Stale Information Prompts Regulator's Dismissal of Insider Trading Case

On August 26, 2014, the Ontario Securities Commission (OSC) issued its decision dismissing insider trading and tipping allegations against Jowdat Waheed and Bruce Walter. The case related to the toehold purchase of shares of Baffinland Iron Mines Corporation (Baffinland) by a company controlled by Waheed and Walter and that company's subsequent unsolicited take-over bid for Baffinland. In its decision, the OSC provides guidance on materiality determinations during M&A negotiations. The OSC also clarifies the scope of its public interest jurisdiction in the context of take-over bids.

Background

Waheed was a consultant to Baffinland in early 2010, providing strategic advice to the Board, including consideration of a potential joint venture with ArcelorMittal that would facilitate the development of Baffinland’s mining project. Over the summer of 2010, Waheed approached Walter about a potential acquisition of Baffinland. They incorporated an acquisition vehicle, which made a toehold purchase in September 2010 and later launched an unsolicited take-over bid. Baffinland was ultimately acquired jointly by ArcelorMittal and Waheed and Walter.

Staff made insider trading and tipping allegations against Waheed and Walter, as well as allegations that their conduct was contrary to the public interest. Staff alleged:

• Waheed and Walter engaged in insider trading with respect to the toehold purchase—they were in a special relationship with Baffinland and had knowledge of material facts that had not been generally disclosed, namely the status of negotiations between Baffinland and ArcelorMittal;
• Waheed engaged in tipping by sharing undisclosed material facts with third parties, including Walter; and
• Walter and Waheed acted contrary to the public interest in making the toehold purchase and take-over bid and Waheed acted contrary to the public interest by not always acting in the best interests of Baffinland as a consultant.

The OSC's Decision

The OSC dismissed Staff’s allegations, finding that the respondents did not trade or tip in respect of undisclosed material facts. In addition, the OSC concluded that there was no other conduct by the respondents that warranted the exercise of the OSC's public interest jurisdiction.

Materiality and M&A negotiations

In order to make out an allegation of insider trading or tipping, Staff was required to show that the respondents had knowledge of material facts about Baffinland that were not generally disclosed. The test for assessing materiality, including the materiality of a contingent event such as the outcome of ongoing M&A negotiations, is the market impact test—that is, whether the information, if disclosed, would be reasonably expected to have a significant effect on the trading price or value of the issuer’s securities.

Assessing the materiality of information about the status of M&A negotiations is challenging, and determinations of materiality will turn on the particular facts of each case.  In this case, as a consultant Waheed had access to information about a potential transaction with ArcelorMittal. However, given the status of negotiations between Baffinland and ArcelorMittal, the information Waheed had was stale and was not material by the time the toehold purchase was made; therefore, Staff’s insider trading and tipping allegations failed.

The OSC's public interest jurisdiction

The OSC was asked by Staff to make orders in the public interest that were independent of the insider trading and tipping allegations. The OSC can make orders in the public interest even where there has been no breach of Ontario securities law, but the circumstances in which it will do that are limited. The OSC will intervene to restrain a transaction when it is abusive of investors or the capital markets. With respect to past conduct, the OSC has indicated that it will be more inclined to intervene in situations where the respondents are market participants—for example, where they are registrants or where their conduct arose when they were officers or directors of a reporting issuer. In those circumstances, the fundamental principles of Ontario securities law are more likely to be engaged even where there has been no breach.

In its decision in this case, the OSC concluded that its public interest jurisdiction was not engaged by the respondents’ conduct. Although Waheed was in a special relationship with Baffinland as a result of his consultancy, he was not a director or officer of Baffinland or a registrant. Consequently, the OSC was not required to exercise its public interest jurisdiction to ensure honest and responsible conduct by market participants. The nature of Waheed’s obligations to Baffinland as a consultant was a private dispute, a matter for the courts and not for the OSC.

Staff alleged that Waheed and Walter timed their toehold purchase and take-over bid in a manner that was unfair since it was intended to disrupt Baffinland’s negotiations with ArcelorMittal and had the effect of depriving Baffinland shareholders of the opportunity to benefit from the development by Baffinland and ArcleorMittal of Baffinland’s mining project. In dismissing this allegation, it was important to the OSC that Baffinland shareholders were not financially disadvantaged by the respondents’ conduct. Shareholders ultimately received consideration from the successful joint take-over bid that was close to the top of the range of values that Baffinland’s financial advisers had estimated in connection with the transaction. With respect to the toehold purchase, the OSC noted that toehold purchases are excluded from the prohibition against insider trading and acknowledged that the acquisition of toeholds is a permitted strategy for bidders, which among other things, provides some protection for costs if bidders lose out to a competing bid. Absent insider trading or tipping, there was nothing in the respondents’ toehold purchase or take-over bid that was contrary to the public interest.