Getting the Deal Through - Securities Finance 2011 - Gowlings

®Securities Financein 27 jurisdictions worldwide2011Contributing editor: Mark GreenePublished byGetting the Deal Throughin association with:Bahamondez, Alvarez & Zegers LtdaBowman Gilfillan IncCajola & AssociatiCravath, Swaine & Moore LLPDebarliev, Dameski & Kelesoska Attorneys at LawDLA Piper AustraliaElvinger, Hoss & PrussenFerrere AbogadosGide Loyrette NouelGorrissen FederspielGowling Lafleur Henderson LLPHarry Elias Partnership LLPJD Sellier + CoKinstellarLenz & StaehelinLuthra & Luthra Law OfficesMattos Filho, Veiga Filho, Marrey Jr e Quiroga AdvogadosMayer Brown JSMMGAP Attorneys at LawNagashima Ohno & TsunematsuSarie-Eldin & PartnersSchoenherrSimont Braun SCRLSimon Tortell & AssociatesSlaughter and MaySquire, Sanders & Dempsey (US) LLPUdo Udoma & Belo-Osagie

contents®Securities Finance2011Contributing editor:Mark GreeneCravath Swaine & Moore LLPBusiness development managersAlan LeeGeorge IngledewRobyn HetheringtonDan WhiteMarketing managersEllie NotleySarah WalshMarketing assistantsAlice HazardWilliam BentleySarah SavageSubscriptions managerNadine RadcliffeSubscriptions@GettingTheDealThrough.comAssistant editorAdam MyersEditorial assistantLydia GergesSenior production editorJonathan CowieChief subeditorJonathan AllenSenior subeditorKathryn SmulandSubeditorsDavet HylandCaroline RawsonEditor-in-chiefCallum CampbellPublisherRichard DaveySecurities Finance 2011Published byLaw Business Research Ltd87 Lancaster RoadLondon, W11 1QQ, UKTel: +44 20 7908 1188Fax: +44 20 7229 6910© Law Business Research Ltd 2011No photocopying: copyright licencesdo not apply.ISSN 1744-0939The information provided in thispublication is general and may not applyin a specific situation. Legal advice shouldalways be sought before taking any legalaction based on the information provided.This information is not intended tocreate, nor does receipt of it constitute, alawyer–client relationship. The publishersand authors accept no responsibility forany acts or omissions contained herein.Although the information provided isaccurate as of May 2011, be advised thatthis is a developing area.Overview Mark Greene, Andrew Pitts and George Stephanakis Cravath, Swaine & Moore LLP 3Australia David Morris and Catherine Merity DLA Piper Australia 6Austria Ursula Rath and Christoph Moser Schoenherr 13Belgium Sandrine Hirsch and Vanessa Marquette Simont Braun SCRL 20Brazil Jean Marcel Arakawa and Vanessa FiusaMattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados 27Canada Eugene Chen, Martine Guimond, Brett A Kagetsu and Jason A SaltzmanGowling Lafleur Henderson LLP 32Chile Matías Zegers and Gonzalo Rivera Bahamondez, Alvarez & Zegers Ltda 41Denmark Søren Fogh and Michael Steen Jensen Gorrissen Federspiel 46Egypt Motaz Eldreny Sarie-Eldin & Partners 51France Arnaud Duhamel Gide Loyrette Nouel 56Germany Andreas Fillmann and Jörg Uhlmann Squire, Sanders & Dempsey (US) LLP 62Hong Kong Patrick Wong and Noella Chow Mayer Brown JSM 72India The Securities and Finance Team Luthra & Luthra Law Offices 78Italy Riccardo G Cajola Cajola & Associati 84Japan Masatsura Kadota and Shinichi Araki Nagashima Ohno & Tsunematsu 90Luxembourg Philippe Hoss Elvinger, Hoss & Prussen 95Macedonia Elena Miceva and Dragan Dameski Debarliev Dameski & Kelesoska Attorneys at Law 101Malta Simon Tortell, Adrian Cutajar and Nicholas Micallef Simon Tortell & Associates 105Nigeria Yinka Edu Udo Udoma & Belo-Osagie 109Russia Svetlana London and Alexander Yurchik MGAP Attorneys at Law 114Singapore Claudia Teo and Douglas Koh Harry Elias Partnership LLP 119South Africa Ezra Davids, David Yuill and Ryan Wessels Bowman Gilfillan Inc 125Switzerland Jacques Iffland and Patrick Schleiffer Lenz & Staehelin 133Trinidad and Tobago William David Clarke and Donna-Marie Johnson JD Sellier + Co 138Turkey Halide Cetinkaya, Gamze Cigdemtekin and Tuna Cakirca Kinstellar 143United Kingdom Peter Brien and Daniel Won Slaughter and May 149United States Mark Greene, Andrew Pitts and George Stephanakis Cravath, Swaine & Moore LLP 157Uruguay Diego Rodríguez Ferrere Abogados 165Printed and distributed byEncompass Print SolutionsTel: 0844 2480 112LawBusinessResearch

CanadaGowling Lafleur Henderson LLPCanadaEugene Chen, Martine Guimond, Brett A Kagetsu and Jason A SaltzmanGowling Lafleur Henderson LLPStatutes and regulations1 What are the relevant statutes and regulations governing securitiesofferings? Which regulatory authority is primarily responsible for theadministration of those rules?Each of Canada’s 13 provinces and territories has its own securitieslaws and, despite recent efforts to harmonise this legislationacross Canada, the issuance of securities to Canadian investors iscurrently governed by the securities laws of the province or territoryin which the Canadian investor resides and, in certain jurisdictions,also where the issuer’s head office is located. Generally, each provinceand territory has a securities act and related regulations, includingharmonised national and multilateral instruments enacted throughregulation and associated companion policies. This article assumesthat prospective investors of securities are resident in the provinces ofOntario, British Columbia, Alberta or Québec. If securities are soldto investors in other Canadian provinces or territories, a review ofsuch jurisdiction’s securities laws will be required in order to confirmwhether there are any different or additional requirements.The securities regulatory authorities in each province and territorythat are primarily responsible for the administration of localsecurities laws are:Province or TerritoryBritish ColumbiaAlbertaSaskatchewanManitobaOntarioQuébecNew BrunswickNova ScotiaPrince Edward IslandNewfoundland and LabradorYukonNorthwest TerritoriesNunavutSecurities Regulatory AuthorityBritish Columbia Securities CommissionAlberta Securities CommissionSaskatchewan Financial ServicesCommissionManitoba Securities CommissionOntario Securities CommissionAutorité des marchés financiersNew Brunswick Securities CommissionNova Scotia Securities CommissionSecurities Office - Prince Edward IslandDepartment of Government Services,Consumer & Commercial Affairs Branch,Newfoundland and LabradorSuperintendent of Securities,Government of YukonSuperintendent of Securities,Government of Northwest TerritoriesSuperintendent of Securities,Government of NunavutThe provincial and territorial securities regulatory authorities havealso formed a voluntary umbrella organisation called the CanadianSecurities Administrators (CSA) that is primarily responsible fordesigning policies and regulations that are consistent across