Final Rule: NI - 62-101 - Control Block Distribution Issues

Final Rule: NI - 62-101 - Control Block Distribution Issues

National Instrument



NOTICE OF RULE
UNDER THE SECURITIES ACT
NATIONAL INSTRUMENT 62-101
CONTROL BLOCK DISTRIBUTION ISSUES

Notice of Rule

The Commission has, under section 143 of the Securities Act (the "Act"), made National Instrument 62-101 Control BlockDistribution Issues (the "National Instrument") as a Rule under the Act.

The National Instrument and the material required by the Act to be delivered to the Minister of Finance were deliveredon December 14, 1999. If the Minister does not approve the National Instrument, reject the National Instrument or returnit to the Commission for further consideration by February 28, 2000, or if the Minister approves the National Instrument,the National Instrument will come into force, pursuant to section 4.1 of the National Instrument, on March 15, 2000.

The National Instrument has been made a rule concurrently with National Instrument 62-102 Disclosure of OutstandingShare Data and National Instrument 62-103 The Early Warning System and Related Take-over Bid and Insider ReportingIssues (collectively, the "Early Warning Instruments").

The National Instrument is an initiative of the Canadian Securities Administrators ("CSA"), and the National Instrumentis expected to be adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, as aCommission regulation in Saskatchewan, and as a policy in all other jurisdictions represented by the CSA.

The CSA published for comment a draft of the National Instrument, and the other Early Warning Instruments, inSeptember 1998.(1) During the comment periods on the Early Warning Instruments, the CSA received submissions froma number of commenters. Five commenters commented specifically on National Instrument 62-101. The names of thesecommenters and the summary of their comments, together with the CSA responses to those comments, are containedin Appendix A of this Notice. Reference should be made to the Notice of Rule for each of National Instruments 62-102and 62-103 for a summary and discussion of the specific comments on those instruments. In addition, some of thecomments related generally to the Early Warning Instruments; those comments are summarized and discussed in theNotice of Rule for National Instrument 62-103.

The version of National Instrument 62-101 published in 1998 is referred to in this Notice as the "1998 Draft".

As the result of consideration of the comments, the CSA have made a number of minor amendments to NationalInstrument 62-101 and the other Early Warning Instruments. However, as these changes are not material, the CSA arenot republishing those instruments for a further comment period.

Substance and Purpose of the National Instrument

There are two purposes of the National Instrument. One purpose is to set out a limited exemption for eligible institutionalinvestors from the prospectus requirements applicable to control block distributions in order to facilitate the ability ofthose investors to dispose of their securities of an issuer without having to comply with the provisions of securitieslegislation. Those provisions would require a statement that the investor has no knowledge of undisclosed materialinformation concerning the issuer, or that would impose subsequent hold periods.

The other purpose of the National Instrument is to modify the application of hold periods as they may apply to pledgeesdisposing of securities that form part of a control block.

Summary of Changes to the National Instrument from the 1998 Draft

This section describes the substantive changes made in the National Instrument from the 1998 Draft. For a detailedsummary of the contents of the 1998 Draft, reference should be made to the notice that was published with the 1998Draft.

A definition of "information circular requirement" has been added. This definition references a requirement to deliver aninformation circular in some circumstances under Policy Statement Q-12 of the Commission des valeurs mobilières duQuébec ("CVMQ").

Section 2.1 has been amended to provide an exemption from the information circular requirement in Quebec on thesame basis as the exemption from the prospectus requirement provided by Section 2.1.

Subparagraph 2.1(1)(a)(i) has been amended so that the subparagraph refers only to the requirements that all filingsrequired under either the early warning requirements or Part 4 of National Instrument 62-103 in connection with thecurrent securityholding position of the eligible institutional investor in the reporting issuer have been made. A referenceto the issue of a news release has been deleted as unnecessary. Reference is made to the detailed discussion of theoperation of this subparagraph in Appendix A.

In addition, section 4.1 has been added to provide that the National Instrument comes into force on March 15, 2000.

Appendix A has been amended by the addition of a reference to Policy Q-12 of the CVMQ.

Text of National Instrument

The text of the National Instrument follows.

