4.1(2) and paragraph (a) of subsection 5.1(2) of the proposed Rule.

The Commission currently does not have the ability to deem issuers to be reporting issuers.

The Commission notes that the 1996 proposed Rule and the proposed Rule both contain a two percent de minimis test.

The Commission believes that it has appropriate enforcement powers to enforce compliance by CDN issuers with the proposed Rule,without requiring that compliance with the proposed Rule be part of the CDN quotation contract.

The Commission does not agree with the comment that issuers who have completed private placements in Ontario should be subjectto the going private and related party requirements of the proposed Rule. The Commission is of the view that the proposed Ruleshould only apply to those transactions if the issuer has accessed Ontario's public markets by becoming a reporting issuer here orhaving its securities quoted on CDN.

8. Retention of 90 Percent Going Private Transaction Minority Approval Exemption (Paragraph 2 of Subsection 4.7(1))

The 1996 proposed Rule continued the exemption in Policy 9.1 from the minority approval requirements in a going private transactionwhere the interested party holds 90 percent or more of the affected securities. Comment was sought on the appropriateness ofretaining this 90 percent exemption or whether it may be more appropriate to limit its use to situations involving a substantial valueof minority security holdings.

Comments

Four of the commenters felt that the exemption should be retained. They thought that without it, controlling shareholders could besubject to the "tyranny of the minority", who seek to be paid for a blocking premium rather than fair market value. They were of theview that dissent and appraisal rights would provide sufficient protection in the circumstances. As one commenter put it: "[i]mposinga minority vote in these circumstances would generally reduce market values for these stocks by eliminating speculative going privatepremiums, would perpetuate inefficiencies in the utilization of corporate resources of the enterprises involved, and, where buy-outtransactions are proposed, would place disproportionate bargaining power in the hands of short-term speculators to the possibledisadvantage of long-term investors." Three of the four commenters stated that the value of the minority interest is irrelevant to theissue.

Another commenter noted that, while the OBCA accepts that a 90 percent controlling shareholder should be entitled to squeeze outminority shareholders without having to take the minority's interests into account, the power must be exercised fairly. That commenterfelt that the appraisal and oppression remedies are often not realistic protection for the minority because of the costs of litigation. Itstated that a minority shareholder's need for protection is not lessened because the interested party holds over 90 percent of theshares. The commenter was of the view that the exemption should only be available in defined de minimis cases and should not beavailable where the consideration offered is less than the mid-point of a formal valuation.

Response

The Commission agrees with the four commenters and continues to support the retention of the 90 percent minority approvalexemption, which appears in paragraph 2 of subsection 4.8(1) of the proposed Rule. The Commission does not feel that it isappropriate to link minority approval to the amount of the consideration offered relative to the valuation or to the value of the minority'sholdings in the issuer.

9. Disclosure of Directors' Commercial Links

Comment was sought on the appropriateness of requiring disclosure of directors' commercial links, direct or indirect, with an issuerand its controlling shareholder or entities controlled by the controlling shareholder.

Comments

One of the commenters felt that, in the Canadian corporate environment of interlocking directorships, independence of directors isdifficult to gauge given the limited disclosure of a director's links to the issuer or its controlling shareholders. In the commenter's view,it would be useful to require directors to disclose all of their commercial connections with an issuer or such issuer's controllingshareholder and any entity controlled by such shareholder, either directly or indirectly, in a manner similar to Item 404 of RegulationS-K of the SEC.

A second commenter felt that this disclosure should be required in the annual information circular relating to the election of directorsand supplemented, if necessary, in a later disclosure document relating to a transaction.

A third commenter felt that materiality is the standard against which disclosure obligations should be measured and that the only linksthat should be disclosed are those that are material in the context of the relevant transaction.

A fourth commenter was unclear as to what the Commission had in mind concerning the disclosure. It noted such links may berelevant to shareholders' consideration of a related party transaction, but said it is difficult to assess whether the benefit of thisdisclosure would be worth the detailed inquiries that would be needed to obtain this information.

A fifth commenter did not support this additional disclosure. It thought that the disclosure being contemplated was unclear. Thecommenter felt the need for additional disclosure has not been demonstrated, especially in light of recent changes in Canadiancorporate law and practice in the area. The commenter expressed concern about legislative changes that could encumber corporategovernance in Canada and discourage capable individuals from serving as corporate directors.

Response

The Commission accepts the comments that a general requirement in the proposed Rule to disclose directors' direct and indirectrelationships with an issuer and its controlling shareholder entities is too broad and potentially unclear.

10. Timing of Valuations in Insider Bids

The 1996 proposed Rule adopted the requirement in Policy 9.1 that an insider cannot make a take-over bid without having firstcompleted a valuation, unless the insider can avail itself of one of the valuation exemptions. This requirement is imposed on the theorythat the insider may have information about the target that could affect its determination of value, creating an informational imbalancebetween the offeror and the minority shareholders.

The possible valuation exemptions in the context of an insider bid include the auction exemption (where the insider makes a bid duringthe currency of another bid) and the lack of knowledge and access exemption (where the insider has no knowledge, and has not withinthe preceding 12 months had board or management representation or other access sufficient to enable it to acquire knowledge, ofundisclosed material information).

The valuation requirement can make it difficult for an insider to make a take-over bid because, while the bidder may have had access(such as board or management representation or otherwise) to the target in the 12 months prior to the bid, it may no longer be onfriendly terms with the target and therefore may not necessarily be able to get sufficient access to complete a valuation. Alternatively,a former director may be prevented by his or her fiduciary obligations to the target from using the information obtained as a directorof the target for valuation purposes in the context of an insider bid without first obtaining the consent of the target.

Comment was sought on whether an offeror making an insider bid should be able to launch the bid with the valuation by theindependent directors to follow, perhaps accompanied by a longer time period, or whether independent directors need to be involvedbefore rather than after the making of the bid and, if such a process were to be adopted, the amount of time that should be providedto the independent directors.

Comments

Three of the commenters felt that an offeror should be able to launch an insider bid without a valuation, with the valuation to besubsequently obtained by the target directors under the supervision of an independent committee. Those commenters felt the bidperiod would need to be extended from 21 to perhaps 35 days to enable the target directors additional time to complete the valuationprocess. One of those commenters was of the view that the independent committee of the target should be left to determine whethera valuation is needed at all and, where a valuation is obtained, the cost of obtaining the valuation should be incurred by the target.In that commenter's experience, the current rules result in insider bids being highly negotiated transactions between the bidder andthe target with the bidder not being shown the valuation until the conclusion of the negotiation process.

A fourth commenter was of the view that the mechanism under Policy 9.1 to determine who controls the preparation of the valuation,which is also adopted in the 1996 proposed Rule, has led to significant and unnecessary manoeuvring on the part of independentcommittees to avoid being characterized as hostile and thereby losing control of the preparation of the valuation. This stems from theapproach that only one valuation, overseen by the issuer's board, should be prepared in respect of an insider bid. That commenterdid not see any reason why an insider bid should be treated differently from a take-over bid in this respect. The insider, like any offeror,will be motivated to have a valuation to show the appropriateness of the bid. The commenter felt the question of access is one thatshould be determined between the parties as it is in all take-over bids (the incentive on the board to provide access to obtain a betterprice is no different here). The board of directors of the issuer would be required to decide whether a separate valuation is necessaryin order to properly respond to the insider bid. Once the question of issuer involvement in the insider's valuation has disappeared,that commenter saw no reason to allow the insider to launch a bid without a valuation where one is to be provided.

A fifth commenter did not favour shifting the valuation requirement to the target directors in responding to a hostile insider bid. Rather,it felt a valuation exemption should be provided for an insider holding less than 35 percent of the target's voting shares where suchinsider lacks sufficient access to the target to have a valuation performed, has no knowledge of material non-public informationregarding the issuer, and has a reasonable basis for believing and did in fact believe that a bid by the insider would be regarded ashostile by the majority of the issuer's board. If the insider holds greater than 35 percent of the target's voting shares, satisfactoryarrangements could be expected to be made with the target's board to comply with the valuation requirement. The commentersuggested that in such cases, an actual indication of hostility from the board, as currently contemplated by paragraph (b) of subsection2.2(2) of the 1996 proposed Rule, should be required to qualify for a valuation exemption.

Response

The Commission continues to believe that a valuation should appear in the take-over bid circular and that, subject to the exceptionscurrently in Policy 9.1, the valuation should be prepared under the supervision of the target board. The Commission has thereforedetermined to continue the position in the 1996 proposed Rule which is a continuation of the requirement in Policy 9.1. While it maynot present a perfect solution, it has proven generally workable and, to the extent that it is not appropriate in a particular case, it canbe dealt with on a case by case basis by application for exemption. While the proposals suggested by the commenters each havetheir own merits, they each raise their own concerns.

11. Appropriateness of the 1996 Proposed Rule's Treatment of Related Party Transactions Involving Junior ResourceIssuers

Comment was sought on the appropriateness of the 1996 proposed Rule's treatment of related party transactions involving juniorresource issuers.

Comment

The Commission received one comment on this issue, which is summarized in the comments in Item 1, Regulatory Treatment ofRelated Party Transactions. That commenter was not in favour of adopting either of the two alternatives for regulating related partytransactions as they applied to junior issuers.

Response

The Commission's response is in Item 1, Regulatory Treatment of Related Party Transactions.

12. Cost/Benefit Analysis

The 1996 Notice requested comment on anticipated costs and benefits of the 1996 proposed Rule and the alternative approachesto the regulation of related party transactions.

Comments

Generally, cost/benefit comments were only received in relation to specific sections of the 1996 proposed Rule and 1996 proposedCompanion Policy.

One commenter indicated that it found it difficult to comment on the anticipated costs and benefits of the 1996 proposed Rule. Whilethere are considerable costs, the commenter acknowledged that transactions with an inherent conflict of interest raise special concernsand require appropriate safeguards for minority shareholders. That commenter believed that, if related party transactions are regulatedthrough a policy, an appropriate balance would be struck.

Response

The Commission discusses the comments relating to specific sections in this summary in the context of those sections.

The Commission's views on regulating related party transactions are set out in Item 1, Regulatory Treatment of Related PartyTransactions.

13. Requiring Independent Committees for All Substantial Transactions Governed by the 1996 Proposed Rule

The Commission sought comment on whether independent committees should be mandatory for all substantial transactions governedby the proposed Rule or even more generally for all transactions involving related parties.

Comments

One commenter noted the important role independent committees play in connection with related party transactions with respect tothe objective application of statutory exemption standards, selection of independent advisors and adequacy of disclosure and, overall,contributing to shareholders' confidence in the decision making process. That commenter felt that independent committees shouldbe required to review (and in some cases approve) all transactions that are subject to the proposed Rule, retain the valuator andsupervise the valuation, where a valuation is undertaken, and generally supervise the approval process and disclosure in connectionwith the transaction. It felt independent committees should also be responsible for determining whether a related party transactioncomes within any exemption from the proposed Rule's requirements.

A second commenter was also of the view that only directors independent from the interested party should be involved in decisionsregarding substantial transactions governed by the proposed Rule. That commenter felt that whether a subset of such independentdirectors is formed as an independent committee or whether all independent directors are involved should be left for boards todetermine on a case by case basis.

A third commenter felt that the Commission should not formalize the use of independent committees, but should leave to the boardof directors the decision as to the appropriate procedures to be followed.

A fourth commenter felt that the decision as to whether to form an independent committee to consider a related party transactionshould be left to the board of directors of the issuer. It was of the view that boards of Canadian public companies can effectivelyprotect the interests of minority shareholders in the context of each related party transaction, subject always to the Commissions'spublic interest jurisdiction.

Response

The Commission continues to be of the view that, except in connection with insider bids, the proposed Rule should not mandate theuse of independent committees.

B. DISCUSSION OF SPECIFIC COMMENTS

The Commission received a number of comments on specific provisions of the 1996 proposed Rule and the 1996 proposedCompanion Policy. The comments are summarized here, together with the Commission's response, in the order of the sections inthe 1996 proposed Rule and 1996 proposed Companion Policy.

The 1996 Proposed Rule

1. Subsection 1.1(1) - Definition of "director"

Comment

The definition in the 1996 proposed Rule included a person "acting in a capacity similar to that of a director of a company". Onecommenter was of the view that the phrase could have at least two meanings. It might be a reference to a person performing a rolein a non-corporate vehicle similar to that of a director in a company or it might be a reference to a person not elected as a director ofa company but performing the same function, i.e. a shadow director. That commenter felt the phrase should be clarified and shouldnot cover a "shadow director".

Response

This definition is based on and is the same as the definition of "director" in the Act. As the Commission believes the definition in theAct is appropriate, it has deleted the definition here since, under Rule 14-501 Definitions, terms used in a rule that are defined insection 1 of the Act have the meaning given in section 1. As well, as the portion of the definition of "director" in the Act that causesconcern is in relation to a director of a person and not of a company, the shadow director comment is not of concern here.

The Commission has added section 2.1 to the proposed Companion Policy that provides that in appropriate circumstances a directorof a general partner of a limited partnership can be considered to be a director of the limited partnership under the definition of"director".

2. Subsection 1.1(1) - Definition of "fair market value"

Comment

One commenter believed that the words "maximum monetary" should be deleted from the definition of "fair market value". The word"maximum" is unnecessary and the word "monetary" improperly excludes consideration in other forms, such as securities.

Response

The Commission disagrees with the change both because "fair market" value has to be based on the maximum consideration andbecause, even if non-cash consideration is being offered, the fair market value of the consideration is to be determined based on thecash equivalent value.

3. Subsection 1.1(1) - Definition of "formal insider bid" and "formal issuer bid"

Comment

One commenter noted that the defined term "formal insider bid" would be confused with the defined term "formal bid" in the Act (whichis incorporated into the 1996 proposed Rule). A formal bid is a take-over bid that requires a circular. Since a "formal insider bid" isdefined as one that occurs through a stock exchange, the commenter suggested that perhaps a better defined term would be "stockexchange insider bid".

The commenter made a similar comment in respect of "formal issuer bid".

Response

The Commission agrees with the commenter and has made the changes suggested.

4. Section 1.1(1) - Definition of "holder" and "to hold"

Comments

Three of the commenters felt that the reference to "exercising control or direction" should be deleted from these definitions. They notedthat the meaning of the phrase is uncertain and is the focus of discussion itself in connection with the proposed rule on early warningreporting. They were of the view that this concept would create uncertainty while not remedying any identified defect.

One of the commenters felt that if the extended definition is adopted, it should only be used in specific instances in the proposed Rulewhere it is considered necessary and, if used, the phrase should be more clearly defined.

Response

"Holder" is now defined in the proposed Rule as registered holder and, where the Commission intends that a section refer to beneficialowners or persons or companies who exercise control or direction, reference is now made specifically to those concepts.

5. Subsection 1.1(1) - Paragraph (c) of "interested party"

Comment

One commenter noted that, under Policy 9.1, control persons who enter into an understanding to support a going private transactionare included in the definition of "interested party" in respect of a going private transaction, and an interested party is excluded fromvoting as part of the minority. While the 1996 proposed Rule continued to exclude such control persons from the minority for votingpurposes, it was done in a section defining minority approval and not through the definition of "interested party". The commenter feltthat this proposed departure from Policy 9.1 would affect the standards applicable in determining the independence of valuators anddirectors. For example, while the 1996 proposed Rule dealing with determining the independence of valuators sets out a presumptionthat a valuator is not independent of an interested party if the valuator or any of its affiliates advise the interested party, the controlperson is not defined as an interested party and therefore a person who advises the control person would not be presumed to lackindependence.

Response

As indicated previously, control persons are no longer excluded from the minority solely by virtue of being control persons. In anyevent, the Commission disagrees with the comment. The Commission does not want to deal with the issue of whether personsadvising control persons are independent indirectly through the definition of "interested party".

6. Subsection 1.1(1) - Definition of "market capitalization"

Under Policy 9.1 and the 1996 proposed Rule, market capitalization is generally defined as the product of the outstanding equitysecurities of the issuer and the market price of the securities. The 1996 proposed Rule provides that market price is to be determinedin accordance with section 183 of the Regulation, which allows the calculation to be based on a 20 day period. Policy 9.1 requiresthat the calculation be made using securities outstanding over the three calendar months preceding the transaction. Provision is madefor inclusion in the calculation of convertible and similar type securities and for obtaining a price per security where there is nopublished market including, as a last option, relying on the directors' determination.

Comments

One commenter suggested that it would be preferable to retain in the proposed Rule the method of calculating market capitalizationcurrently in Policy 9.1. It thought a three month period would minimize the effect of short term market fluctuations whereas a 20 dayperiod would permit short term share price fluctuations to affect the calculation. As the day on which a related party transaction isagreed to is within the discretion of an issuer's management, the commenter felt the formula in the 1996 proposed Rule would increasean issuer's ability to time a transaction to come within the exemption. The commenter also noted that if the public announcement ofa transaction preceded the date of agreement, the situation would be further aggravated.

That commenter also noted that the definition of "market capitalization" in the 1996 proposed Rule contained a residual provisionallowing a board of directors to make the determination where it cannot be made under the other parts of the definition. Thatcommenter felt that if any such determination is to be made, the proposed Rule should require that it be made by an independentcommittee of directors and that the basis of the committee's determination be disclosed in the material change report required undersection 5.2 of the 1996 proposed Rule concerning the transaction.

Another commenter noted that the definition of "market capitalization" only includes the equity capitalization of an issuer and that debtsecurities should be included. Some issuers have a large amount of debt capital outstanding with a relatively small equity capitalizationthat is wholly-owned by a parent corporation. The commenter stated that in these situations, the related party transaction requirementswould arguably apply to transactions that are not material to public debt holders.

A third commenter proposed using the day before the transaction is agreed to rather than using the number of outstanding securitiesat month's end to calculate "market capitalization".

Response

The definition under the proposed Rule is intended to simplify the calculation of market capitalization. The Commission believes that,as in the private agreement provisions in the Act's take-over bid rules, the 20 day calculation is sufficient and considers it unlikely thatissuers will structure related party transactions in periods where the price has been high in order to take advantage of short term shareprice fluctuations.

The Commission believes that equity securities are the appropriate benchmark for calculating market capitalization and that debtsecurities should not be taken into account in determining market capitalization. Most issuers have material amounts of debt which,if added to the calculation of market capitalization, would likely result in an increased number of related party transactions beingexempt from the proposed Rule's requirements by falling under a 25 percent threshold that would be raised due to the inclusion of theissuer's outstanding debt, which is not a reasonable means of calculating the overall value of an issuer. In addition, in the situationraised by the commenter, the exemptions in the proposed Rule involving transactions with a wholly-owned subsidiary should be ofassistance.

The Commission does not see the difficulty in using the month end as the date for fixing the number of outstanding shares and believesit provides more certainty than a calculation that would rely on the number of outstanding securities on the day before the transactionis agreed to.

The Commission has deleted, as not being relevant, the paragraph that provided that market capitalization shall be, in the case ofequity securities the aggregate market price of which was not otherwise determinable under the definition, the amount determined bythe board to represent the aggregate market value of all outstanding securities.

7. Subsection 1.1(1) and Section 1.5 - Definition of "prior valuation"

In the 1996 proposed Rule, subsection 1.1(1) provided a definition of prior valuation and section 1.5 provided four exclusions from thedefinition. Comments were provided on the following exclusions.

i. Preliminary or Draft - Paragraph (a) of Section 1.5

The 1996 proposed Rule carried forward an exclusion in Policy 9.1 for a preliminary report of a valuation or appraisal prepared by anindependent valuator who did not charge, has not been and is not to be paid a fee.

Comments

One commenter found the exclusion hard to understand as it would not be expected that an independent valuator would prepare anyreport of a valuation without an understanding as to payment and, if it were to occur, it would seem inherently suspect. The commenterbelieved these valuations should be disclosed. If concern as to potential liability of the valuer was the reason for the exclusion, thecommenter suggested the proposed Rule or its accompanying Notice could provide that disclosure of the prior valuation is not intendedto attract civil liability.

Another commenter felt the exclusion lacks utility for it is unavailable where there has been any payment whatsoever.

A third commenter supported the inclusion in the definition of a materiality qualification, but also felt the definition should be clarifiedto specifically exclude interim or preliminary valuation analyses provided to a special committee during the course of the valuator'sengagement. That commenter felt that such analyses, given in circumstances where it is intended to be superseded by a finalvaluation report, should not constitute a disclosable prior valuation.

Response

The Commission does not believe that drafts that lead to final valuations need to be disclosed and has modified paragraph (a) of thedefinition of "prior valuation" in subsection 1.1(1) of the proposed Rule to provide an exclusion for one or more drafts that lead to aformal valuation by the same independent valuator that prepared the draft.

The Commission agrees with the comments that question the utility of the condition that the valuator did not charge, has not been andis not to be paid a fee. That condition has been removed in the proposed Rule from paragraph (a) of the definition of "prior valuation".

ii. "Ordinary Course of Business" - Paragraph (b) of Section 1.5

The 1996 proposed Rule provided an exemption for internal valuations or appraisals prepared in the ordinary course, not madeavailable to, and prepared without participation of, any director or senior officer of the issuer or an interested party.

Comments

One commenter pointed out that Policy 9.1 excludes these reports where an interested party's directors and senior officers have notbeen involved in their preparation or been given access to them regardless of the participation of directors or officers of the issuer.The commenter felt that the valuations and appraisals should not be excluded from the definition of "prior valuation" as they could bematerial to shareholders when deciding how to vote on a related party transaction. The commenter felt that the fact it was preparedwithout involvement of the issuer's or an interested party's directors is not relevant. If concern as to potential liability of the valuer wasthe reason for the exclusion, the commenter suggested the proposed Rule or its accompanying Notice could provide that disclosureof the prior valuation is not intended to attract civil liability.

Another commenter felt the "ordinary course of business" exemption is of no use if the involvement of a senior officer negates it.

Response

The Commission disagrees with the first commenter. The Commission believes that ordinary course of business valuations madewithout the participation of directors or senior officers of the issuer or an interested party and not made available to them should beexcluded from the definition of "prior valuation". Those are less likely to be indicative of actual value and less relevant to shareholdersand as a general matter should not be disclosable. The Commission also believes however that once a director or senior officer isinvolved, the valuation gains greater relevancy and disclosure of the valuation should be made.

The Commission disagreed with the second commenter. As mentioned above, the Commission believes that the involvement of adirector or senior officer lends relevancy to the report and justifies disclosure.

iii. Prepared by or on behalf of an Interested Party - Paragraph (d) of Section 1.5

The 1996 proposed Rule provided an exemption for valuations and appraisals prepared by or on behalf of an interested party to assistwith pricing of a proposed insider bid, going private transaction or related party transaction where they are not made available to theindependent directors of the issuer.

Comment

One commenter felt that this new exclusion from the definition of "prior valuation" should be deleted from the 1996 proposed Rule.That commenter was of the view that the exemption assumes that a controlling shareholder, or other related party, acts at arm's lengthfrom an issuer it controls. The commenter disagreed with that and pointed out that such a person invariably has an understandingof and access to the issuer not available to other shareholders. It felt that the exemption would permit the related party to utilize itsaccess to the issuer for its own benefit in connection with the transaction without disclosing the results to minority shareholders. Thecommenter was of the view that a provision should be added to the proposed Rule requiring the related party to provide any valuationobtained by it in connection with a transaction subject to the proposed Rule to the issuer or its independent committee of directors (andif the transaction is an insider bid, to include in its take-over bid circular a summary of the valuation that complies with the proposedRule).

Response

In striking the appropriate balance between the interested party and minority shareholders, the Commission proposes a continuationof its current practice that an interested party need not disclose its valuations provided they are not made available to the independentdirectors of the issuer. The minority is sufficiently protected by an insider offeror being required to obtain a valuation or an issuer beingrequired to obtain a valuation in other cases.

8. Subsection 1.1(1) - Definition of "quasi-going private transaction"

Policy 9.1 does not specifically define or regulate quasi-going private transactions. Quasi-going private transactions were defined inthe 1996 proposed Rule as transactions involving related parties where the securityholders are non-consensually separated from theirsecurities in exchange for participating securities of another issuer in a different business. Going private transactions under the 1996proposed Rule differ from quasi-going private transactions in that they are transactions not necessarily involving related parties wheresecurityholders are forced to take at least some cash in place of their security.

While most of the transactions that would qualify as a quasi-going private transaction under the 1996 proposed Rule are neverthelesscaught within the related party transaction definition under Policy 9.1, it is not always clearly the case. More specifically, it was feltthat the 1996 proposed Rule should clearly catch quasi-going private transactions, and that quasi-going private transactions are moresimilar to going private transactions than related party transactions and should be regulated like going private transactions.

Comments

One commenter noted that the 1996 proposed Rule defined quasi-going private transactions as related party transactions, but for themost part treated them like going private transactions. It felt that this dual approach to quasi-going private transactions createsunnecessary complexity and that it would be preferable to define going private transactions to include quasi-going private transactions.The commenter suggested this could be accomplished by deleting from the going private transaction definition in subsection 1.1(3)the reference to "an interest of equivalent value in a participating security of a corporation other than the issuer".

Another commenter agreed that Policy 9.1 provided a "loophole" in its definition of going private transaction. However, it felt creatinga new class of transaction called a quasi-going private transaction was a cumbersome way of addressing what the commenter believedto be a relatively minor issue. The commenter made two main points. First, any quasi-going private transaction would usually becaught by the related party transaction rules, which are not substantially different enough from the going private transaction rules tocause much concern, especially if the distinction between the 50 percent and 66 2/3 percent minority vote is eliminated. Secondly,a simpler way to address this issue may be to broaden the definition of going private transaction to include transactions where non-cash consideration is offered that is not "substantially the same in all material respects" as suggested in the proposed quasi-goingprivate transaction definition.

A third commenter noted that the 1996 proposed Rule treated a quasi-going private transaction as a subcategory of a related partytransaction but regulated it like a going private transaction. That commenter recommended that the whole concept of a quasi-goingprivate transaction be dropped and that the definition of a going private transaction be amended to include situations where a securityin an upstream company (with substantially different assets and liabilities) is being provided in exchange for the share that is beingexpropriated. The commenter felt this approach would eliminate the very considerable complication that is introduced into the 1996proposed Rule by the concept of quasi-going private transaction.

A fourth commenter indicated that it was generally in agreement with the proposition that, to the extent a shareholder's investmentcould be non-consensually replaced with a participating security of equivalent value of an issuer having a different business incircumstances where the transaction would otherwise be a going private transaction, the transaction should be regulated in the sameway as a going private transaction. However, that commenter was of the view that the definition of quasi-going private transactionis unduly restrictive in that it requires the successor entity to resemble the predecessor entity in too strict a manner. In thatcommenter's view, where the successor entity will succeed to substantially all of the assets of the predecessor, that should besufficient. It felt that the fact that other assets will be added, or that liabilities will be changed or increased, or that the successor entitycould be substantially larger than or different in business profile from the predecessor, should not make the transaction a quasi-goingprivate transaction.

A fifth commenter felt that quasi-going private transactions should not be regulated as related party transactions. That commenterstated that it could see no justification on policy grounds for imposing valuation and minority approval requirements on transactionsthat meet the equivalent value exception in the definition of going private transaction. Specifically, that commenter did not think thatparagraph (c) of the definition of quasi-going private transaction in the 1996 proposed Rule (substantially the same business) provideda meaningful or appropriate restriction to the equivalent value exception in the definition of going private transaction. With respectto paragraph (b) of the definition (no additional benefit), that commenter was of the view that it is a legitimate activity for issuers thatare related parties to restructure themselves as the corporate statutes allow, provided that the minority is treated fairly from aneconomic point of view (which is the test inherent in the equivalent value exception in the definition of going private transaction). Thecommenter noted that these restructurings usually involve some benefit to the corporate entities involved as, otherwise, therestructuring would be to no purpose.

