Photo of Joe BrennanBy Joe BrennanAugust 09 2012
Business Law

Important Insider Trading Decision by OSC - Public Company Insiders Take Notice

The Short Story:

In a decision released on August 1, 2012, the Ontario Securities Commission (“OSC”) determined that Paul Donald (“Donald”), a former officer and employee of Research in Motion Ltd. (“RIM”), engaged in the trading of shares of Certicom Corp. (“Certicom”) that was “contrary to the public interest”, and therefore illegal, despite the fact that Donald was not in technical breach of the insider trading restrictions contained in the Ontario Securities Act.

The OSC found that Donald, who was an officer and employee of RIM, learned of material facts regarding Certicom that had not been generally disclosed to the public from another RIM officer who was the head of the group investigating the potential acquisition of Certicom by RIM. 

The OSC stated in its decision that:

  • “market participants and the officers of public companies, such as Donald, are expected to adhere to a high standard of behaviour. In our view, by purchasing securities with knowledge of material facts which had not been generally disclosed, Donald clearly failed to meet that standard and did so in a manner that impugns the integrity of Ontario’s capital markets.”

The OSC further concluded that:

  • “any failure by the [OSC] to address trades that are based on information obtained as a result of a person’s position or relationship that has not been made available to the market calls into question the very integrity of our capital markets”.

The OSC concluded that that:

  • “although we do not find any technical breach of subsection 76(1) of the [Ontario Securities] Act, we find that Donald’s purchases of Certicom shares directly engage the fundamental principles of securities regulation and the purposes of the [Ontario Securities] Act. The unusual circumstances of this matter warrant a finding that Donald’s conduct was contrary to the public interest”.

The OSC has scheduled a sanctions hearing for this matter on September 13, 2012. 

This decision underscores the view of the OSC and the approach that it will take where it feels the need to protect investors and the integrity of the capital markets.

If you have interest in learning more about the “facts” and “law” in this decision, read on.  Otherwise, simply remember that if you are unsure about whether or not you have material information that prevents you from trading in securities of a public company, don’t trade.  And being technically “on-side” does not mean that the securities commissions will not sanction you.

The Facts:

The OSC found that Donald learned, from another officer of RIM responsible for investigating a potential acquisition of Certicom by RIM, that:

  1. RIM had been, but was not then currently, engaged in confidential discussions with Certicom relating to a potential acquisition of Certicom by RIM;
  2. RIM had an ongoing interest in acquiring Certicom; and
  3. Certicom’s then current share price was, in the opinion of that other RIM officer, undervalued based on Certicom’s licensing agreements;

(the foregoing facts collectively referred to herein as the “Three Facts”).

The day after learning the Three Facts Donald purchased $305,000 worth of Certicom shares. When RIM eventually acquired all of the shares of Certicom the following year, Donald made a gross profit of $295,000.

The Law:

Insider Trading Restrictions

Subsection 76(1) of the Ontario Securities Act states:

No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.

For these purposes, a “person or company in a special relationship with a reporting issuer” means,

  1. a person or company that is an insider, affiliate or associate of,


    1. the reporting issuer,
    2. a person or company that is proposing to make a take-over bid ... for the securities of the reporting issuer, or
    3. a person or company that is proposing to become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its property;
  2. a person or company that is engaging in or proposes to engage in any business or professional activity with or on behalf of the reporting issuer or with or on behalf of a person or company described in subclause (a)(ii) or (iii);
  3. a person who is a director, officer or employee of the reporting issuer or of a person or company described in subclause (a)(ii) or (iii) or clause (b);
  4. a person or company that learned of the material fact or material change with respect to the reporting issuer while the person or company was a person or company described in clause (a), (b) or (c);
  5. a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship.

The term material fact is defined in subsection 1(1) of the Ontario Securities Act as follows:

“material fact”, where used in relation to securities issued or proposed to be issued, means a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities.

Contrary to the Public Interest

Section 76(1) of the Ontario Securities Act provides that:

“The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders ...” 

Note that the Ontario Securities Act then provides for a list of such possible orders none of which seems directly on point with the facts in this case. However, the Supreme Court of Canada and the OSC have each provided their own guidance on the scope of this section.  In the Donald decision, the OSC noted that the Supreme Court clarified the scope of the OSC’s public interest jurisdiction under section 127 of the Ontario Securities Act in Committee for Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37, wherein it stated that: 

“… the public interest jurisdiction of the OSC is not unlimited. Its precise nature and scope should be assessed considering s. 127 in context. Two aspects of the public interest jurisdiction are of particular importance in this regard. First, it is important to keep in mind that the OSC’s public interest jurisdiction is animated in part by both of the purposes of the [Ontario Securities] Act described in s. 1.1, namely “to provide protection to investors from unfair, improper or fraudulent practices” and “to foster fair and efficient capital markets and confidence in capital markets”.”

