UK law firm Allen & Overy released the Q1 2013 global M&A Index showing a 23% decline in M&A activity from Q1 2012 . The writers tried to put a positive spin, asking, “The darkest hour is just before dawn – isn’t it?”

Canada ranked 4^th globally in both inbound and outbound deal categories. Canada has 9 outbound deals ($5969M USD) and 9 inbound deals ($4940 USD). The top outbound market for Canadian firms was the US with 5 deals. Surprisingly, the US had 5 outbound deals with Canada.

If Canada ranked 4^th, why did they do 7 regional analyses, but not one for Canada?

Most countries enforce securities law through both public and private enforcement. Public enforcement is manly conducted through securities regulators. Private enforcement is conducted through shareholder lawsuits also known as securities class actions. Securities class actions are a mechanism relatively new to Canada. Many say that Canada has a more relaxed securities enforcement regime, but is this really the case? This post will compare Canadian and US securities enforcement, via both public and private mechanisms. Next, I will discuss how securities class actions add value to securities enforcement and propose modifications that will enhance securities enforcement.

Private Enforcement

Private enforcement in the US is primarily conducted through shareholder lawsuits for monetary damages. They can be brought against, manages, issuers, auditors, financial analysts and employees or any party whose credibility can influence the stock price. US lawsuits require “knowing misconduct” of the party when making a material misrepresentation under SEC Rule 10b-5.

The principles and policies underlying private enforcement are generally the same in Canada and the US. Private enforcement in Canada is relatively new and still developing. Class action legislation was announced in 1993 under the Class Proceedings Act 1992, with secondary market liability not coming into force until 2005. Canadian law differs from US on misrepresentations because there is a statutory “deemed reliance” on the issuer’s representation by the investor. Canada has significantly fewer securities class actions than the US, even relative to size of the markets. However, this could be due to the immature Canadian private action market. Two procedural restraints block private enforcement in Canada, being limits on statutory liability (In Ontario the greater of $1 Million of 5% of market share).

Under US law, extraterritorial enforcement was barred in Morrison v. National Australia Bank Ltd. for securities private action suits against issuers on foreign stock exchanges. However in Canada, companies listed on foreign stock exchanges may face private actions if they have a “real and substantial” connection to Ontario, as recently held in Abdula v. Canadian Solar Inc. Canadian Solar may bring many more global class actions to Canada.

Public Enforcement

Public enforcement is conducted by state organs tasked with enforcement or by institutions with quasi-governmental powers.  Canada’s security regulators have a significantly smaller budget than the SEC and in fact smaller than many that they regulate. Canadian securities regulators rely on a more proactive approach at the detriment to public enforcement compared to the SEC.

Quasi-criminal insider trading rules exist in most provincial securities statutes. Canada’s securities laws are at a disadvantage over the US because each province has its own Securities Act. While each province’s legislation is generally the same, there is a significant regulatory burden keeping the laws up to date and there is the potential for regulatory arbitrage between provinces. In some provinces, the Securities Act provides securities commission staff to directly prosecute offences, while other provinces require staff to refer prosecution to Crown counsel. The Criminal Code was amended in 2004 to include the specific offence of insider trading. This was as a result of media attention indicating high rates of insider trading in Canada.

Enforcement actions between Canada and the US “align substantially although inexactly,” with different terms for certain offences and sources of law (case versus legislation), but the substantive offence remains generally the same. For instance, the offence of insider trading in the US was primarily developed in case law, whereas Canada’s is defined explicitly in provincial statute.

Canadian securities regulators, unlike the US, do not allow for no-contest settlements, where a wrongdoer can pay a penalty without an admission of guilt. This increases the amount of resources needed to a particular file. Therefore, Canadian regulators use a risk-based approach to enforcement, weighing the degree of harm to the capital markets by the cost to pursue the case.

Securities Class Actions Add Value

The 1994 Allen Committee report recommended secondary market misrepresentation because it would serve as a deterrent as well as a method to compensate the injured party. While Kraakman puts class action law firms akin to “Old West” bounty hunters, earning a reward on successful prosecutions, I do not believe this should be the case. Securities class action’s primary purpose should be to compensate the aggrieved party, and as a secondary consideration, to punish the wrongdoer.