Canadaand for ensuring the smooth operation of Canada’s securitiesindustry.The other key regulatory authorities in Canada that play a rolein the governance of securities offerings are the Investment IndustryRegulatory Organisation of Canada (IIROC) and the Mutual FundDealers Association of Canada (MFDA), both of which have beenrecognised as self-regulatory organisations by the securities regulatoryauthorities in Canada. IIROC’s role is to oversee all investmentdealers, as well as trading activity on debt and equity marketplacesin Canada, and the MFDA’s role is to oversee all mutual fund dealersoperating in Canada.Finally, the principal stock exchanges in Canada, being theToronto Stock Exchange (TSX) and the TSX Venture Exchange(TSXV), also have rules and policies applicable to issuers listed onthose exchanges and to member investment dealers, which are relevantto securities offerings.Public offerings2 What regulatory or stock exchange filings must be made in connectionwith a public offering of securities? What information must beincluded in such filings or made available to potential investors?Primary offeringsAn issuer wishing to make a public offering of securities in Canadadoes so by preparing and filing a preliminary prospectus with thesecurities regulators in the provinces and territories in which theoffering is to be made and with the stock exchange on which itdesires to list its securities. In Canada, the vast majority of issuersare listed on the TSX or the TSXV. After addressing the commentsof Canadian securities regulators and obtaining conditional approvalof the TSX or TSXV, the issuer files a final prospectus and obtains adecision document that allows the securities to be qualified for saleto the public. The prospectus performs two functions. First, it is usedby the issuer and the underwriters as a marketing document for theoffering. Second, it is required to provide potential investors with‘full, true and plain disclosure of all material facts’ relating to thesecurities being offered for sale.General prospectus requirements are governed by NationalInstrument 41-101 General Prospectus Requirements (NI 41-101).For eligible reporting issuers with certain required informationalready filed with the securities regulators and publicly available,an issuer may conduct an offering of securities by preparing a shortform prospectus in accordance with National Instrument 44-101Short Form Prospectus Distributions (NI 44-101). An issuer mayalso prepare a shelf prospectus in accordance with National Instrument44-102 Shelf Distributions, which is a prospectus that is filedand put on a ‘shelf’ (for up to 25 months) until the issuer takes someor all of the qualified securities ‘off the shelf’ for distribution. At thetime of the sale, the issuer must file a shelf prospectus supplementto ensure that the subscribers are provided with full, true and plaindisclosure of all material facts relating to the securities being offeredfor sale at that time.32 Getting the Deal Through – Securities Finance 2011

CanadaGowling Lafleur Henderson LLPsecurities regulators and the receipt for such final prospectus hasbeen received by the issuer. Once a preliminary prospectus is filed,the principal regulator will typically take up to three business days toreview and provide their comments on the preliminary prospectus.The general steps for filing a prospectus in a ‘bought deal’ publicoffering are as follows:• the issuer and the lead underwriter enter into an enforceableagreement and the issuer issues a press release;• the underwriters solicit expressions of interest;• within four business days of the date of the enforceable agreement,the issuer files the preliminary prospectus along withrelated materials (including an underwriting agreement) and isreceipted the same day provided that the materials are filed byearly afternoon;• the principal regulator generally takes three business days toreview and provide its first comment letter to the issuer;• a response letter along with a ‘blackline’ of the final prospectusto the preliminary prospectus is filed evidencing all revisions tothe preliminary prospectus;• assuming all of the principal regulator’s concerns are addressedin the response letter, the issuer receives clearance to file the finalprospectus and related materials;• if the principal regulator’s concerns are not fully addressed, theprincipal regulator will issue a second comment letter withinthree business days and the process repeats until all of the principalregulator’s concerns are addressed;• once the issuer receives clearance to file the final prospectus, thefinal prospectus along with the related materials are filed and theissuer is receipted; and• the issuer and the underwriters proceed to the closing of the publicoffering.The general steps for filing a prospectus in a ‘fully marketed’ or ‘bestefforts’ public offering are as follows:• the issuer and the lead underwriter or agent enter into a bindingengagement agreement;• the issuer files the preliminary prospectus along with relatedmaterials and is receipted the same day provided that the materialsare filed no later than the early afternoon;• the principal regulator generally takes three business days toreview and provide its first comment letter to the issuer;• a response letter along with a ‘blackline’ of the final prospectusto the preliminary prospectus is filed;• if all of the principal regulator’s concerns are addressed in theresponse letter, the issuer receives clearance to file the final prospectusand related materials;• if the principal regulator’s concerns are not fully addressed, theprincipal regulator will issue a second comment letter withinthree business days and the process repeats until all of the principalregulator’s concerns are addressed;• during the time that the principal regulator is reviewing the preliminaryprospectus, the underwriters or agents will pre-marketthe offered securities and build the ‘book’ and will negotiate anunderwriting or agency agreement with the issuer;• once the issuer receives clearance to file the final prospectus, thefinal prospectus along with the related materials (including theunderwriting or agency agreement) are filed and the issuer isreceipted;• the issuer will issue a press release regarding the entering into ofan underwriter or agency agreement and the filing of the finalprospectus; and• the issuer and the underwriters or agents proceed to the closingof the public offering.The timelines outlined for responses by regulators in the precedingparagraphs are applicable for a short form prospectus filed under NI44-101 where the issuer is incorporating the