NOTICE OF NATIONAL INSTRUMENT 62-101
CONTROL BLOCK DISTRIBUTION ISSUES

Substance and Purpose of Proposed National Instrument

Introduction

On October 20, 1995, the Ontario Securities Commission (the "Ontario Commission") published a proposed Rule, The Early Warning System and Related Take-Over Bid, Insider Trading and Control Block Distribution Issues⁽¹⁾ (the "Ontario Draft Rule") under the Securities Act (Ontario) (the "Ontario Act"). The Canadian Securities Administrators (the "CSA") have agreed to use the Ontario Draft Rule as the basis for three national instruments that will regulate substantially the same matters as the Ontario Draft Rule.

This Notice relates to proposed National Instrument 62-101 Control Block Distribution Issues (the "National Instrument"), which, in Ontario, amends and replaces part of the Ontario Draft Rule. This Notice summarizes both the proposed National Instrument and the changes made from the Ontario Draft Rule. The CSA are publishing, concurrently with the proposed National Instrument, proposed National Instrument 62-102 Disclosure of Outstanding Share Data and proposed National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues. Those proposed National Instruments are also based on the Ontario Draft Rule.

The proposed National Instrument is an initiative of the CSA, and is expected to be adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario, and Nova Scotia, as a Commission regulation in Saskatchewan, and as a policy in all the other jurisdictions represented by the CSA.

The proposed National Instrument implements, in part, the recommendation of the CSA Task Force on Operational Efficiencies that Canadian securities regulatory authorities increase the coordination of regulation, including standardization of requirements.

During the comment period for the Ontario Draft Rule, which expired on January 22, 1996, the Ontario Commission received submissions on the Ontario Draft Rule from a broad range of commenters. These comments were summarized, together with Ontario Commission staff responses, in the Staff Notice Summary of Comments and Status Report on Proposed Changes to the Early Warning System and Related Take-Over Bid, Insider Reporting and Control Block Issues,⁽²⁾ which was published on August 2, 1996 (the "1996 Ontario Staff Notice").

The Ontario Commission considered these comments with the other members of the CSA in conjunction with the development of the proposed National Instrument, which reflects the decisions of the CSA in this regard. The proposed National Instrument has been reorganized to increase clarity, and to conform to the style employed in other national instruments implemented by the CSA. In addition, a number of drafting changes to the Ontario Draft Rule have been made throughout the proposed National Instrument to increase clarity.

Background

The proposed National Instrument concerns matters that the Ontario Commission first considered in 1993 when it published a proposed refinement of the early warning, insider reporting, and take-over bid regimes on September 10, 1993⁽³⁾. For a discussion of the background to the proposed National Instrument, as well as general early warning issues, reference should be made to the Notice of proposed National Instrument 62-103.

The proposed National Instrument is based on the control block distribution exemption contained in section 7.1, on the exemption for pledgees relating to hold periods contained in subsections 8.1(1) and (2), and on certain conditions for the exemption from insider reporting requirements contained in subsection 10.1(1), all of the Ontario Draft Rule. Comments received on the Ontario Draft Rule, and the related responses of the Ontario Commission staff, were summarized in the 1996 Ontario Staff Notice.

As with the disclosure of outstanding share data, the control block distribution relief was proposed to be separated out from the main early warning instrument, so it has been moved into the proposed National Instrument.

Purpose of the Proposed National Instrument

There are two purposes of the proposed National Instrument. One purpose is to set out a limited exemption for eligible institutional investors from the prospectus requirements applicable to control block distributions in order to facilitate the ability of those investors to dispose of their securities of an issuer without having to comply with the provisions of securities legislation that would require a statement that the investor has no knowledge of undisclosed material information concerning the issuer, or that would impose subsequent hold periods. This relief is analogous to the relief proposed to be provided to eligible institutional investors under proposed National Instrument 62-103.

The other purpose of the proposed National Instrument is to modify the application of hold periods as they may apply to pledgees disposing of securities that form part of a control block.

The securities legislation of a number of jurisdictions makes unavailable prospectus exemptions that are ordinarily available to control block distributions if securities of the class being disposed of have been acquired by the seller within certain prescribed periods (usually 6 months). Uncertainty has existed concerning how these hold periods apply to distributions in which a pledgee is selling securities that are part of a control block. Some market participants take the view that where the pledgee is selling securities under a power of sale, the "seller" for purposes of securities legislation is the owner or pledgor of the securities, so that the sale does not result in new hold periods based on the pledgee's holdings. Other market participants take the view that the "seller" is the pledgee and have applied for relief from the securities regulatory authorities so that the pledgee can sell without a hold period arising. Subsection 2.2(1) of the proposed National Instrument would ensure that the relevant hold period would run from the time that the pledgor acquired the relevant securities.