DATED: December 17, 1999

APPENDIX A
SUMMARY OF COMMENTS RECEIVED
ON
DRAFT NATIONAL INSTRUMENT 62-101
AND
RESPONSE OF THE CANADIAN SECURITIES ADMINISTRATORS

1. INTRODUCTION

On September 4, 1998, the Canadian Securities Administrators (the "CSA") published for comment National Instrument62-101 Control Block Distribution Issues. National Instrument 62-101 was published concurrently with NationalInstrument 62-103 The Early Warning System and Related Take-over Bid and Insider Reporting Issues and NationalInstrument 62-102 Disclosure of Outstanding Share Data.

In this Notice, the version of the National Instrument 62-101 published in 1998 is called the "1998 Draft" and the finalversion published with this Notice is called the "National Instrument". National Instruments 62-101, 62-102 and 62-103are collectively called the "Early Warning Instruments".

The CSA received submissions on the 1998 Draft from five commenters. The commenters providing the submissionscan be grouped as follows:

Trade Associations 3

- Canadian Bankers Association ("CBA")

- Securities Subcommittee of the Business Law Section of the Canadian Bar Association(Ontario) (the "Securities Subcommittee")

- The Investment Funds Institute of Canada ("IFIC")

Financial Institution 1

- RT Investment Management Holdings ("RT")

Lawyer 1

- Simon Romano ("Romano")

TOTAL 5

Copies of the comment letters may be viewed at the office of Micromedia, 20 Victoria Street, Toronto, Ontario (416) 312-5211 or (800) 387-2689; the office of the British Columbia Securities Commission, 200-865 Hornby Street, Vancouver,British Columbia (604) 899-6660; the office of the Alberta Securities Commission, 410-300 5th Avenue S.W., Calgary,Alberta (403) 297-6454; and the office of the Commission des valeurs mobilières du Québec, Stock Exchange Tower,800 Victoria Square, 22nd Floor, Montréal, Québec (514) 940-2150.

In addition, the CSA received a number of comments on National Instruments 62-102 and 62-103, which are summarizedand discussed in the Notices of Rule for those National Instruments published concurrently with this Notice. A numberof the comments related generally to the Early Warning Instruments; reference should be made to the Notice of Rulefor National Instrument 62-103, which contains a summary and discussion of those comments.

The CSA have considered the comments received and thank all commenters for providing their comments.

The following is a summary of the comments received, together with the CSA's responses and, where applicable, theproposed changes in response to the comments. Terms used in this summary that are defined in the NationalInstrument have the meanings ascribed to them in that Instrument.

2. GENERAL COMMENTS

Companion Policy

The Securities Subcommittee asked that a companion policy for the National Instrument be provided, on the basis thatthe National Instrument is highly technical and that interpretative guidance would be helpful.

CSA Response

The CSA do not believe that a companion policy is necessary to accompany the National Instrument.

Availability of Prospectus Exemptions for Pledgees

The CBA stated that this is an appropriate opportunity to clarify that the prospectus requirements will not apply torealizations and dispositions by a pledgee of securities that do not constitute control blocks in the hands of a pledgee.The CBA stated that it was concerned that "securities legislation may be viewed to taint pledged securities of any quantityif they originate from a control block", even if the pledgee itself holds, or is disposing of, securities that do not constitutea control block in the hands of the pledgee.

CSA Response

The comment of the CBA relates to the prospectus requirements under the securities acts of most Canadianjurisdictions,(2) which are not intended to be affected or amended; the CBA's comment is therefore outside the scope ofthe National Instrument.

Aggregation Relief

The CBA sought clarification that the aggregation relief under Part 5 of National Instrument 62-103 can be relied uponfor the purpose of the prospectus exemption for control block distributions provided in section 2.1 of the NationalInstrument. The CBA noted that the definition of "applicable provisions" in National Instrument 62-103 appears to extendonly to subsection 2.1(2) of the National Instrument 62-101, and should be extended to include all of National Instrument62-101. The CBA argued that the concept of business units is important for the prospectus exemption for control blockdistributions to enable an eligible institutional investor's other business units to take advantage of the relief,notwithstanding the fact that a separate business unit may have made an acquisition of that class of shares or haveappointed directors or have inside information behind Chinese walls.