majority of its materialinformation into the prospectus from documents that are filed andpublicly available (eg, its annual information form, press releases,material change reports and financial statements). For a long formprospectus filed under NI 41-101, the regulator’s response times willbe significantly longer, generally 10 business days for a first commentletter.4 What publicity restrictions apply to a public offering of securities?Are there any restrictions on the ability of the underwriters to issueresearch reports?The Canadian securities regulators recommend certain practices thatparticipants in prospectus distributions should consider to avoidcontravening securities legislation in the Companion Policy to NI41-101. In addition, to ensure that advertising or marketing activitiesare carried out in compliance with the prospectus requirements,participants must ensure that any statements made in the course ofadvertising or marketing activities are not untrue or misleading andotherwise comply with securities legislation. Furthermore, unless anexemption from the registration requirement is available, advertisingor marketing activities may be made only by a person or companywho is registered in the appropriate category.Prior to issuance of preliminary receiptIn general, any advertising or marketing activities undertaken in connectionwith a prospectus prior to the issuance of a receipt for thepreliminary prospectus are prohibited under securities legislation byvirtue of the prospectus requirement. This applies to any act, advertisement,solicitation, conduct or negotiation directly or indirectlyin furtherance of a distribution unless a prospectus exemption isavailable.During the waiting periodSecurities legislation provides an exception to the prospectus requirementfor limited advertising or marketing activities during the waitingperiod between the issuance of the receipt for the preliminaryprospectus and the receipt for the final prospectus, including:• the distribution of notices, circulars, advertisements, letters orother communications that ‘identify’ the securities proposed tobe issued, state the price of such securities and state the nameand address of a person or company from whom purchases ofsecurities may be made;• the distribution of the preliminary prospectus; and• the solicitation of expressions of interest from a prospective purchaser,if prior to such solicitation or forthwith after the prospectivepurchaser indicates an interest in purchasing the securities, acopy of the preliminary prospectus is forwarded to such prospectivepurchaser. Any communications used in connection with aprospectus offering during the waiting period must contain alegend prescribed by NI 41-101.After the issuance of the final receiptAdvertising or marketing activities that are not prohibited by theprospectus requirement during the waiting period may also be undertakenon the same basis after a receipt has been issued for the finalprospectus relating to the distribution. In addition, the prospectusand any document filed with or referred to in the prospectus may bedistributed. Any communications used in connection with a prospectusoffering following the issuance of a final receipt must contain alegend prescribed by NI 41-101.5 Are there any special rules that differentiate between primary andsecondary offerings? What are the liability issues for the seller ofsecurities in a secondary offering?As discussed under question 2, under a secondary offering, the sellingsecurityholders use the same prospectus to sell their securities as34 Getting the Deal Through – Securities Finance 2011

Gowling Lafleur Henderson LLPCanadathe company uses to offer newly issued securities. However, eventhough the prospectus is prepared by the issuer and its advisers, sellingsecurityholders have statutory liability for a misrepresentation inthe prospectus and will be jointly and severally liable with the issuer(and certain other parties) for the full amount of the offering, withoutthe benefit of a due diligence defence. To limit potential exposure, aselling securityholder may seek indemnities from the issuer and otherselling securityholders.In certain circumstances, under a permitted secondary offering,a principal may sell all or any portion of the securities that it held atthe time of the public offering free of escrow, which must be disclosedin the prospectus. Any of the principal’s unsold escrow securities willcontinue to be subject to escrow.A secondary distribution of securities is permitted to be effectedpursuant to a prospectus offering through the facilities of the TSX orthe TSXV. Under the policies of the TSXV, if an offering consists ofboth a primary and a secondary distribution, the primary distributionmust be completed before the commencement of the secondarydistribution and the price of the secondary distribution must be thesame as the primary distribution. The selling securityholders of anysecondary offering must bear a proportionate share of the agent’scommission and offering costs. The TSX does not set out any specificrequirements regarding a secondary distribution.6 What is the typical settlement process for sales of securities in apublic offering?Generally, there are two types of settlement processes for a sale ofsecurities in a public offering in Canada. Traditionally, the processhas been to have the issuer issue a physical global certificate representingthe aggregate shares issued under the public offering, registeredin the name of ‘CDS & Co’, which will get directly depositedwith CDS Clearing and Depository Services Inc (CDS) by a participant(usually the transfer agent of the issuer) immediately followingthe closing of the public offering. CDS will then credit the lead underwriter’saccount with the number of shares shown on the certificate.More recently, the settlement for public offerings has been done on a‘book-entry only’ basis where the lead underwriter will electronicallyset up its deposit account with CDS using the CUSIP (Committee onUniform Security Identification Procedures) number of the issuer’ssecurities and provide the deposit information to the transfer agent sothat it can be electronically deposited directly by the transfer agent tothe account of the lead underwriter through the facilities of CDS.Private placings7 Are there specific rules for the private placing of securities? Whatprocedures must be implemented to effect a valid private placing?Private placements are sales of securities effected by means of exemptionsfrom the legal requirement to file and deliver a prospectus tothe public. National Instrument 45-106 Prospectus and RegistrationExemptions