That commenter also questioned whether, with respect to companies governed by the OBCA, the Commission has the legal authorityto alter the manner in which going private transactions are regulated, as the legislature has already spoken on the issue. Thecommenter asserted that the rule-making power of the Commission in paragraph 42 of subsection 143(1) of the Act is limited toestablishing conditions for exemptions from the requirements in the OBCA and it does not extend to variations of such requirements.That commenter believed that an amendment to the OBCA would be required to effectively expand the definition of going privatetransaction in the manner proposed through the regulation of quasi-going private transactions.

Response

The Commission agrees that the 1996 proposed Rule's treatment of quasi-going private transactions is confusing: quasi-going privatetransactions are defined separately, then the defined term is included in the definition of related party transaction, therefore subjectingquasi-going private transactions to the same rules as related party transactions, but in most cases specifically treating them like goingprivate transactions.

On further reflection and after considering the comments received, and in light of the change made to the definition of going privatetransaction to require that a related party be involved, the Commission has decided to remove the exception in the definition of "goingprivate transaction" in the 1996 proposed Rule and Policy 9.1 that provides that a transaction is not a going private transaction if aninterest of equivalent value in a participating security of the issuer or a successor entity is substituted for the securityholder's interest.From a policy perspective, given that the Commission is now regulating these transactions only when a related party is involved anda conflict of interest is possible, the Commission does not believe that an "equivalent value" exception is appropriate. The Commissioncannot rationalize providing protection to shareholders when shareholders receive cash for their securities, but providing no protectionwhen shareholders receive securities in exchange for their securities.

In light of this change, the Commission has been able to simplify the drafting in this area by deleting the definition of quasi-goingprivate transaction and any reference to it in the proposed Rule.

In connection with the question raised by one of the commenters as to whether the Commission has the legal authority to alter themanner in which going private transactions are regulated for OBCA corporations, the Commission is of the view that it has been giventhe authority by the legislature to regulate going private transactions and that an amendment to the legislation is not required.

9. Subsection 1.1(1) - Definition of Related Party

Comments

One commenter believed there is too much overlap between paragraphs (a) and (d) of this definition. That commenter recommendedchanging paragraph (a) so that it refers to persons or companies that hold sufficient securities to affect materially the control of theissuer, with a presumption that over a 20 percent holding constitutes such a position, i.e., the same as in the definition of "distribution"in the Act. This would make the proposed Rule consistent with the statutory standard for when a person is in a position to materiallyaffect control and would eliminate the need for paragraph (d). That commenter believed the bright line 10 percent test in paragraph(d) is inappropriately low given the statutory standard.

Another commenter was of the view that the definition carries forward from Policy 9.1 a concept that is unnecessary, that is, that"downstream" controlled entities of an issuer are its related parties (paragraph (c) of the definition). The substantive treatment ofrelated party transactions then generally exempts transactions between an issuer and its wholly-owned subsidiaries. That commentersuggested eliminating paragraph (c) as that commenter did not think that an issuer's dealings with its partly owned downstreamaffiliates require, from the perspective of protecting the issuer's minority shareholders, any "related party" regulation except in onecase: where the issuer and a partially owned downstream affiliate have a common controlling shareholder. This situation is alreadycomprehended within paragraph (b) of the definition. The commenter recognized that the downstream affiliate's minority may needprotection but, again, paragraphs (a) and (b) of the definition of related party already do this job.

Response

The Commission proposes to retain the 10 percent threshold in paragraph (d). The Commission believes that, in the context ofregulating related party transactions, the 10 percent threshold is the appropriate one rather than a "control person" test.

In respect of the second comment, the Commission believes it appropriate to characterize the person or company in paragraph (c)of the definition as a related party. The Commission is concerned about a situation where an "upstream" related party of the issuerholds more than a nominal interest in a "downstream" related party of the issuer but not enough securities for that entity to be a relatedparty within the definition of paragraph (b). The Commission has provided appropriate valuation and majority of the minority exceptionsin paragraphs 9 and 10 of section 5.6 and paragraph 3 of subsection 5.8(1) of the proposed Rule to deal with transactions with asubsidiary or related party where the Commission does not believe a conflict is inherent.

10. Subsection 1.1(3) and Sections 1.3 to 1.6 - Combining Definitions

Comment

One commenter suggested that the definition of going private transaction contained in subsection 1.1(3) be included in the definitionsection in subsection 1.1(1) or that there be a cross-reference in subsection 1.1(1) to the going private transaction definition insubsection 1.1(3). That commenter also indicated that it would provide more ease of reference if the exclusions in sections 1.3 to 1.6were included in the relevant definitions.

Response

The definition of "going private transaction" is a term that must be defined for the purposes of the Act, the regulations and the rules.Accordingly, it does not appear in the general definition section of the proposed Rule, which lists only terms defined for purposes ofthe proposed Rule. As well, it has not been the Commission's drafting style to cross reference terms defined elsewhere. TheCommission agrees with the last suggestion and has moved the exclusions in sections 1.3 to 1.6 into the terms to which they relate.

11. Subsection 1.1(3) - Definition of Insider Bid

Comment

One commenter questioned the qualification at the end of the definition of "insider bid" which provides "and, subject to paragraph1.2(2)(b), excludes an issuer bid". The commenter wondered whether that means that an insider bid which constitutes an indirectissuer bid is treated for purposes of the 1996 proposed Rule as an insider bid.

Response

The Commission has deleted the qualifying words as the Commission is of the view that, where the indirect bid rules apply, an "insiderbid" can be an "issuer bid".

12. Paragraph (d) of Subsection 1.2(1) - "Acting Jointly or in Concert"

Comment

One commenter was of the view that the first two presumptions in section 91 of the Act are arguably inappropriate in the context ofrelated party transactions. That commenter felt it would be preferable to limit the incorporation by reference to section 91 of the Actto insider and issuer bids and to add a definition of "acting jointly or in concert" that is drafted in contemplation of related partytransactions and going private transactions.

Response

The test in section 91 is a factual test and the presumptions are not exhaustive. In any event, the presumptions would seemappropriate for going private transactions and many related party transactions.

13. Subsection 1.7(1) - Liquidity Test

Comments

One commenter indicated that it supported the concept of providing a standard of liquidity that would obviate the necessity of obtaininginvestment dealer opinions in situations that are clear. This would reduce regulatory costs. The commenter deferred to the commentsof The Toronto Stock Exchange and securities dealers regarding the liquidity thresholds set forth in paragraph 1.7(1)(b) of the 1996proposed Rule.

A second commenter noted that, as the definition is based on numbers of shares only, the thresholds make no distinction betweenshares trading at 20¢ versus shares trading at $20. Any issuer could meet the threshold simply by splitting its stock. The commenterwould propose to add to the definition a dollar value test, in addition to the number of shares test, of $75 million in paragraph 1.7(1)(b)and $15 million in paragraph 1.7(1)(c) of the 1996 proposed Rule. The $75 million threshold would be consistent with the test for POPeligible issuers.

A third commenter noted that, while the criteria for the determination of a liquid market seems reasonable with respect to most issuers,an exemption from the valuation requirement may not be appropriate for a class of subordinate voting shares of an issuer with a dualclass structure, even if a "liquid market" exists with respect to the class, as the prices at which the subordinate voting shares trademay be affected by the share structure. The commenter thought the definition of "liquid market" should be amended to exclude issuerswith a dual class capital structure or to require a liquid market with respect to each class of participating and voting shares of suchissuers.

A fourth commenter was of the view that it is difficult to create a general test which is meaningful in all instances. For example, thefactors specified in subsection 1.7(1) of the 1996 proposed Rule may be indicative of liquidity in some instances, yet in other instances(such as penny stocks) these factors would not necessarily be presumptive of a liquid market. The commenter noted that in thecontext of the issuer bid liquid market exemption, the exemption would still require the issuer's board to be satisfied that there wouldnot be a materially less liquid market after the bid. As this requires consideration of the impact of the bid on actual pre-bid liquidity,rather than presumptive liquidity, the commenter suggested that very few prudent boards would be willing to make such adetermination without a liquidity opinion. Consequently, the commenter questioned whether this liquidity presumption would achievethe intended reduction in compliance costs.

Response

The Commission proposes to retain the proposed liquidity test, but has revised it as suggested by one of the commenters to includean aggregate trading price test with a minimum $15 million threshold, and a market value test with a minimum $75 million threshold.See clause (a)(ii)(D) and subparagraph (a)(iii) of subsection 1.3(1) of the proposed Rule.

14. Subsection 2.1(2) - Insider Bids - Lock-up Agreements

Comment

One commenter noted that this section exempts from the deemed beneficial ownership rules contained in section 90 of the Act sharesunder a lock-up agreement entered into with an insider, subject to three conditions. The commenter felt that the exemption shouldbe available provided the selling securityholder is not otherwise acting jointly or in concert with the offeror as contemplated by the Act.It was of the view that paragraphs (b) and (c) of subsection 2.1(2) of the 1996 proposed Rule are both unnecessary given the expressprovisions of the Act which deal with these conditions. The commenter also felt that these clauses raise interpretative questions. Ifthe selling securityholder receives a collateral benefit which is permitted by an order of the Commission under clause 104(2)(a) of theAct, is the exemption unavailable because of paragraph (c)? Should paragraph (b) provide in any event that the securityholder receiveno benefit as a consequence of the transaction which is not also "available to" as opposed to "received" on a pro-rata basis by otherholders? Regardless of the interpretative questions, the commenter submitted that these two qualifications are unnecessary.

Response

The Commission agrees with the commenter and has deleted paragraphs (b) and (c) on the basis that subsections 97(1) and (2) ofthe Act apply to the situations referred to in those paragraphs.

15. Section 2.2 - Insider Bids - Independent Committee

Comment

One commenter noted that the drafting in sections 2.2 and 2.4 is unduly complicated. The essence of the provisions is that, for afriendly insider bid, an independent committee should supervise the valuation. In a hostile situation, the offeror can supervise thevaluation. The commenter stated that it is very difficult to distil these two relatively simple concepts from reading sections 2.2 and 2.4.

Response

The Commission agrees with the commenter and has deleted former section 2.2 of the 1996 proposed Rule and dealt with therequirement to prepare a valuation in section 2.3 of the proposed Rule.

16. Subsection 2.3(2) - Disclosure in Formal Insider Bids

Comment

One commenter noted that the 1996 proposed Rule required the disclosure document for a formal insider bid to contain the enhanceddisclosure required by Form 33 of the Regulation. The commenter felt that if an offeror would be exempted from the formal valuationrequirements on grounds of lack of knowledge and access, the offeror should to the same extent be exempted from the enhanceddisclosure requirements of Form 33. Also, it suggested that the proposed Rule contain an explicit statement allowing the disclosurerequirements of Form 33 to be adjusted as necessary in light of the facts of an insider bid.

Response

With respect to the first comment, the Commission does not believe an exemption is necessary. The Commission has amendedsubsection 2.2(2) of the proposed Rule to refer to the disclosure required by Form 33, "appropriately modified". The proposedCompanion Policy lists the items of disclosure required by Form 33, in addition to Form 32, for which an offeror should be able to makedisclosure with necessary modifications. With respect to the second comment, the proposed Rule contains the words "appropriatelymodified". Accordingly, the Commission does not believe the proposed Rule needs to be further amended.

17. Section 2.5 - Exemptions from Formal Valuation Requirement

Comment

One commenter noted that, if an exemption is available under section 2.5 of the 1996 proposed Rule, the insider offeror (in an insiderbid) is explicitly exempted from the formal valuation requirements. The commenter felt it was not clear (although presumably intended)on the face of section 2.5 that the issuer, through the independent committee, would also be exempt and would not be required toprovide a valuation. The commenter suggested the proposed Rule should make it clear that no formal valuation is required by theissuer or its independent committee if an exemption is available to the offeror.

Response

The Commission believes it is clear that no formal valuation is required by the issuer or its independent committee if an exemptionis available to the offeror, and the Commission does not propose to make any changes.

18. Paragraph 2 of Section 2.5 - Lack of Knowledge and Access

Comment

One commenter felt this valuation exemption has evolved inappropriately. The original concept, still reflected in subsection 182(2)of the Regulation, was that where the insider offeror "lacks access to information enabling the offeror to comply" with the valuationobligation, that insider should be exempt from the requirement to provide such a valuation. In the commenter's view, the fact that aninsider may have had recent access to material information (because of, for instance, board representation) should not require a formalvaluation where the access necessary to prepare a valuation is not available.

Response

The proposed exemption is a refinement of the exemption in Policy 9.1 which is not available if the insider offeror had knowledge ofany material non-public information and had access sufficient to provide an "informational advantage". The proposed exemption inparagraph 2 of section 2.4 of the proposed Rule is available only where the insider offeror has no knowledge, and has not within thepreceding 12 months had board or management representation or other access sufficient to enable it to acquire knowledge, of amaterial fact or change that has not been generally disclosed. The Commission has retained the proposed exemption as drafted.The Commission is of the view that if the offeror had the board or management representation or access, the onus should be on theofferor to obtain a full valuation by negotiation with the target or seek discretionary relief.

19. Paragraph 3 of Subsection 2.5 and Paragraph 15 of Subsection 5.6(1) - Previous Arm's Length Negotiation

Comments

a) Clause (iii)

(i) Two commenters felt that the 20 percent/5 percent test proposed in the 1996 proposed Rule was reasonable.However, the commenters proposed broadening the exemption to apply to one or more shareholders holding in theaggregate 20 percent of the minority and 5 percent of the class. They were of the view that getting the agreementof more than one minority shareholder strengthens the argument that the negotiated price should be acceptable toshareholders at large.

(ii) One commenter felt that negotiation with a 5 percent holder of the class should be sufficient to displace therequirement for a valuation, which is only a "proxy" for a price arrived at in an arm's length transaction. Thecommenter felt that the addition of the 20 percent of the minority test was unnecessarily onerous.

b) Clause (iv)

(i) One commenter indicated that it was unclear what "full knowledge and access to information concerning the offereeissuer and its securities" meant and suggested it may be appropriate for the Commission to provide someinterpretive guidance on this phrase in the proposed Companion Policy.

(ii) Another commenter noted that the "access" requirement would seem to preclude a transaction in which asophisticated institutional shareholder sells a sizeable block of shares, simply because of lack of access toconfidential information. That commenter noted that a reporting issuer is required to publicly disclose all materialinformation. It then concluded that access to confidential information, therefore, should not be a prerequisite for thisexemption. The commenter stated that a recent sale of a large block of shares by an institutional or othershareholder is a better indicator of fair market value than a valuation opinion.

c) Clause (v)

One commenter suggested that this provision should be based on the insider's actual knowledge and, thus, the requirementfor "reasonable inquiry" seems to be redundant where it is a question of the offeror's knowledge.

Response

a) The 5 percent/20 percent test is an attempt to ensure representation by a shareholder who has a substantial amount at stakeand can speak for a substantial portion of the minority. There is a concern that any particular shareholder should haveenough at stake to be able to negotiate with knowledge and access. On the other hand, the Commission recognizes thatit may be reasonable to rely on more than one shareholder comprising the sizeable block. Accordingly, the Commission hasmodified the exemption by allowing the 20 percent test to be satisfied on an aggregate basis.

b) The Commission does not propose to delete the reference to "access". While issuers are required to disclose all materialinformation, they are also permitted to file material change reports on a confidential basis. The exemption is supposed torepresent a proxy for a "fair price", not simply a price based on public market information. The Commission also does notconsider it necessary to provide guidance in the proposed Companion Policy as to what "full knowledge and access toinformation" means.

c) The Commission has deleted the condition that the insider offeror must make "reasonable inquiry" to determine whether anyundisclosed material change or fact had occurred in the affairs of the offeree issuer at the time of the previous arm's lengthnegotiation because the Commission believes that such test should be based only on the offeror's actual knowledge at thetime of the arm's length negotiation. However, all other requirements for "reasonable inquiry" remain in the paragraph. TheCommission believes that a selling securityholder's knowledge and access to the issuer and the possibility of a materialchange or material fact occurring since the time of the arm's length negotiation that could reasonably be expected to increasethe value of the securities are both extremely relevant, and it is within the power of the offeror to make such inquiries.

d) For the reasons indicated in Item 40 of Part B of this Appendix, the Commission has deleted paragraph 15 ofsubsection 5.6(1) of the 1996 proposed Rule.

20. Paragraph 4 of Section 2.5, Paragraph 2 of Section 4.4 and Paragraph 15 of Subsection 5.6(1) - Auction-basedValuation Exemption for Insider Bids, Going Private Transactions and Quasi-Going Private Transactions

The auction exemption for insider bids in Policy 9.1 was included in the 1996 proposed Rule. The exemption was provided where aninsider bid is made during the currency of another formal bid on the theory that the existence of at least two competing bids providesan auction, which provides a proxy to a valuation for valuing the shares. This auction exemption was extended in the 1996 proposedRule to a going private transaction announced while another going private transaction is proposed or one or more formal bids areoutstanding.

Comment

One commenter saw no reason why the exemption should be limited to a situation where at least one other formal bid is outstanding.It felt that the auction based exemption should be available where the board of directors of the offeree issuer has conducted anyauction in good faith, including a controlled private auction, provided that the disclosure requirements referred to in paragraph 4 ofsection 2.5 of the 1996 proposed Rule are satisfied.

Response

The Commission believes that the best proxy for value is two competing transactions. The Commission is not prepared to accept aboard held auction as a suitable proxy in all circumstances where no bid or, in the case of a going private transaction, no competinggoing private transaction or bid results. Accordingly, the Commission is not prepared to accept the comment.

For the reasons indicated in Item 40 of Part B of this Appendix, the Commission has deleted paragraph 15 of subsection 5.6(1) of the1996 proposed Rule.

21. Paragraph 3 of Subsection 3.4(1) - Issuer Bid for Preference Shares

Paragraph 3 of subsection 3.4(1) of the 1996 proposed Rule proposed a new valuation exemption in respect of an issuer bid for offereesecurities (i) that are neither equity securities nor voting securities, (ii) that are not convertible into equity or voting securities, (iii) thathave never been in arrears on dividends, and (iv) for which there are no reasonable grounds for believing that there would be arrearson dividends if the securities were not repurchased.

Comments

One commenter indicated that it agreed with this proposed exemption from the valuation requirement. Non-convertible preferredshares are fixed income instruments and as such their valuation is dependent on a far fewer number of assumptions and factors thancommon shares. The commenter noted that in practice the valuations provided in preferred share issuer bids are generally hastilyprepared, involve little or no due diligence on the issuer and provide little or no useful information to a holder.

Another commenter indicated that the exemption should equally be available in the case of debt securities or preferred shares thatare convertible into equity or voting securities but are, and are highly likely to remain, "out of the money". In these circumstances theconvertible security is really nothing more than a non-convertible non-voting or non-equity security to which is attached a relativelyworthless conversion option.

Response

The Commission has reconsidered this exemption and determined that the proposed Rule should provide a valuation exemption forany issuer bid for securities that are not participating securities or convertible into participating securities. The Commission hasdetermined that a valuation should not be provided merely because the securities carry a vote, and should only be provided wherethe securities are participating securities. The Commission has further determined that the presence of arrears does not itself justifya valuation.

The Commission is not prepared to adopt the second comment as it is concerned that conversion features have value even thoughfar out of the money and that it would be difficult to define in the proposed Rule when a security has been out of the money longenough or if there are other factors that would suggest that the securities would likely remain out of the money.

22. Paragraph (d) of Subsection 4.1(1) - Going Private Transactions - Application

Comment

One commenter recommended that the de minimis threshold that must be reached before the going private transaction rules applybe set at 10 percent of the outstanding securities being held in Ontario rather than 2 percent.

Response

The Commission has retained the 2 percent test in paragraph (c) of subsection 4.1.(2) of the proposed Rule, as it believes that is themore appropriate test in the circumstances and is consistent with the de minimis exemption used in clauses 93(1)(e) and 93(3)(h) ofthe Act.

23. Paragraph (c) of Subsection 5.1(2) - Application of Related Party Transaction Requirements to Going PrivateTransactions

Comment

Paragraph (c) of subsection 5.1(2) of the 1996 proposed Rule provided that Part 5 (the part of the 1996 proposed Rule applicable torelated party transactions) does not apply to a going private transaction carried out in accordance with Part 4 of the 1996 proposedRule (which contains the going private transaction requirements). One commenter believed a going private transaction should beexcluded even if exempt from the provisions of Part 4.

Response

The Commission has changed the proposed Rule to provide exemptions in paragraphs (e) and (f) of subsection 5.1(2) of the proposedRule if the going private transaction is carried out in accordance with Part 4, exempt from Part 4 under subsection 4.1(2) of theproposed Rule or comes within the exceptions to the definition of going private transaction. The Commission has also added in section2.6 of the proposed Companion Policy a provision that if an issuer relies on a valuation or a majority of the minority exemption in Part 4,the transaction is being carried out in accordance with Part 4.

24. Paragraphs (d) through (g) of Subsection 5.1(2) - Application of Related Party Transaction Requirements -Grandfathering

Comment

Two of these "grandfathering" exemptions are stated to be available only if the issuer is obligated to complete the transaction inaccordance with its terms. One commenter was of the view that for greater certainty all of these "grandfathering" exclusions shouldsay expressly that they are available only if the transaction is completed in accordance with its terms.

Response

The Commission has added this requirement in paragraphs (g) through (i) of subsection 5.1(2) of the proposed Rule, subject to asubstantiality concept, as minor variations from the terms should not preclude reliance on the exclusions.

25. Paragraph (f) of Subsection 5.1(2) - Application of Related Party Transaction Requirements - Related PartyTransactions Commenced Prior to the Proposed Rule Coming into Force

Comment

One commenter was of the view that, given the serious legal implications of making the related party transaction requirements intoa rule, the apparent imposition of the related party transaction requirements retroactive to before July 1991 (the effective date of Policy9.1) is inappropriate.

Response

The Commission has modified paragraph (h) of subsection 5.1(2) of the proposed Rule to clarify that the exclusion is only necessaryif the related party transaction was not completed before the coming into force of the proposed Rule.

26. Paragraph (h) of Subsection 5.1(2) - Application of Related Party Transaction Requirements on Exercise ofConversion Rights

Comment

One commenter suggested this exclusion from the application of the related party transaction requirements should also be extendedto retractable securities.

Response

The Commission agrees with the comment and has made the change in paragraph (j) of subsection 5.1(2) of the proposed Rule.

27. Paragraph (i) of Subsection 5.1(2) - Financial Institution Exemption from Related Party Transaction Requirements

Comments

One commenter strongly supported the exclusion from the 1996 proposed Rule of related party transactions involving federal and otherfinancial institutions that are subject to a specified statutory regime governing their transaction so long as the transaction complieswith the specified legislation.

Another commenter was of the view that, as the regulatory regimes listed in the 1996 proposed Rule differ from the 1996 proposedRule's requirements, it is not obvious that issuers subject to them should be excluded from the proposed Rule's coverage. If thisexclusion is to be retained that commenter felt it should be tailored to the requirements of the financial institution legislation andperhaps limited to transactions that receive the approval of a regulatory authority like OSFI. Even if this is done, the commenter wasof the view that related party transactions involving such issuers should be treated as exempt, rather than excluded, from the proposedRule's application, in order to permit denial of the exemption by the Commission in appropriate circumstances.

Response

The approach under the 1996 proposed Rule is based on two factors. First, such financial institutions are subject to comprehensivefederal or provincial regulation which generally includes regulation of conflicts of interest and related party matters. Second, suchinstitutions often do not have controlling shareholders due to legislative prohibitions on large holdings. As the Commission still believesthis approach to be valid, it proposes to retain the exemption in its current form. In response to the comment that financial institutionsshould be treated as exempt, rather than excluded from valuation and minority approval requirements, the Commission notes that theonly difference that usually results from being exempted is that disclosure would be required under section 5.2 of the proposed Ruleand the Commission does not believe that this is necessary due to the disclosure requirements under financial institution legislation.

28. Subsection 5.2(1) - Disclosure of Related Party Transactions

Comment

One commenter supported the requirement to require issuers, whether or not reporting issuers, that are involved in related partytransactions to comply with the continuous disclosure requirements of section 75 of the Act. That commenter supported the proposalto require CDN quoted issuers to generally comply with all reporting issuer continuous disclosure standards.

Response

The Commission proposes to deal with the issue of requiring CDN quoted issuers to comply with all continuous disclosure standardsin its broader consideration of the appropriate manner of regulating CDN issuers.

29. Paragraph (e) of Subsection 5.2(3) - Disclosure of Review and Approval Process

Paragraph (e) of subsection 5.2(3) of the 1996 proposed Rule required a material change report to include a discussion of the directors'review and approval process and any contrary views, disagreements or abstentions.

Comment

One commenter felt that paragraph (e) of subsection 5.2(3) may have a muzzling effect on board and committee discussion. Thecommenter was concerned that it might also lead to fractured and misleading disclosure. It thought a materiality test should beimported into the section.

Response

The Commission proposes to retain paragraph (e) of subsection 5.2(3) as it feels that the disclosure called for is very useful informationto shareholders in assessing a transaction and should be provided. It has imported a materiality test into the paragraph and providedan exception if the information is to be disclosed in an information circular for the transaction.

30. Paragraphs 3, 4 and 14 of Subsection 5.6(1) - 25 Percent of Market Capitalization/Size of Transaction

Comments

One commenter noted that the 1996 proposed Rule did not indicate the amount of difficulty necessary before a value is not "readily"determinable. The commenter felt that the determination of value referred to in these sections should be made by an independentcommittee of directors.

Another commenter felt that the two pronged tests in these sections suggested that there are situations where value can be objectivelydetermined with certainty. In the commenter's experience this is rarely, if ever, the case. Inevitably, someone has to make adetermination of value. The commenter recommended that subparagraph (i) in each of these sections be deleted so that the directorswould determine value for the purposes of the proposed Rule.

That commenter also noted that paragraph 3 of subsection 5.6(1) of the 1996 proposed Rule required that a transaction be valued"in its entirety". Often a related party will be participating only to a limited extent in a transaction (e.g. an early redemption of publiclyheld debentures where a related party holds some of the debentures). It is unclear whether this requires that the whole transactionbe valued "in its entirety" or whether only the extent to which the transaction involves the related party must be valued in its "entirety".The commenter presumed the latter meaning is intended and recommended this be clarified.

Response

In respect of the first comment, the Commission does not propose to mandate an independent committee.

The Commission disagrees with the second commenter that value can rarely be determined with certainty. This was the test underPolicy 9.1 and, to the Commission's knowledge, there were no problems. The Commission feels the two pronged approach ispreferable. If value is not readily determinable, it is appropriate for the board to make this determination.

The Commission has clarified that only the part of a transaction that involves the interested parties must be valued in its entirety.

31. Paragraph 4 of Subsection 5.6(1) - Amalgamation, Merger or Arrangement

Comments

One commenter noted that, despite the broad heading, the paragraph purported to provide an exemption in connection with a statutoryamalgamation only. The commenter also noted that the language is somewhat difficult to follow and suggested drafting changes.

A second commenter noted that subparagraph 4(i) of subsection 5.6(1) of the 1996 proposed Rule included the phrase "other thanthe issuer and persons acting jointly or in concert with the issuer". That commenter was of the view that the calculation of value forpurposes of the exemption should be based on securities of the related amalgamating party held by all persons other than the issuer.