Securities class action litigation has the capacity to alert public enforcement. If a private litigator finds an issuer potentially committed a breach, but deems it is not worthwhile to bring a private action; they can alert the public enforcement instead.

Canada’s private and public actors are known to work together. For instance, the 2007 ABCP crisis was resolved through a multilateral court sanctioned restructuring, with aggrieved investors benefiting from compensation, private parties benefiting from a release of liability, and public enforcement benefited from an efficient and equitable remedy.

Recommended Changes to Canadian Securities Law

To make securities class actions more appealing, provincial legislatures should consider increasing the limits to statutory liability, perhaps remove the maximum amount altogether and increase the percentage of market cap. An increase in the securities class action bar is necessary to develop private enforcement capabilities.

In terms of public enforcement, the SEC is required by the Government Performance and Results Act of 1993 to make annual reports on performance measures. This is not the case for provincial securities regulators in Canada and it has been suggested that enforcement would benefit from defining enforcement goals and publicizing the results. Further, no contest settlements should be allowed for certain offences. No contest settlements are aligned with provincial regulators commitment to operate on small budgets.

Overall, more time is needed to develop private enforcement in Canada. However, public enforcement cannot lag either. Both public and private enforcement had different roles to serve and both should grow and develop together.

This post was submitted in a revised form as part of an examination in the Corporate Governance class of Osgoode Hall Law School’s Business Law LL.M.

Agrium Inc.’s 12 director board slate has been voted in over the two directors Jana Partners, an activist fund, has been lobbying for.

Since last summer, the Agrium board and Jana Partners have been fighting over the company’s performance. The accusations got rather aggressive up to today’s vote. The Globe and mail reports, “Right to the last minute, both sides were appealing to shareholders to back their positions. Agrium said Jana was using ‘Trojan horse tactics’ to sneak directors into the company to pursue a breakup strategy. Jana accused Agrium of ‘buying votes’ after Agrium quietly offered a fee to brokers for every share that retail investors voted for the company’s slate.”

Even if Jana Partners did not succeed in the proxy battle, did they still affect change? Well, Agrium has raised its dividend since Jana Partners has come on the scene (Agrium outright denies this was because of Jana). Perhaps the board under this new pressure is still considering the split that Jana Partners is proposing?

Read more below:

http://www.theglobeandmail.com/report-on-business/agrium-shareholder-vote-tainted-jana-charges/article10944203/

http://www.marketwire.com/press-release/agrium-shareholders-re-elect-all-12-incumbent-nominees-to-agriums-board-tsx-agu-1777010.htm

In 2008, the Canadian Securities Administrators (“CSA”) issued a request for comment on the proposed repeal and replacement of the corporate governance guidelines with nine core corporate governance principles. Under the proposal, issuers would be required to disclose the practices they used to achieve the objectives of each principle. Less than a year later the CSA issued a staff notice expressing that changes were not appropriate due to the global financial crisis.

I believe that Canada’s markets are now in a position to implement some principles-bases regulation (“PBR”). While the Finance Minister and the IMF have both recently cut Canada’s growth forecast for 2013, GDP growth remains positive at approximately 2%. Further, the changes themselves may lead to less market volatility and stronger growth.

What is a Principled-Based Approach to Corporate Governance?

A PBR approach from my perspective means that where it is appropriate, regulations are positioned with more principles than rules. The problem with rules is that they are rigid, cumbersome, slow to adapt, and can be “gamed” by loophole seekers. Principles on the other hand are more flexible, contextual and adaptive to changes. However, downsides include uncertainty in application and difficulty in interpretation.

Regulatory Premium

There is the potential for a regulatory competitive advantage in moving to principles-based securities regulation. Foreign companies cross-listing on a US exchange achieved a premium of 13.9% on average above companies solely listed on foreign exchanges. It is argued the premium relates to “bonding” with regulations in a jurisdiction with higher disclosure standards and better corporate governance principles.

Firm Independence

Academia has concluded since the 1970s the corporations are best left alone to implement corporate governance. PBR allows for firms to chose how they implement the standards in their own way, benefiting from lower compliance costs. For example, a smaller company will certainly comply with a principle in a different way than a larger company will. Following principles reduces the “checking boxes” approach that promulgates from a roles oriented approach. Further, broad BPR works much better in areas where there are changing or novel characteristics at play, such as where there is high innovation or political change.