and Regulation 45-106 Respecting Prospectus andRegistration Exemptions in Québec (collectively, NI 45-106) are theapplicable regulatory instruments for private placements in Canada.It is the issuer’s responsibility to ensure that it is issuing securities toinvestors in compliance with applicable securities laws.NI 45-106 describes various private placement exemptions. Themost commonly used prospectus exemption by issuers for privateplacements in Canada is the ‘accredited investor’ exemption. Otherprospectus exemptions under NI 45-106 may be available to issuerswhen certain specific criteria are met. This section summarises themore relevant exemptions that issuers use.Accredited investor exemptionWhen an investor falls within the definition of an ‘accredited investor’,issuers are permitted to rely on the accredited investor exemption(the Accredited Investor Exemption) to the prospectus requirementto issue securities to an investor provided that the investor is purchasingthe securities as principal and has not been created solely to relyon the exemption. Under this exemption, purchasers of securities thatmeet the definition of an accredited investor are treated as sophisticatedinvestors that do not require the protection of a prospectusto make an investment decision. Typically, purchasers who meetcertain specified income or asset thresholds, for example, Canadianfinancial institutions such as banks and insurance companies, otherinstitutional investors such as pension funds, as well as individualswith a net worth, financial assets or annual income over stipulatedthresholds, fall into the category of accredited investors.The onus is on the issuer to determine whether or not potentialinvestors qualify as accredited investors. Canadian securities regulatorsexpect that an issuer will exercise reasonable diligence for thepurpose of determining the availability of the Accredited InvestorExemption and have indicated that, unless an issuer has specificknowledge otherwise, reasonable diligence will have been exercisedif the issuer obtains a written declaration or certificate from the prospectiveinvestor as to its status as an accredited investor.Minimum investment amount exemptionThe ‘Minimum Investment Amount Exemption’ is available to issuersif:• the investor buys as principal;• the investor’s acquisition cost of the security is not less thanC$150,000, paid in cash at the time of closing; and• the distribution is of a security of a single issuer.The timing of the cash requirement is significant, as full payment ata later date would not qualify the issuer for this exemption. If theinvestment exceeds C$150,000, only the first C$150,000 needs tobe paid in cash. The requirement of the investor to buy any securitiesas principal prevents a syndicate or group of investors from poolingtheir funds to use this exemption.Employee exemptionsIssuers in certain jurisdictions may be exempted from the prospectusrequirement when offering securities to their employees, executiveofficers, directors or consultants (the Employee Exemption), subjectto certain additional requirements. Securities offered to the permittedassigns of such persons captured under this exemption, includingspouses, trustees, holding entities and registered retirement savingplans and income plans of such persons or their spouses, are includedunder the Employee Exemption.Offering memorandum exemptionWhen certain requirements are met, issuers effecting private placementsin jurisdictions of Canada (other than Ontario) can be exemptedfrom the prospectus requirements under Canadian securities laws bydelivering an offering memorandum to prospective investors priorto the sale of securities to the investors (the OM Exemption). TheOM Exemption allows issuers selling their own securities to distributethem to investors purchasing the securities as principal. In orderto qualify for the OM Exemption, the offering memorandum mustcomply with the form requirements set forth in NI 45-106. As witha prospectus, an offering memorandum requires issuers to disclose,in writing, details about the business and the securities offered. Thedisclosure requirements in an offering memorandum, however, aremuch less onerous than those in a prospectus. In addition, unlike aprospectus, an offering memorandum is not reviewed in advance bythe applicable securities regulators. The issuer has 10 days after theinitial sale of securities to file a copy of the offering memorandumwith the applicable securities regulator.In Alberta, Manitoba, the Northwest Territories, Nunavut, PrinceEdward Island, Québec, Saskatchewan and the Yukon, there is anadded restriction whereby the maximum investment by the purchaserwww.gettingthedealthrough.com 35

CanadaGowling Lafleur Henderson LLPin question is C$10,000 unless the purchaser is an ‘eligible investor’.The detailed definition of ‘eligible investor’ is set out in NI 45-106.Investors in British Columbia, New Brunswick, Nova Scotia andNewfoundland are permitted without the additional requirement ofbeing an eligible investor to invest in excess of C$10,000 under theOM Exemption. The OM Exemption is not available in Ontario orto certain types of investment funds.Required filings for private placementsWithin 10 days of the date of closing of the sale of securities on a privateplacement basis, the issuer must file with the Canadian securitiesregulatory authority in the jurisdiction in which the investor resides(and in the case of an issuer with its head office in certain jurisdictions,with that jurisdiction) a completed and executed Report ofExempt Distribution on Form 45-106F1.Registration requirementsWhen issuing securities in Canada, an issuer must also determine if itis required to be registered under securities laws. National Instrument31-103 Registration Requirements and Exemptions and Regulation31-103 Respecting Registration Requirements and Exemptions inQuébec (collectively, NI 31-103) govern registration requirements inCanada. In general, any person who trades in securities for a businesspurpose or holds themselves out as trading in securities for a businesspurpose, must be registered as a dealer or rely on an exemptionfrom registration.There are certain exceptions, however, that have been institutedby some jurisdictions. For example, each of the securities regulatorsin Alberta, British Columbia, Saskatchewan, Manitoba, Nunavut,the Northwest Territories and the Yukon have provided certain limitedtrade-based registration exemptions to persons who would otherwisebe required to register as exempt market dealers (EMD) underNI 31-103. These registration exemptions provide for an exemptionfrom the