Response

The Commission has modified the language in paragraph 3 of section 5.6 of the proposed Rule to address the drafting concerns raisedby the first commenter.

In response to the second comment, since a transaction may be a related party transaction due to there being joint actors, theCommission is of the view that the exemption should also address the possibility of joint actors.

32. Paragraph 5 of Subsection 5.6(1) - Ordinary Course Transactions

Paragraph 5 of subsection 5.6(1) of the 1996 proposed Rule provided an exemption for purchases or sales of inventory in the ordinarycourse and leases of real or personal property on reasonable commercial terms, in either case as long as there is general disclosuremade of the transaction. The basis of the exemption was, as stated in the 1996 Notice, to "prevent inappropriate restrictions frombeing imposed on certain transactions in the ordinary course of business".

Comment

One commenter was of the view that these transactions present potential for unfairness and the exemption is inappropriate. If theCommission concludes nevertheless that such an exemption should be granted, the commenter felt some further monitoringmechanisms should be added, for example:

a) define "ordinary course of business" or provide guidance on what the Commission contemplates by this exemption;and

b) require board approval for lease transactions as well and at a minimum require approval for inventory and leasetransactions by an independent committee of directors. The 1996 proposed Rule currently requires board approvalfor inventory transactions only.

Response

The Commission believes that the "ordinary course of business" exemption contained in paragraph 4 of section 5.6 of the proposedRule is appropriate and does not believe it is necessary to further define it or adopt the additional restrictions suggested by thecommenter.

33. Paragraph 6 of Subsection 5.6(1) and Subsection 5.6(2) - Pro Rata Transactions

Comments

One commenter noted that this exemption does not seem to allow a stand-by subscription commitment or a rights offering on the termspermitted by OSC Policy Statement No. 6.2. The commenter recommended that such an exemption be provided.

A second commenter was of the view that where a dividend in specie or distribution of assets by an issuer would result in the issueof shares of another issuer, and in a related party of the issuer becoming a controlling shareholder in the other issuer, the related partyshould undertake not to sell the shares by means of a private agreement take-over bid with no sunset (as opposed to the limited twoyear period currently in the 1996 proposed Rule). The commenter felt this would ensure that the related party does not receive abenefit over the longer term unavailable to other shareholders by obtaining a control block in a pro rata distribution and then resellingthe block at a premium. It noted that if the related party wishes subsequently to sell the control block, it would encourage the relatedparty to ensure that all shareholders of the issuer making the distribution are treated equally in the take-over bid.

Another commenter was of the view that the undertaking was not a true coattail and that there was no reason for imposing therestriction contained in the undertaking. The exemption set forth in clause 93(1)(c) of the Act is generally available to any holder of20 percent or more of the outstanding securities of an issuer without any coattail restriction. The commenter was of the view that thereis no justification for limiting the availability of that exemption after a dividend spin-out. Even if the dividend distribution has beencarried out for the purpose of permitting a private agreement disposition by the related party of the securities received, the commenterdid not see the harm which demands imposing an absolute requirement for approval of a sale for a period of two years. Thecommenter concluded that if that is an abuse, the availability of the exemption in clause 93(1)(c) prior to the distribution must be anabuse.

Response

Paragraph 5 of section 5.6 of the proposed Rule now allows for a stand-by commitment in a rights offering on the terms permitted byPolicy 6.2.

The Commission has eliminated the coattail restriction. If it is a bona fide transaction a coattail is not appropriate. If the transactionis not bone fide, then a two year coattail is not the appropriate mechanism, and the Commission will rely on its public interest power.

34. Paragraph 7 of Subsection 5.6(1) - Public Offering of Securities

Where there is a public offering and a related party wishes to participate to minimize or avoid dilution, this section provided a valuationexemption to the extent the issuer met one of three conditions, being: (i) reasonable arrangements are made for participation by allother holders on a pro rata basis and notice is provided by news release or other reasonable means; (ii) there is a liquid market, theoffering price is less than the closing price prior to pricing the offering and the related party contributes to the issuer an amount persecurity based on the difference between the offering price and the lesser of the most recent closing price prior to pricing or followingthe first announcement of the size and pricing of the offering, or (iii) there is a liquid market and the size of the offering is announcednot less than 10 days prior to the pricing and the offering price is not more than 5 percent less than the most recent closing price priorto pricing.

Comments

Two commenters were of the view that this exemption is unworkable and unfair to controlling shareholders. One of those commentersnoted that subparagraph (i) appears difficult to comply with in the context of bought deals that are often sold in minutes. It also notedsubparagraph (ii) appears to provide for controlling shareholders paying more than other purchasers of the issue.

In respect of subparagraph (ii), the second commenter did not foresee acceptance by related parties of the business case forcontributing back to the issuer the market discount implied in the offering price. In addition, it noted that the required contribution failsto take into account the financial benefit which the issuer receives in not having to pay an underwriting commission on the securitiespurchased by the related party. As for subparagraph (iii), the commenter stated that the procedure contemplated does notaccommodate bought deals or short-form prospectus offerings.

A third commenter was of the view that the limitation in subparagraph (ii), which requires that there be a liquid market and the relatedparty pay an additional amount of money over what others pay, is unfair to the related party. The commenter felt it should be sufficientthat either the other shareholders are being allowed to participate pro rata or that there is a liquid market.

A fourth commenter was of the view that the reference to "reasonable arrangements" being made to permit participation by othershareholders suggests that shareholders' rights to participate may be less than those available in a rights offering. This would betroublesome if the purpose were to allow the related party to maintain its existing ownership level. It would be less so if the relatedparty percentage holding will be reduced and it intends only to minimize the dilution. The commenter thought the exemption insubparagraph (i) should be limited to circumstances in which a related party intends only to minimize its dilution. In addition, thatcommenter was of the view that the exemption in subparagraph (ii) should not be granted in the proposed Rule, but should be left tothe discretion of the Director on specific applications. Its concern was that there would not necessarily be in each case an equalopportunity for shareholders, other than the related party who is participating in the offering, to maintain their existing levels ofownership, even if there is a liquid market.

The fourth commenter was also of the view that subparagraph (iii) appeared to provide the related party participating in the publicoffering with a benefit not available to other shareholders. The other shareholders who act on the opportunity to purchase the issuer'sshares in the market after the announcement by the issuer of the public offering but before the offering itself may pay up to five percentmore than the related party will pay under the offering.

Response

The Commission has eliminated this exemption as it agrees that the exemption presents difficulties in its operation. The Commissionconsidered modifying the exemption so that it would only apply to a distribution by way of prospectus and would be conditional on therelated party participating at the same price as other investors and not increasing its ownership interest in the issuer, individually orin the aggregate with other related parties relative to non-related parties. However, the Commission was not comfortable with thisapproach as it was concerned that a related party could, along with non-related parties, acquire securities at below fair market value,without all holders of affected securities having the same opportunity. As a result, the Commission felt that at this time it is moreappropriate to deal with this issue in the context of applications for relief.

35. Paragraph 8 of Subsection 5.6(1) - Negotiated Transaction with Arm's Length Controlling Shareholder

This exemption is available where a related party transaction has been negotiated with an interested party, and another related party,who is at arm's length, holds more voting securities than the interested party and whose holdings materially affect control of the issuer,supports the transaction and is treated identically to all other holders.

Comment

One commenter took the position that this exemption should be available whenever there is a second party, completely at arm's lengthfrom the interested party, who approves the related party transaction. It should not be necessary that the second party holds morevotes than the interested party connected to the transaction.

Response

The basis of the exemption is that a neutral party with a larger stake in the issuer than the interested party supports the transaction.Accordingly, the Commission is not prepared to accept the commenter's suggestion.

36. Paragraph 10 of Subsection 5.6(1) and Paragraph 3 of Subsection 5.9(1) - Financial Hardship

This exemption is available where a transaction is designed to improve the financial position of an issuer, where the issuer is insolventor in serious financial difficulty, if the board of directors determines that the terms are reasonable in the circumstances.

Comments

One commenter was of the view that while the purpose of the exemption is to avoid requiring an issuer that is insolvent or close toinsolvency from incurring the expenses necessary for a valuation and shareholders' meeting, the circumstances of financial difficultymay enhance the conflict of interest inherent in related party transactions. The commenter suggested that it would be useful to definethe degree of seriousness required for the exemption; a possible standard would require a determination that insolvency is imminentif the transaction is not concluded. That determination and the determination that the terms of the transaction are reasonable shouldbe required to be made by an independent committee of directors.

A second commenter supported the financial hardship exemption, which recognizes that issuers facing severe hardship are not alwaysby definition insolvent.

Response

It is difficult to define "serious financial difficulty" and, in the Commission's view, unnecessary. For instance, imminent insolvency mayin many instances be present but is not always going to be the case. It should be left to the board to determine in the circumstancesif the issuer is in serious financial difficulty. The Commission does not propose to mandate independent director involvement.

37. Paragraph 12 of Subsection 5.6(1) and Paragraph 3 of Subsection 5.9(1) - Loan on Commercial Terms

This new exemption allows for (i) a loan, or the creation of a credit facility or advance thereunder, to be obtained by the issuer froma related party on reasonable commercial terms that are not less advantageous than if obtained from an arm's length party and doesnot directly or indirectly enable the related party to obtain equity securities or voting securities, or (ii) a cash payment by the issuer tothe related party on account of the loan or credit facility.

Comment

One commenter was concerned that the proposed exemption does not expressly deal with the default provisions that might becontained in an agreement and as a result the related party might acquire assets from the issuer. As a result, the commenter wasof the view that minority approval and independent committee approval should be required. The commenter also felt that theexemption regarding cash payments on loans should be limited to repayment of the loan and payment of interest and other servicecharges required under it, so that finders' fees relating to a loan are not permitted.

Response

As long as the default mechanisms are on market terms, the Commission is not concerned about the possibility of the related partyacquiring assets on default. The Commission also disagrees with the commenter's suggestion that finders' fees be specificallyexcluded. The Commission does not propose to prescribe the cash fees that can be paid so long as the loan is on reasonablecommercial terms and not less advantageous than can be obtained from an arm's length party.

38. Paragraph 13 of Subsection 5.6(1) - Reorganization With No Adverse Effect

This new exemption is based on waivers previously granted under Policy 9.1 and is in respect of an amalgamation of the issuer withan interested party, which is undertaken for the benefit of a related party other than the interested party, and does not adversely affectthe issuer involved or beneficial owners of affected securities who, after the transaction, are in substantially the same position thatthey were in prior to the transaction.

Comments

One commenter was of the view that the 1996 proposed Rule should require that an independent committee of the directors determinewhether the conditions required for the exemption are satisfied.

Another commenter indicated that it is not clear whether the reference to a related party in the bottom line of the introduction toparagraph 13 of subsection 5.6(1) of the 1996 proposed Rule is intended to include the related party with whom the amalgamationis taking place. If so, the indemnity in subparagraph (iii) and the payment of costs in subparagraph (v) is not easily accommodated.That commenter felt this should be clarified.

Response

The references are intended to be to two different parties: an interested party and a related party other than the interested party. TheCommission has clarified this in paragraph 12 of section 5.6 of the proposed Rule.

Again, the Commission does not propose to mandate an independent committee.

39. Paragraph 14 of Subsection 5.6(1) - Transaction Size

As in Policy 9.1, paragraph 14 of subsection 5.6(1) of the 1996 proposed Rule provided an exemption where neither the value of thesubject matter nor the consideration is $500,000 or more. The 1996 proposed Rule added that the board could determine the valueswhere they are not otherwise readily determinable.

Comments

One commenter was of the view that it may not be appropriate to extend this valuation exemption to junior issuers because, dependingon the issuer, a transaction of this size may constitute a significant portion of its business. "A measure relative to the company's assetsor earnings may be more appropriate".

Another commenter was of the view that the determination of value and of the availability of the exemption should be made by anindependent committee of directors.

Response

The $500,000 test reflects the inequity of requiring an expensive valuation to value a small asset. While the Commission recognizesthe logic of the first commenter's position, it is not prepared to impose substantial costs on an issuer with respect to a small asset.Again, the Commission does not propose to mandate an independent committee.

40. Paragraph 15 of Subsection 5.6(1) - Previous Arm's Length Negotiation or Auction

The 1996 proposed Rule cross referenced "the circumstances described in paragraph 3 of section 2.5, with necessary modifications"and "the circumstances described in paragraph 4 of section 2.5, with necessary modifications". Those paragraphs provided relief inconnection with insider bids.

Comment

One commenter noted that this related party transaction exemption referenced the previous arm's length negotiation exemption forinsider bids with necessary modifications and questioned how this insider bid exemption is supposed to apply to related partytransactions. If the exemption was intended to deal with share transactions, the commenter thought it was difficult to envisage thetype of share transactions that the provision was intended to exempt in view of the other exemptions in the 1996 proposed Rule forshare transactions. It noted that if the exemption was intended to deal with asset transactions, there was an appropriate exemptionalready provided in paragraph 17 of subsection 5.6(1) of the 1996 proposed Rule. The commenter suggested that the Commissionidentify the circumstances that the exemption is intended to exempt and specify them in the proposed Rule with appropriate conditions.

Response

The Commission agrees that this exemption cannot practically be applied and has deleted both the previous arm's length negotiationand auction exemptions with respect to related party transactions.

41. Paragraph 16 of Subsection 5.6(1) - Treasury Issue of Listed Securities

This exemption was available in situations involving the issuance from treasury by an issuer to a related party of securities for cashwhere there is a liquid market in the securities, they have been trading on a recognized stock exchange for at least 12 months,disclosure is made that neither the issuer nor any interested party has knowledge of material information that has not been generallydisclosed and of the effect of the treasury issue on the voting interest of any interested party. Policy 9.1 contains this exemption withthe additional requirement that, if the transaction will result in a material change in control of the issuer, disclosure be made of the facta control premium may accrue to the interested party in a subsequent private agreement take-over bid.

Comments

One commenter was of the view that approval of an independent committee should be required, in view of the fact that the exemptionwould only be required where the market capitalization exemption is unavailable.

Another commenter stated that it did not support the proposed modification of paragraph 16 of section 5.6 of the 1996 proposed Rule.The commenter believed the treasury issue exemption in Policy 9.1 has worked well and did not understand why the provision in Policy9.1 regarding a material change in control (subparagraph (2)(iii) of section 18.2) did not appear in the 1996 proposed Rule.

Response

Again, the Commission does not propose to mandate an independent committee. The Commission does not believe the changesuggested by the second commenter is necessary, given that the relevant document must include a description of the effect of thetreasury issue on the direct or indirect voting interest of any interested party.

42. Paragraph 17 of Subsection 5.6(1) - Asset Resale

This exemption, which is based on the resale of an asset within 12 months of its acquisition on an arm's length basis at basically thesame price, as certified by an independent valuator, is currently in Policy 9.1.

Comment

One commenter felt that the exemption should be available only where the valuator is retained and the transaction is approved by anindependent committee of directors.

Response

The Commission does not believe the changes suggested by the commenter are necessary.

43. Paragraph 5 of Subsection 5.9(1) - 90 Percent Exemption from Minority Approval - Related Party Transactions

This section, which is currently in Policy 9.1, provided an exemption from minority approval requirements in the context of a relatedparty transaction where an interested party holds at least 90 percent of the affected securities.

Comment

One commenter felt that this exemption should be deleted. It was of the view that the premise of this exemption relates to going privatetransactions but is not applicable to related party transactions. The commenter noted that related party transactions affect the ongoingoperations of an issuer in which minority shareholders continue as shareholders. In the commenter's view, judicial recourse usuallydoes not provide a realistic remedy so the minority have the choice of accepting the related party transaction or selling shares intoa market that may not adequately reflect their value in view of the position of the controlling shareholder. The commenter thoughtremoval of the exemption would provide a balance that would better protect minority shareholders against unfair transactions, whilestill leaving substantial flexibility for controlling shareholders.

Response

The Commission does not agree with the commenter. The Commission thinks the exemption is equally appropriate to related partytransactions. Without it, the opportunities for minority abuse increase unjustifiably.

44. Paragraph 18 of Subsection 5.6(1) and Paragraph 6 of Subsection 5.9(1) - Quasi-Going Private Transaction FollowingTake-over Bid

In the 1996 proposed Rule, quasi-going private transactions were treated differently from going private transactions in that paragraph18 of section 5.6 and paragraph 6 of subsection 5.9(1) of the 1996 proposed Rule provided a valuation and minority approvalexemption, respectively, where a quasi-going private transaction occurred within 120 days of a first step arm's length take-over bid,but the 1996 proposed Rule did not provide the same exemptions in the context of second step going private transactions.

Comments

One commenter was of the view that, while the valuation exemption was reasonable, there was no reason to provide relief from theminority approval requirements for quasi-going private transactions. That commenter felt an exemption from minority approval wouldgive an offeror a right of compulsory acquisition not available under corporate legislation where the offeror acquires less than 90percent of the shares.

A second commenter was of the view that there should be an exemption from the formal valuation requirement where a going privatetransaction follows a take-over bid. The commenter noted that if a take-over bid has just been completed and a substantial numberof shareholders have tendered, there should be no need for a valuation before proceeding with a going private transaction.

A third commenter was of the view that it would be appropriate to provide an automatic valuation exemption in respect of a goingprivate transaction following an arm's length take-over bid where the minority approval requirements have been met and theconsideration is at least equal to that under the take-over bid. Conditions that the commenter thought should be imposed on theavailability of such an exemption were:

i. there has been no material change which has occurred from the date for the prior transaction to the date of thegoing private transaction; and

ii. an appraisal or similar right is available to minority shareholders in connection with the going private transaction.

In the commenter's view, it does not make sense to impose a valuation requirement in respect of a follow-up going private transactionwhich is a foregone conclusion by reason of the high level of acceptance of the prior take-over bid. The commenter stated that theonly question is one of value and the appropriate mechanism to deal with it is through the exercise of an appraisal or similar right.It concluded that requiring a formal valuation would only result in unnecessary cost.

Response

The 1996 proposed Rule provided a valuation and minority approval exemption for a second step quasi-going private transactionproposed within 120 days of a completed take-over bid that was not an insider bid. The rationale for the exemption included: therelated party proposing the quasi-going private transaction only became a related party as a result of the completion of the first stepof a multi-step transaction, the limited period of time that passes between the two steps presumably means the related party lacks anyinformational advantage at the time it proposes the quasi-going private transaction, and the consideration being offered in the first andsecond step is the same.

The 1996 proposed Rule did not and Policy 9.1 does not provide a valuation exemption for a second step going private transactionproposed within 120 days of a completed take-over bid. Possible reasons are the desire to be consistent with the OBCA or concernover a shareholder's interest being terminated without consent. Another rationale that could be advanced is that historically (prior tothe 1991 version of Policy 9.1) going private transactions were defined only to apply where an insider was proposing the going privatetransaction and therefore related party concerns would be present in every instance. Policy 9.1 currently defines a going privatetransaction to apply to any such proposed transaction regardless of whether an insider is proposing it.

The Commission has eliminated the concept of a quasi-going private transaction. The question consequently becomes the appropriatetreatment of second step going private transactions.

Consistency with the OBCA is not in and of itself a reason to impose a requirement. The concern with going private transactions isthat they are often made by insiders and therefore a valuation and minority approval is necessary to overcome the perception orpossibility that the insiders have information that is not available to the minority shareholders and to ensure that all shareholders aretreated fairly. The Commission does not see why, if a valuation is not mandated on a take-over bid made by a non-insider, it shouldmandate a valuation on the going private transaction, as the going private transaction is essentially an extension of the take-over bid.If the bid was made by an insider, then a valuation would have been provided with the take-over bid or the insider would have reliedon a valuation exemption.

Accordingly, the Commission has added a provision to the proposed Rule (paragraph 4 of section 4.5) that provides a valuationexemption for a going private transaction following a formal bid and involving the outstanding securities of the same class that werethe subject of the formal bid, if the going private transaction takes place no later than 120 days after the expiry of the formal bid, theintent to effect the going private transaction was disclosed in the disclosure document for the formal bid, the consideration per securityis at least equal in value to and in the same form as the consideration that was paid in the formal bid, and the tax consequences, ifdifferent, were disclosed. This exemption applies regardless of whether the first step take-over bid is an insider bid or made at arm'slength.

The Commission has not eliminated the requirement for majority of the minority approval. However, section 8.2 of the proposed Ruleallows securities tendered to the bid to be counted for the purposes of determining minority approval.

45. Subsection 6.1(3) - Independence of Valuator

This subsection provided a number of rebuttable presumptions concerning situations in which a valuator is considered not to beindependent of an interested party.

Comments

One commenter indicated that it was extremely concerned about the proposed use of "rebuttable presumptions" in the context of theindependence of valuators as they suggest "guilty until proven innocent". Policy 9.1 provides for what the commenter viewed to bea more balanced approach to independence that relies on the business judgement of the independent committee. Whereas thecommenter agreed that the situations under paragraphs (a), (b), (d) and (g) of subsection 6.1(3) and subsection 6.1(4) of the 1996proposed Rule should disqualify the valuator from being independent, the commenter strongly disagreed with all or parts of paragraphs(c), (e) and (f) of subsection 6.1(3). Paragraph 3(c) referred to future business unrelated to the transaction in question in respect ofwhich there is an understanding. The commenter felt a financial materiality test should apply. The commenter noted the greaterpotential "conflict" exists with respect to future business for which no understanding exists. In this case a valuator might have anincentive to reach a certain conclusion. With respect to paragraph 3(e) the commenter failed to see how having acted for the issuerin the preceding 24 month period makes the valuator not independent from the interested party. In fact, having acted for the issueroften makes the valuator far more qualified to perform the valuation due to its knowledge of the issuer. The commenter concludedthat having performed services for the interested party in the past should also not be in and of itself a reason to disqualify a valuator.It felt the test in Policy 9.1 regarding the materiality of any fees earned from the interested party was a reasonable test that should bekept in the proposed Rule. The commenter also strongly opposed paragraph 3(f) which presumed that a valuator is not independentif it or any of its affiliates is a lead in respect of loans of material amounts to the issuer. All bank-owned investment dealers have, byregulation, strict firewall procedures in place between the bank and the investment dealer subsidiary. The commenter was of the viewthat a financial materiality test should apply to this restriction as well.

In that commenter's view, the determination as to whether a conflict exists should be left to the valuator and the independent committeeto determine based on their business judgement, without reference to "rebuttable presumptions" for which no evidence is given asto what a "rebuttable defense" represents. The commenter predicted that the result of a broad list of "rebuttable presumptions" wouldlikely be that few qualified firms would be deemed "independent". The commenter strongly urged the Commission to concentrate onreal issues of independence (such as paragraphs (a), (b), (d) and (g) of subsection 6.1(3) and subsection 6.1(4)) and leave any otherpotential issues to the business judgement of independent committees.

Two commenters strongly recommended that paragraphs (c), (e) and (f) of subsection 6.1(3) be removed from the 1996 proposed Ruleand discussed in the proposed Companion Policy in the same manner that Policy 9.1 currently addresses them. In Policy 9.1, thesespecific situations are factors to take into account in determining whether a valuator is independent. The commenters noted that the1996 proposed Rule does not assist in indicating how the presumptions might be rebutted and yet the situations are not in the sameorder of magnitude as the other presumptions.

Another commenter stated that it was not clear why the relationships identified in subsection 6.1(3) were rebuttable as it was difficultto see how persons in such relationships could ever be independent. That commenter felt that the proposed Rule should say that avaluator in any of the identified relationships is not independent. That commenter was also of the view that the descriptive restriction"financial" should be deleted from paragraph (b) of subsection 6.1(3) so that a valuator acting as an adviser in respect of thetransaction under consideration or otherwise would not be independent. The commenter was of the view that circumstances in whichthe valuator or its affiliates had a material financial interest in transactions involving the issuer, an interested party or their affiliatesor associates during the preceding 24 months should be included. It thought such prior business relationships should be includedas creating non-independence, as they are in section 23.5 of Policy 9.1.

Finally, that commenter noted that under the 1996 proposed Rule a manager or co-manager of a soliciting dealer group was presumednot to be independent. The other members of the group would not fall within the presumption. However, as participation in a solicitingdealer group creates an economic and psychological incentive to favour a transaction, and a conflict of interest when acting as avaluator, the commenter felt that such participation should not be treated differently than any other conflict of interest. It was of theview that such a relationship is covered by the presumption directed at compensation and therefore the provision applicable to solicitingdealer groups should be deleted.

Response

The Commission has moved that portion of paragraph (c) dealing with the valuator having a material financial interest in futurebusiness and paragraphs (e) and (f) into section 5.2 of the proposed Companion Policy as factors that may be relevant in determiningas a factual matter whether a valuator is independent.

The Commission has determined that the remaining subparagraphs are situations that should not be rebuttable presumptions andaccordingly has made it clear in subsection 6.1(3) of the proposed Rule that a valuator is not independent in those situations.

The Commission has also made the change suggested by one of the commenters that the word "financial" be deleted from paragraph(b) of subsection 6.1(3).

The Commission has added as a factor in section 5.2 of the proposed Companion Policy whether, during the 24 months before thevaluator was first contacted, the valuator or an affiliated entity of the valuator had a material financial interest in transactions involvingthe interested party or the issuer.

46. Subsection 6.1(4) - Independence of Valuator

Subsection 6.1(4) of the 1996 proposed Rule contained a new rebuttable presumption that a valuator is not independent if the valuatoris jointly retained by the issuer and an interested party to prepare a formal valuation in respect of the transaction and the valuator alsoprovides another advisory service, "including a fairness opinion", to an interested party in connection with the same transaction.

Comments

One commenter indicated that it was not clear how a valuator providing advisory services to an interested party in connection with thesame transaction could be independent. The commenter stated that, presumably, this new provision was intended to make clear thata valuator does not lose independence merely because an interested party pays part of the valuator's fees. The commenter thoughtthis may be reasonable so long as the valuator is selected by and reports to an independent committee of the issuer's directors whosupervise the conduct of the valuation. To accomplish this purpose the commenter was of the view that the provision need only saythat "a valuator who is paid jointly by the issuer and one or more interested parties for preparing a formal valuation in respect of atransaction is not by that fact alone disqualified from preparing the formal valuation". It concluded that subsection 6.1.(4) of the 1996proposed Rule should be amended accordingly or deleted.

Another commenter indicated that it was unclear whether a fairness opinion prepared for an issuer would raise the presumption thata valuator is not independent.

Response

The Commission has modified this subsection along the lines suggested by the first commenter.

In response to the second comment, the Commission believes that it is clear from paragraph (b) of subsection 6.1(3) and from itsmodification of subsection 6.1(4) of the proposed Rule that the preparation of a fairness opinion for an interested party results in thevaluator not being independent, but that the preparation of a fairness opinion for the issuer does not in itself make the valuator notindependent.

47. Subsection 6.1(6) - Independence of Valuator

This subsection provided that, for purposes of determining valuator independence, an interested party does not include the issuer inthe case of an issuer bid.

Comment

One commenter was of the view that this provision was too broad as it did not contain a qualification with respect to other servicesprovided to the issuer. It would thus exclude from the presumption a valuator who itself or through an affiliate provided other servicesto the issuer. The commenter felt that subsection 6.1(6) should be amended to say that "a valuator who is retained by the issuer toprepare a formal valuation in respect of an issuer bid is not by that fact alone not independent".

Response

The Commission has made the suggested change in subsection 6.1(5) of the proposed Rule.

48. Section 6.2 - Disclosure re Valuator

This section, which is also in Policy 9.1, required certain disclosure about the valuator.