In addition, the Canadian securities legislation of three jurisdictions (Newfoundland, Ontario and Saskatchewan) contains a provision imposing additional hold periods applicable to, among others, pledgees, that apply to securities acquired under specified exemptions and that run from the time that any securities of the class to be distributed by a pledgee were acquired. Again, some uncertainty has arisen as to whether those hold periods and acquisitions should take into account acquisitions by a pledgor. Subsection 2.2(2) of the proposed National Instrument ensures that the time of acquisition by the pledgee of the securities being distributed is not relevant to the calculation of the relevant hold period.

Summary of the Proposed National Instrument

This summary notes that certain changes have been made in the proposed National Instrument from the Ontario Draft Rule.

The proposed National Instrument has been changed from the Ontario Draft Rule version to remove all specific references to the Ontario Act and the Ontario Regulation. However, for explanatory purposes in this Notice, reference is occasionally made to provisions of the Ontario Act and the Ontario Regulation.

Part 1 DEFINITIONS

Part 1 sets out one definition specific to the operation of the proposed National Instrument, and it includes an interpretative section. A number of other terms used in the proposed National Instrument are defined or interpreted in proposed National Instrument 62-103; those terms are "early warning requirements", "effective control", "eligible institutional investor", "joint actor", and "pledgee".

Section 1.1 Definitions

The term "control distribution" refers to a trade in securities of an issuer from the holding of a person or company, or a combination of them, that holds a sufficient number of securities of the issuer to affect materially the control of the issuer.

Changes from the Ontario Draft Rule

This definition is new.

Section 1.2 Interpretation

Section 1.2 provides that terms defined or interpreted in proposed National Instrument 62-103 and used in the proposed National Instrument have the respective meanings ascribed to them in National Instrument 62-103.

Changes from the Ontario Draft Rule

Section 1.2 is new.

Part 2 PROSPECTUS EXEMPTION

Part 2 sets out the exemption from the prospectus requirement that is available for control block distributions. Part 2 also exempts pledgees of securities from control block distribution prospectus requirements.

Section 2.1 Prospectus Exemption

Subsection 2.1(1) exempts a control distribution made by an eligible institutional investor from the prospectus requirement if several conditions, contained in paragraphs 2.1(1)(a) through (e), are satisfied.

Subparagraph 2.1(1)(a)(i) requires that the eligible institutional investor has issued and filed the news releases and filed reports under the early warning requirements or Part 4 of National Instrument 62-103 for the reporting issuer, reflecting the current securityholding percentage of the eligible institutional investor in classes of voting and equity securities of the reporting issuer. Subparagraph 2.1(1)(a)(ii) requires that the eligible institutional investor does not have knowledge of any material fact or material change pertaining to the reporting issuer that has not been generally disclosed. Subparagraph 2.1(1)(a)(iii) requires that the eligible institutional investor does not receive in the ordinary course of its business and investment activities knowledge of the type referred to in subparagraph 2.1(1)(a)(ii). Subparagraph 2.1(1)(a)(iv) requires that the eligible institutional investor, either alone or with any joint actors, does not possess effective control of the issuer of the securities.

Paragraph 2.1(1)(b) requires that there are no directors or officers of the issuer of the securities who were, or could reasonably be seen to have been, selected, nominated, or designated by the eligible institutional investor or any joint actor.

Paragraph 2.1(1)(c) requires that the control distribution is made in the ordinary course of business or investment activity of the eligible institutional investor.

Paragraph 2.1(1)(d) requires that the securities would not be subject to any requirements of securities legislation requiring them to be held for a specified time if the trade was not a control distribution.

Paragraph 2.1(1)(e) requires that no unusual effort is made to prepare the market or to create a demand for the securities, and that no extraordinary commission is paid in respect of the distribution.

Subsection 2.1(2) requires that an eligible institutional investor making a distribution in reliance on subsection (1) file a letter within 10 days after the distribution describing certain specified particulars of the distribution.

Changes from the Ontario Draft Rule

Subsection 2.1(1) of the proposed National Instrument was published as section 7.1 of the Ontario Draft Rule, although it has been substantially amended. There are three main changes made to this provision in the proposed National Instrument from the Ontario Draft Rule.

First, the relief provided by section 2.1 is now available to eligible institutional investors that satisfy the conditions contained in the section. The Ontario Draft Rule would have provided the relief only to insiders of an issuer that were insiders only due to their holdings of securities. This change is consistent with the general changes made to proposed National Instrument 62-103, in which much of the relief proposed under that Instrument would be available only to eligible institutional investors.