EMD registration requirement for persons trading in securitiesin reliance on certain prospectus exemptions under NI 45-106,specifically, the Accredited Investor Exemption, family, friends andbusiness associates exemptions, the OM Exemption and MinimumInvestment Amount Exemption. Certain conditions must be met inorder to rely on this exemption from registering as an EMD in thesejurisdictions. Specifically, the person or company seeking to rely onthe exemption:• must not be registered or required to be registered in any jurisdiction,including a foreign jurisdiction;• must not have provided advice to the purchaser with respect tosuitability;• must obtain from the purchaser a signed risk acknowledgementin the prescribed form;• must not have provided financial services to the purchaser atany time (other than in connection with a prospectus-exemptdistribution under the same exemptions as stated in the previousparagraph);• must not hold or have access to the purchaser’s assets; and• must electronically file with the applicable securities regulatora current or updated information report in the prescribed formwithin ten days of relying on the exemption.8 What information must be made available to potential investors inconnection with a private placing of securities?Under NI 45-106, there is no requirement to provide informationto investors under the private placement exemptions. However, asubscription agreement with representations and warranties is typicallyprovided. If an issuer voluntarily provides a prospective purchaserwith a private placement memorandum, which qualifies as an‘offering memorandum’, depending on the jurisdiction of the privateplacement, other restrictions and requirements may apply pursuantto applicable securities legislation, including requirements relatingto the disclosure of statutory rights of action and delivery of thedocument to the applicable regulator. If an issuer is relying on theOM Exemption, all of the requisite information as stated in the NI45-106 compliant form must be provided.9 Do restrictions apply to the transferability of securities acquired ina private placing? And are any mechanisms used to enhance theliquidity of securities sold in a private placing?Restrictions on trading securities are generally imposed on securitiesissued under private placement exemptions to the prospectusrequirement as there has not been prospectus-level disclosure on theissuer and the securities and, in many cases, a registered dealer hasnot advised investors on the investment.National Instrument 45-102 Resale of Securities generally implementsa resale or ‘hold period’ for a security that expires four monthsand a day after its issuance, assuming the issuer has been a ‘reportingissuer’ for at least four months. For non-reporting issuers, the holderof the security must not trade the security before the date that is fourmonths and a day after the later of the distribution date (typically thedate of closing), and the date the issuer became a reporting issuer inany province or territory.An issuer can reduce the length of a hold period by filing a prospectuswith the securities regulators to qualify the securities previouslyissued under the private placement exemption. A security mayalso be traded to another purchaser if there is another available prospectusexemption, such as a sale to an accredited investor. The newpurchaser would acquire the security with the existing hold periodand would not be able to resell it until the expiry of the hold periodor through another prospectus exemption.Offshore offerings10 What specific domestic rules apply to offerings of securities outsideyour jurisdiction made by an issuer domiciled in your jurisdiction?Where an issuer distributes securities from British Columbia orAlberta to an investor resident outside of British Columbia orAlberta, respectively, the issuer must comply with the registrationand prospectus requirements of the Securities Act (British Columbia)or the Securities Act (Alberta), respectively, or rely on exemptionsfrom those requirements, in addition to complying with the laws ofthe jurisdiction of residence of the investor.In Québec, with respect to an offering outside of the jurisdiction,the Securities Act (Québec) provides that the issuer must preparea prospectus and obtain a receipt therefor from the Autorité desmarchés financiers (the ‘AMF’), unless the AMF agrees or does notobject within 15 days after receiving certain information requiredby regulation.Particular financings11 What special considerations apply to offerings of exchangeableor convertible securities, warrants or depositary shares or rightsofferings?Issuers proposing to offer exchangeable, convertible or exercisablesecurities or rights pursuant to a rights offering must do so by prospectusand through a registered dealer or in reliance on an applicableprospectus and registration exemption. An exemption fromthe prospectus and registration requirements exists for the issuanceof the underlying security issuable upon exchange, conversion orexercise in accordance with the terms and conditions of the initialsecurity.36 Getting the Deal Through – Securities Finance 2011

Gowling Lafleur Henderson LLPCanadaUnderwriting arrangements12 What types of underwriting arrangements are commonly used?As discussed in question 2 above, there are generally three types ofunderwriting arrangements: the ‘bought deal’ financing; the ‘fullymarketed’ offering; and the ‘best efforts’ offering.The ‘fully marketed’ offering includes a firm commitment fromthe underwriter, under which the underwriter agrees to purchase allof the securities offered by the issuer for purposes of resale to itsown investor network. In this case, the transaction is firm, subject toany ‘market out’ clauses contained in the underwriting agreement.In many of these underwritings, lead underwriters are selected and asyndicate of underwriters is assembled to support the offering. Thesetransactions are common in the case of an initial public offering orwhen an existing reporting issuer is eligible to file a short form prospectusunder Canadian securities law. Such eligibility enables anissuer to go to the market in an abridged time frame, thereby reducingthe market risk to the underwriter.In a ‘best efforts’ offering, a dealer does not purchase the securitiesoffered as principal, but instead agrees to use its ‘best efforts’ tosell the securities as agent for the issuer. In this case, the dealer incursno financial loss in the case of an unsuccessful offering, other thanthe failure to receive a commission that is contingent on the successof the offering.13 What does the underwriting