PBR requires regulators to trust that participants will be committed to doing the “right thing,” based on the theory that organizations will follow the regulators’ rules if they are easy to follow and their peers are following them. However, does this hold true after financial crisis? Condon quotes Hector Sants, chief executive of the Financial Services Authority (“FSA”) saying, “a principles-based approach does not work with participants who have no principles.” However, Canadian banks demonstrated to be different that the US investment banks at the heart of the financial crisis, as demonstrated by their commitment to retail depositors.

Responsibility for Implementation to Senior Management

Increased responsibility to the Board and to senior management was also reflected in the Basel Committee’s report on corporate governance principles. Increased responsibility and deference to the board follows other trends in Canadian business law, as exemplified with the business judgment rule in the BCE case.

While I agree with the level of internal risk controls the Basel Committee recommended, for systemic institutions, I believe that risk appetite levels should be regulated so that liquidity crises are mitigated in the future. While it is noticed that Canadian banks demonstrated a more prudent management of risk over their US colleagues during the global financial crisis, the asset-backed commercial paper (“ABCP”) crisis is still relatively recent. The balance between deference to the board and harm to the overall market I believe falls in favour of the market in terms of regulating systemic risk. In any matter, if Canadian banks are prudently managed, the regulation over a risk threshold will never be met due to the bank’s internal appetite for risk.

Senior management, when left to their own devices can make very harmful and self-interested decisions. Compensation of executives can lead to increases in risky investment behaviour and a focus on short-term value at the expense of long-term growth. Risks associated with compensation schemes may not be taken into account when considering a firm’s overall risk. This could be overcome by aligning compensation with outcomes. If a bank incurs losses, bonuses could be reduced or not issued that year.

Constant Improvement of Best Practices

Any change in regulation comes with increased compliance and training costs. But how will constant improvements on best practices impact compliance costs? Firms may have to be constantly hiring experts for advice on the impact of every set of changes. Constant changes also leads to the question of legitimacy of the regulation. If the best practices are constantly being improved upon, how can a firm know what to follow? These issues could be mitigated with sufficient notice for changes or a fixed schedule or changes analogous to the Finance Minister’s yearly budget announcements.

A possibility is to obtain help in determining the appropriate best practices from a third party. Best practices could be formulated in connection with the Canadian Coalition for Good Governance (“CCGG”) who already timely reports on governance principles and proxy circular disclosure. However there are impartiality concerns with CCGG as a shareholder advocate.

This post was submitted in a revised form as part of an examination in the Corporate Governance class of Osgoode Hall Law School’s Business Law LL.M.

The Minister of Finance proposed a Securities Act in June 2010 with the purpose of creating a national securities regulator. The Act does not unilaterally impose a unified system, but permits provinces and territories to opt in, with the hope of creating an effective unified national securities regulation system. The government used the advisory opinion function of the Supreme Court of Canada to determine the constitutional validity of the Act. The Supreme Courts Securities Reference held that the proposed national securities act is not valid under the federal powers to regulate trade and commerce under subsection 91(2) of the Constitution Act, 1867.  The Federal government is currently negotiating with the provinces to come to an agreement on a federal securities regulator.  This post will consider some of the positive and negative aspects of a national securities regulator.

Considerations For a National Regulator

A national securities regulator creates centralized control. The securities markets are becoming more and more complex and globally connected; securities regulation needs to be as responsive and skilful as possible to keep up with innovation. Currently, provincial securities regulators can diverge on aspects of policy and enforcement, creating compliance issues and potentially room for regulatory arbitrage between provinces. There are economies of scale savings associated with a national securities regulator as policymaking, enforcement and other duties can be pooled. The proposed Securities Act includes many positive aspects including: registration requirements for securities dealers, prospectus filing requirements, disclosure requirements, specific duties for market participants, derivatives regulation, civil remedies and regulatory and criminal offences pertaining to securities.

From a provincial perspective, several provinces have very few public companies or other securities concerns. Maintaining a commission is a strain on the provincial budget and is also risky because commission staff do not have the exposure that a busy office like the OSC provides. Some provinces were concerned that the national securities regulator would be located in Ontario, which could be resolved through a regional office system.