Comment

One commenter noted that the credentials of the individuals principally responsible for preparing a valuation are extremely relevantand important to a reader. The commenter recommended that, like Policy 9.1, the proposed Rule require disclosure in a valuationreport of the identity and credentials (which should be understood to include all academic degrees and professional designations andrelevant work experiences) of the individual(s) principally responsible for preparing a valuation.

Response

The Commission does not propose to mandate this requirement.

49. Subsection 6.3(2) - Subject Matter of Valuation - Exemption for Liquid Securities

This subsection, also in Policy 9.1, provided that a valuation of non-cash consideration is not required if the consideration consistsof securities for which there is a liquid market and the securities which comprise the consideration constitute less than 10 percent ofthe outstanding securities of the class and are not subject to resale restrictions.

Comments

One commenter agreed with this exemption for valuing non-cash consideration in the case where a liquid market exists. Thecommenter was of the view that it should be made clear however that, if a valuator has reason to believe that the market price of thesecurities does not represent their fair market value, a valuation should be performed regardless of the exemption.

A second commenter indicated that it did not understand the reference in subparagraph (a)(ii) of subsection 6.3(2) of the 1996proposed Rule. It asked whether a resale restriction under subsection 72(5) of the Act meant that this exemption was not available.

Response

The Commission disagrees with the first commenter's suggestion as this exemption is premised on the existence of a liquid market.In addition, if the commenter's suggestion was adopted, it would effectively negate the exemption as it would require the involvementof a valuator to make the determination called for by the commenter. The Commission has also clarified that only securities that arefreely tradeable are candidates for this exemption to ensure that securities that are subject to subsection 72(5) of the Act are notcaught unless the issuer has not been a reporting issuer for one year. The Commission has added a provision in section 2.2 of theproposed Companion Policy to that effect.

50. Section 6.4 - Preparation of Formal Valuation

This section required that valuations be conducted in a diligent and professional manner and prepared within 120 days of filing orsending the disclosure document to securityholders, and prohibited discounts to reflect liquidity or minority interests, among otherthings, in certain circumstances.

Comment

One commenter was of the view that certain obligations set out in sections 22.3 and 24.3(1) of Policy 9.1 pertaining to access tomanagement and advisers and to all material information in its possession that is relevant to the valuation and specification ofresponsibilities of valuators should be added to the proposed Rule rather than remain in the Companion Policy.

Response

The Commission is of the view that these issues are more appropriately dealt with in the proposed Companion Policy rather than inthe proposed Rule.

51. Subsection 6.8(3) - Prior Valuation Exemption

This was a new subsection that provided that disclosure of a prior valuation is not required where, although the prior valuation is knownto exist, its contents are not known or reasonably obtainable by persons or companies required under the proposed Rule to disclosethe valuation.

Comment

One commenter stated that it did not understand the references to any person or company referred to in this section.

Response

The reference depends on the context and can refer to directors, senior officers, offerors, etc. The Commission does not propose tomake any changes.

52. Section 7.1 - Independent Directors

Section 7.1 created a rebuttable presumption, based on Policy 9.1, that directors are not independent directors in certaincircumstances.

Comments

One commenter stated that paragraph (a) of subsection 7.1(2) of the 1996 proposed Rule has become too broad due to the inclusionof the concept of acting jointly or in concert. As drafted, the commenter felt it would raise a presumption that a director is notindependent where the director is an associate of an associate of an affiliate of an interested party.

Another commenter noted that the 1996 proposed Rule stated that a director's independence is a question of fact and created arebuttable presumption that a director is not independent in four specified circumstances. It was not clear to the commenter why thepresumption was rebuttable. The commenter felt it would be preferable to define the concept of independence. It was of the view thatthe proposed Rule should provide that a director is not independent where the director: (i) is also a director of a related or interestedparty or an affiliate of either; (ii) is an officer of or has any material financial or other relationship with the issuer, a related or interestedparty or any affiliate of any of them; or (iii) is a director or officer of another issuer which has such a relationship with the issuer, arelated party or an interested party. If this approach is accepted, the commenter felt the presumptions in the proposed Rule shouldbe modified to declare that directors in the defined relationships are not independent.

Paragraph (b) of subsection 7.1(2) provided that directors who are or have been insiders, associates or employees of a person actingas a financial advisor to an interested party are not independent. That commenter felt there is no reason to limit this provision tofinancial advisers, as other types of advisors may also have a financial relationship that would negate independence. In thecommenter's view, an insider, associate or employee of any adviser of an interested party should not be treated as independent.

Policy 9.1 treats a director who is an insider, associate or employee of a valuator retained to perform a formal valuation as notindependent (para. 27.3.(iii)). In view of the fact that independent committees are expected to select and supervise the valuator, thecommenter felt it would be preferable to retain this disqualification in the proposed Rule.

Finally, the commenter was of the view that subsection 7.1(3) is too broad as it would exclude from the presumption a director whois a partner or employee of an ongoing adviser of the issuer or of the issuer's auditor. The commenter thought that it should beamended to say that, for purposes of section 7.1, in the case of an issuer bid a director of the issuer is not, by the fact of hisdirectorship alone, other than independent.

Response

The Commission agrees that the reference to parties "acting jointly or in concert" in paragraph (a) of subsection 7.1(2) should bedeleted because it extends the "net" of non-independence too far.

In response to the comment regarding paragraph (b) of subsection 7.1(2) the Commission has deleted the adjective "financial" thatlimited "adviser" in paragraph (b) of subsection 7.1(2). The Commission believes that this also addresses the comment regarding adirector who has a relationship with a valuator. The Commission has added the reference in paragraph (c) of subsection 7.1(2) to amaterial financial interest in any affiliated entity of an interested party.

The Commission has also amended paragraphs (a) and (b) of subsection 7.1(2) by changing the time periods from three years to 12months as it felt that three years was unduly long.

Again, the Commission has deleted the concept of the presumption being rebuttable as it believes the items listed negateindependence. With respect to the one commenter's three proposed categories of independence, the Commission believes that someof them would disqualify directors as being independent even where any potential for a conflict of interest is very small. TheCommission believes that section 7.1 adequately addresses the situations where a conflict of interest could arise.

The Commission has made the suggested change by the commenter regarding subsection 7.1(3).

The 1996 Proposed Companion Policy

53. Section 3.3 - Issuer Bids

Section 3.3 of the 1996 proposed Companion Policy set out the Commission's view that an issuer bid includes an offer to acquire madeby a wholly-owned subsidiary of the target company.

Comment

One commenter stated that section 3.3 should not apply in the case of securities dealers that are wholly-owned subsidiaries ofreporting issuers, if they are acting in their capacity as underwriter or as agent for a bona fide purchaser when purchasing securitiesof their parent. Otherwise an unequal playing field is created among securities dealers.

Response

The Commission agrees with the comment and has made the clarification in section 2.4 of the proposed Companion Policy.

54. Section 3.4 - Form 33 Disclosure

Form 33 disclosure requirements relate to issuer bids made by way of circular. Section 3.4 of the 1996 proposed Companion Policyprovided the Commission's view on which parts of Form 33 should apply to going private transactions, insider bids and related partytransactions.

Comment

One commenter was of the view that, as these items have been identified and as the disclosure concerning them is expected to bemade, this should be in the proposed Rule rather than the proposed Companion Policy.

Response

The Commission has left this item in section 4.1 of the proposed Companion Policy as it is in the nature of guidelines and better suitedas a policy.

55. Section 3.5 - Disclosure of Financial Information

Section 3.5 of the 1996 proposed Companion Policy provided the Commission's view that, unless clearly irrelevant or unavailable,certain historical financial information should be included in a disclosure document in respect of transactions subject to the formalvaluation requirements.

Comments

One commenter felt this requirement should be in the proposed Rule, rather than in the proposed Companion Policy, and anindependent committee should determine whether information is irrelevant or unavailable.

A second commenter questioned whether the words "subject to the formal valuation requirements of the Rule" meant that suchdisclosure was necessary even if a formal valuation was not required as a result of the availability of an exemption. The commenterfelt this should be clarified. The commenter also suggested that the word "clearly" be deleted from that section as the commentercould see no material difference between something that is clearly irrelevant and something that is irrelevant.

Response

The Commission has left this item in section 4.2 of the proposed Companion Policy, but has clarified that the disclosure is suggestedonly where a valuation is required to be obtained and has deleted the word "clearly".

56. Recognition of Chartered Business Valuator and CICBV Valuation Standards

Comment

One commenter recommended the addition to the Companion Policy of (i) recognition of "Chartered Business Valuator" as being arelevant professional designation for the purposes of assessing the qualifications of a valuator, and (ii) a recognition of certain CICBVvaluation report standards (re scope of work and file documentation) as representing a reasonable approach to meeting the applicablelegal requirements.

Response

The Commission believes the provisions in the proposed Companion Policy are appropriate at this time. The Commission is notprepared to provide the recognition requested without a more comprehensive review on its part to determine whether the recognitionrequested is appropriate.

C. GENERAL COMMENTS

1. Going Private Transactions

Comment

One commenter suggested that fairness be defined in terms of price received in a going private transaction. The commenter furthersuggested that the implementation of Policy 9.1 did not lead to higher premiums in going private transactions and speculated that,while majority of the minority approval and disclosure requirements may be useful, valuations and independent committees areunnecessary and ineffective to ensure that shareholders receive a fair price. However, the commenter believed it necessary for furtherempirical studies to be completed before these conclusions could be confirmed.

Response

It has not been and should not be the objective of Policy 9.1 and the proposed Rule to ensure that shareholders receive higher prices.Rather, the focus is and should be on process and disclosure issues, enabling shareholders to vote, on an informed basis and withoutconcern for bias resulting from conflicts, on whether to accept the price offered. On the same basis, the Commission does not believethat the requirement for valuations in going private transactions needs to be justified by cost-benefit analyses that show that valuationsresult in higher prices when subject to current requirements.

2. Fairness Opinions

While fairness opinions are not mandated under Policy 9.1, there is a requirement in Policy 9.1 that, if valuation or appraisal work isconducted to support a fairness opinion, such materials constitute a prior valuation. Policy 9.1 further discusses the Commission'sviews on appropriate disclosure where fairness opinions are relied on. Neither the 1996 proposed Rule nor the 1996 proposedCompanion Policy specifically regulate or discuss fairness opinions. Reference is made to Part IV, Section 3 of the 1996 Notice fora discussion of fairness opinions.

Comment

One commenter suggested that as fairness opinions are not required, the 1996 proposed Rule should be amended to treat fairnessopinions, where they are used in connection with a transaction subject to the 1996 proposed Rule, in the same manner as valuations.The commenter was of the view that the proposed Rule need specify only three governing principles, namely, that fairness opinions:(i) be prepared by an independent, qualified valuator; (ii) be based on appropriate valuation or appraisal work as determined by thevaluator and stated in the opinion; and (iii) contain sufficient detail to enable shareholders to understand the basis for it and to forma reasoned judgment concerning it. The commenter thought the proposed Rule should also require disclosure of a fairness opinionto be included in a material change report or information circular relating to the transaction for which the opinion is prepared. Finally,it felt the proposed Rule should be amended to make clear that, where valuation or appraisal work is performed to support a fairnessopinion, the fairness opinion and the work are included within the definition of "prior valuation".

Response

The proposed Rule continues to adopt the approach that the Commission does not mandate or regulate fairness opinions.

In response to the commenter's final point, the Commission notes that the definition of "prior valuation" means a valuation or appraisal,so that valuation or appraisal work performed to support a fairness opinion may constitute a prior valuation.

3. Monitoring of Disclosure Practices

Comment

One commenter recommended the Commission carefully monitor valuation disclosure practices as they evolve under the twodisclosure standards.

Response

The Commission will monitor valuation disclosure practices as it considers appropriate.

ONTARIO SECURITIES COMMISSION RULE 61-501
INSIDER BIDS, ISSUER BIDS, GOING PRIVATE TRANSACTIONS
AND RELATED PARTY TRANSACTIONS

TABLE OF CONTENTS

PART TITLE

PART 1 GENERAL PROVISIONS
1.1 Definitions
1.2 Application of Part XX of the Act
1.3 Liquid Market in a Class of Securities
1.4 Arm's Length Dealings
1.5 Interpretation

PART 2 INSIDER BIDS
2.1 Application
2.2 Disclosure
2.3 Formal Valuation
2.4 Exemptions from Formal Valuation Requirement

PART 3 ISSUER BIDS
3.1 Application
3.2 Disclosure
3.3 Formal Valuation
3.4 Exemptions from Formal Valuation Requirement

PART 4 GOING PRIVATE TRANSACTIONS
4.1 Application
4.2 Meeting and Information Circular
4.3 Conditions for Relief from Timing for OBCA Information Circular
4.4 Formal Valuation
4.5 Exemptions from Formal Valuation Requirement
4.6 Conditions for Relief from OBCA Valuation Requirement
4.7 Minority Approval
4.8 Exemptions from Minority Approval Requirement
4.9 Conditions for Relief from OBCA Minority Approval Requirement

PART 5 RELATED PARTY TRANSACTIONS
5.1 Application
5.2 Disclosure: News Release and Material Change Report
5.3 Copy of Material Change Report
5.4 Meeting and Information Circular
5.5 Formal Valuation
5.6 Exemptions from Formal Valuation Requirement
5.7 Minority Approval
5.8 Exemptions from Minority Approval

PART 6 FORMAL VALUATIONS AND PRIOR VALUATIONS
6.1 Independent Valuator
6.2 Disclosure Re Valuator
6.3 Subject Matter of Formal Valuation
6.4 Preparation of Formal Valuation
6.5 Summary of Formal Valuation
6.6 Filing of Formal Valuation
6.7 Valuator's Consent
6.8 Disclosure of Prior Valuation
6.9 Filing of Prior Valuation

PART 7 INDEPENDENT DIRECTORS
7.1 Independent Directors

PART 8 MINORITY APPROVAL
8.1 From Holders of Affected Securities
8.2 Multi-Step Transactions

PART 9 EXEMPTION
9.1 Exemption

ONTARIO SECURITIES COMMISSION RULE 61-501
INSIDER BIDS, ISSUER BIDS, GOING PRIVATE TRANSACTIONS
AND RELATED PARTY TRANSACTIONS⁽¹⁾

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions⁽²⁾

(1) In this Rule

"affected security" means

(a) for a going private transaction of an issuer, a participating security⁽³⁾ of the issuer in which the interest of a beneficialowner would be terminated by reason of the transaction, and

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

 

"bona fide lender"⁽⁴⁾ means a person or company that

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

(i) solely as collateral for debt under a written pledge agreement entered into by the person or company as alender, or

(ii) solely as collateral acquired under a written agreement by the person or company as an assignee or transfereeof the debt and collateral referred to in subparagraph (i),

(b) is not yet legally entitled to dispose of the securities for the purpose of applying proceeds of realization in repaymentof the secured debt, and

(c) was not a related party of the issuer at the time the pledge agreement referred to in subparagraph (a)(i) or theassignment or transfer referred to in subparagraph (a)(ii) was entered into⁽⁵⁾;

"class"⁽⁶⁾includes a series of a class;

⁽⁷⁾

"disclosure document" means,

(a) for an insider bid,

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

(ii) if the insider bid takes the form of a stock exchange insider bid, the disclosure document sent to holders ofofferee securities that is deemed to be a take-over bid circular under subsection 131(10) of the Act,

(b) for an issuer bid,

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

(ii) if the issuer bid takes the form of a stock exchange issuer bid, the disclosure document sent to holders ofofferee securities that is deemed to be an issuer bid circular under subsection 131(10) of the Act,

(c) for a going private transaction, an information circular sent to holders of affected securities, or, if no informationcircular is required, another document sent to holders of affected securities in connection with a meeting of holdersof affected securities⁽⁸⁾, and

(d) for a related party transaction,

(i) an information circular sent to holders of affected securities,

(ii) if no information circular is required, another document sent to holders of affected securities in connection witha meeting of holders of affected securities, or

(iii) if no information circular or document is required, a material change report filed⁽⁹⁾ for the transaction;

"fair market value" means, except as provided in paragraph 6.4(1)(d), the maximum monetary consideration that, inan open and unrestricted market, a prudent and informed buyer would pay to a prudent and informed seller, each actingat arm's length with the other and under no compulsion to act;

"formal valuation" means, for a transaction, a valuation prepared in accordance with Part 6 that contains a qualifiedand independent valuator's opinion as to a value or range of values representing the fair market value of the subjectmatter of the valuation;

"freely tradeable"⁽¹⁰⁾ means, in respect of securities, that the securities are not

(a) non-transferable,

(b) subject to any escrow requirements, or

(c) subject to any requirements of Canadian securities legislation that would require that the securities be traded undera prospectus or in reliance on a prospectus exemption;

"holder" of a security or "securityholder" means a person or company that is the registered holder of the security;⁽¹¹⁾

"independent committee" means, for an issuer, a committee consisting exclusively of one or more independentdirectors of the issuer;

"independent director" means, for an issuer in respect of a transaction, a director of the issuer who

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

(b) is independent, as determined in accordance with section 7.1;⁽¹²⁾

"independent valuator" means, for a transaction, a valuator that is independent of all interested parties in thetransaction, as determined in accordance with section 6.1⁽¹³⁾;

"interested party" means,

(a) for an insider bid, the offeror,

(b) for an issuer bid,

(i) the issuer, and

(ii) any person or company, other than a bona fide lender,⁽¹⁴⁾ that, whether alone or jointly or in concert with others,holds or would reasonably be expected to hold, upon successful completion of the issuer bid, securities of theissuer sufficient to affect materially its control,

(c) for a going private transaction, a related party of the issuer that is the subject of the going private transaction, if therelated party would

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

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

(B) consideration of greater value than that paid to all other beneficial owners of affected securities of the sameclass, or

(ii) upon completion of the transaction, beneficially own, or exercise control or direction over, participatingsecurities of a class other than affected securities,⁽¹⁵⁾ and

(d) for a related party transaction for the issuer, a related party of the issuer that is a party to or is involved in the relatedparty transaction,⁽¹⁶⁾

"issuer insider"⁽¹⁷⁾ means, for an issuer

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

(b) every director or senior officer of a company that is itself an issuer insider or subsidiary entity of the issuer, and

(c) a person or company who beneficially owns, directly or indirectly, voting securities of the issuer, or who exercisescontrol or direction over voting securities of the issuer, or a combination of both, carrying more than 10 percent ofthe voting rights attached to all voting securities of the issuer for the time being outstanding other than votingsecurities beneficially owned by the person or company as underwriter in the course of a distribution;⁽¹⁸⁾

⁽¹⁹⁾

"market capitalization"⁽²⁰⁾ of an issuer means, for a transaction, the aggregate market price of all outstanding securitiesof all classes of equity securities of the issuer, the market price of the outstanding securities of a class being

(a) in the case of equity securities of a class for which there is a published market⁽²¹⁾, the product of

(i) the number of securities of the class outstanding as at the close of business on the last business day of thecalendar month preceding the calendar month in which the transaction is agreed to or, if no securities of theclass were outstanding on that day, on the first business day after that day that securities of the class becameoutstanding, so long as that day precedes the date the transaction is agreed to, and

(ii) the market price of the securities at the business day referred to in subparagraph (i), as determined inaccordance with section 183 of the Regulation,

(b) in the case of equity securities of a class for which there is no published market but that are currently convertibleinto a class of equity securities for which there is a published market, the product of

(i) the number of equity securities into which the convertible securities were convertible as at the close of businesson the last business day of the calendar month preceding the calendar month in which the transaction is agreedto or, if no convertible securities were outstanding or convertible on that day, on the first business day after thatday that the convertible securities became outstanding or convertible, so long as that day precedes the datethe transaction is agreed to, and

(ii) the market price of the securities into which the convertible securities were convertible at the business dayreferred to in subparagraph (i), as determined in accordance with section 183 of the Regulation, and

(c) in the case of equity securities of a class not referred to in paragraphs (a) or (b), the amount of shareholders' equityattributed to the outstanding securities of the class on the issuer's most recent audited balance sheet⁽²²⁾;

"minority approval"⁽²³⁾ means, for a going private transaction or related party transaction of an issuer, approval of theproposed transaction by a majority of the votes cast by holders of each class of affected securities specified by section8.1 at a meeting of securityholders of that class called to consider the transaction;

⁽²⁴⁾

"OBCA" means the Business Corporations Act;

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

"participating security" means a security of an issuer that carries a residual right to participate in the earnings of theissuer or, upon the liquidation or winding up of the issuer, in its assets;

"prior valuation" means a valuation or appraisal of an issuer or its securities or material assets, whether or not preparedby an independent valuator, that would, if disclosed, reasonably be expected to affect the decision of a beneficial ownerto vote for or against a transaction, or to retain or dispose of affected securities or offeree securities, other than⁽²⁵⁾

(a) any draft or preliminary report of a valuation or appraisal prepared for the issuer by an independent valuator, whichdraft or report has resulted in a valuation or appraisal by that valuator,⁽²⁶⁾

(b) in respect of a transaction involving an issuer, an internal valuation or appraisal prepared for the issuer in theordinary course of business that has not been made available to, and has been prepared without the participationof, any director or senior officer of either the issuer or an interested party,

(c) a report of a market analyst or financial analyst⁽²⁷⁾ that

(i) has been prepared by or for and at the expense of a person or company other than the issuer, an interestedparty, or an associate or affiliated entity of the issuer or an interested party, and

(ii) is either generally available to clients of the analyst or of the analyst's employer or, if not, is not based, so faras the person or company required to disclose a prior valuation is aware, on an undisclosed material fact ormaterial change concerning the issuer or its securities or a material asset of the issuer, or

(d) a valuation or appraisal prepared by or on behalf of an interested party for the purpose of assisting the interestedparty in determining the price at which to propose a transaction that, if pursued, would be an insider bid, goingprivate transaction or related party transaction, if the valuation or appraisal is not made available to any of theindependent directors of the issuer;

"related party" of an issuer or of an interested party in connection with a transaction, as the case may be, means aperson or company, other than a bona fide lender,⁽²⁸⁾ that, at the relevant time and after reasonable inquiry, is known bythe issuer, the interested party or a director or senior officer of the issuer or interested party to be

(a) a person or company that holds, whether alone or jointly or in concert with others, securities of the issuer or of theinterested party sufficient to affect materially the control of the issuer or of the interested party,

(b) a person or company in respect of which a person or company referred to in paragraph (a) holds, whether alone orjointly or in concert with others, securities sufficient to affect materially the control of the first-mentioned person orcompany,

(c) a person or company in respect of which the issuer or the interested party holds, whether alone or jointly or inconcert with others, securities sufficient to affect materially the control of the person or company,

(d) a person or company that beneficially owns, or exercises control or direction over, voting securities of the issuer orof the interested party carrying more than 10 percent of the voting rights attached to all of the issued andoutstanding voting securities of the issuer or of the interested party,

(e) a director or senior officer

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

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

(f) a person or company that manages or directs the affairs or operations of the issuer or the interested party underan agreement, arrangement or understanding between the person or company and the issuer or the interested party,including the general partner of an issuer or interested party that is a limited partnership, and

(g) an affiliated entity⁽²⁹⁾ of, a person controlling, or a company controlled by, any of the persons or companies describedin paragraphs (a) through (f);

"stock exchange insider bid"⁽³⁰⁾ means an insider bid described in subclause (b)(i) of the definition of "formal bid" insubsection 89(1) of the Act;

"stock exchange issuer bid"⁽³¹⁾ means an issuer bid described in subclause (b)(i) of the definition of "formal bid" insubsection 89(1) of the Act; and

⁽³²⁾

"valuation date" means, in respect of a transaction, the effective date of a formal valuation for the transaction.⁽³³⁾

(2) For the purposes of this Rule, a person or company, whether alone or jointly or in concert with others, that beneficiallyowns, or exercises control or direction over, voting securities to which are attached more than 20 percent of the votesattached to all of the outstanding voting securities of another person or company, is considered, in the absence ofevidence to the contrary, to hold securities sufficient to affect materially the control of that person or company.

(3) For the purposes of the Act, the regulations and the rules,⁽³⁴⁾

"going private transaction"⁽³⁵⁾ means⁽³⁶⁾ an amalgamation, arrangement, consolidation, amendment to the terms of aclass of participating securities of the issuer, or any other transaction with or involving a person or company that is arelated party of the issuer at the time the transaction is agreed to, as a consequence of which the interest of a beneficialowner of a participating security of the issuer in that security may be terminated without the beneficial owner's consent,other than⁽³⁷⁾

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

(b) a share consolidation that does not have the effect of terminating the interests of the beneficial owners ofparticipating securities of an issuer in those securities without their consent except to an extent that is nominal inthe circumstances⁽³⁸⁾,

(c) a redemption of, or other compulsory termination of, a beneficial owner's interest in a participating security of anissuer in accordance with and under the terms attached to the class of securities of which the participating securityforms a part,

(d) a proceeding under the liquidation or dissolution provisions of the statute under which the issuer is organized or isgoverned as to corporate law matters, or

(e) a transaction in which the related party

(i) is not entitled to receive, directly or indirectly, consequent upon the transaction

(A) a consideration that is not identical to that paid to all other beneficial owners in Canada of affectedsecurities of the same class,

(B) consideration of greater value than that paid to all other beneficial owners of affected securities of the sameclass,⁽³⁹⁾ or

(ii) upon completion of the transaction does not beneficially own or exercise control or direction over participatingsecurities of a class other than affected securities;

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

(a) an issuer insider of the offeree issuer,

(b) an associate or affiliated entity of the issuer insider,

(c) an associate or affiliated entity of the offeree issuer, or

(d) an offeror acting jointly or in concert with a person or company referred to in paragraphs (a), (b) or (c);⁽⁴⁰⁾ and

"related party transaction" means, in respect of an issuer, a transaction between or involving the issuer and a personor company that is a related party of the issuer at the time the transaction is agreed to, whether or not there are alsoother parties to the transaction, as a consequence of which, either by itself or together with other related transactionsbetween or involving the issuer and the related party or a person or company acting jointly or in concert with the relatedparty, whether or not there are also other parties to the transaction, the issuer directly or indirectly

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

(b) purchases or acquires, jointly or in concert with the related party, an asset from a third party, if the proportion of theasset acquired by the issuer is less than the proportion of the consideration paid by the issuer,⁽⁴¹⁾

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

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

(e) sells, transfers or disposes of, jointly or in concert with the related party, an asset to a third party, if the proportionof the consideration received by the issuer is less than the proportion of the asset sold, transferred or disposed ofby the issuer,⁽⁴²⁾

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

(g) issues a security to the related party or subscribes for a security of the related party,

(h) amends or agrees to the amendment of the terms of a security of the issuer beneficially owned or over which controlor direction is exercised by the related party, or agrees to the amendment of the terms of a security of the relatedparty beneficially owned by the issuer or over which the issuer exercises control or direction,⁽⁴³⁾

(i) borrows money from or lends money to the related party,

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

(k) provides a guarantee or collateral security for a debt or liability of the related party, or amends or agrees to theamendment of the terms of the guarantee or security⁽⁴⁴⁾,

(l) is a party to an amalgamation, arrangement or merger with the related party, other than a transaction referred toin paragraph (m), or

(m) participates in a transaction with the related party that is a going private transaction in respect of the related partyor would be a going private transaction in respect of the related party except that it comes within the exception inparagraph (e) of the definition of going private transaction.⁽⁴⁵⁾

1.2 Application of Part XX of the Act

(1) For the purposes of this Rule,⁽⁴⁶⁾

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

⁽⁴⁷⁾

(b) acting jointly and in concert has the meaning ascribed to that phrase in section 91 of the Act.