agreement typically provide with respectto indemnity, force majeure clauses, success fees and over-allotmentoptions?IndemnitiesCanadian underwriting agreements typically require the issuer toindemnify the underwriters and their respective directors, officers,employees, agents, affiliates and shareholders from and against all‘claims’ in any way caused by, or arising directly or indirectly from,or in consequence of:• any breach of or default under any representation, warranty orcovenant contained in the underwriting agreement;• any misrepresentation contained in any of the offeringdocuments;• any order made or any inquiry, investigation or proceeding instituted,threatened or announced by any court, securities regulatoryauthority or stock exchange or by any other competentauthority based on any untrue statement, omission or misrepresentationcontained in any of the offering documents; or• the issuer not complying with any requirements of any securitieslaws.Notwithstanding the above, such indemnities will not apply to claimsthat arise from the negligence, dishonesty or wilful misconduct of theparty seeking indemnification.Force majeure clausesUnderwriters are typically entitled to terminate their obligations topurchase the offered securities if, among other things:• any inquiry, investigation or other proceeding is commencedannounced or threatened, if any order is issued by a regulatoryauthority or if there is any change of law that in the reasonableopinion of the underwriters prevents or restricts the trading inor adversely impacts the distribution or the marketability of theoffered securities;• a material adverse change occurs or the underwriter becomesaware of any undisclosed material fact that has or would beexpected to have a significant adverse effect on the market priceor value of the offered securities;• the state of the financial markets is such that the offered securitiescannot in the reasonable opinion of the underwriters be profitablymarketed; or• there should develop, occur or come into effect any event, condition,occurrence, catastrophe, act of war or terrorism which inthe reasonable opinion of the underwriter significantly affects thebusiness operations or affairs of the issuer.Success feesUnderwriter commissions are typically equal to a percentage of theaggregate purchase price for the purchased securities, including anysecurities purchased upon the exercise of an over-allotment option.Such percentages can range from 5 to 8 per cent in the case of aninitial public offering.Over-allotment optionsUnderwriters are typically granted, in their respective syndicate percentages,a non-assignable option to purchase up to 10 per cent of thesecurities offered on the public offering at the offering price within30 days of the closing date.14 What additional regulations apply to underwriting arrangements?Only registered dealers may act as underwriters in connection withdistributions of securities in Canada. A registered dealer that is fullyregistered with the Canadian securities regulators as an ‘investmentdealer’ may act as underwriter with respect to any distribution ofsecurities. A registered dealer that is registered with the Canadiansecurities regulators as an EMD may act as underwriter with respectto a distribution of securities made under an exemption from theprospectus requirements.In addition, National Instrument 33-105 Underwriting Conflictsprovides a framework to address situations where there is a director indirect relationship between the issuer (or selling securityholder)and the underwriter which might give rise to a perception that theyare not independent of each other in connection with a distribution.This instrument requires full disclosure of the relationships that giverise to the potential conflict of interest and the use of an independentunderwriter in certain circumstances.Ongoing reporting obligations15 In which instances does an issuer of securities become subject toongoing reporting obligations?There are three primary ways in which an issuer of securities becomesa ‘reporting issuer’ in Canada, and therefore subject to reportingobligations:• by virtue of filing a prospectus with, and obtaining a receipt from,a provincial securities regulator (eg, an initial public offering);• by virtue of directly listing on a stock exchange recognised by aprovincial securities regulator, such as the TSX or the TSXV; or• by way of a statutory amalgamation, arrangement or statutoryprocedure where one of the amalgamating or merged companiesor the continuing company has been a reporting issuer, in somecases, for at least twelve months.In addition, an issuer may become a reporting issuer by being designatedas such by a securities regulator or pursuant to applicablesecurities legislation.An issuer may also become a reporting issuer indirectly if it isacquired by an existing reporting issuer in a reverse take-over transaction(RTO). In an RTO, an existing reporting issuer acquires allof the shares of a non-reporting issuer in exchange for such numberof treasury shares of the reporting issuer that amounts to a controlposition of the reporting issuer. Following the RTO, the businessof the acquired company becomes the primary business of thewww.gettingthedealthrough.com 37

CanadaGowling Lafleur Henderson LLPUpdate and trendsIn June 2009, the Canadian federal government launched an initiativeto transition from the current system of 13 provincial and territorialsecurities regulators to a single national securities regulator, theCanadian Securities Regulatory Authority (CSRA). Since then, thefederal government has drafted a new national securities act (theNew Act). The CSRA has indicated that it will adopt the provincial andterritorial rules that are already harmonised across Canada and thatthose rules will become CSRA regulations under the New Act; thisshould help to ensure that there will be a seamless transition andminimal disruption for market participants. There will also be worktowards resolving the non-harmonised elements in the existing rulesand regulations.To date, the Quebec Court of Appeal and the Alberta Court ofAppeal have both ruled that the Canadian federal government doesnot have the constitutional authority to regulate the securities industryin Canada. The Canadian federal government has asked Canada’shighest court, the Supreme Court of Canada, for its opinion onwhether the New Act is within the constitutional jurisdiction of theCanadian federal government, and it is expected that the SupremeCourt of Canada will rule on this issue by the end of 2011.reporting issuer and is therefore the principal subject matter of theissuer’s ongoing