CSA Response

The CSA agree with this comment and have amended the definition of "applicable provisions" in National Instrument 62-103 to include all of section 2.1 of the National Instrument. It is not technically necessary to include section 2.2 of theNational Instrument in that definition.

3. COMMENTS ON SPECIFIC PROVISIONS OF THE 1998 DRAFT

Section 2.1

A number of comments were received concerning the conditions to the availability of the prospectus exemption providedin subsection 2.1(1).

IFIC submitted that the key condition for the use of the prospectus exemption by an eligible institutional investor shouldbe that the eligible institutional investor have a "passive" investment intent in relation to the relevant securities. IFICargued that the proper test for "passive" intent should be that contained in section 4.2 of National Instrument 62-103,namely that the investor be disqualified if it "makes or intends to make a formal bid" or "proposes or intends to propose"a transaction that gives it effective control of the issuer. Whether the eligible institutional investor has, or receives in theordinary course of its business, non-disclosed inside information about an issuer should be irrelevant. Consequently,IFIC urged the deletion of the conditions in paragraphs 2.1(1)(a) that pertained to the receipt of inside information(subparagraphs 2.1(1)(a)(ii) and (iii)).

Both the CBA and RT commented that subparagraph 2.1(1)(a)(iii) was too restrictive. Both argued that the prospectusexemption provided by subsection 2.1(1) should be available so long as the eligible institutional investor does not havenon-disclosed inside information at the time of the relevant trade; it should not matter whether the eligible institutionalinvestor receives inside information in the ordinary course of its business. The commenters suggested that otherprovisions of securities legislation, such as the prohibitions on tipping and on insider trading, should be sufficient to dealwith any concerns raised by the receipt of inside information in the ordinary course.

RT argued that subparagraph 2.1(1)(a)(iv) should be deleted. RT submitted that the concept of "effective control" usedin that provision is confusing due to the deeming provisions of securities legislation. RT provided additional commentson the definition of "effective control", which are summarized and discussed in the Notice of Rule for National Instrument62-103.

The CBA submitted that paragraph 2.1(1)(b) should be deleted. The CBA noted that lenders, in connection with aworkout or reorganization, may select, nominate or designate officers or directors of a reporting issuer. The CBA statedthat it "seems unreasonable" to deny lenders access to the relief offered by section 2.1 in such circumstances,particularly in light of subparagraph 2.1(1)(a)(ii) and the fiduciary duties of officers and directors.

Romano provided a number of drafting comments on section 2.1. He suggested that the reference to "current" insubparagraph 2.1(1)(a)(i) be deleted, and that provision simply reference the issue and filing of all required reports. Healso indicated that he found the reference to the word "held" in paragraph 2.1(1)(d) confusing and suggested alternativelanguage.

CSA Response

The conditions to the prospectus exemption provided by section 2.1 of the National Instrument have not been materiallychanged by the CSA in response to the comments. The CSA consider each such condition important to the reliefprovided by the section. The CSA note that the relief is provided to eligible institutional investors that do not have, andare not in a position to have, inside information concerning the subject reporting issuer. The exemption is analogousto the prospectus exemptions contained in securities legislation(3) that provide a prospectus exemption for control blockdistributions or pledgees selling pledged securities if the seller certifies that it has no inside information concerning thesubject reporting issuer. The exemption contained in section 2.1 provides similar relief, but eliminates the need for thecertificate; this is done on the basis that additional conditions ensuring that the eligible institutional investor not be in aposition to have inside information are satisfied. Therefore, the CSA consider it appropriate that there be conditions thatthe seller not have inside information, not have access in the ordinary course to inside information and not have anotherrelationship that could give it access to inside information, such as effective control or a role nominating or designatingdirectors or officers of the subject reporting issuer.

The CSA agree with one of Romano's drafting comments concerning subparagraph 2.1(1)(a)(i), and have deleted thereference to the issue of a press release.

The CSA have not made the suggested change on the deletion of the reference to "current" in order to avoid a possibleambiguity. The intent of subparagraph 2.1(1)(a)(i) is that the eligible institutional investor must have made all requiredfilings with respect to its current securityholding position. The CSA believe that a deletion of the word "current" couldsuggest that if any filing at any time in the past had been missed by the eligible institutional investor, it would forever bedenied the use of this exemption. The CSA wish to make the exemption available so long as all required filings inconnection with its current position have been made.