In the Donald decision, the OSC noted that it previously stated in its decision in Re Canadian Tire Corp. (1987), 10 O.S.C.B. 857:

“Equally clearly in our view, the [OSC] should act to restrain a transaction that is clearly abusive of investors and of the capital markets, whether or not that transaction constitutes a breach of the [Ontario Securities] Act, regulations or a policy statement.”

The OSC also noted in the Donald decision that it previously stated in Re Biovail Corp. (2010), 33 O.S.C.B. 8914, another decision in which the OSC found that the respondent’s conduct was contrary to the public interest even though it did not contravene Ontario securities law, that:

“… where market conduct engages the animating principles of the [Ontario Securities] Act, the [OSC] does not have to conclude that an abuse has occurred in order to exercise its public interest jurisdiction.”

This decision underscores the view of the OSC and the approach that it will take where it feels the need to protect investors and the integrity of the capital markets.

The Issues:

Therefore, the issues in the Donald case were as follows:

  1. Donald a person in a “special relationship” with Certicom when he purchased Certicom shares?
  2. If the answer to the question set out in (a) above is yes, was Donald in possession of a “material fact” regarding Certicom when he purchased Certicom shares?
  3. If the answer to the question set out in paragraph (b) above is yes, was the material fact “generally disclosed”?
  4. If the answers to the questions set out in paragraphs (a), and (b) above are yes and (c) above is no, did Donald engage in insider trading, contrary to subsection 76(1) of the Ontario Securities Act?
  5. Whether or not Donald breached subsection 76(1) of the Ontario Securities Act, did his purchases of Certicom shares constitute conduct contrary to the public interest?

The Standard of Proof:

The Supreme Court of Canada held in F.H. v. McDougall, 2008 SCC 53, that there is one standard of proof in civil proceedings (i.e. such as regulatory hearings by securities commissions like the OSC), namely, proof on a balance of probabilities.

The Findings:

Insider Trading Restrictions

The OSC concluded that the Three Facts, taken together, would, if generally disclosed on the day following the date on which Donald learned of the Three Facts, reasonably be expected to have significantly affected the market price or value of Certicom’s securities, and would therefore be a “material fact”. However, the OSC further concluded that RIM was not at the stage of proposing a take-over bid, reorganization, amalgamation, merger or arrangement of similar business combination with Certicom at the time of the RIM golf event, and was not, therefore, in a “special relationship” with Certicom by virtue of subsection 76(5)(a)(iii) of the Ontario Securities Act at that time.  Consequently, Donald was also not in “special relationship” with Certicom at that time and therefore he was not technically in breach of section 76(1) of the Ontario Securities Act (i.e. the section of the Ontario Securities Act containing restrictions on insider trading).

Contrary to the Public Interest

However, the OSC also concluded that “Donald should not have traded in Certicom shares with knowledge of [the Three Material Facts]” and such actions were “contrary to the public interest”.

The OSC found that Donald, who was an officer and employee of RIM, learned of the Three Facts in the context of a confidential discussion with the RIM officer who was the head of the group investigating the potential acquisition of Certicom by RIM. 

The OSC stated in its decision that:

  • “market participants and the officers of public companies, such as Donald, are expected to adhere to a high standard of behaviour. In our view, by purchasing securities with knowledge of material facts which had not been generally disclosed, Donald clearly failed to meet that standard and did so in a manner that impugns the integrity of Ontario’s capital markets.”

The OSC further concluded that:

  • “any failure by the [OSC] to address trades that are based on information obtained as a result of a person’s position or relationship that has not been made available to the market calls into question the very integrity of our capital markets”.

The OSC concluded that that:

  • “although we do not find any technical breach of subsection 76(1) of the [Ontario Securities] Act, we find that Donald’s purchases of Certicom shares directly engage the fundamental principles of securities regulation and the purposes of the [Ontario Securities] Act. The unusual circumstances of this matter warrant a finding that Donald’s conduct was contrary to the public interest”.

The OSC has scheduled a sanctions hearing for this matter on September 13, 2012.

The Key Lesson:

If you are unsure about whether or not you have material information that prevents you from trading in securities of a public company, don’t trade.  And being technically “on-side” does not mean that the securities commissions will not sanction you.

Invitation for Discussion:

If you would like to discuss the insider trading rules under Canadian securities legislation or the powers of the securities commissions to act “in the public interest”, please do not hesitate to contact one of the lawyers in the Business Law group at Nerland Lindsey LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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