reporting. RTOs are typically regulated by theapplicable securities regulators and the stock exchange on which theresulting issuer proposes to list. The TSXV offers a unique capitalpool programme, which enables a newly formed reporting issuerwith no more than C$5 million in cash to enter into a ‘qualifyingtransaction’ (similar in concept to an RTO) with an operating businesswithin 24 months of formation with the resulting issuer listingon the TSXV. The TSX also offers a similar special purchase acquisitioncompany or ‘SPAC’ programme for larger issuers.16 What information is a reporting company required to make available tothe public?In becoming a reporting issuer by way of a prospectus filing, an issuerprovides full, true and plain disclosure of all material facts relating tothe securities proposed to be distributed. This includes both business,financial and offering specific disclosure and is based on the generalprospectus requirements and the prescribed form mandated by thesecurities regulators. This requirement is the same whether the issuerbecomes a reporting issuer through the filing of a prospectus, directlisting, or as a result of a transaction involving a statutory amalgamation,arrangement or statutory procedure where an informationcircular or filing statement is required.A reporting issuer is required to provide regular financial disclosureprepared in accordance with International Financing ReportingStandards, including annual audited financial statements and unauditedquarterly financial statements, which are accompanied by CEOand CFO certifications, as well as MD&A in the prescribed form.Such financial disclosure is required to be filed with the regulatorswithin 90 days of year-end, or 120 days for a ‘venture issuer’ (ie, typicallyissuers not listed on the TSX), in the case of annual disclosure,or within 45 days of quarter-end, or 60 days for a venture issuer, inthe case of quarterly disclosure. Issuers that are not venture issuersare also required to prepare and file an Annual Information Form inthe prescribed form setting out additional annual disclosure aboutthe business and affairs of the issuer.Reporting issuers are also required to issue a press release forthwithafter a material change and file a material change report withthe securities regulators in the prescribed form within 10 days of amaterial change. When a material change involves a material contract,the reporting issuer is required to file such material contract,subject to the ability to redact certain confidential provisions in certainlimited circumstances.Prescribed information, including relating to executive compensationand corporate governance practices, is required to be providedin the issuer’s management information circular sent to shareholdersin connection with an issuer’s annual meeting of shareholders.All disclosure documents that are required to be filed with thesecurities regulators are made available to the public on www.sedar.com, subject to limited exceptions where confidential filings maybe made.Anti-manipulation rules17 What are the main rules prohibiting manipulative practices insecurities offerings and secondary market transactions?Canada has one of the largest markets in the world for small capissuers, and in the past, some of its previous stock exchanges haddubious reputations for being associated with market manipulation.That time has passed, as Canada’s regulators and stock exchangeshave developed and adopted rules which are geared towards prohibitingmanipulative practices in securities offerings and secondarymarket transactions.There is a common prohibition in the securities laws in eachCanadian jurisdiction which generally provides that a person mustnot, directly or indirectly, engage in or participate in any transactionor series of transactions, or method of trading relating to a trade inor acquisition of a security or any act, practice or course of conduct,if the person knows, or ought reasonably to know, that the transactionor series of transactions, or method of trading or act, practiceor course of conduct results in or contributes to a misleading appearanceof trading activity in, or an artificial price for, a security or aderivative of that security, or perpetrates a fraud on any person.In addition, marketplaces (such as stock exchanges and quotationand reporting systems) which are recognised and regulated byCanadian securities regulators must set requirements governing theconduct of their members or users, as the case may be, and suchmarketplaces are able to monitor the conduct of their members andenforce such requirements either directly or through a regulationservices provider, which includes a self-regulatory entity.IIROC is the national self-regulatory entity which oversees allinvestment dealers and trading activity on debt and equity marketplacesin Canada. As part of its responsibilities, IIROC enforces theUniversal Market Integrity Rules which apply to trading activity onCanadian equity marketplaces and which include rules designed toprohibit manipulative practices in securities offerings and secondarymarket transactions.In addition, the Criminal Code (Canada) includes an offence inrelation to ‘wash trades’ where a person who, through the facilityof a stock exchange or other market, with intent to create a false ormisleading appearance of active public trading in a security or withintent to create a false or misleading appearance with respect to themarket price of a security, acts on both sides of the transaction.Price stabilisation18 What measures are permitted in your jurisdiction to support the priceof securities in connection with an offering?In general, the Universal Market Integrity Rules which apply toCanadian investment dealers permit dealers involved in an offering ofsecurities to conduct market stabilisation or market balancing activitieswhere the bid for or purchase of that security is for the purposeof maintaining a fair and orderly market in the security by reducingthe price volatility of or addressing imbalances in buying and38 Getting the Deal Through – Securities Finance 2011