The CSA also note that this exemption continues to be available if there has been a change in the securityholdingpercentage of the eligible institutional investor in an issuer that has not triggered a reporting requirement under eitherthe early warning requirements or the alternative monthly reporting system. For example, an eligible institutional investorthat reported a position of 13 percent under the alternative monthly reporting system is still eligible to use the exemptioncontained in this Instrument, subject to compliance with the other conditions, if its position has changed to 14 percent.In that situation, the eligible institutional investor would have made all required reports in connection with its current 14percent position - i.e., it would have reported when its position was 13 percent and no new reporting requirements haveyet arisen.

Section 2.2

As with subsection 2.1(1), the CBA urged that aggregation relief be available in respect of section 2.2.

Romano requested a footnote or comment explaining the intended result of paragraph 2.2(2)(b). Romano asked if theresult of this provision was that any acquisition, even post-realization, by the pledgee would be irrelevant.

CSA Response

The CSA have not provided aggregation relief with respect to section 2.2 of the National Instrument. Section 2.2 pertainsto the hold period provisions contained in the securities legislation of some jurisdictions that, in turn, relate to prospectusexemptions contained in that securities legislation. The National Instrument, and National Instrument 62-103, generallydo not deal with existing prospectus exemptions.

The CSA note that subsection 2.2(2) pertains to the hold period provisions of securities legislation of three jurisdictionsset out in Appendix C of the National Instrument. Those provisions provide, in effect, that where a seller of securitiesthat acquired securities under a specified exemption, the seller cannot distribute any security of that class under thecontrol block/pledgee exemption unless all securities of that class were held by the seller for a specified hold period.Subsection 2.2(2) provides that, in effect, a pledgee need not be delayed in distributing securities by those hold periods,as subsection (2) deems the pledgee to have held the securities for the required hold periods.

NATIONAL INSTRUMENT 62-101

CONTROL BLOCK DISTRIBUTION ISSUES

TABLE OF CONTENTS

PART TITLE

PART 1 DEFINITIONS
1.1 Definitions
1.2 Interpretation

PART 2 PROSPECTUS EXEMPTION
2.1 Prospectus Exemption
2.2 Pledgees

PART 3 EXEMPTION
3.1 Exemption

PART 4 EFFECTIVE DATE
4.1 Effective Date

NATIONAL INSTRUMENT 62-101

CONTROL BLOCK DISTRIBUTION ISSUES

PART 1 DEFINITIONS

1.1 Definitions - In this Instrument

"control block distribution" means a trade to which the provisions of securities legislation listed in Appendix Aapply; and

"information circular requirement" means the requirement, under some circumstances, to deliver an informationcircular under Policy Statement Q-12 Secondary Distribution through Solicitations under the Securities Act(Quebec).

1.2 Interpretation - Terms defined or interpreted in National Instrument 62-103 The Early Warning System andRelated Take-over Bid and Insider Reporting Issues and used in this Instrument have the respective meaningsascribed to them in National Instrument 62-103.

PART 2 PROSPECTUS EXEMPTION

2.1 Prospectus Exemption

(1) The prospectus requirement, and in Quebec only, the information circular requirement, does not applyto a control block distribution of securities issued by a reporting issuer made by an eligible institutionalinvestor if

(a) the eligible institutional investor

(i) has filed the reports required under the early warning requirements or Part 4 of NationalInstrument 62-103 for the reporting issuer in connection with the current securityholdingpercentage of the eligible institutional investor in classes of voting and equity securities ofthe reporting issuer,

(ii) does not have knowledge of any material fact or material change with respect to thereporting issuer that has not been generally disclosed,

(iii) does not receive in the ordinary course of its business and investment activities knowledgeof any material fact or material change with respect to the reporting issuer that has notbeen generally disclosed, and

(iv) either alone or together with any joint actors, does not possess effective control of thereporting issuer;

(b) there are no directors or officers of the reporting issuer who were, or could reasonably be seento have been, selected, nominated or designated by the eligible institutional investor or any jointactor;

(c) the control block distribution is made in the ordinary course of business or investment activity ofthe eligible institutional investor;

(d) if the trade was not a control block distribution, the securities would not be subject to anyrequirements of securities legislation requiring them to be held for a specified period of time; and

(e) no unusual effort is made to prepare the market or to create a demand for the securities and noextraordinary commission or consideration is paid in respect of the control block distribution.

