8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading
Key Takeaways
Investors can sue issuers and their directors and officers for misrepresentations in continuous disclosure without proving they relied on them, subject to court leave and damage caps.
An offer that would bring the bidder's holdings to 20% or more of a class of voting or equity securities is a take-over bid under NI 62-104.
A formal bid must stay open at least 105 days (the target board can shorten it to 35), must have more than 50% of the securities not owned by the bidder tendered, and must then be extended 10 days.
Under early warning rules, acquiring 10% or more of a class (5% during a bid) requires a press release promptly and a report within two business days.
A person in a special relationship with an issuer must not trade on material undisclosed information or tip others about it.
Disclosure rules protect investors only if they can be enforced, and some corporate events, such as take-overs and trading by insiders, need special rules. This section covers investors' rights in the secondary market, the take-over bid regime, and insider trading.
Investor Rights in the Secondary Market
The prospectus rights covered earlier protect investors who buy in a distribution. Most investors buy on the secondary market instead. Since 2005, Ontario's Securities Act (Part XXIII.1), followed by similar laws in other provinces, gives them a statutory right to sue an issuer and its directors and officers if:
- a document the issuer released (financial statements, MD&A, press releases and so on) or a public oral statement contained a misrepresentation; or
- the issuer failed to make timely disclosure of a material change.
Investors do not have to prove they relied on the misrepresentation, but a court must grant leave to proceed, defendants can use a due diligence defence, and damages are capped. These claims are usually brought as class actions.
Take-Over Bids
Under National Instrument 62-104, a take-over bid is an offer to acquire outstanding voting or equity securities of a class that would bring the bidder's holdings (including those of joint actors) to 20% or more of the class. A formal bid must meet strict requirements designed to treat all shareholders equally and give them time to decide:
| Requirement | Rule |
|---|---|
| Bid circular | Sent to all holders of the class, with full disclosure of the offer |
| Identical consideration | Every holder is offered the same price and terms |
| Minimum deposit period | At least 105 days; the target's board can shorten it to as few as 35 days |
| Minimum tender condition | More than 50% of the securities not owned by the bidder must be tendered before any are taken up |
| 10-day extension | Once the minimum is met, the bid must be extended for at least 10 more days so remaining holders can tender |
| Pro-rata take-up | If a partial bid is oversubscribed, securities are taken up proportionally |
| Directors' circular | The target's board must send a circular with its recommendation |
Exemptions
Some purchases do not need a formal bid, for example:
- Private agreement exemption: buying from not more than five sellers at a price no more than 115% of the market price.
- Normal course purchase exemption: buying no more than 5% of the class in any 12-month period at market prices.
- Bids for issuers with few Canadian holders, and certain foreign bids.
Early Warning Reporting
Investors need to know when someone is building a large position. Under the early warning rules:
- A person who acquires beneficial ownership or control of 10% or more of a class of voting or equity securities must promptly issue a press release and file a report within two business days.
- Further reports are required for each additional 2% change and when holdings fall below 10%.
- The acquirer may not buy more securities of the class until one business day after the report is filed.
- During a take-over bid by someone else, the reporting threshold drops to 5%.
Issuer Bids and Minority Protections
An issuer bid is an offer by a company to buy back its own securities. Many listed companies buy back shares through a normal course issuer bid (NCIB) under exchange rules; on the TSX, an NCIB is generally limited to the greater of 10% of the public float or 5% of the outstanding shares over 12 months. Multilateral Instrument 61-101 protects minority shareholders in insider bids, going-private transactions and related-party deals, generally requiring a formal valuation and approval by a majority of the minority shareholders.
Insider Trading and Tipping
Insider reporting (filing trades on SEDI) is legal and required. Insider trading in the illegal sense means trading with knowledge of a material fact or material change that has not been generally disclosed.
Provincial securities laws prohibit a person in a special relationship with an issuer from:
- trading the issuer's securities while knowing undisclosed material information; and
- tipping, meaning informing anyone else of the information, other than in the necessary course of business.
People in a special relationship include insiders, affiliates, directors, officers and employees, people engaged in business with the issuer (such as lawyers, accountants, underwriters and potential acquirers), and anyone who learns the information from such a person (a tippee).
Penalties are severe. Provincial offences can bring large fines (in Ontario, up to $5 million, and for insider trading at least the profit made and up to three times it) and imprisonment for up to five years less a day. The Criminal Code also makes insider trading a crime punishable by up to 10 years in prison. Offenders can also be sued by those they traded with and must account to the issuer for their profit. Firms protect themselves with insider trading policies, blackout periods around earnings releases, and restricted lists.
A company already owns 12% of a target's voting shares and makes an offer to the public that would raise its holdings to 25%. What applies under NI 62-104?
It requires approval from CDCC
It is an issuer bid governed only by TSX rules
It is a take-over bid, subject to the formal bid rules or an exemption
Nothing applies, because the bidder already owns more than 10% of the class
An investor crosses 10% ownership of a listed company's common shares through market purchases. What must the investor do under the early warning rules?
Make a formal take-over bid to all other shareholders within 30 days
Nothing until the holding reaches 20% of the class
Notify CIPF and the exchange within 30 days of crossing 10%
Issue a news release and file a report within two business days
An external auditor learns that a client company is about to announce a large write-down and tells her brother, who sells his shares before the news is released. Who has broken the law?
Only the brother, because the auditor did not trade
Neither, because auditors are not insiders or in a special relationship
Only the auditor, because the brother was not an insider
Both: the auditor tipped and the brother traded as a tippee
Under secondary market civil liability rules, what must an investor generally prove to sue an issuer for a misrepresentation in its continuous disclosure?
That there was a misrepresentation; reliance need not be proved
That the investor read and relied on the document
Nothing, because such claims are automatically paid by the stock exchange
That the issuer committed criminal fraud under the Criminal Code
Sections you finish are checked off in the contents.