(2) For the purposes of the definition of related party and subsection 1.1(2),⁽⁴⁸⁾ section 90 of the Act applies in determiningbeneficial ownership of securities.^{(49)(50)(51)(52)(53)}

1.3 Liquid Market in a Class of Securities

(1) For the purposes of this Rule, a liquid market in a class of securities of an issuer in respect of a transaction involving anissuer exists only

(a) if

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

(ii) at all times during the period of 12 months before the date the transaction is agreed to

(A) the number of outstanding securities of the class was at least 5,000,000, excluding securities beneficiallyowned, directly or indirectly, or over which control or direction was exercised, by related parties andsecurities that were not freely tradeable⁽⁵⁴⁾,

(B) the aggregate trading volume of the class of securities on the published market on which that class isprincipally traded⁽⁵⁵⁾ was at least 1,000,000 securities,

(C) there were at least 1000 trades in securities of the class on the published market on which that class isprincipally traded, and

(D) the aggregate trading price of the trades referred to in clause (C) was at least $15,000,000,⁽⁵⁶⁾ and

(iii) the market value of the class of securities on the published market on which that class is principally traded wasat least $75,000,000 for the calendar month preceding the calendar month

(A) in which the transaction is agreed to, in the case of a related party transaction, or

(B) in which the transaction is announced, in the case of an issuer bid,⁽⁵⁷⁾ or

(b) if the tests set out in paragraph (a) are not met,

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

(ii) a qualified person or company that is independent of all interested parties to the transaction, as determined inaccordance with section 6.1,⁽⁵⁸⁾ provides an opinion to the issuer that there is at the relevant time a liquid marketin the class, and

(iii) the opinion is included in a disclosure document for the transaction, together with a statement that the publishedmarket on which the class is principally traded has sent a letter to the Director indicating concurrence with theopinion or providing a similar opinion.

(2) For the purpose of determining whether an issuer satisfies the market value requirement of subparagraph (1)(a)(iii), themarket value of a class of securities for the calendar month is calculated by multiplying

(a) the number of securities of the class outstanding as at the close of business on the last business day of the calendarmonth; by

(b) the arithmetic average of the closing prices of the securities of that class on the published market on which thatclass is principally traded for each of the trading days during the calendar month.⁽⁵⁹⁾

(3) For the purposes of subsection (2), in calculating the number of securities of the class, an issuer shall exclude thosesecurities of the class that were beneficially owned, directly or indirectly, or over which control or direction was exercised,by related parties and securities that were not freely tradeable.

(4) An issuer that relies on an opinion referred to in paragraph (1)(b) shall cause the letter referred to in subparagraph(1)(b)(iii) to be provided promptly to the Director.

1.4 Arm's Length Dealings

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

(2) Despite subsection (1), an issuer does not act, negotiate or deal at arm's length with a related party of the issuer andan interested party does not act, negotiate or deal at arm's length with a related party of the interested party.^(60)(61)(62)

1.5 Interpretation⁽⁶³⁾

(1) In this Rule, a person or company is considered to be an affiliated entity of another person or company if one is asubsidiary entity of the other or if both are subsidiary entities of the same person or company, or if each of them iscontrolled by the same person or company.

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

(a) it is controlled by

(i) that other, or

(ii) that other and one or more persons or companies, each of which is controlled by that other, or

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

(b) it is a subsidiary entity of a person or company that is that other's subsidiary entity.

(3) In this Rule for the purposes of interpreting the terms "subsidiary entity" and "affiliated entity", a person or company isconsidered to be controlled by a person or company if

(a) in the case of a person or company

(i) the other person or company beneficially owns or exercises control or direction over voting securities of the first-mentioned person or company carrying more than 50 percent of the votes for the election of directors, and

(ii) the votes carried by the securities are entitled, if exercised, to elect a majority of the directors of the first-mentioned person or company;

(b) in the case of a partnership that does not have directors, other than a limited partnership, the second-mentionedperson or company beneficially owns or exercises control or direction over more than 50 percent of the interestsin the partnership; or

(c) in the case of a limited partnership, the general partner is the second-mentioned person or company.

(4) For the purposes of this Rule, a company is considered to be a wholly-owned subsidiary entity of an issuer if the issuerowns, directly or indirectly, all the voting and equity securities and securities convertible or exchangeable into voting andequity securities of the person or company⁽⁶⁴⁾.

PART 2 INSIDER BIDS

2.1 Application

(1) This Part applies to every insider bid, except an insider bid that is exempt from Part XX of the Act under

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

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

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

(2) Despite subsection (1), this Part does not apply to a take-over bid that is an insider bid by reason solely of the applicationof section 90 of the Act to an agreement between the offeror and a securityholder of the offeree issuer that offereesecurities beneficially owned by the securityholder, or over which the securityholder exercises control or direction, willbe tendered to the bid, only if

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

(b) the general nature and material terms of the agreement to tender are disclosed in a news release and report filedunder section 101 of the Act or are otherwise generally disclosed.⁽⁶⁵⁾

2.2 Disclosure

(1) ⁽⁶⁶⁾An offeror shall disclose in a disclosure document for an insider bid in accordance with section 6.8 every prior valuationin respect of the offeree issuer

(a) that has been made in the 24 months before the date of the insider bid; and

(b) the existence of which is known after reasonable inquiry to the offeror or any director or senior officer of the offeror.

(2) ⁽⁶⁷⁾An offeror shall include in the required disclosure document for a stock exchange insider bid the disclosure requiredby Form 33 of the Regulation, appropriately modified^(68),(69).

(3) ⁽⁷⁰⁾The board of directors of an offeree issuer shall

(a) disclose in the directors' circular for an insider bid in accordance with section 6.8 every prior valuation in respectof the offeree issuer not disclosed in the disclosure document for the insider bid

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

(ii) the existence of which is known after reasonable inquiry to the offeree issuer or to any director or senior officerof the offeree issuer;

(b) disclose in the directors' circular any prior offer that relates to the offeree securities or is otherwise relevant to theinsider bid, which was received by the issuer during the 24 months before the insider bid was publicly announced,and a brief description of the offer and the background to the offer; and

(c) include in the directors' circular a discussion of the review and approval process adopted by the board of directorsand the independent committee, if any, of the offeree issuer for the insider bid, including any materially contrary viewor abstention by a director and any material disagreement between the board and the independent committee.⁽⁷¹⁾

2.3 Formal Valuation

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

(a) obtain, at its own expense, a formal valuation;

(b) provide the disclosure required by section 6.2; and

(c) disclose, in accordance with section 6.5, a summary of the formal valuation in the disclosure document for theinsider bid, unless the formal valuation is included in its entirety in the disclosure document.⁽⁷²⁾

(2) Subject to subsection (3), an independent committee of the offeree issuer shall, and the offeror shall enable theindependent committee to

(a) determine who the valuator should be; and

(b) supervise the preparation of the formal valuation.

(3) The offeror shall determine who the valuator should be and supervise the preparation of the formal valuation if⁽⁷³⁾

(a) the insider bid is being made without the prior knowledge of all of the independent directors of the offeree issuer;or

(b) after informing the issuer's independent directors of the proposed bid, the offeror has a reasonable basis forconcluding that the insider bid is being regarded as a hostile bid by a majority of the independent directors.

2.4 Exemptions from Formal Valuation Requirement Section 2.3 does not apply to an offeror in connection with an insiderbid in any of the following circumstances if the facts supporting reliance upon an exemption are disclosed in the disclosuredocument for the insider bid:

1. Discretionary Exemption - The offeror has been granted an exemption from section 2.3 under section 9.1.

2. Lack of Knowledge and Access - The offeror has no knowledge, and does not have and has not had within the preceding12 months board or management representation or other access to the offeree issuer sufficient to enable in the ordinarycourse the offeror to acquire knowledge, of any material fact or material change concerning the offeree issuer or itssecurities that has not been generally disclosed.

3. Previous Arm's Length Negotiations - If

(a) the consideration under the insider bid is at least equal in value to and is in the same form as the considerationagreed to with one or more selling securityholders of the offeree issuer in arm's length negotiations either

(i) in connection with the making of the insider bid, or

(ii) in connection with another transaction involving securities of the class of offeree securities agreed to not morethan 12 months before the date of the first public announcement of the bid,

(b) at least

(i) one of the selling securityholders beneficially owns or exercises control or direction over, or beneficially ownedor exercised control or direction over at the time of the other transaction, at least five percent of the outstandingsecurities of the class of offeree securities, and

(ii) one or more of the selling securityholders beneficially owns or exercises control or direction over, or beneficiallyowned or exercised control or direction over at the time of the other transaction, in the aggregate, at least 20percent of the outstanding securities of the class of offeree securities beneficially owned, or over which controlor direction is exercised, by persons or companies other than the offeror and persons or companies actingjointly or in concert with the offeror,⁽⁷⁴⁾

(c) the offeror reasonably believes, after reasonable inquiry, that at the time of the arm's length negotiations

(i) each selling securityholder had full knowledge and access to information concerning the offeree issuer and itssecurities, and

(ii) any factors peculiar to a selling securityholder, including non-financial factors,⁽⁷⁵⁾ that were considered relevantby that selling securityholder in assessing the consideration did not have the effect of reducing the price thatwould otherwise have been considered acceptable by that selling securityholder,

(d) at the time of the arm's length negotiations, the offeror did not know,⁽⁷⁶⁾ and to the knowledge of the offeror, afterreasonable inquiry, no selling securityholder knew, of a material fact or material change in respect of the offereeissuer or the offeree securities that,

(i) had occurred and was not disclosed generally, and

(ii) if disclosed, could have reasonably been expected to affect the agreed consideration, and

(e) no material fact or material change known to the offeror, after reasonable inquiry, has occurred in respect of theofferee issuer or the offeree securities since the time of the arm's length negotiation that could reasonably beexpected to increase the value of the offeree securities.

⁽⁷⁷⁾

4. Auction - If

(a) the insider bid is publicly announced or made while one or more formal bids for securities of the same class thatare the subject of the insider bid are outstanding,

(b) at the time the bid is made, full access to the offeree issuer has been given not only to the offeror in the insider bidbut also to the other offerors⁽⁷⁸⁾, and,

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

(i) includes all material facts or material changes concerning the offeree issuer or its securities that are known tothe offeror after reasonable inquiry but have not been generally disclosed, together with a description of thenature of the offeror's access to the issuer; and

(ii) states that the offeror does not know, after reasonable inquiry, of any material facts or material changesconcerning the offeree issuer or its securities other than those that have been disclosed under subparagraph(i) or that have otherwise been generally disclosed.

PART 3 ISSUER BIDS

3.1 Application - This Part applies to every issuer bid, except an issuer bid that is exempt from Part XX of the Act under

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

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

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

3.2 Disclosure

(1) ⁽⁷⁹⁾An issuer shall

(a) include in a disclosure document for an issuer bid the disclosure required by item 16 of Form 32 of the Regulation,to the extent applicable;

(b) disclose in the disclosure document in accordance with section 6.8 every prior valuation in respect of the offereeissuer

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

(ii) the existence of which is known after reasonable inquiry to the issuer or to any director or senior officer of theissuer;

(c) disclose in the disclosure document any prior offer that relates to the offeree securities or is otherwise relevant tothe issuer bid, which was received by the issuer during the 24 months before the issuer bid was publicly announced,and a brief description of the offer and the background to the offer; and

(d) include in the disclosure document a discussion of the review and approval process adopted by the board ofdirectors and the independent committee, if any, of the issuer for the issuer bid, including any materially contraryview or abstention by a director and any material disagreement between the board and the independentcommittee.⁽⁸⁰⁾

(2) An issuer shall include in the required disclosure document for a stock exchange issuer bid the applicable disclosurerequired by Form 33 of the Regulation.⁽⁸¹⁾

3.3 Formal Valuation

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

(a) obtain a formal valuation;

(b) provide the disclosure required by section 6.2;

(c) disclose, in accordance with section 6.5, a summary of the formal valuation in the disclosure document for the issuerbid, unless the formal valuation is included in its entirety in the disclosure document; and

(d) if there is an interested party, other than the issuer, state in the disclosure document who will pay or has paid forthe valuation.

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

(a) determine who the valuator should be; and

(b) supervise the preparation of the formal valuation.

3.4 Exemptions from Formal Valuation Requirement

(1) Section 3.3 does not apply to an issuer in connection with an issuer bid in any of the following circumstances if the factssupporting reliance upon an exemption are disclosed in the disclosure document for the issuer bid:

1. Discretionary Exemption - The issuer has been granted an exemption from section 3.3 under section 9.1.⁽⁸²⁾

2. Bid for Non-Convertible Securities - The issuer bid is for securities that are not participating securities and that arenot, directly or indirectly, convertible into or exchangeable for participating securities.

3. Liquid Market - Subject to subsection (2), the issuer bid is made for securities for which

(a) a liquid market exists at the time of the making of the bid,

(b) it is reasonable to conclude that, following the completion of the bid, there will be a market for beneficial ownersof the securities who do not tender to the bid that is not materially less liquid than the market that existed at thetime of the making of the bid, and

(c) if an opinion referred to in paragraph (b) of subsection 1.3(1) is provided, the person or company providing theopinion reaches the conclusion described in subparagraph 3(b) of this subsection 3.4(1) and so states in itsopinion.

(2) An issuer that relies on the exemption in paragraph (1)3 shall include in the disclosure document for the issuer bid

(a) a statement of the intention, if known to the issuer after reasonable inquiry, of every interested party to accept ornot to accept the issuer bid; and

(b) a description of the effect that the issuer anticipates the issuer bid, if successful, will have on the direct or indirectvoting interest in the issuer of every interested party.

PART 4 GOING PRIVATE TRANSACTIONS

4.1 Application

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

(2) This Part does not apply to a going private transaction⁽⁸³⁾

(a) if

(i) the issuer is not a reporting issuer, and

(ii) none of the affected securities of the issuer are quoted on the over-the-counter trade reporting and quotationsystem operated by The Canadian Dealing Network Inc.;

(b) if the issuer is a mutual fund;⁽⁸⁴⁾

(c) if

(i) persons or companies

(A) whose last address as shown on the books of the issuer is in Ontario do not hold more than two percentof each class of the outstanding affected securities of the issuer, or

(B) who are in Ontario and who beneficially own affected securities of the issuer do not beneficially own morethan two percent of each class of outstanding affected securities of the issuer, and

(ii) all documents concerning the transaction that are sent generally to other holders of affected securities of theissuer are concurrently sent to all holders of the securities whose last address as shown on the books of theissuer is in Ontario; or

(d) if the transaction

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

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

(iii) is being carried out in accordance with the guidelines of Ontario Securities Commission Policy 9.1, and

(iv) is completed substantially in accordance with the terms generally disclosed at the time the transaction wasannounced or thereafter before the coming into force of this Rule.⁽⁸⁵⁾

4.2 Meeting and Information Circular

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

(a) call a meeting of holders of affected securities; and

(b) send an information circular to holders of affected securities.⁽⁸⁶⁾

(2) ⁽⁸⁷⁾An issuer shall include in the information circular referred to in paragraph (1)(b)

(a) the disclosure required by Form 33 of the Regulation, to the extent applicable and with necessary modifications;

(b) the disclosure required by item 16 of Form 32 of the Regulation, to the extent applicable, together with a descriptionof rights that may be available to securityholders opposed to the transaction and of legal developments, if any,relating to the type of transaction;

(c) disclosure in accordance with section 6.8 of every prior valuation in respect of the issuer

(i) that has been made in the 24 months before the date of the information circular, and

(ii) the existence of which is known after reasonable inquiry to the issuer or to any director or senior officer of theissuer;

(d) disclosure of any prior offer that relates to the subject matter of or is otherwise relevant to the transaction, which wasreceived by the issuer during the 24 months before the transaction was publicly announced, and a brief descriptionof the offer and the background to the offer; and

(e) a discussion of the review and approval process adopted by the board of directors and the independent committee,if any, of the issuer for the transaction, including any materially contrary view or abstention by a director and anymaterial disagreement between the board and the independent committee.⁽⁸⁸⁾

(3) If, after sending the information circular referred to in paragraph (1)(b) and before the date of the meeting, a changeoccurs that would, if disclosed, reasonably be expected to affect the decision of a beneficial owner of affected securitiesto vote for or against the going private transaction or to retain or dispose of affected securities, the issuer shall promptlydisseminate disclosure of the change in a manner that the issuer reasonably determines will inform beneficial ownersof affected securities of the change.

(4) If subsection (3) applies, the issuer shall file a copy of the information disseminated contemporaneously with itsdissemination.

4.3 Conditions for Relief from Timing for OBCA Information Circular⁽⁸⁹⁾

(1) The conditions for the granting of an exemption from the requirement in subsection 190(3) of the OBCA to send amanagement information circular not less than 40 days before the date of a meeting called to consider a "going privatetransaction" as defined in the OBCA are that

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

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

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

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

(a) is exempt from the 40 day requirement in subsection 190(3) of the OBCA in respect of a meeting called to considera "going private transaction" as defined in the OBCA; and

(b) does not have to make an application under subsection 190(6) of the OBCA for the requisite exemption.

4.4 Formal Valuation

(1) Subject to section 4.5, an issuer whose affected securities are the subject of a proposed going private transaction shall

(a) obtain a formal valuation;

(b) provide the disclosure required by section 6.2;

(c) disclose, in accordance with section 6.5, a summary of the formal valuation in the disclosure document for the goingprivate transaction, unless the formal valuation is included in its entirety in the disclosure document; and

(d) ⁽⁹⁰⁾state in the disclosure document for the going private transaction who will pay or has paid for the valuation.

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

(a) determine who the valuator should be; and

(b) supervise the preparation of the formal valuation.

4.5 Exemptions from Formal Valuation Requirement - Section 4.4 does not apply to an issuer in connection with a goingprivate transaction in any of the following circumstances if the facts supporting reliance upon an exemption are disclosed inthe disclosure document:

1. Discretionary Exemption - The issuer has been granted an exemption from section 4.4 under section 9.1.

2. Previous Arm's Length Negotiations⁽⁹¹⁾ - If

(a) the consideration under the going private transaction is at least equal in value to and is in the same form as theconsideration agreed to with one or more selling securityholders of the issuer in arm's length negotiations either

(i) in connection with the going private transaction, or

(ii) in connection with another transaction involving securities of the class of affected securities agreed to not morethan 12 months before the date of the first public announcement of the going private transaction,

(b) at least

(i) one of the selling securityholders beneficially owns or exercises control or direction over, or beneficially ownedor exercised control or direction over at the time of the other transaction, at least five percent of the outstandingsecurities of the class of affected securities, and

(ii) one or more of the selling securityholders beneficially owns or exercises control or direction over, or beneficiallyowned or exercised control or direction over at the time of the other transaction, in the aggregate, at least 20percent of the outstanding securities of the class of affected securities beneficially owned or over which controlor direction is exercised by persons or companies other than an interested party and persons or companiesacting jointly or in concert with an interested party,

(c) the person or company proposing the going private transaction reasonably believes, after reasonable inquiry, thatat the time of the arm's length negotiations

(i) each selling securityholder had full knowledge and access to information concerning the issuer and itssecurities,

(ii) any factors peculiar to a selling securityholder, including non-financial factors, that were considered relevantby the selling securityholder in assessing the consideration did not have the effect of reducing the price thatwould otherwise have been considered acceptable by that selling securityholder, and

(d) at the time of the arm's length negotiations, the person or company proposing the going private transaction did notknow, and to the knowledge of the person or company proposing the going private transaction, after reasonableinquiry, no selling securityholder knew, of a material fact or material change in respect of the issuer or the affectedsecurities that,

(i) had occurred and was not disclosed generally, and

(ii) if disclosed, could have reasonably been expected to affect the agreed consideration, and

(e) no material fact or material change known to the person or company proposing the going private transaction, afterreasonable inquiry, has occurred in respect of the issuer or the affected securities since the time of the arm's lengthnegotiation that could reasonably be expected to increase the value of the affected securities.

3. Auction⁽⁹²⁾ - If

(a) the going private transaction is publicly announced while another going private transaction is outstanding or one ormore formal bids for the affected securities are outstanding, and

(b) at the time the disclosure document for the going private transaction has been sent, full access to the issuer hasbeen given not only to the person or company proposing the going private transaction, but also to the persons orcompanies involved in the other going private transactions or that have made the formal bids.

4. Second Step Going Private Transaction⁽⁹³⁾ - If

(a) the going private transaction is being effected by a person or company in respect of the offeree issuer following aformal bid by that person or company and is in respect of the outstanding securities of the same class that were thesubject of the bid,

(b) the going private transaction takes place no later than 120 days after the date of expiry of the formal bid,

(c) the intent to effect the going private transaction was disclosed in the disclosure document for the formal bid,

(d) the consideration per security in the going private transaction is at least equal in value to and is in the same formas the consideration per security that was paid in the formal bid, and

(e) the tax consequences of tendering to the formal bid were reasonably expected to be different from the taxconsequences arising from the subsequent going private transaction, the disclosure document for the formal biddescribed the tax consequences of both the formal bid and the subsequent going private transaction.

5. Non-redeemable Investment Fund - The issuer is a non-redeemable investment fund⁽⁹⁴⁾ that,

(a) at least once each quarter calculates and publicly disseminates the net asset value of its securities, and

(b) at the time of announcing the going private transaction, publicly disseminates the net asset value of its securitiesas at the business day before announcing the going private transaction.⁽⁹⁵⁾

4.6 Conditions for Relief from OBCA Valuation Requirement

⁽⁹⁶⁾

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

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

(b) the transaction is not a going private transaction as defined in subsection 1.1(3)⁽⁹⁷⁾;

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

(d) ⁽⁹⁸⁾section 4.4 is complied with.

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

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

(b) does not have to make an application under subsection 190(6) of the OBCA for the requisite exemptions.

4.7 Minority Approval - Subject to section 4.8, no going private transaction shall be carried out in respect of an issuer unlessminority approval for the going private transaction has been obtained under Part 8.

4.8 Exemptions from Minority Approval Requirement

(1) Section 4.7 does not apply to a going private transaction in any of the following circumstances if the facts supportingreliance upon an exemption are disclosed in the disclosure document for the going private transaction:

1. Discretionary Exemption - The issuer has been granted an exemption from section 4.7 under section 9.1.

2. 90 Percent Exemption - Subject to subsection (2), one or more interested parties beneficially owns 90 percent or moreof the securities of a class of affected securities at the time that the going private transaction is proposed, and either

(a) an appraisal remedy is available to holders of the class of affected securities under the statute under which theissuer is organized or is governed as to corporate law matters, or

(b) if the appraisal remedy referred to in subparagraph (a) is not available, holders of the class of affected securitiesare given an enforceable right that is substantially equivalent to the appraisal remedy provided for in subsection185(4) of the OBCA and that is described in the disclosure document for the going private transaction.

(2) If there are two or more classes of affected securities, paragraph 2 of subsection (1) applies only to a class for whichthe interested party beneficially owns or the interested parties beneficially own 90 percent or more of the outstandingsecurities of the class.

4.9 Conditions for Relief from OBCA Minority Approval Requirement

(1) The conditions for the granting of an exemption from the requirements of clauses 190(3)(b) and (d) and subsection190(4) of the OBCA for a transaction that is a "going private transaction" as defined in the OBCA are that

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

(b) the transaction is not a going private transaction as defined in subsection 1.1(3)⁽⁹⁹⁾;

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

(d) section 4.7 is complied with.

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

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

(b) does not have to make an application under subsection 190(6) of the OBCA for the requisite exemptions.

PART 5 RELATED PARTY TRANSACTIONS

5.1 Application

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

(2) This Part does not apply to a related party transaction,

(a) if

(i) the issuer is not a reporting issuer, and

(ii) none of the affected securities of the issuer are quoted on the over-the-counter trade reporting and quotationsystem operated by The Canadian Dealing Network Inc.;

(b) if the issuer is a mutual fund;⁽¹⁰⁰⁾

(c) if

(i) persons or companies

(A) whose last address as shown on the books of the issuer is in Ontario do not hold more than two percentof each class of the outstanding affected securities of the issuer, or

(B) who are in Ontario and who beneficially own affected securities of the issuer do not beneficially own morethan two percent of each class of outstanding affected securities of the issuer, and

(ii) all documents concerning the transaction that are sent generally to other holders of affected securities of theissuer are concurrently sent to all holders of the securities whose last address as shown on the books of theissuer is in Ontario;

(d) that is a statutory amalgamation between

(i) the issuer and one or more of its wholly-owned subsidiary entities, but no other person or company or

(ii) two or more wholly-owned subsidiary entities of the issuer, but no other person or company;

(e) that is a going private transaction in respect of the issuer carried out in accordance with Part 4 or exempt from Part4 under subsection 4.1(2)⁽¹⁰¹⁾;

(f) that would be a going private transaction in respect of the issuer except that it comes within the exceptions inparagraphs (a) through (e) of the definition of going private transaction;⁽¹⁰²⁾

(g) that

(i) is part of a series of related transactions that the issuer or a predecessor of the issuer negotiated at arm'slength with a person or company that became a related party of the issuer only as a consequence of one of thetransactions in the series of related transactions, and

(ii) the issuer is obligated to and does complete the transaction⁽¹⁰³⁾ substantially in accordance with the termsnegotiated at arm's length⁽¹⁰⁴⁾;

⁽¹⁰⁵⁾

(h) that

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

(ii) has not been completed before the coming into force of this Rule,⁽¹⁰⁶⁾

(iii) is being carried out in accordance with the guidelines of Ontario Securities Commission Policy 9.1, and

(iv) the issuer is obligated to and does complete the transaction substantially in accordance with the terms agreedto and generally disclosed at the time the transaction was agreed to or thereafter before the coming into forceof this Rule;

(i) if

(i) the transaction was agreed to by the issuer or a predecessor of the issuer on or before the earlier of the datethat

(A) the issuer became a reporting issuer, and

(B) any class of affected securities of the issuer first became quoted on the over-the-counter trade reportingand quotation system operated by The Canadian Dealing Network Inc., and

(ii) the issuer is obligated to and does complete the transaction substantially in accordance with the terms agreedto and generally disclosed at the time the transaction was agreed to or thereafter before the occurrence of theearlier of the events described in subparagraphs (A) and (B);⁽¹⁰⁷⁾

(j) if the transaction represents an issuance or transfer by an issuer of securities upon the exercise by a holder of aright to purchase, convert, exchange or retract previously granted by the issuer, which right is attached to a classof securities for which there is a published market, and the issuer is obligated to complete the transaction;

(k) that

(i) is subject to the requirements of Part IX of the Loan and Trust Corporations Act, Part XI of the Bank Act(Canada), Part XI of the Insurance Companies Act (Canada), or Part XI of the Trust and Loan Companies Act(Canada), and

(ii) is carried out in accordance with those provisions;

(l) that is carried out by an issuer to which the Rule In the Matter of Certain Trades in Securities of Junior ResourceIssuers (1997), 20 OSCB 1218 or any successor to that Rule applies, in accordance with that Rule or any successorto that Rule; or

⁽¹⁰⁸⁾

(m) that is a distribution

(i) of the securities of an issuer and is a related party transaction in respect of the issuer solely because theinterested party is an underwriter of the distribution, and

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

(A) Part XIII of the Regulation, or

(B) Multilateral Instrument 33-105 Underwriting Conflicts.

5.2 Disclosure: News Release and Material Change Report

(1) If a related party transaction would constitute a material change for an issuer that is not a reporting issuer, the issuershall issue and file a news release, and file a material change report, in accordance with section 75 of the Act, as ifsection 75 applied to the issuer.⁽¹⁰⁹⁾

(2) If a material change report is filed by a reporting issuer, or by an issuer that is not a reporting issuer under subsection(1), less than 21 days before the expected date of closing of the transaction, the issuer shall explain in the news releaseand material change report why the shorter period is reasonable or necessary in the circumstances.