(2) An eligible institutional investor that makes a distribution in reliance on subsection (1) shall file a letterwithin 10 days after the distribution that describes the date and size of the distribution, the market onwhich it was made and the price at which the securities being distributed were sold.

2.2 Pledgees

(1) For purposes of a distribution of securities by a pledgee, the period of time referred to in the provisionof securities legislation set out in Appendix B is considered to commence on the date that the pledgoracquired the securities being distributed.

(2) If a pledgee is distributing securities, then for the purposes of the provisions of securities legislation setout in Appendix C

(a) a reference to a "seller" or "vendor" shall be construed as a reference to the pledgee; and

(b) the pledgee shall be considered to have held the securities being distributed for the applicabletime period provided for in that provision.

PART 3 EXEMPTION

3.1 Exemption

(1) The regulator or the securities regulatory authority may grant an exemption to this Instrument, in wholeor in part, subject to such conditions or restrictions as may be imposed in the exemption.

(2) Despite subsection (1), in Ontario only the regulator may grant such an exemption.

PART 4 EFFECTIVE DATE

4.1 Effective Date - This Instrument comes into force on March 15, 2000.

NATIONAL INSTRUMENT 62-101

APPENDIX A

CONTROL BLOCK DISTRIBUTIONS

JURISDICTION SECURITIES LEGISLATION REFERENCE

ALBERTA Clause 1(f)(iii) of the Securities Act (Alberta)

BRITISH COLUMBIA Paragraph (c) of the definition of "distribution" contained in subsection 1(1) of the Securities Act(British Columbia)

MANITOBA Paragraph 1(b) of the definition of "primary distribution to the public" contained in subsection 1(1)of the Securities Act (Manitoba)

NEW BRUNSWICK Paragraph (b) of the definition of "primary distribution to the public" contained in section 1 of theSecurity Frauds Prevention Act (New Brunswick)

NEWFOUNDLAND Clause 2(1)(l)(iii) of the Securities Act (Newfoundland)

NOVA SCOTIA Clause 2(1)(l)(iii) of the Securities Act (Nova Scotia)

ONTARIO Paragraph (c) of the definition of "distribution" contained in subsection 1(1) of the Securities Act(Ontario)

PRINCE EDWARD Clause 1(b.1)(iii) of the Securities Act
ISLAND (Prince Edward Island)

QUEBEC Policy Statement Q-12 Secondary Distribution through Solicitation under the Securities Act(Quebec)

SASKATCHEWAN Subclause 2(1)(r)(iii) of The Securities Act, 1988 (Saskatchewan)

NATIONAL INSTRUMENT 62-101

APPENDIX B

JURISDICTION SECURITIES LEGISLATION REFERENCE

ALBERTA Subparagraph 112(1)(d)(iii) of the Securities Act (Alberta)

BRITISH COLUMBIA Subparagraph 128(d)(iii) of the Securities Rules (British Columbia)

NEWFOUNDLAND Subsection 73(18) of the Securities Act (Newfoundland)

ONTARIO Subsection 3.11(1) of Rule 45-501 Exempt Distributions

SASKATCHEWAN Subclause 81(10)(b)(iii) of The Securities Act, 1988 (Saskatchewan)

NATIONAL INSTRUMENT 62-101

APPENDIX C

JURISDICTION SECURITIES LEGISLATION REFERENCE

NEWFOUNDLAND Subsection 73(19) of the Securities Act (Newfoundland)

ONTARIO Subsection 3.11(2) of Rule 45-501 Exempt Distributions

SASKATCHEWAN Subclause 81(10)(b)(iv) of The Securities Act, 1988 (Saskatchewan)

 

Footnotes

1. In Ontario, at (1998) 21 OSCB 5637.

2. In Ontario, subsection 72(7) of the Securities Act.

3. Clause 72(7) of the Securities Act (Ontario) and corresponding provisions in other securities legislation.