Issue: Can trading based on confidential information about a public company that is not admitted or found to be material give rise to liability under the Ontario Securities Act?
Key Facts: Volk was the general counsel (GC) of an issuer, a public energy company. Over the course of four months the issuer was, to the GC’s knowledge, subject to solicitations of take-over interest from two other companies. With a view to exploring those solicitations, the issuer entered into confidentiality agreements and non-binding solicitations of interest. Ultimately, the two interested companies bid to acquire the issuer jointly, but the bid was subsequently withdrawn. None of this information was made public or blossomed into a transaction; however, the GC was aware of it. The GC purchased some unsecured notes of the issuer at a time when both interested companies separately had confidentiality agreements in place, but neither had made a binding offer (and with one of the companies, there had been no discussion about price or structure of a potential transaction). It was acknowledged that the GC “self-assessed” that he had no knowledge of any material non-public information, and that the issuer was not in any blackout period. The OSC took the position that the GC’s purchase of unsecured notes was contrary to the public interest, under section 127 of the Securities Act.
Key Admissions and Settlement: In this settlement, which was approved by the OSC, the regulator’s Staff and the GC agreed that: (1) the GC was in a position of “high responsibility and trust and was subject to a high professional standard to avoid any appearance of conflicts…and…misuse of confidential information” related to the issuer; (2) a “prudent course of action as...general counsel would have been to err on the side of caution…and refrain from purchasing” the securities when he did; and (3) the GC’s conduct was contrary to the public interest.
The terms of the settlement required the GC to: (i) make a voluntary payment of $30,000; (ii) obtain external legal advice in any circumstances where he would be required to “self-assess” whether he was in possession of material non-public information; (iii) successfully complete Canadian Securities Institute or Institute of Corporate Directors training; (iv) be reprimanded; and (v) pay $10,000 in costs of the investigation.
What You Need to Know: Securities commissions in Canada have for some time now used their public interest jurisdiction to prosecute people whom they allege have traded or tipped others off to confidential information about a company, even where that conduct may fall short of a breach of the statutory prohibitions against insider trading or tipping.1 The settlement in OSC v. Volk is yet another of these cases, and entrenches the message from the regulators that capital markets participants, including senior public company officers and securities dealer registrants, will be held to a very high standard regarding the use of both material and important but not necessarily material, non-public information. That high standard includes not trading on or imparting confidential information to others if doing so would give the appearance, to the average person, of impropriety, conflict or misuse of information which has not been disclosed. Through these cases, the securities commissions are essentially directing that market participants err on the side of not trading based on, and not discussing with third parties, any information that could possibly be or may become material—or else face regulatory scrutiny and possible prosecution.
1 See for example, Re Donald, 36 O.S.C.B. 1449, Re Moore, 36 O.S.C.B. 4455, Finkelstein v. OSC, 2018 ONCA 61
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