(3) ⁽¹¹⁰⁾An issuer shall include in the material change report required to be filed for a related party transaction

(a) a description of the transaction and its material terms;

(b) the purpose and business reasons for the transaction;

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

(d) a description of

(i) the interest in the transaction of every interested party and the issuer insiders, associates, affiliated entities andother related parties of the interested party,

(ii) the effect of the transaction on every person or company referred to in subparagraph (i), and

(iii) the nature of any benefit that will accrue as a consequence of the transaction to every person or companyreferred to in subparagraph (i);

(e) unless subsection 5.4(2) applies to the issuer, a discussion of the review and approval process adopted by theboard of directors of the issuer, and the independent committee, if any, of the board for the transaction, includingany materially contrary view or abstention by a director and any material disagreement between the board and theindependent committee;⁽¹¹¹⁾

(f) a summary in accordance with section 6.5 of the formal valuation, if any, obtained for the transaction, unless theformal valuation is included in its entirety in the material change report or will be included in its entirety in anotherdisclosure document;

(g) disclosure in accordance with section 6.8 of every prior valuation in respect of the issuer that has been made in the24 months before the date of the material change report

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

(ii) the existence of which is known after reasonable inquiry to the issuer or to any director or senior officer of theissuer; and

(h) the general nature and material terms of any agreement entered into by the issuer, or a related party of the issuer,with an interested party, or a person or company acting jointly or in concert with an interested party, in connectionwith the transaction.

5.3 Copy of Material Change Report - An issuer shall send a copy of the material change report prepared by it in respect ofthe related party transaction to any securityholder of the issuer upon request and without charge.

5.4 Meeting and Information Circular

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

(a) call a meeting of holders of affected securities; and

(b) send an information circular to holders of affected securities.⁽¹¹²⁾

(2) ⁽¹¹³⁾An issuer shall include in the information circular referred to in paragraph (1)(b)

(a) the disclosure required by Form 33 of the Regulation, to the extent applicable and with necessary modifications;

(b) the disclosure required by item 16 of Form 32 of the Regulation, to the extent applicable, together with a descriptionof rights that may be available to securityholders opposed to the transaction and of legal developments, if any,relating to the type of transaction;

(c) disclosure in accordance with section 6.8 of every prior valuation in respect of the issuer

(i) that has been made in the 24 months before the date of the information circular, and

(ii) the existence of which is known after reasonable inquiry to the issuer or to any director or senior officer of theissuer;

(d) disclosure of any prior offer that relates to the subject matter of or is otherwise relevant to the transaction, which wasreceived by the issuer during the 24 months before the transaction was publicly announced, and a brief descriptionof the offer and the background to the offer; and

(e) a discussion of the review and approval process adopted by the board of directors and the independent committee,if any, of the issuer for the transaction, including any materially contrary view or abstention by a director and anymaterial disagreement between the board and the independent committee.

(3) If, after sending the information circular referred to in paragraph (1)(b) and before the date of the meeting, a changeoccurs that would, if disclosed, reasonably be expected to affect the decision of a beneficial owner of affected securitiesto vote for or against the related party transaction or to retain or dispose of affected securities, the issuer shall promptlydisseminate disclosure of the change in a manner that the issuer reasonably determines will inform beneficial ownersof affected securities of the change.

(4) If subsection (3) applies, the issuer shall file a copy of the information disseminated contemporaneously with itsdissemination.

5.5 Formal Valuation

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

(a) obtain a formal valuation;

(b) provide the disclosure required by section 6.2;

(c) disclose, in accordance with section 6.5, a summary of the formal valuation in the disclosure document for therelated party transaction, unless the formal valuation is included in its entirety in the disclosure document; and

(d) ⁽¹¹⁴⁾state in the disclosure document who will pay or has paid for the valuation.

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

(a) determine who the valuator should be; and

(b) supervise the preparation of the formal valuation.

5.6 Exemptions from Formal Valuation Requirement^(115),(116) - Section 5.5 does not apply to an issuer in connection with a relatedparty transaction in any of the following circumstances if the facts supporting reliance upon an exemption are disclosed inboth the material change report referred to in section 5.2 and the information circular referred to in paragraph (b) ofsubsection 5.4(1):

1. Discretionary Exemption - The issuer has been granted an exemption from section 5.5 under section 9.1.

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

(a) is not an amalgamation or merger, whether by way of arrangement or otherwise, and⁽¹¹⁷⁾

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

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

(ii) if either of the values referred to in clause (i) is not readily determinable, the board of directors of the issuer,acting in good faith, determines that the value referred to in clause (i) that is not readily determinable, is notgreater than 25 percent of the issuer's market capitalization.

3. Amalgamation, Merger or Arrangement - The transaction is

(a) an amalgamation, merger or arrangement between an issuer or a wholly-owned subsidiary entity⁽¹¹⁸⁾ of the issuerand an interested party described in paragraph (c) of the definition of related party, without taking into accountsubsection 1(6) of the Act, and

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

(i) neither the fair market value of the securities of the interested party beneficially owned by persons orcompanies other than the issuer, and persons or companies acting jointly or in concert with the issuer,before the transaction, nor the fair market value of the consideration to be received by those persons orcompanies under the transaction, is greater than 25 percent of the issuer's market capitalization, or

(ii) if either of the values referred to in clause (i) is not readily determinable, the board of directors of theissuer, acting in good faith, determines that the value referred to in clause (i) that is not readilydeterminable is not greater than 25 percent of the issuer's market capitalization.⁽¹¹⁹⁾

4. Certain Transactions in the Ordinary Course of Business - The transaction is

(a) a purchase or sale, in the ordinary course of business of the issuer, of inventory consisting of personal propertyunder an agreement that has been approved by the board of directors of the issuer and the existence of whichhas been generally disclosed, or

(b) a lease of real or personal property under an agreement on reasonable commercial terms that are not lessadvantageous to the issuer than if the lease was with a person or company dealing at arm's length with theissuer and the existence of which has been generally disclosed.

5. Pro Rata Transaction⁽¹²⁰⁾ - If

(a) the transaction consists of⁽¹²¹⁾

(i) a rights offering made to holders of affected securities,

(ii) a dividend paid in cash or in securities of the issuer⁽¹²²⁾ or a dividend in specie to holders of affectedsecurities,

(iii) a distribution of assets of the issuer directly or indirectly to holders of affected securities, or

(iv) a reorganization of one or more classes of an issuer's affected securities to which subparagraphs (i), (ii)and (iii) do not apply, and

(b) the interested party is treated identically to all other holders in Canada of affected securities and does notreceive, directly or indirectly, as a consequence of the transaction consideration of greater value⁽¹²³⁾ than thatreceived on a pro rata basis by all other holders of affected securities, except that in the case of a rights offeringmade to holders of affected securities, an interested party may provide a stand-by commitment, and take upsecurities under the stand-by commitment, in accordance with the terms of OSC Policy No. 6.2 Rights Offeringsor a successor rule.

⁽¹²⁴⁾

 

6. Negotiated Transaction with Arm's Length Controlling Shareholder - The interested party beneficially owns orexercises control or direction over voting securities of the issuer that carry fewer voting rights than the votingsecurities beneficially owned or over which control or direction is exercised by another securityholder of the issuerwhose holding affects materially the control of the issuer and who, in the circumstances of the transaction,

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

(b) is dealing at arm's length with the interested party,

(c) supports the transaction, and

(d) is treated identically to all other holders in Canada of affected securities and does not receive, directly orindirectly, as a consequence of the transaction a benefit⁽¹²⁵⁾ that is not also received on a pro rata basis by allother holders of affected securities.

7. Bankruptcy, Insolvency or Reorganization - If

(a) the transaction is subject to court approval under

(i) the Bankruptcy and Insolvency Act (Canada) or the Companies' Creditors Arrangement Act (Canada),

(ii) section 191 of the Canada Business Corporations Act (Canada), or

(iii) bankruptcy or insolvency laws of another jurisdiction or foreign jurisdiction⁽¹²⁶⁾ that are applicable to thetransaction,

(b) the issuer advises the court of the requirements of this Rule, and

(c) the court does not require compliance with section 5.5.

8. Financial Hardship - If

(a) the issuer is insolvent or in serious financial difficulty,

(b) the transaction is designed to improve the financial position of the issuer,

(c) paragraph 7 is not applicable, and

(d) the board of directors of the issuer, acting in good faith, determines that the terms of the transaction arereasonable in the circumstances of the issuer.

9. Transaction with Wholly-owned Subsidiary Entity - The transaction is between an issuer and one or more wholly-owned subsidiary entities of the issuer and no other person or company or between two or more wholly-ownedsubsidiary entities of the issuer and no other person or company.

10. Transaction with an Interested Party involving another Related Party⁽¹²⁷⁾ - If paragraph 9 does not apply, thetransaction is between an issuer and an interested party described in paragraph (c) of the definition of related party,without taking into account subsection 1(6) of the Act, if, to the knowledge of the issuer after reasonable inquiry, noother related party of the issuer other than a wholly-owned subsidiary entity of the issuer either

(a) beneficially owns, or exercises control or direction over, securities of the interested party, other than throughthe related party's interest in the issuer, except for a nominal interest in the interested party that could notreasonably be expected to result in the related party exercising control or influence over the issuer so as tobenefit the interested party, or

(b) receives, directly or indirectly, as a consequence of the transaction a benefit that is not also received on a prorata basis by all other holders of affected securities.

11. Loan on Commercial Terms - The transaction is

(a) a loan or the creation of or an advance under a credit facility

(i) that is obtained by the issuer from an interested party on reasonable commercial terms that are not lessadvantageous to the issuer than if the loan or credit facility were obtained from a person or companydealing at arm's length with the issuer, and

(ii) that is not, directly or indirectly, convertible into or exchangeable for participating securities or votingsecurities of the issuer or a subsidiary entity of the issuer and is not otherwise participating in nature oraccompanied by rights to acquire participating or voting securities of the issuer or a subsidiary entity of theissuer, or

(b) a payment in cash by the issuer to that interested party as payment under the loan or credit facility referred toin paragraph (a).

12. Amalgamation with No Adverse Effect on Issuer or Minority⁽¹²⁸⁾ - The transaction is a statutory amalgamation of theissuer with an interested party that is undertaken in whole or in part for the benefit of another related party, if

(a) the transaction does not and will not have any adverse tax or other consequences to the issuer, a companyresulting from the amalgamation, or beneficial owners of affected securities generally,

 

(b) no material actual or contingent liability of the interested party with which the issuer is amalgamating will beassumed by the issuer or a successor to the issuer,

(c) the related party agrees to indemnify the issuer against any and all liabilities of the interested party with whichthe issuer is amalgamating,

(d) after the transaction, the nature and extent of the equity participation of holders of affected securities in theamalgamated entity will be the same as, and the value of their equity participation will not be less than, thevalue of their interest in the issuer before the transaction, and

(e) the related party pays for all of the costs and expenses of or relating to or resulting from the transaction.

13. Transaction Size - The transaction is one in which, at the date the transaction is agreed to

(a) neither the fair market value of the subject matter of, nor the fair market value of the consideration for, thetransaction is $500,000 or more, or

(b) if either of the values referred to in subparagraph (a) are not readily determinable, the board of directors of theissuer that is the subject of the related party transaction, acting in good faith, determines that the value referredto in subparagraph (a) that is not readily determinable is less than $500,000.

14. Distribution of Listed Securities - The transaction involves a distribution by an issuer of its securities to an interestedparty for cash consideration, if

(a) the securities have been listed and posted for trading on The Toronto Stock Exchange, The Montreal Exchange,The Alberta Stock Exchange or the Vancouver Stock Exchange for at least 12 months before the date that thetransaction is agreed to,

(b) a liquid market for the securities exists at the time that the transaction is agreed to,

(c) neither the issuer nor, to the knowledge of the issuer after reasonable inquiry, the interested party hasknowledge of any material fact or material change concerning the issuer or its securities that has not beengenerally disclosed, and the disclosure document for the related party transaction includes a statement to thateffect, and

(d) the disclosure document for the related party transaction includes a description of the effect of the distributionon the direct or indirect voting interest of the related party.

15. Asset Resale - The subject matter of the related party transaction was acquired by the issuer or an interested party,as the case may be, in a prior transaction with a person or company acting at arm's length, that was agreed to notmore than 12 months before the date that the related party transaction is agreed to, and a qualified valuator,independent of all interested parties to the transaction, as determined in accordance with section 6.1, provides awritten opinion that, after making such adjustments, if any, as the valuator considers appropriate in the exercise ofthe valuator's professional judgment,

(a) the value of the consideration payable by the issuer for the subject matter of the related party transaction is notmore than the value of the consideration paid by the interested party in the prior arm's length transaction, or

(b) the value of the consideration to be received by the issuer for the subject matter of the related party transactionis not less than the value of the consideration paid by the issuer in the prior arm's length transaction.

16. Non-redeemable Investment Fund - The issuer is a non-redeemable investment fund that,

(a) at least once each quarter calculates and publicly disseminates the net asset value of its securities, and

(b) at the time of announcing the related party transaction, publicly disseminates the net asset value of its securitiesas at the business day before announcing the related party transaction.⁽¹²⁹⁾

5.7 Minority Approval - Subject to section 5.8, an issuer shall not carry out a related party transaction unless minority approvalfor the related party transaction has been obtained under Part 8.

5.8 Exemptions from Minority Approval

(1) Section 5.7 does not apply to an issuer in connection with a related party transaction in any of the followingcircumstances if the facts supporting reliance upon an exemption are disclosed in both the material change reportreferred to in section 5.2 and the information circular referred to in paragraph (b) of subsection 5.4(1):

1. Discretionary Exemption - The issuer has been granted an exemption from section 5.7 under section 9.1.

2. Fair Market Value not more than 25 Percent of Market Capitalization - The circumstances described in paragraph2 or 3 of section 5.6.

3. Other Transactions Exempt from Formal Valuation - The circumstances described in paragraph 4, 5, 6, 9, 10, 11or 12 of section 5.6.

4. Bankruptcy - The circumstances described in subparagraphs 7(a) and 7(b) of section 5.6, if the court does notrequire compliance with section 5.7.

5. Financial Hardship - The circumstances described in paragraph 8 of section 5.6, if there is no other requirement,corporate or otherwise, to hold a meeting to obtain any approval of the holders of any class of affected securities.

6. 90 Percent Exemption - Subject to subsection (2), one or more interested parties beneficially owns 90 percent ormore of the securities of a class of affected securities at the time that the related party transaction is proposed, andeither

(a) an appraisal remedy is available to holders of the class of affected securities under the statute under which theissuer is organized or is governed as to corporate law matters, or

(b) if the appraisal remedy referred to in subparagraph (a) is not available, holders of the class of affectedsecurities are given an enforceable right that is substantially equivalent to the appraisal remedy provided forin subsection 185(4) of the OBCA and that is described in an information circular or other document sent tosecurityholders in connection with a meeting to approve the going private transaction.

(2) If there are two or more classes of affected securities, paragraph 6 of subsection (1) applies only to a class for whichthe interested party beneficially owns or the interested parties beneficially own 90 percent or more of the outstandingsecurities of the class.

PART 6 FORMAL VALUATIONS AND PRIOR VALUATIONS

6.1 Independent Valuator

(1) Every formal valuation required by this Rule for a transaction shall be prepared by an independent valuator for thetransaction having appropriate qualifications.

(2) Subject to subsections (3), (4) and (5), it is a question of fact as to whether

(a) a valuator is independent of an interested party;

(b) a person or company is independent of an interested party, for the purposes of subparagraph (b)(ii) of subsection1.3(1); and

(c) a valuator or a person or company referred to in paragraph (b) has appropriate qualifications.

(3) A valuator or a person or company referred to in subsection (2) is not independent of an interested party in connectionwith a transaction if⁽¹³⁰⁾

(a) the valuator or the person or company or an affiliated entity of either of them is an issuer insider, associate oraffiliated entity of the interested party;

(b) except in the circumstances described in paragraph (e), the valuator or the person or company or an affiliated entityof either of them acts as an adviser to the interested party in respect of the transaction;⁽¹³¹⁾

(c) the compensation of the valuator or the person or company or an affiliated entity of either of them depends in wholeor in part upon an agreement, arrangement or understanding that gives the valuator or person or company oraffiliated entity of either of them a financial incentive in respect of the conclusions reached in the formal valuationor opinion or the outcome of the transaction;

(d) the valuator or the person or company or an affiliated entity of either of them is

(i) a manager or co-manager of a soliciting dealer group formed in respect of the transaction, or

(ii) a member of the soliciting dealer group, if the valuator or person or company or affiliated entity of either of them,in its capacity as a soliciting dealer, performs services beyond the customary soliciting dealer's function orreceives more than the per security or per securityholder fees payable to other members of the group;

(e) the valuator or the person or company is the independent auditor of the issuer or of an interested party, or thevaluator or person or company is an affiliated entity of the auditor, unless neither the valuator nor the person orcompany nor an affiliated entity of either of them will be the independent auditor of the issuer or an interested partyupon completion of the transaction and that fact has been publicly disclosed; or

(f) the valuator or the person or company or an affiliated entity of either of them has a material financial interest in thecompletion of the transaction.⁽¹³²⁾

(4) A valuator or a person or company referred to in subsection (2) that is paid jointly by the issuer and one or moreinterested parties to a transaction to prepare a formal valuation for a transaction or to provide the opinion referred to insubparagraph (b)(ii) of subsection 1.3(1) for a transaction is not, by that fact alone, not independent.⁽¹³³⁾

(5) A valuator or a person or company referred to in subsection (2) that is retained by an issuer to prepare a formal valuationfor an issuer bid or to provide the opinion referred to in subparagraph (b)(ii) of subsection 1.3(1) for an issuer bid is not,by that fact alone, not independent.⁽¹³⁴⁾

6.2 Disclosure Re Valuator - An issuer or offeror required to obtain a formal valuation in respect of a transaction or that relieson an opinion referred to in subparagraph (b)(ii) of subsection 1.3(1) or paragraph 15 of section 5.6 shall include in thedisclosure document for the transaction

(a) a statement that the valuator or the person or company has been determined to be qualified and independent;

(b) a description of any past, present or anticipated relationship between the valuator or the person or company andthe issuer or an interested party that may be relevant to a perception of lack of independence;

(c) a description of the compensation paid or to be paid to the valuator or the person or company;

(d) a description of any other factors relevant to a perceived lack of independence of the valuator or the person orcompany;

(e) the basis for determining that the valuator or the person or company is qualified; and

(f) the basis for determining that the valuator or the person or company is independent, despite any perceived lack ofindependence, including the amount of the compensation or other factors referred to in paragraphs (b) and (d).

6.3 Subject Matter of Formal Valuation

(1) An issuer or offeror required to obtain a formal valuation under this Rule shall provide the valuation in respect of

(a) the offeree securities, in the case of an insider bid or issuer bid;

(b) the affected securities, in the case of a going private transaction;

(c) the subject matter of the transaction, in the case of a related party transaction; and

(d) except as provided in subsection (2), any non-cash consideration being offered in or forming part of the transaction.

(2) A formal valuation of non-cash consideration is not required if

(a) the non-cash consideration consists of securities of a class of an issuer for which a liquid market exists at the timethat the transaction is agreed to;

(b) the securities offered as non-cash consideration

(i) constitute 10 percent or less of the aggregate number of securities of the class that are issued and outstandingimmediately before the distribution of the securities offered as non-cash consideration, and

(ii) are freely tradeable⁽¹³⁵⁾; and

(c) the issuer or offeror required to obtain the formal valuation states in the disclosure document for the transaction thatthe issuer or offeror has no knowledge of a material change or material fact concerning the issuer or its securitiesthat has not been generally disclosed.

6.4 Preparation of Formal Valuation

(1) Subject to subsection (3), an issuer or offeror required to obtain a formal valuation under this Rule shall ensure that

(a) the formal valuation is prepared in a diligent and professional manner;

(b) the formal valuation is prepared as of an effective date that is not more than 120 days before the earlier of

(i) the date that a disclosure document for the transaction is first sent to securityholders, if applicable, and

(ii) the date that a disclosure document is filed;

(c) the formal valuation contains appropriate adjustments for material intervening events between the effective date ofthe valuation and the date referred to in subparagraph (b)(i);

(d) in determining fair market value of securities, the formal valuation does not include a downward adjustment to reflectthe liquidity of the securities, the effect of the transaction on the securities or the fact that the securities do not formpart of a controlling interest; and

(e) disclosure in the formal valuation is sufficient to allow the securityholders to understand the principal judgments andprincipal underlying reasoning of the valuator so as to form a reasoned judgment of the valuation opinion orconclusion.⁽¹³⁶⁾

(2) National Instrument 52-101 Future Oriented Financial Information does not apply to a formal valuation for which financialforecasts and projections are relied upon and disclosed.

(3) If, in respect of an insider bid, the preparation of a formal valuation is supervised by an independent committee of theofferee issuer, the offeree issuer shall be responsible for satisfying the requirements of this Part 6, and the offeror shallmake reasonable efforts to ensure that those requirements are satisfied.

6.5 Summary of Formal Valuation

(1) An issuer or offeror that is required by this Rule to provide a summary of a formal valuation shall ensure that thesummary provides sufficient detail to allow the beneficial owners of the securities to understand the principal judgmentsand principal underlying reasoning of the valuator so as to form a reasoned judgement of the valuation opinion orconclusion.⁽¹³⁷⁾

(2) In addition to the disclosure referred to in subsection (1), if an issuer or offeror is required by this Rule to provide asummary of a formal valuation, the issuer or offeror shall ensure that the summary

(a) discloses

(i) the valuation date, and

(ii) any distinctive material benefit that might accrue to an interested party as a consequence of the transaction,including the earlier use of available tax losses, lower income taxes, reduced costs or increased revenues;

⁽¹³⁸⁾

(b) if the formal valuation differs materially from a prior valuation, explains the differences between the two valuationsor, if it is not practicable to do so, the reasons why it is not practicable to do so;

(c) indicates an address where a copy of the formal valuation is available for inspection; and

(d) states that a copy of the formal valuation will be sent to any securityholder upon request and without charge.⁽¹³⁹⁾

6.6 Filing of Formal Valuation

(1) An issuer or offeror required to obtain a formal valuation in respect of a transaction shall file a copy⁽¹⁴⁰⁾ of the formalvaluation concurrently with

(a) the sending of the disclosure document for the transaction to securityholders; or

(b) the filing of a material change report for a related party transaction for which no disclosure document is sent tosecurityholders.

(2) If the formal valuation is included in its entirety in a disclosure document, an issuer or offeror satisfies the requirementin subsection (1) by filing the disclosure document.

6.7 Valuator's Consent - An issuer or offeror required to obtain a formal valuation shall

(a) obtain the valuator's consent to its filing and to the inclusion of the formal valuation or disclosure of a summary ofthe formal valuation in the disclosure document for the transaction for which the formal valuation was obtained; and

(b) include in the disclosure document a statement signed by the valuator substantially as follows:

We refer to the formal valuation dated , which we prepared for (indicate name of the person or company) for(briefly describe the transaction for which the formal valuation was prepared). We consent to the filing of theformal valuation with the Ontario Securities Commission and the inclusion of [a summary of the formalvaluation/the formal valuation] in this document.

6.8 Disclosure of Prior Valuation

(1) A person or company required to disclose a prior valuation shall, in the document in which the person or company isrequired to disclose the prior valuation,

(a) disclose sufficient detail to enable beneficial owners of securities to understand the prior valuation and its relevanceto the present transaction;

(b) indicate an address where a copy of the prior valuation is available for inspection; and

(c) state that a copy of the prior valuation will be sent to any securityholder upon request and without charge⁽¹⁴¹⁾.

(2) If there are no prior valuations, the existence of which is known after reasonable inquiry, the person or companypreparing the document in which the person or company would be required to disclose the prior valuation, if one existed,shall include a statement to that effect in the document.

(3) Despite anything to the contrary contained in this Rule, disclosure of a prior valuation is not required in a document if

(a) the contents of the prior valuation are not known to the person or company required under this Rule to disclose theprior valuation;

(b) the prior valuation is not reasonably obtainable by the person or company referred to in paragraph (a), irrespectiveof any obligations of confidentiality; and

(c) the document contains statements in respect of the prior valuation substantially to that effect.

6.9 Filing of Prior Valuation - An issuer or offeror required to disclose a prior valuation shall file a copy⁽¹⁴²⁾ of the prior valuationconcurrently with the filing of the document to which the prior valuation relates.

PART 7 INDEPENDENT DIRECTORS

7.1 Independent Directors

(1) Subject to subsections (2) and (3), it is a question of fact as to whether a director of an issuer is independent.

(2) A director of an issuer is not independent in connection with a transaction if⁽¹⁴³⁾

(a) the director is currently, or has been at any time during the twelve months before the date of the transaction, anemployee, issuer insider or associate of an interested party or an affiliated entity of an interested party, other thansolely in his or her capacity as a director of the issuer;

(b) the director is currently, or has been at any time during the twelve months before the date of the transaction, anemployee, issuer insider or associate of any person or company acting as an adviser to an interested party inconnection with the transaction or an affiliated entity of the adviser;

(c) the director has a material financial interest in an interested party or an affiliated entity of an interested party or itis anticipated that the director will, in the event that the transaction is successful, be provided with the opportunityto obtain a material financial interest in an interested party, an affiliated entity of the interested party, or in the issuer;or

(d) the director would reasonably be expected to receive a benefit as a consequence of the transaction that is not alsoreceived on a pro rata basis by all other beneficial owners in Canada of affected securities.

(3) For the purposes of this section, in the case of an issuer bid, a director of the issuer is not, by that fact alone, notindependent of the issuer.⁽¹⁴⁴⁾

PART 8 MINORITY APPROVAL

8.1 From Holders of Affected Securities

(1) Subject to subsection (2), if minority approval is required for a going private transaction or related party transaction, itshall be obtained from the holders of every class of affected securities of the issuer, in each case voting separately asa class.

(2) If minority approval is required for a going private transaction or a related party transaction and the transaction wouldaffect a particular series of a class of affected securities of the issuer in a manner different from other securities of theclass, then the holders of the series shall be entitled to vote separately as a series.⁽¹⁴⁵⁾

(3) In determining minority approval for a going private transaction or a related party transaction, an issuer shall exclude thevotes attached to affected securities that, to the knowledge of the issuer or any interested party or their respectivedirectors or senior officers, after reasonable inquiry, are beneficially owned or over which control or direction is exercisedby

(a) the issuer;

(b) subject to section 8.2, an interested party in connection with the transaction;

(c) a related party of an interested party in connection with the transaction, other than a director of the issuer who isindependent of the interested party; and

(d) a person or company acting jointly or in concert with a person or company referred to in paragraph (b) or (c) inrespect of the transaction.^{(146)(147)(148)}

8.2 Multi-Step Transactions - Despite paragraphs (b) and (c) of subsection 8.1(3), the votes attached to securities tenderedto a formal bid may be included as votes in favour of a subsequent going private transaction in the determination of whetherthe requisite minority approval has been obtained if

(a) the securityholder tendering the securities

(i) did not receive

(A) a consideration that is not identical to the consideration paid to all other beneficial owners in Canada ofaffected securities of the same class, or

 

(B) consideration of greater value than that paid to all other beneficial owners of affected securities of the sameclass; or

(ii) upon completion of the transaction, did not beneficially own, or exercise control or direction over, participatingsecurities of a class other than affected securities;⁽¹⁴⁹⁾

(b) the going private transaction takes place no later than 120 days after the date of expiry of the formal bid;

(c) the going private transaction is proposed by the offeror who made the formal bid and involves the outstandingsecurities of the same class that were the subject of the formal bid and that were not acquired by the offeror underthe formal bid;

(d) the consideration per security in the subsequent going private transaction is at least equal in value to and is in thesame form as the consideration per security in the formal bid; and

(e) the disclosure document for the formal bid

(i) disclosed the intent to effect the subsequent transaction,

(ii) contained a summary of a formal valuation of the securities in accordance with the applicable provisions of Part6, or contained the valuation in its entirety, if the offeror in the formal bid was subject to and not exempt fromthe requirement to obtain a formal valuation,

(iii) identified the securities, if known to the offeror after reasonable inquiry, the votes attached to which would berequired to be excluded in the determination of whether the requisite minority approval of the subsequenttransaction had been obtained,

(iv) stated that the subsequent transaction would be subject to minority approval,

(v) identified each class of securities, the holders of which would be entitled to vote separately as a class on thesubsequent transaction, and

(vi) described the tax consequences of both the formal bid and the subsequent transaction, if the tax consequencesof tendering to the formal bid were reasonably expected to be different from the tax consequences arising fromthe subsequent transaction.