Gowling Lafleur Henderson LLPCanadaselling interests for the security, subject to price limitations. IIROC,the national self-regulatory entity which oversees all investment dealersand trading activity on debt and equity marketplaces in Canada,considers it to be inappropriate for an investment dealer to engagein market stabilisation activities in circumstances where the dealerknows or should reasonably know that the market price is not fairlyand properly determined by supply and demand. This might existwhere, for example, the dealer is aware that the market price is aresult of inappropriate activity by a market participant or that thereis undisclosed material information regarding the issuer. IIROC hasalso stated that market balancing activities should contribute to afair and orderly market by contributing to price continuity and depthand by minimising supply-demand disparity, and market balancingdoes not seek to prevent or unduly retard any price movements, butmerely to prevent erratic or disorderly changes in price.Liabilities and enforcement19 What are the most common bases of liability for a securitiestransaction?Canadian securities legislation establishes civil liability for ‘misrepresentations’in prospectuses, offering memoranda and certain requireddisclosure documents in connection with take-over bids and issuerbids, as well as for a failure to deliver the prospectus, offering memorandaand required disclosure documents within the required time.A ‘misrepresentation’ is generally defined under Canadian securitieslegislation as an untrue statement of a material fact, or an omissionto state a material fact that is required to be stated, or necessary toprevent a statement that is made from being false or misleading inthe circumstances in which it was made.Where a prospectus contains a misrepresentation, a person whopurchases a security offered by the prospectus is deemed to haverelied on the misrepresentation if the person did not have knowledgeof the misrepresentation and it was a misrepresentation at the timeof purchase. Such person has a right of action for damages against:• the issuer of the securities or a securityholder selling the securitiesunder the prospectus;• every underwriter contracted to assist with the distribution ofsecurities;• every director of the issuer at the time the prospectus was filed;• every person whose consent to disclosure of information in theprospectus has been filed (only with respect to a misrepresentationcontained in a report, opinion or statement made by theperson); and• every person who signed the prospectus.The amount recoverable by a plaintiff must not exceed the price atwhich the securities purchased by the plaintiff were offered to thepublic, and a defendant is not liable for all or any part of the damagesthat the defendant proves does not represent the depreciationin value of the security resulting from the misrepresentation. In thealternative, the purchaser of securities may elect to exercise a right ofrescission against the issuer, selling securityholder or underwriter, inwhich case the purchaser has no right of action for damages againstthat person. The liabilities are similar in respect of misrepresentationscontained in offering memoranda.Where a take-over bid circular, issuer bid circular or certainrelated documents prepared in connection with a take-over bid containa misrepresentation, a person to whom such circular or documentwas sent is deemed to have relied on the misrepresentation ifthe person did not have knowledge of the misrepresentation. Suchperson has a right of action for rescission against the offeror, or, in thealternative, damages against the offeror, each person who signed thecertificate in the circular or document, every director of the offeror atthe time the circular or document was signed and every person whoseconsent was filed as required (only with respect to a misrepresentationcontained in a report, opinion or statement made by the person).A defendant is not liable for all or any part of the damages that thedefendant proves does not represent the depreciation in value of thesecurity resulting from the misrepresentation.There are also statutory civil liabilities for:• misrepresentations in continuous disclosure documents (suchas MD&A, the Annual Information Form and the managementinformation circular);• a failure to make timely disclosure of material changes; and• trading an issuer’s securities or ‘tipping’ in respect of such securitieswhile in possession of undisclosed material facts or materialchanges about the issuer.Gowling Lafleur Henderson LLPKathleen RitchieEugene ChenMartine GuimondBrett A KagetsuJason A Saltzmankathleen.ritchie@gowlings.comeugene.chen@gowlings.commartine.guimond@gowlings.combrett.kagetsu@gowlings.comjason.saltzman@gowlings.comSuite 1600, 1 First Canadian Place Tel: +1 416 862 7525100 King Street West Fax: +1 416 862 7661Torontowww.gowlings.comOntarioM5X 1G5Canadawww.gettingthedealthrough.com 39

CanadaGowling Lafleur Henderson LLP20 What are the main mechanisms for seeking remedies and sanctionsfor improper securities activities?In Canada, administrative proceedings, criminal prosecution andcivil litigation are the main mechanisms for seeking remedies andsanctions for improper securities activities, with administrative sanctionsbeing most frequently used by securities regulators.Securities regulators may bring allegations of securities misconductfor a hearing before a securities regulator or an associated tribunal.After a hearing, and if the securities regulator believes it tobe in the public interest, the securities regulator may seek or imposeadministrative sanctions for securities-related misconduct, includingan administrative fine and prohibitions from market participationor access.Canadian provincial and territorial securities legislationalso provides for quasi-criminal offences for contraventions ofregulatory requirements and prohibitions of certain capital marketsrelated activities. Penalties for committing these types of offencesmay include a term of imprisonment and a significant fine, and suchcases are prosecuted in the courts.Prosecution under the Criminal Code (Canada) is the most severesanction in the securities regulatory regime, and consequently a prosecutionis not a widely-used remedy and is reserved for the most egregiousof behaviour, usually involving allegations of fraud. Penaltiesimposed by the courts for criminal offences may include a lengthyterm of imprisonment and a significant fine.As mentioned in response to Question 19, Canadian securitieslegislation establishes statutory civil liability for misrepresentationsin prospectuses, offering memoranda and certain required disclosuredocuments in connection with take-over bids and issuer bids. Thereare also statutory civil liabilities for misrepresentations in continuousdisclosure documents, for a failure to make timely disclosure ofmaterial changes and for trading an issuer’s securities or ‘tipping’ inrespect of such securities while in possession of undisclosed materialfacts or material changes about the issuer.40 Getting the Deal Through – Securities Finance 2011

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