There are also inefficiencies for companies who have to deal with regulators in each province. This method is confusing for foreign investors, as most countries have national securities regulation. Easier integration with the International Organization of Securities Commissions (“IOSCO”) and other international organizations

The Supreme Court in Securities Reference supported their decision by identifying that different industries are clustered in different geographic areas (i.e. oil in Alberta, financial services in Ontario). However, companies generally distribute securities nationally and internationally so the market for securities is much larger than the provincial industrial cluster.

Quebec was the most strongly opposed of the four provinces opposed. The federal government has the ability to get around Quebec by creating a national securities regulator to manage every province except for Quebec, and allowing the Autorité des Marchés Financiers use a passport between the two regulators. Quebec’s unique-to-Canada civil law and French language laws supports this method. Further, Quebec already has its own Quebec Pension Plan, instead of the Canada Pension Plan.

Considerations Against a National Regulator

The passport system was established in 2004 between every province and territory besides Ontario is already harmonizing securities legislation and provides mutual recognition between provinces. In terms of international relations, the OSC and the AMF are ordinary members and many other provinces hold associate memberships so international relations is already happening. Further, with 80% of Canada’s financial activity taking place in Ontario, the OSC is the de facto national regulator.

In terms of managing systemic risk, which the Supreme Court in the Securities Reference indicated was within the competence of the federal government. The Supreme Court believed national regulation was necessary because systemic risk “can be evasive of provincial boundaries and usual methods of control.” Without provincial agreement, the federal government can still create a regulator of systemic risk.

If one looks south of the border and admires the SEC’s national reach, one must also acknowledge that that regulator failed in a number of ways during the global financial crisis, including failing to manage systemic risk, proper disclosure of securitized products such as collateralized debt obligations, and failed to regulate the credit agencies.  Maybe a national regulator is not Canada’s saviour after all?

This post was submitted in a revised form as part of an examination in the Corporate Governance class of Osgoode Hall Law School’s Business Law LL.M.

The 2013 Federal budget contained an update on how the Federal government is planning to implement a national securities regulator in the wake of the 2011 Supreme Court decision declaring it unconstitutional without consent of the provinces.

The update in the budget is here, paraphrased below:

Proposing legislation to carry out the Government’s responsibilities for capital markets, consistent with the decision rendered by the Supreme Court of Canada, if a timely agreement cannot be reached with provinces and territories on a common securities regulator.

Plan A is to come to an agreement with the provinces to delegate power to the national securities regulator.

Plan B is to decrease the scope of the national securities regulator to just systemic risk, as held by the Supreme Court. This would include ““the capacity to monitor, prevent and respond to systemic risks emerging from capital markets.”

Further reading:

http://www.canadiansecuritieslaw.com/2013/03/articles/securities-law-compliance/federal-budget-sets-out-plan-for-national-securities-regulator/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CanadianSecuritiesLawOnline+%28Canadian+Securities+Law%29

http://business.financialpost.com/2013/03/21/single-securities-regulator-still-on-the-table/

http://www.theglobeandmail.com/report-on-business/economy/ottawa-plans-national-securities-regulator/article10112074/

The number of securities class action suits filed in Canada is down in 2012 to 9 from 15 in 2011. This article hypothesizes why that is with four possibilities:
1. The initial wave of suits is subsiding;
2. A small number of lawyers make up the plaintiffs bar with limited resources; The major 2011 cases such as Sino-Forest are still being worked on;
3. Setbacks in the time to bring the suit (Timminco decision) and the dramatic dismissal of Western Coal may have diminished the appeal to potential plaintiffs;
4. The Securities Act reforms may be working as an effective deterrent to stop issuers from acting in an actionable way.

The fourth alternative is the most optimistic and hopefully the one the is contributing the most to the decrease. There could simply be too much risk on issuers to not follow the rules.

The authors sum their opinion in the following way:
“We believe that the spectre of multimillion-dollar lawsuits, years of litigation and reputational damage to culpable defendants have helped deter stock fraud. We believe that there are fewer filings because there are fewer good cases, and there are fewer good cases because more of Ontario’s public companies are complying with their disclosure obligations.”

The Alberta provincial court ruled this week that police stations should provide detainees with Internet access in connecting with their right to counsel. In this case the police gave the 19 year old accused a 1-800 number for counsel and the yellow pages. The court held that this was not sufficient to his Charter rights, as the primary means of the accused of finding information was using google.