PART 9 EXEMPTION⁽¹⁵⁰⁾

9.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictionsas may be imposed in the exemption.

 

ONTARIO SECURITIES COMMISSION
COMPANION POLICY 61-501CP
TO ONTARIO SECURITIES COMMISSION RULE 61-501
INSIDER BIDS, ISSUER BIDS, GOING PRIVATETRANSACTIONS
AND RELATED PARTY TRANSACTIONS
TABLE OF CONTENTS

PART TITLE

PART 1 GENERAL

1.1 General

PART 2 DEFINITIONS AND INTERPRETATION

2.1 Director

2.2 Freely Tradeable

2.3 Jointly or in Concert

2.4 Issuer Bid

2.5 Director for Purposes of Section 1.3

2.6 Transactions Carried out in Accordance withPart 4

2.7 Related Party Transactions Carried out inAccordance with Policy 9.1

2.8 Persons or Companies Involved in aTransaction

2.9 Amalgamations

PART 3 MAJORITY OF THE MINORITY APPROVAL

3.1 Majority of the Minority Approval

PART 4 DISCLOSURE

4.1 Form 33 Disclosure

4.2 Disclosure of Financial Information

4.3 Disclosure of Smaller Related

Party Transactions

PART 5 VALUATIONS

5.1 Formal Valuations

5.2 Independent Valuators

PART 6 ROLE OF DIRECTORS

6.1 Role of Directors

ONTARIO SECURITIES COMMISSION
COMPANION POLICY 61-501CP
TO ONTARIO SECURITIES COMMISSION RULE 61-501
INSIDER BIDS, ISSUER BIDS, GOING PRIVATETRANSACTIONS
AND RELATED PARTY TRANSACTIONS

PART 1 GENERAL

1.1 General - The Commission regards it as essential, inconnection with the disclosure, valuation, review andapproval processes followed for insider bids, issuerbids, going private transactions and related partytransactions, that all securityholders be treated in amanner that is fair and that is perceived to be fair. Inthe view of the Commission, issuers and others whobenefit from access to the capital markets assume anobligation to treat securityholders fairly and thefulfilment of this obligation is essential to theprotection of the public interest in maintaining capitalmarkets that operate efficiently, fairly and withintegrity.

The Commission does not consider that insider bids,issuer bids, going private transactions and relatedparty transactions are inherently unfair. It recognizes,however, that these transactions are capable of beingabusive or unfair, and has made Rule 61-501 (the"Rule") to regulate these transactions.

This Policy expresses the Commission's views oncertain matters related to the Rule.⁽¹⁵¹⁾

PART 2 DEFINITIONS AND INTERPRETATION

2.1 Director - The term "director" is used frequently inthe Rule. By virtue of Rule 14-501 Definitions, theterm has the meaning in section 1 of the Act. TheCommission is of the view that, by virtue of thisdefinition, in appropriate circumstances a director ofa general partner in a limited partnership can beconsidered to be a director of the limited partnership.⁽¹⁵²⁾

2.2 Freely Tradeable - In order for securities to be"freely tradeable" for purposes of the Rule, they must,among other things, not be subject to anyrequirements of Canadian securities legislation thatwould require that the securities be traded under aprospectus or in reliance on a prospectus exemption.Under this definition, securities would be freelytradeable if the conditions referred to in subsections72(4) and 72(5) of the Act have been met andthe other conditions of the definition are met.Securities that could only be distributed under aprospectus or in reliance on a prospectusexemption, including subsection 72(7) of the Act,would not be considered to be freely tradeable.

2.3 Jointly or in Concert

(1) The Act sets out certain circumstances wherethe presumption will arise that parties are actingjointly or in concert. Paragraph (c) of subsection1.2(1) of the Rule provides that the term "actingjointly or in concert" has the meaning ascribed toit in section 91 of the Act. The Commission is ofthe view that, for an insider bid, an offeror andan insider may be viewed as acting jointly or inconcert if an agreement, commitment orunderstanding between an offeror and an insiderprovides that the insider shall not tender to theoffer or provides the insider with an opportunitynot offered to all securityholders to maintain oracquire a direct or indirect equity interest in theofferor, the issuer or a material asset of theissuer.

(2) Concern has been expressed that agreementsby a shareholder to tender into a proposed take-over bid or to vote in favour of a proposedtransaction, which are commonly referred to aslock-up agreements, may result in the sellingshareholder being seen to be acting jointly or inconcert with an acquiror. While the language ofsection 91 of the Act is broad, and the particularfacts of any case must be considered, theCommission is of the view that an ordinary lock-up agreement with an identically treatedshareholder should not in and of itself generallyresult in arm's length parties being seen to bethereby acting jointly or in concert.

2.4 Issuer Bid

(1) The term "issuer bid" is defined in Rule 14-501as having the meaning ascribed to that term insubsection 89(1) of the Act. Subject tosubsection (2), the Commission is of the viewthat, by virtue of the provisions of section 92 ofthe Act, an offer to acquire securities of theissuer made by a wholly-owned subsidiary entityof the issuer would be an issuer bid.

(2) The Commission is of the view that a purchaseof securities of an issuer made by a registereddealer that is a wholly-owned subsidiary entity ofthe issuer may not be an issuer bid if theregistered dealer is not acting at the direction ofthe issuer in making the purchases, e.g., aregistered dealer acting in its capacity as anunderwriter or agent for a purchaser other thanthe issuer.⁽¹⁵³⁾

2.5 Director for Purposes of Section 1.3 -Subparagraph (b)(iii) of subsection 1.3(1) of the Ruleand subsection 1.3(4) of the Rule require certainletters to be sent to the Director for purposes ofsatisfying the liquid market test. Those letters shouldbe sent to Corporate Finance,Administration/Document Management, Attention:Manager.

2.6 Going Private Transactions Carried Out inAccordance with Part 4 - Paragraph (c) ofsubsection 4.3(1) of the Rule provides an exemptionfrom the 40 day delivery requirement in the OBCA ifthe going private transaction is carried out inaccordance with Part 4 of the Rule. Paragraph (e) ofsubsection 5.1(2) of the Rule provides that Part 5 ofthe Rule does not apply to a related party transactionthat is a going private transaction carried out inaccordance with Part 4 of the Rule. If the issuerrelies on an exemption from the valuation or majorityof the minority requirements in Part 4 of the Rule, theCommission still views the going private transactionas being carried out in accordance with Part 4 of theRule.

2.7 Related Party Transactions Carried Out inAccordance with Policy 9.1 - Paragraph (d) ofsubsection 4.1(2) of the Rule provides that Part 4 ofthe Rule does not apply to a going private transactionthat was announced before the coming into force ofthe Rule and, among other things, is being carriedout in accordance with the guidelines of OntarioSecurities Commission Policy 9.1. Paragraph (h) ofsubsection 5.1(2) provides a similar exemption forrelated party transactions. The Commission is of theview that a transaction is being carried out inaccordance with Policy 9.1 if staff have granted a"no-action letter", in respect of any part of thetransaction that is not otherwise being carried out inaccordance with the guidelines of Policy 9.1, and thetransaction is being carried out in accordance withthe terms of the no-action letter.

2.8 Persons or Companies Involved in a Transaction -In the definitions of "interested party", "going privatetransaction" and "related party transaction", the Rulerefers to a person or company involved in atransaction or a transaction involving a person orcompany. In those situations, the Rule sets outcertain consequences for the person or company(eg., disclosure, exclusion for minority approvalpurposes). The Commission is of the view that adirector or senior officer of an issuer is not involvedin a transaction merely because the director or seniorofficer is acting in that capacity in negotiating orapproving the transaction.

2.9 Amalgamations

(1) Generally, a transaction is a going privatetransaction if the interest of a beneficial owner ofa participating security of an issuer may beterminated without the beneficial owner'sconsent as a consequence of the transaction, arelated party of the issuer is involved in thetransaction and the transaction does not comewithin the exceptions to the definition of goingprivate transaction in the Rule. The Commissionis of the view that in the normal situation, wheretwo or more operating corporations amalgamateand shareholders of the amalgamatingcorporations receive non-redeemableparticipating securities of the amalgamatedcorporation, a beneficial owner's interest in aparticipating security is not being terminated andtherefore the transaction is not a going privatetransaction.

(2) An amalgamation between a corporation andone or more related parties of the corporation isa related party transaction for all of theamalgamating corporations.

(3) Exemptions from the valuation and minorityapproval requirements of the Rule may beavailable under paragraphs 3 and 10 of section5.6 and paragraphs 2 and 3 of subsection 5.8(1)of the Rule for an upstream corporationamalgamating with a downstream corporation.Those exemptions are not available for thedownstream corporation. Similarly, thoseexemptions are not available for amalgamatingcorporations that are related parties because ofa common controlling shareholder.

PART 3 MAJORITY OF THE MINORITY APPROVAL

3.1 Majority of the Minority Approval - While the Ruleprovides, in a number of circumstances, for minorityapproval, the Commission recognizes that such arequirement may give rise to abuses. As the purposeof the Rule is to ensure fair treatment of minoritysecurityholders, unjustifiable minority tactics in asituation involving a minimal minority position maycause the Director to grant an exemption from therequirement to obtain minority approval.

PART 4 DISCLOSURE

4.1 Form 33 Disclosure

(1) Form 32 of the Regulation (the form for a take-over bid circular) requires for an insider bid, andsubsection 2.2(2) of the Rule requires for a stockexchange insider bid, the disclosure required byForm 33 of the Regulation, appropriatelymodified. In the view of the Commission, Form33 disclosure would generally include, inaddition to Form 32 disclosure, disclosure withrespect to the following items, with necessarymodifications, in the context of an insider bid ora stock exchange insider bid:

1. Item 10 Reasons for Bid

2. Item 14 Acceptance of Bid

3. Item 15 Benefits from Bid

4. Item 17 Other Benefits to Insiders, Affiliatesand Associates

5. Item 18 Arrangements Between Issuer andSecurity Holder

6. Item 19 Previous Purchases and Sales

7. Item 21 Valuation

8. Item 24 Previous Distribution

9. Item 25 Dividend Policy

10. Item 26 Tax Consequences

11. Item 27 Expenses of Bid

(2) Paragraph (a) of subsection 4.2(2) of the Ruleand paragraph (a) of subsection 5.4(2) of theRule require, for a going private transaction anda related party transaction, respectively, thedisclosure required by Form 33 of theRegulation, to the extent applicable and withnecessary modifications. In the view of theCommission, Form 33 disclosure wouldgenerally include disclosure with respect to thefollowing items, with necessary modifications, inthe context of those transactions:

1. Item 5 Consideration Offered

2. Item 10 Reasons for Bid

3. Item 11 Trading in Securities to be Acquired

4. Item 12 Ownership of Securities of Issuer

5. Item 13 Commitments to Acquire Securitiesof Issuer

6. Item 14 Acceptance of Bid

7. Item 15 Benefits from Bid

8. Item 16 Material Changes in the Affairs ofIssuer

9. Item 17 Other Benefits to Insiders, Affiliatesand Associates

10. Item 18 Arrangements Between Issuer andSecurity Holder

11. Item 19 Previous Purchases and Sales

12. Item 20 Financial Statements

13. Item 21 Valuation

14. Item 22 Securities of Issuer to beExchanged for Others

15. Item 23 Approval of Bid

16. Item 24 Previous Distribution

17. Item 25 Dividend Policy

18. Item 26 Tax Consequences

19. Item 27 Expenses of Bid

20. Item 28 Judicial Developments

21. Item 29 Other Material Facts

22. Item 30 Solicitations

4.2 Disclosure of Financial Information - TheCommission is of the view that, in order to providesecurityholders with sufficiently detailed informationto form a reasoned judgment, a disclosure documentdelivered to securityholders in respect of transactionssubject to and not exempt from⁽¹⁵⁴⁾ the formal valuationrequirements of the Rule should contain, unless suchinformation would be⁽¹⁵⁵⁾ irrelevant or unavailable,summary disclosure of comparative historical annualfinancial information over the previous five years andof historical interim financial information for the mostrecent period and the comparative period in theprevious year, together with summary informationconcerning key financial statement ratios andstatistics and key operating statistics over the sameperiods. This disclosure would be in addition to anydisclosure required under Ontario securities law orreferred to in Staff Accounting Communique No. 7:Financial Disclosure in Information Circulars, or otherStaff Accounting Communiques or any successorinstruments.

4.3 Disclosure of Smaller Related PartyTransactions -The Commission is of the view thattransactions involving related parties, and beneficialownership by an issuer of or an issuer's exercise ofcontrol or direction over securities of related partiesother than the issuer's subsidiary entities, should bedisclosed to securityholders if they are material eitherindividually or in the aggregate, in order to providesecurityholders with sufficiently detailed informationto form a reasoned judgment regarding such mattersas the election of directors. If such transactions orownership do not otherwise require immediatedisclosure, annual disclosure may suffice. Issuersare referred, without limitation, to item 8 of Form 30of the Regulation and other similar informationcircular requirements, as well as to section 3840 ofthe Handbook.⁽¹⁵⁶⁾

PART 5 VALUATIONS

5.1 Formal Valuations

(1) The Rule requires formal valuations in a numberof circumstances. The Commission is of theview that a conclusory statement of opinion as tothe value or range of values of the subjectmatter of the formal valuation does not by itselfachieve this purpose.⁽¹⁵⁷⁾

⁽¹⁵⁸⁾

(2) The disclosure standards proposed by theInvestment Dealers Association of Canada andAppendix A to Standard #110 of the CanadianInstitute of Chartered Business Valuators eachgenerally represent a reasonable approach tomeeting the applicable legal requirements.Specific disclosure standards, however, cannotbe construed as a substitute for the professionaljudgment and responsibility of the valuator and,on occasion, additional disclosure may benecessary.

(3) A person or company required to have a formalvaluation prepared should, at the request of thevaluator, promptly furnish the valuator withaccess to the person or company's managementand advisers and to all material information in itspossession relevant to the formal valuation. Thevaluator is expected to use that access toperform a comprehensive review and analysis ofinformation upon which the formal valuation isbased. The valuator should form its ownindependent views of the reasonableness of thisinformation, including any forecasts orprojections or other measurements of theexpected future performance of the enterprise,and of any of the assumptions upon which it isbased, and adjust the information accordingly.

(4) The disclosure in the valuation of the scope ofreview should include a description of anylimitation on the scope of the review and theimplications of the limitation on the valuator'sconclusion. Scope limitations should not beimposed by the issuer, an interested party or thevaluator, but should be limited to those beyondtheir control that arise solely as a result ofunusual circumstances. In addition, it isinappropriate for any interested party to exerciseor attempt to exercise any influence over avaluator.

(5) The person or company responsible forobtaining a formal valuation should ensure thatthe requirements of the Rule are satisfied, andshould work in cooperation with the valuator tothat end.

5.2 Independent Valuators⁽¹⁵⁹⁾ - While, except in certainprescribed situations, the Rule provides that it is aquestion of fact as to whether a valuator or a personor company providing the opinion referred to insubparagraph (b)(ii) of subsection 1.3(1) isindependent, situations have been identified in thepast that raise serious concerns for the Commissionand that must be disclosed and assessed formateriality. In determining the independence of thevaluator or person or company from the interestedparty, a number of factors may be relevant, includingwhether

(a) the valuator or the person or company or anaffiliated entity of either of them has a materialfinancial interest in future business in respect ofwhich an agreement, commitment orunderstanding exists involving the issuer, aninterested party of the issuer or an associate oraffiliated entity of the issuer or interested party;

(b) during the 24 months before the valuator orperson or company was first contacted for thepurpose of the formal valuation or opinion, thevaluator or the person or company or anaffiliated entity of either of them

(i) had a material involvement in an evaluation,appraisal or review of the financial conditionof the issuer or an interested party or anassociate or affiliated entity of the issuer orinterested party;

(ii) acted as a lead or co-lead underwriter of adistribution of securities by the issuer or aninterested party; or

(iii) had a material financial interest intransactions involving the interested party orthe issuer; or

(c) the valuator or the person or company or anaffiliated entity of either of them is a lead or co-lead lender or manager of a lending syndicate inrespect of the transaction in question or is alender of a material amount of indebtedness ina situation where an interested party or theissuer is in financial difficulty and the transactionwould reasonably be expected to have the effectof materially enhancing the lender's position.⁽¹⁶⁰⁾

PART 6 ROLE OF DIRECTORS

6.1 Role of Directors

(1) Paragraphs (b) of subsection 2.2(3), (c) ofsubsection 3.2(1), (d) of subsection 4.2(2), (e) ofsubsection 5.2(3) and (d) of subsection 5.4(2) ofthe Rule require that the relevant disclosuredocuments include a discussion of the reviewand approval process adopted by the board ofdirectors and the independent committee, if any,of the issuer for the relevant transaction,including any materially contrary view orabstention by a director and any materialdisagreement between the board and theindependent committee.

(2) An issuer involved in any of the types oftransactions regulated by the Rule shouldprovide sufficient information to beneficialowners of securities to enable them to make aninformed decision. Accordingly, directors shoulddisclose their reasonable beliefs as to thedesirability or fairness of the proposedtransaction and make useful recommendationswith regard to the transaction. A statement thatthe directors are unable to make or are notmaking a recommendation with respect to thetransaction, without detailed reasons, wouldgenerally be viewed as insufficient disclosure.

(3) In reaching a conclusion as to the fairness of atransaction, the directors should disclose inreasonable detail the material factors on whichtheir beliefs regarding the transaction are based.The disclosure disseminated by the directorsshould discuss fully the background ofdeliberations by the directors and any specialcommittee and any analysis of expert opinionsobtained.

(4) The factors that are important in determining thefairness of a transaction to beneficial owners ofsecurities and the weight to be given to thesefactors in a particular context will vary with thecircumstances. Normally the factors consideredshould include whether or not the transaction issubject to minority approval, whether or not thetransaction has been reviewed and approved bya special committee and, if there has been aformal valuation, whether the considerationoffered is fair in relation to the valuationconclusions arrived at through the application ofthe valuation methods considered relevant forthe subject matter of the formal valuation. Astatement that the directors have no reasonablebelief as to the desirability or fairness of thetransaction or that the transaction is fair inrelation to values arrived at through theapplication of valuation methods consideredrelevant, without more, would generally beviewed as insufficient disclosure.

(5) The directors of an issuer involved in an issuerbid, insider bid, going private transaction orrelated party transaction generally are in thebest position to assess the formal valuation to beprovided to securityholders. Accordingly, theCommission is of the view that, in dischargingtheir duty to securityholders, the directors shouldconsider the formal valuation and all priorvaluations disclosed and discuss them fully inthe applicable disclosure document.

(6) To safeguard against the potential for unfairadvantage accruing to an interested party as aresult of that party's conflict of interest orinformational or other advantage in respect ofthe proposed transaction, it is good practice fornegotiations respecting a transaction involvingan interested party to be carried out by orreviewed and reported upon by a specialcommittee of disinterested directors. Followingthis practice would normally assist in addressingthe Commission's interest in maintaining capitalmarkets that operate efficiently, fairly and withintegrity. While the Rule only mandatesindependent committees in limitedcircumstances, the Commission is of the viewthat it would generally be appropriate for, andthat corporate law may require, issuers involvedin a material transaction to which the Ruleapplies to constitute an independent committeeof the board of directors to participate in thetransaction. The Commission would alsoencourage independent committees to select thevaluator, to supervise any formal valuationinvolved and to review the disclosure respectingthe formal valuation.

(7) A special committee should in the Commission'sview include only directors who are independentfrom the interested party. While a specialcommittee may invite non-independent boardmembers and other persons possessingspecialized knowledge to provide information tothe committee, in the Commission's viewnon-independent persons should not bepresent at or participate in the deliberationsof the special committee.

 

Footnotes

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1. The proposed Rule is derived from Ontario Securities Commission Policy Statement No. 9.1 (1991), 14 OSCB 3345, as amended (1992), 15 OSCB 2921 ("Policy9.1") and the Rule In the Matter of Going Private Transactions (1997), 20 OSCB 1219, as amended by (1998), 21 OSCB 2337 and (1998), 21 OSCB 7751 (the"Going Private Rule"). The provisions of the Going Private Rule have been incorporated into the proposed Rule. The Going Private Rule will expire on thecoming into force of the proposed Rule. The proposed Rule was first published for comment on May 31, 1996 (1996), 19 OSCB 2981 (the "1996 proposedRule").

The Commission proposes to delete section 182 of the Regulation, which contains definitions and formal valuation and related requirements in respect of insiderbids, issuer bids and take-over bids to be followed by a going private transaction, since any relevant definitions or requirements have been incorporated into theproposed Rule. The Rule In the Matter of Insider Bids, Issuer Bids and Take-Over Bids in Anticipation of Going Private Transactions (1997), 20 OSCB 1219 asamended by (1998), 21 OSCB 2338 and (1998), 21 OSCB 7752, which contains exemptions from the requirements in section 182, will expire on the coming intoforce of the proposed Rule.

2. A general definition rule has been adopted as Rule 14-501 Definitions ("Rule 14-501"). It contains definitions of certain terms used in more than one rule. Rule14-501 also provides, among other things, that terms used in a rule and defined in section 1 of the Securities Act or subsection 1(2) of the Regulation will havethe respective meanings given to them in the Securities Act or Regulation, as appropriate. Rule 14-501 also incorporates terms defined in National Instrument14-101 Definitions ("NI14-101"). NI14-101 contains, among other things, definitions for terms used in more than one national instrument.

3. The Commission has determined that the "going private transaction" requirements of the proposed Rule should apply to participating securities as that term isdefined in subsection 1.1(1). See the notice that accompanies the proposed Rule for further explanation.

4. This is a new definition that picks up the exclusion that appeared in sections 1.4 and 1.6 of the 1996 proposed Rule. The drafting has been simplified and thedefinition has been revised to be more consistent with proposed National Instrument 62-103 The Early Warning System and Related Take-Over Bid and InsiderReporting Issues (1998), 21 OSCB 5649. The phrase "holds securities sufficient to affect materially the control of an issuer" is interpreted in subsection 1.1(2).

5. Paragraph (c) has been added to provide that the lender or assignee was not a related party of the issuer at the time the agreement was entered into.

6. In the 1996 proposed Rule, this definition excepted series for the purposes of voting. This has been revised and is dealt with in subsection 8.1(2).

7. The definition of "director" in the 1996 proposed Rule has been deleted as the term "director" has the meaning in section 1 of the Act.

8. The reference to another document sent to holders of affected securities in connection with a meeting here and in subparagraph (d)(ii) contemplates a situationwhere the proposed Rule does not impose a minority approval requirement, but requires disclosure to securityholders (eg a valuation) and a meeting is being heldunder the terms of a document governing the security, eg partnership agreement or trust indenture.

9. The words "with the Commission" have been deleted, as filing with the Commission is dealt with under section 140 of the Act.

10. This is a new term added to facilitate the drafting of section 1.3 and subparagraph 6.3(2)(b)(ii). The phrase "Canadian securities legislation" is defined in NI 14-101 as meaning the statutes and the other legislative instruments set out in an appendix to that instrument and will generally include the statute, regulations and,in some cases, rules, forms, rulings and orders relating to securities.

11. In the 1996 proposed Rule, holder was defined as a beneficial owner and a person or company who "exercised control or direction over" the security, exceptwhere the context otherwise required and subject to certain instances where it meant registered owner. Holder is now defined as registered owner, and where theCommission intends that a section refer to beneficial owners or persons or companies who exercise control or direction, reference is now made specifically tothose concepts.

12. The words "(other than the issuer in the case of an issuer bid)" have been deleted as the definition refers to section 7.1, which specifically provides for theexception in subsection 7.1(3).

13. The words "(other than the issuer in the case of an issuer bid)" have been deleted as the definition refers to section 6.1, which specifically provides for theexception in subsection 6.1(5).

14. The words "other than a bona fide lender" replace the words "subject to section 1.4" that appeared in the 1996 proposed Rule.

15. The 1996 proposed Rule contained the phrase "in Canada" in clause (c)(i)(A). That phrase has been deleted because any shareholder who receivesconsideration of greater value should be treated as an interested party, even if that party is outside Canada. However, the phrase "in Canada" remains in clause(c)(i)(B) as a result of the possibility that the laws of a foreign jurisdiction may dictate that different types of consideration be offered outside Canada.

Subparagraph (c)(i) has been simplified by deleting a phrase that was an unnecessary example.

Subparagraph (c)(ii) has been added to deal with a situation where a related party continues to beneficially own another class of participating securities.

16. The words "or is involved in" have been added to paragraph (d) to be consistent with the definition of related party transaction.

17. The definition comes from subsection 182(1) of the Regulation. The term "insider" has been renamed as "issuer insider" so as to not use a term which is alreadyused in section 1 of the Act with a different definition.

18. Paragraph (d) of the definition, which included an issuer for so long as it beneficially owned its securities, has been deleted as being unnecessary.

19. The term "junior resource issuer" has been deleted as that type of issuer is now described in paragraph 5.1(2)(l).

20. Some minor drafting changes have been made to make the definition consistent with new subsection 1.3(2).

21. The term "published market" is defined in Rule 14-501 as having the meaning ascribed to that term in subsection 89(1) of the Act.

22. The 1996 proposed Rule contained a paragraph (d) that provided that, in the case of equity securities of a class not otherwise referred to in the definition or theaggregate market price of which was not otherwise determinable under the definition, market capitalization was the amount determined by the board to representthe aggregate market value of all outstanding securities. That paragraph has been deleted as not being relevant in the circumstances.

23. This definition incorporates section 8.3 of the 1996 proposed Rule. The definition has been modified as a result of the proposed Rule now using a simple majoritytest.

24. The term "minority securityholders" has been deleted as the substance of that term appears in the definition of "minority approval".

25. The exclusions from the definition that appeared in section 1.5 of the 1996 proposed Rule now appear in paragraphs (a) through (d).

26. The corresponding provision in the 1996 proposed Rule was premised on the valuator not being paid a fee. That requirement has been removed in response tocomments received.

27. The words "in respect of an issuer or any of its securities or any of its material assets" have been deleted since a report is only a prior valuation if it is in respect ofthose items.

28. The words "other than a bona fide lender" replace the words "except as provided in section 1.6".

29. The term "affiliated entity" is used as the term "affiliate" in the Act may be construed as limited to corporations. See section 1.5.