By now, must people know that the Government approved the CNOOC’s $15 Billion acquisition of Nexen. It was approved on the basis of a confidential agreement between CNOOC and the Competition to maintain beneficial aspects to Canada. The Government has said that they will not reveal the details of the agreement, but CNOOC may release details if they wish.  

However, we already know a few details or can infer them from fact. The details could help to identify what is required for future deals with the Competition Bureau

1. CNOOC Will List on the TSX

The Globe and Mail believes this establishes greater transparency as CNOOC will have to comply with disclosure rules. I think this is a CNOOC concession as they have no need for capital. Will the listing be the parent or a Canadian sub is yet to be known. 

http://www.theglobeandmail.com/report-on-business/streetwise/cnoocs-tsx-listing-all-about-transparency/article6213613/

2. Qualified Development Spending.

CNOOC has agreed to spend an extra $5 to $8 Billion on oil and gas development in North America. However, its dependant on the price of oil and timeframes. This is above the roughly $3 Billion Nexen was going to spend in 2013. 

http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/cnooc-promises-billions-in-new-spending—-if-oil-prices-stay-high/article6280321/

Updates to come, hopefully.

Companies listed on foreign stock exchanges can face securities class action if they have a “real and substantial” connection to Ontario. The Supreme Court of Canada yesterday denied appeal to Abdula v. Canadian Solar Inc. Canadian Solar, a company headquartered in Kitchener, Ontario but listed on the NASDAQ, faces an allegation of misrepresentation in its disclosure filings and on an investor conference call.

The case came down to the interpretation of a “responsible issuer” in section 138.3 of the Securities Act (Ontario):

“The definition of “responsible issuer” is not confined to persons who are reporting issuers in Ontario and therefore have a continuous disclosure obligation in Ontario. Extra-territorial application is specifically envisaged by the paragraph (b) of the definition of “responsible issuer”, with its reference to issuers with a “real and substantial connection” to Ontario

Abdula v. Canadian Solar Inc., 2012 ONCA 211, at para 88.

“Some say Canada’s more open courts could become attractive to plaintiffs lawyers looking to file foreign securities class actions against multinationals with some sort of presence in Canada.” (source: http://www.theglobeandmail.com/report-on-business/industry-news/the-law-page/supreme-court-wont-hear-canadian-solar-case/article5791440/?cmpid=rss1)

I recently profiled the Youth Social Innovation Capital Fund, one of ten finalists for MaRS’ Social Finance Awards. I was thoroughly impressed by this group of young social entrepreneurs. 

If you have a few moments, please check out their profile and the other finalists and vote for who you think is the “Most Promising New Financial Player” in Canadian social finance.

Canada has been wary of outsourcing legal work but this article believes change is happening. I think it only makes sense. Lawyers in Canada free up time to focus on advice and clients get more affordable legal services.

DBRS believes that the CNOCC/Nexen deal is mixed in terms of economics (negative benefit) and politics (positive benefit) to Canada. Economically, Nexen is healty they say so the acquisition isn’t needed. However, they say politically it could be a big help.

What is “Net Benefit” Test?

A foreign acquirer has an obligation to demonstrate that the proposed transaction is of net benefit to Canada. The factors assessed are:
1. the effect of the investment on the level and nature of economic activity in Canada;
2. the degree and participation by Canadians;
3. the factors of productivity, efficiency, technological development, product innovation and variety
4. competition in Canada;
5. the compatibility with national industrial, economic and cultural policies; and
6. Canada’s ability to compete in world markets.
Source: http://www.ic.gc.ca/eic/site/cprp-gepmc.nsf/eng/00014.html

While there isn’t an “economic” and “political” direct category, these factors fit into several of the above criteria.

Is there need for a political concession to China?

I don’t think so. China announced it wants a trade agreement with Canada last week. http://m.theglobeandmail.com/news/politics/china-calls-for-free-trade-deal-with-canada-within-a-decade/article4561149/?service=mobile

For China-Canada relations? But what about the fraud investigations and TSX removal of Sino Forest? Sino Forest in my opinion warranted the investigation.

Is there a need for a political concession on terms of foreign acquisitions?

The Canadian Competition Bureau has been put on the global hot seat lately for blocking takeover bids such as BHP Billiton’s bid to takeover Potash Corp. Generally some political concessions may be needed. But, the law is the law: if the net benefit test isn’t passed, it’s not in Canada’s best interests.