30. In the 1996 proposed Rule the defined term was "formal insider bid".

31. In the 1996 proposed Rule the defined term was "formal issuer bid".

32. The definition "to hold" has been deleted. See the note accompanying the definition of "holder".

33. The 1996 proposed Rule contained a definition of value as meaning "except where the context otherwise requires, fair market value determined as at the date ofthe first public announcement of the transaction". That definition has been deleted as the proposed Rule uses the term "fair market value" where necessary.

34. As these are terms defined for purposes of the Act, the regulations and the rules, Rule 14-501 will eventually be amended to include these terms.

35. The definition of "going private transaction" has been narrowed from that proposed in the 1996 proposed Rule (and from the definition contained in the OBCA) toapply to going private type transactions only where they are proposed by or would involve related parties who would not be treated identically to the othershareholders. The definition has also been revised by deleting the exception previously contained in the definition (and also contained in the definition in theOBCA) for such transactions where it is proposed that shareholders would receive an interest of "equivalent value" in securities of the issuer or a successor to thebusiness of the issuer.

The definition reflects the Commission's view that such going private type transactions are only of concern when involving a related party who is treated differentlythan other shareholders. This view differs from the sometimes historical focus of concern that shareholders whose interests in securities are being terminatedwithout their consent are being expropriated and therefore entitled to certain protections.

The 1996 proposed Rule introduced the concept of "quasi-going private transaction", which in effect attempted to narrow the discretion available in adetermination of what would be "equivalent value". Under that proposed definition, a going private transaction would be caught even though the "equivalentvalue" exception was otherwise available, if shareholders were being offered securities of equivalent value of a successor to the business of the issuer, but thesuccessor issuer was not in all material respects the same as the issuer.

The "equivalent value" exception may have been supported in the past under the expropriation theory on the basis that shareholders were not being expropriatedso long as they would be receiving, in return for their securities, securities of equivalent value, and not cash. With the focus of concern now clearly on relatedparty conflicts of interest, the Commission does not believe that the "equivalent value" exception should be available, in connection with a going private typetransaction, where a related party is receiving different or greater consideration than other shareholders.

Accordingly, the Commission has deleted the "equivalent value" exception from the definition of going private transaction and has deleted the concept of quasi-going private transaction.

36. The exclusion in the 1996 proposed Rule that referred to sections 4.5 and 4.8 has been removed. Those sections dealt with "going private transactions" underthe OBCA and the drafting is now such in those sections that it is clear that there "going private transaction" has the OBCA meaning.

37. The exclusion in the 1996 proposed Rule that refers to section 1.3 has been deleted and the exceptions that appeared in that section have been inserted here.

38. This paragraph has been simplified by removing the reference to "good faith", the reference to the purpose of the transaction and the exception for related partiesas being unnecessary.

39. This is a new exception for a related party that is treated identically to all other shareholders. The concept of consideration of greater value is derived fromsubsection 97(2) of the Act.

40. The definition in the 1996 proposed Rule excluded issuer bids subject to paragraph 1.2(2)(b). The exclusion has been deleted as a take-over bid as defined in theAct is separate from an issuer bid. To the extent that the bid should be characterized as an issuer bid, that result will be achieved through the indirect bid rules.

41. Paragraph (b) is new and addresses a situation where an issuer and related party purchase or acquire assets and the proportion of the assets acquired bythe issuer is less than the proportion of the consideration paid by the issuer.

42. This is the converse of paragraph (b).

43. The reference to amending the terms of a security clarifies that amending the term of a security held by the issuer or a related party is itself a related partytransaction.

44. A reference to amendment has been added here.

45. Paragraphs (i) and (j) in the 1996 proposed Rule, which referred to transactions involving the issue of successor entity shares and quasi-going privatetransactions respectively, have been deleted as a result of the change to the definition of "going private transaction" and the elimination of the term "quasi-goingprivate transaction".

New paragraph (l) provides that a transaction is a related party transaction for an issuer who is a party to an amalgamation, arrangement or merger with a relatedparty other than a transaction referred to in paragraph (m).

New paragraph (m) provides that a transaction is a related party transaction for an issuer who participates in a transaction with a related party that is a goingprivate transaction for the related party or would be a going private transaction except that it comes within the exception in paragraph (e) of the definition of goingprivate transaction.

46. References to "business day", "equity security", "issuer bid", "offeree issuer", "published market" and "take-over bid" have been deleted because they are definedin Rule 14-501. Amendments have been proposed to Rule 14-501 (1998), 21 OSCB 2343 to delete the definitions of "equity security", "issuer bid" and "take-overbid" and move them to NI 14-101 as proposed in amendments published for comment on September 11, 1998 at (1998), 21 OSCB 5782.

47. The incorporation of clause 89(2)(a) of the Act has been deleted as being unnecessary as there is only one time period referred to in the proposed Rule and itdoes not require the application of clause 89(2)(a). The reference to subsection 89(3) of the Act has been deleted. Where the term "convertible" is to have anextended meaning, provision to that effect has been made in the proposed Rule.

48. A reference to "related party" and subsection 1.1(2) has been added to provide for an extended definition of beneficial ownership. The reference to Parts 2 and 3has been deleted as being unnecessary. Those Parts apply to insider bids and issuer bids and those terms are, in turn, derived from the terms "take-over bid"and "issuer bid" in the Act. Accordingly, it is unnecessary to specifically reference the application of section 90 to those provisions. For a similar reason,paragraph 2(b) of section 1.2, which provided for the applicability of section 92, has been deleted as being unnecessary.

49. Subsection 1.2(3) of the 1996 proposed Rule, which dealt with the applicability of subsection 100(3) of the Act, has been deleted as being unnecessary.

50. Section 1.3 of the 1996 proposed Rule has been deleted, as the exclusions that appeared there have been moved into the definition of "going privatetransaction".

51. Section 1.4 of the 1996 proposed Rule has been deleted, as the substance of that section has been moved into the definition of "bona fide lender".

52. Section 1.5 of the 1996 proposed Rule has been deleted, as the exclusions that appeared there have been moved into the definition of "prior valuation".

53. Section 1.6 of the 1996 proposed Rule has been deleted, as the exclusion that appeared there has been moved into the definition of "related party".

54. This has been revised to use the newly defined term "freely tradeable".

55. The 1996 proposed Rule introduced here the phrase "one or more published markets". This has been revised to refer to the principal published market becausethat is consistent with paragraph 1.3(2)(b), which is based on National Policy Statement No.47 ("NP 47").

56. The $15,000,000 minimum was added at the suggestion of one commenter.

57. The same commenter suggested adding the $75,000,000 minimum, by analogy to the eligibility requirements of NP 47.

58. The words "with necessary modifications" have been deleted as words have been added to section 6.1 to deal with the independence of a person or companyproviding a liquidity opinion.

59. This subsection is based on paragraphs 4.1(2)(a) and (b) of NP 47 and the definition of "market capitalization" in the proposed Rule. The exclusion in subsection(3) parallels the exclusion in clause (a)(ii)(A) of subsection (1).

60. Section 1.9 of the 1996 proposed Rule, which provided that in determining the fair market value of a security no downward adjustment shall be made in thecircumstances described in paragraph 6.4(1)(d), has been deleted as being unnecessary as the reference to adjustment appears in the definition of "fair marketvalue" and in the actual paragraph.

61. Section 1.10 of the 1996 proposed Rule, which provided that the Rule does not derogate from any other rights of securityholders, has been deleted as beingunnecessary.

62. Section 1.11 of the 1996 proposed Rule, which contained exceptions for the Multijurisdictional Disclosure System, has been deleted as those exceptions nowappear in Rule 71-801 Implementing the Multijurisdictional Disclosure System. Additional amendments to Rule 71-801 may be proposed to fully mirror section1.11 of the 1996 proposed Rule.

63. This section has been added to interpret the term "affiliated entity". This term is used as the term "affiliate" in the Act may be construed as limited to corporations.

64. This concept appeared in paragraphs 4 and 11 of subsection 5.6(1) of the 1996 proposed Rule.

65. Paragraphs 2.1(2)(b) and (c) in the 1996 proposed Rule have been deleted because they are covered in subsections 97(1) and 97(2) of the Act.

66. The words "in addition to complying with the requirements of Form 32 of the Regulation and any other applicable disclosure requirements of this Rule" have beendeleted as being unnecessary. It is clear that these sections are not exclusive.

67. The words "in addition to complying with any other applicable disclosure requirements of this Rule or of the exchange on which the bid is made" have beendeleted as being unnecessary. It is clear that these sections are not exclusive.

68. The words "item 21 of Form 32" have been replaced with the words "Form 33 of the Regulation, appropriately modified" since that is the disclosure that item 21 ofForm 32 requires.

69. The reference to the disclosure required under subsection (1) has been deleted as subsection (1) now applies to all disclosure documents for insider bids,including stock exchange take-over bid circulars.

70. The words "in addition to complying with the requirements of Form 34 of the Regulation" have been deleted as being unnecessary. Subparagraph (b) formerlyappeared in subparagraph (a)(iii) of subsection 6.5(2) of the 1996 proposed Rule as being required disclosure in the summary of a formal valuation. The words"bone fide" have been deleted as being unnecessary. A similar change has been made in sections 3.2, 4.2 and 5.4 of the proposed Rule.

71. A "materiality" threshold has been added in response to a comment.

72. The proposed Rule only mandates a summary of the formal valuation for all transactions to which the proposed Rule applies if the formal valuation is not includedin its entirety in the disclosure document.

73. To simplify drafting, former subsection 2.2(2) is now subsection 2.3(3) and former subsection 2.2(1) has been deleted on the basis that it is unnecessary tospecifically require the offeree issuer to establish an independent committee in certain circumstances as that requirement is implicit by the requirements ofsubsection 2.3(2).

74. This paragraph has been revised so that the 20 percent test can be met on an aggregate basis.

75. Given the lead-in "reasonable inquiry", the Commission has deleted it here.

76. The words "after reasonable inquiry" have been deleted in response to a comment that this test should be based only on the insider's actual knowledge.

77. The requirement that the offeror include in the disclosure document a statement of its reasonable belief described in paragraph (d) and the satisfaction of theconditions in paragraph (e) has been deleted as being unnecessary, given that section 2.4 generally requires disclosure in the disclosure document of the factssupporting reliance upon an exemption.

78. A reference to potential offerors as determined by an independent committee of the offeree issuer acting in good faith has been deleted as the insider should notlose its exemption if a committee of the board subsequently declines access to a potential offeror.

79. The words "in addition to complying with the requirements of Form 33 of the Regulation and any other applicable disclosure requirements of this Rule" have beendeleted as being unnecessary.

80. See the note accompanying paragraph 2.2(3)(b).

81. The words "in addition to complying with any other applicable disclosure requirements of this Rule or of the exchange on which the bid is made" have beendeleted as being unnecessary.

Paragraph (b) of subsection 3.2(2) of the 1996 proposed Rule, which required the disclosure referred to in subsection (1), has been deleted as subsection (1) nowapplies to all disclosure documents for issuer bids, including stock exchange issuer bid circulars.

82. The 1996 proposed Rule provided a valuation exemption if the issuer bid was not for equity securities or voting securities and there had never been dividendarrears and there was no possibility of dividend arrears. The Commission has modified this to apply to securities that are not participating securities and toremove the reference to dividend arrears. See the Notice that accompanies the proposed Rule for further explanation.

The 1996 proposed Rule provided a valuation exemption in the circumstances described in paragraph 3 of section 2.5 of the 1996 proposed Rule with necessarymodifications (arm's length negotiations with selling securityholder). The Commission has decided to remove this exemption as it does not believe it isappropriate to provide a valuation exemption in these circumstances.

83. The 1996 proposed Rule provided that Part 4 would not apply to non-redeemable investment funds. The proposed Rule now provides that Part 4 applies to non-redeemable investment funds but also provides for a valuation exemption. See paragraph 5 of section 4.5 and related footnote.

84. The words "including a commodity pool" that appeared in the 1996 proposed Rule have been deleted because a commodity pool is a mutual fund.

85. A transitional provision has been added to the proposed Rule to deal with going private transactions announced before the coming into force of the proposedRule.

86. The references to applicable corporate law and Ontario securities law have been deleted as being unnecessary.

87. The words "in addition to complying with any other applicable disclosure requirements of this Rule and the requirements of Form 30 of the Regulation, ifapplicable" have been deleted as being unnecessary.

88. See the note accompanying paragraph (b) of subsection 2.2(3).

89. As described in the Notice accompanying the proposed Rule, this is a new exemption to relieve issuers of the 40 day time period requirement in the OBCA.

90. The words "if there is an interested party" have been deleted as there will always be an interested party in a going private transaction.

91. The corresponding provision in the 1996 proposed Rule provided for an exemption in the circumstances described in paragraph 3 or 4 of section 2.5 of the 1996proposed Rule with necessary modifications. The Commission has decided to set out the circumstances for arm's length negotiations and auctions in paragraphs2 and 3.

92. This paragraph specifically provides for an auction exemption in respect of going private transactions. More particularly, the exemption applies if another goingprivate transaction or one or more formal bids are outstanding at the time the going private transaction is announced.

93. This is a new exemption provided on the theory that the going private transaction is a second step transaction that is an extension of either a previous arm'slength take-over bid or an insider bid in which a valuation was provided or a valuation exemption was available and relied upon.

94. The term non-redeemable investment fund is defined in the proposed amendment to Rule 14-501 as meaning an issuer

(a) whose primary purpose is to invest money provided by its securityholders;

(b) that does not invest for the purpose of exercising effective control, seeking to exercise effective control, or being actively involved in the management ofthe issuers in which it invests, other than other mutual funds or non-redeemable investment funds; and

(c) that is not a mutual fund.

95. The 1996 proposed Rule exempted investment funds from the going private transaction requirements completely, but the proposed Rule only provides for anexemption from the valuation requirement on the basis that a valuation exemption is justified because a valuation range can be determined from the issuer'scalculation of net asset value. There is, however, no basis for an exemption from the minority approval and disclosure requirements. A requirement has beenadded that the issuer update the calculation.

96. Subsection 4.5(1) in the 1996 proposed Rule, which defined the terms "corporation" and "going private transaction" for the purposes of sections 4.5 and 4.8 of the1996 proposed Rule, has been deleted, as the term "corporation" has been replaced with the term "issuer" and the term "going private transaction" is nowreferred to in subsections 4.6(1) and (2) of the proposed Rule as a "going private transaction" as defined in the OBCA.

97. New paragraphs (a) and (b) clarify that an exemption from the OBCA valuation requirement would be available if the going private transaction requirements of theproposed Rule do not apply to the transaction by virtue of subsection 4.1(2) or if the transaction is not subject to Part 4 of the proposed Rule because it is not agoing private transaction as defined in the proposed Rule.

98. The words "the transaction is subject to this Part and" have been deleted as being unnecessary.

99. New paragraphs (a) and (b) clarify that an exemption from the OBCA minority approval requirement would be available if the going private transactionrequirements of the proposed Rule do not apply to the transaction by virtue of subsection 4.1(2) or if the transaction is not subject to Part 4 of the proposed Rulebecause it is not a going private transaction as defined in the proposed Rule.

100. The words "including a commodity pool" that appeared in the 1996 proposed Rule have been deleted because a commodity pool is a mutual fund.

101. The words "or exempt from Part 4 under subsection 4.1(2)" have been added.

102. This new exception is provided to ensure that transactions that would be going private transactions, except that they meet one of the exceptions provided in thedefinition, are not caught under the related party transaction requirements.

103. Paragraphs (g) through (i) have been revised by adding the words "and does complete the transaction", in response to a comment that these exclusions shouldonly be available if the transaction actually is completed in accordance with the terms agreed to. A substantiality concept has also been added to theseparagraphs.

104. The condition that the transaction be disclosed either at the time of the agreement or before the coming into force of the proposed Rule has been deleted asbeing unduly onerous in these circumstances.

105. The exclusion added in the 1996 proposed Rule for transactions agreed to before July 5, 1991 has been deleted as being unnecessary since it is highly unlikelythat there are any such transactions that have not been completed.

106. Paragraph (h) has been revised to clarify, in response to a comment, that the exclusion is only necessary if the related party transaction was not completed beforethe coming into force of the proposed Rule because the proposed Rule would clearly not apply to any transactions completed before such time.

107. Paragraph (i) has been revised to require that the disclosure had to have been made before the issuer became subject to the proposed Rule.

108. Subsection (3) of the 1996 proposed Rule is now part of subsection (2).

109. This subsection has been modified to only apply to issuers that are not reporting issuers. Reporting issuers are obligated under the Act to file a material changereport.

110. The words "in addition to complying with the requirements of Form 27 of the Regulation" have been deleted as being unnecessary.

111. See the note accompanying paragraph 2.2(3)(b). The words "unless subsection 5.4(2) applies to the issuer" have been added as the Commission is of the viewthat if an issuer is subject to the disclosure requirements of an information circular in subsection 5.4(2), it need not include the discussion and reviewcontemplated by paragraph (e) of subsection 5.2(3) in its material change report, as such disclosure would be redundant.

112. The references to corporate law and Ontario securities law have been deleted as being unnecessary.

113. The words "in addition to complying with any other applicable disclosure requirements of this Rule and the requirements of Form 30 of the Regulation, ifapplicable" have been deleted as being unnecessary.

114. The words "if there is an interested party" have been deleted as a related party transaction will always have an interested party.

115. The 1996 proposed Rule contained two valuation exemptions (at paragraphs 15 and 18) which have been deleted from the proposed Rule. Paragraph 15, whichwas "Previous Arm's Length Negotiation or Auction", has been deleted based on a comment which pointed out that neither of the exemptions contained in thatparagraph could practically be applied to related party transactions. Paragraph 18, which was "Second-step Arm's Length Quasi-Going Private Transaction", hasbeen deleted given the removal of quasi-going private transactions from the proposed Rule.

As discussed in the accompanying Notice, the exemption in the 1996 proposed Rule for a board determination that a valuation is not necessary has been deleted.

The 1996 proposed Rule also imposed, in subsection 5.6(2) of the 1996 proposed Rule, certain limitations on the exemptions provided in subparagraphs 6(iii) and6(iv) of subsection 5.6(1) which have been deleted. See the note accompanying paragraph 5 of section 5.6 of the proposed Rule.

116. As a general matter in this section, references in the 1996 proposed Rule to the related party involved in the transaction have been replaced with references tothe interested party.

117. The exemption in paragraph 2 has been modified so that it is not available in the context of a business combination. In the context of a business combination,paragraphs 3 or 10 may be relied on for an upstream issuer, but not for a downstream issuer.

118. The exception for securities other than voting or equity securities or securities convertible into voting or equity securities has been moved into subsection 1.5(4).

119. The 1996 proposed Rule required that the transaction be a going private transaction in respect of the interested party. That requirement has been deleted so thatthe paragraph applies to any amalgamation, merger or arrangement with a downstream related party. Reference is made to subsection 1(6) of the Act insubparagraph 3(a) so as to clarify that the amalgamation must be with a downstream related party and not sister corporations that are considered to control oneanother because of subsection 1(6).

120. The 1996 proposed Rule imposed "coattail" requirements in certain circumstances in connection with this exemption. This coattail has been deleted as beingunduly onerous in the circumstances. The Commission is of the view that any abuses of this exemption can be dealt with using its public interest power.

In response to a comment, subparagraph (b) in this paragraph 5 clarifies that a stand-by commitment may be provided to a related party in accordance with OSCPolicy No. 6.2 or a successor rule.

121. The words "bona fide" have been deleted as being unnecessary in subparagraphs (i), (ii) and (iv).

122. The word "share" has been changed to "securities".

123. The reference to "benefit" in the 1996 proposed Rule has been changed to "consideration of greater value" as this is the concept that appears in subsection 97(2)of the Act.

124. The Commission has deleted the exemption that appeared in the 1996 proposed Rule for public offerings of securities as being impractical. See theaccompanying Notice for more details.

125. The term "benefit" is used in paragraph (d), rather than "consideration of greater value", as the transaction may not be of a type that results in consideration goingto securityholders.

126. The term "foreign jurisdiction" has been added so that it is clear that the laws of another country are included.

127. This new exemption is taken from subparagraph 11(ii) of subsection 5.6(1) of the 1996 proposed Rule and broadened so that the exemption will apply to atransaction (including an amalgamation, arrangement or merger) with a "downstream" related party (not just a subsidiary) if the conditions are met. Reference ismade to subsection 1(6) of the Act for the same reasons set out in note 119.

128. Changes have been made to clarify that the "benefit" is to a related party other than the interested party with which the issuer is amalgamating.

129. See the notes accompanying subsection 4.1(2) and paragraph 5 of section 4.5.

130. In response to comments, subsection 6.1(3) has been revised to move the portion of former paragraph (c) relating to future business and paragraphs (e) and (f) tothe Companion Policy where, in the Commission's view, they are factors to be considered that have in the past raised serious concerns; and to remove thereference to the remaining paragraphs in subsection 6.1(3) being rebuttable presumptions. A reference to an affiliated entity of the valuator has been added toparagraph (a).

As indicated in the note accompanying paragraph (b) of subsection 1.3(1), section 6.1 now contains references to the person or company providing the liquidityopinion.

131. The adjective "financial" has been deleted, in response to a comment, so that except in the circumstances of paragraph (e), any adviser is not independent.

132. This paragraph was derived from paragraph (c) of subsection 6.1(3) of the 1996 proposed Rule.

133. This provision has been revised in light of a comment that subsection 6.1(4) of the 1996 proposed Rule suggested that a valuator providing advisory services toan interested party could be independent of the interested party. This revision is consistent with paragraph 6.1(3)(b) of the proposed Rule.

134. The 1996 proposed Rule provided that, for purposes of determining the independence of a valuator in an issuer bid, an interested party does not include theissuer. This has been revised in response to a comment that the former provision inappropriately suggested that a valuator who provides other services to theissuer could be presumed to be independent.

135. This has been revised to use the newly defined term "freely tradeable".

136. Paragraph (d) has been amended to apply generally to a formal valuation of securities, and not just in the context of acquisitions of securities under insider bids,issuer bids and going private transactions.

Paragraph (e) was added in response to comments that the proposed Rule should prescribe a disclosure standard for valuations.

Subsection 6.4(2) of the 1996 proposed Rule, which allowed a formal valuation to be prepared as at a date earlier than 120 days has been deleted as theCommission does not believe that it is appropriate for a formal valuation to be prepared as at a date earlier than 120 days.

137. This subsection and subsection (2) now only apply if an issuer or offeror is required by the proposed Rule to provide a summary.

138. The reference to disclosing prior offers relating to the subject matter of the transaction has been moved to sections 2.2, 3.2, 4.2 and 5.4, as required disclosure ina disclosure document.

139. The reference to "without charge" has been added.

140. The reference to filing two copies has been deleted as being unnecessary.

141. A reference to "without charge" has been added.

142. The reference to filing two copies has been deleted as being unnecessary.

143. This subsection has been revised as follows: in response to a comment similar to that in respect of subsection 6.1(3) of the proposed Rule, the presumptions areno longer rebuttable; in response to a comment, the reference to parties acting jointly or in concert in paragraph (a) of subsection 7.1(2) of the 1996 proposedRule has been deleted because it extends the net of non-independence too far; the time periods in paragraphs (a) and (b) of subsection 7.1(2) have beenchanged from 3 years to 12 months as three years is unduly long; and the adjective "financial" that limited "adviser" in paragraph (b) of subsection 7.1(2) of the1996 proposed Rule has been removed in response to a comment similar to that in respect of paragraph 6.1(3)(b) of the proposed Rule.

144. See the note accompanying subsection 6.1(5).

145. This was added to provide that holders of securities of a series will be entitled to vote separately as a series if they are affected differently. The drafting is basedon subsection 170(2) of the OBCA.

146. The section in the 1996 proposed Rule that provided that the requirement to obtain minority approval is in addition to any other requirement for securityholderapproval has been deleted as being unnecessary.

147. In the 1996 proposed Rule, section 8.2 excluded from the minority vote in connection with a going private transaction the securities of any securityholder thatcontrolled the issuer and entered into an understanding to support the transaction. That exclusion was similar to that in subclause 190(4)3iii of the OBCA. Suchsecurityholders are no longer excluded because, in the Commission's view, such securityholders should not be disenfranchised from the minority vote for dealingwith their securities unless they are, in the case of a going private transaction, an interested party (i.e., a related party who is not being treated identically to othersecurityholders), in which case they are excluded from voting as part of the minority by paragraph (b) of subsection 8.1(3) of the proposed Rule.

148. Section 8.3 of the 1996 proposed Rule has been deleted as the specified percentage of minority approval has been moved into the definition of minority approval.

149. Securities held by controlling shareholders that entered into an understanding to support the transaction are no longer excluded so long as the conditions insection 8.2 are satisfied.

150. Part 9 of the 1996 proposed Rule contained a section (former section 9.1) that would have given the Director the authority to designate additional related partiesin specified circumstances. This section has been deleted because the Commission felt it was unnecessary. The Commission may use its power under section127 of the Act if, in the Commission's opinion, a transaction is contrary to the public interest even though it is not technically a related party transaction.

151. The provisions of Part 2 of the 1996 proposed Companion Policy havebeen deleted as being unnecessary. The Notice published with theproposed Rule and proposed Companion Policy clarifies that termsdefined or interpreted in the proposed Rule or National Instrument 14-101 Definitions or Rule 14-501 Definitions and not otherwise definedin the proposed Companion Policy should be read in accordance withthe Rule and the definition instruments.

The provisions now found in Part 2 comment on certain terms found inthe proposed Rule. Sections 2.2, 2.5, 2.6 and 2.7 of the proposedCompanion Policy are new and sections 2.1, 2.3 and 2.4 of theproposed Companion Policy appeared in the 1996 proposed Rule andthe 1996 Companion Policy.

152. This picks up the closing words of the definition of the term "director"found in the 1996 proposed Rule.

153. Subsection 2.4(2) was added in response to a comment received onthe 1996 proposed Companion Policy.

154. The phrase "and not exempt from" was added in response to acomment received.

155. The word "clearly" appeared before the word "irrelevant". In responseto a comment, "clearly" has been deleted.

156. "Handbook" is defined in National Instrument 14-101 as meaning theHandbook of the Canadian Institute of Chartered Accountants, asamended from time to time.

157. Two sentences that were in section 3.7 of the 1996 proposedCompanion Policy have been deleted here because they areessentially now contained in the proposed Rule.

158. The Commission has deleted the statement, in section 3.7 of the 1996proposed Companion Policy, that the proposed Rule does not requirethe valuator to provide financial advice to the issuer and itsindependent directors. The Commission does not believe this isnecessary.

159. The factors listed in paragraphs (a)-(c) were in subsection 6.1(3) of the1996 proposed Rule, as rebuttable presumptions of non-independence, except subparagraph (b)(iii) which was not in the 1996proposed Rule, but is in section 23.5 of OSC Policy Statement No.9.1. However, in response to comments, subsection 6.1(3) of the1996 proposed Rule has been revised so that its presumptions of non-independence are no longer rebuttable. The Commission believesthat these paragraphs (a)-(c) should be in this proposed CompanionPolicy, not in the proposed Rule, because they relate to howsubsection 6.1(2) of the proposed Rule will be interpreted.

160. In the 1996 proposed Companion Policy the Commission expressedits view that the OBCA does not require the preparation or delivery ofa formal valuation to securityholders before the delivery of aninformation circular. The Commission has deleted this because it isunnecessary and the proposed Rule provides an exemption from thevaluation requirements of the OBCA.