Second, the conditions to the relief have been changed. The conditions contained in the proposed National Instrument generally correspond to the conditions to relief provided to eligible institutional investors in National Instrument 62-103, and restrict the availability of the exemption to eligible institutional investors that are current in their early warning system or Part 4 of National Instrument 62-103 filings and that, generally speaking, do not have inside information about, or control, the reporting issuer. In addition, distributions made in reliance on the exemption must be in the ordinary course of business or investment activity of the eligible institutional investor. The Ontario Draft Rule required that the issuer of the securities had been a reporting issuer for at least 18 months; that no unusual efforts were made to prepare the market for the securities or to create a demand for the securities and no extraordinary commission or consideration is paid in respect of the distribution and the disclosure was made to the Commission within 10 days of the distribution.

Third, the relief proposed in the Ontario Draft Rule would have limited use of the exemption to distributions of five percent of the securities of the issuer over any six or 12 month period, depending on whether the issuer was eligible to use the POP system. This restriction has been eliminated on the basis that the distributions under this exemption are subject to hold periods in any event (as no distribution may be made under this provision unless the securities being sold would be freely tradeable if the distribution was not a control distribution).

Section 2.2 Pledgees

Subsection 2.2(1) sets out an exemption from the hold period referred to in the provision of securities legislation set out in Appendix B of the Instrument. These provisions would normally restrict the availability of an exemption from the prospectus requirement. This provision effectively ensures that for hold period purposes, a pledgee will be treated as selling "in the shoes" of a pledgor by ensuring that the pledgee distributing securities under clauses 72(7)(b) and (c) of the Ontario Act, and equivalent provisions in other jurisdictions, may take advantage of the time that the pledgor of the securities in question held the securities.

Subsection 2.2(2) is similar in function to subsection 2.2(1). It ensures that the provision of securities legislation set out in Appendix C of the Instrument applies to a distribution of securities by a pledgee as if the pledgee is the "seller" within the meaning of that provision and ensures that the securities being distributed are not subject to the hold periods provided for in the provision. The provision may otherwise restrict the availability of an exemption from the prospectus requirement for a distribution of securities of a class by a pledgee.

Changes from the Ontario Draft Rule

Subsection 2.2(1) and (2) of the proposed National Instrument were published as subsections 8.1(1) and (2), respectively, of the Ontario Draft Rule. The drafting of these provisions has been extensively amended to eliminate specific references to provisions of the Ontario Act.

Part 3 EXEMPTION

Part 3 permits the regulator or the securities regulatory authority, as appropriate, to grant an exemption to the proposed National Instrument.

Appendix A

Appendix A sets out the provisions of securities legislation that are equivalent to paragraph (c) of the definition of "distribution" contained in subsection 1(1) of the Ontario Act.

Appendix B

Appendix B sets out the provisions of securities legislation that are equivalent to subsection 25(1) of the Ontario Regulation, which will be replaced by subsection 3.11(1) of proposed Rule 45-501 Exempt Distributions.

Appendix C

Appendix C sets out the provisions of securities legislation that are equivalent to subsection 25(2) of the Ontario Regulation, which will be replaced by subsection 3.11(2) of proposed Rule 45-501 Exempt Distributions.

Changes from the Ontario Draft Rule

Appendices A, B and C are new, and have been added to replace references to specific provisions with the generic language adopted in other national instruments.

Authority for Proposed National Instrument

In those jurisdictions in which the proposed National Instrument is to be adopted or made as a rule or regulation, the securities legislation in each of those jurisdictions provides the securities regulatory authority with rule-making or regulation-making authority in respect to the subject matter of the proposed National Instrument.

In Ontario, the following provision of the Ontario Act provides the Ontario Commission with the authority to make the proposed National Instrument. Paragraph 143(1)20 of the Ontario Act authorizes the Ontario Commission to make rules in respect of exemptions from the prospectus requirements, as well as for the removal of exemptions from those requirements. Paragraphs 143(1)22 and 24 of the Ontario Act authorize the Ontario Commission to make rules in respect of additional continuous disclosure obligations. Paragraph 143(1)39 of the Ontario Act authorizes the Ontario Commission to make rules requiring or respecting the media, format, preparation, form, content, execution, certification, dissemination and other use, filing and review of all documents required under or governed by the Ontario Act.

Alternatives Considered

In the October 1995 Notice accompanying the publication of the Ontario Draft Rule for comment, the Ontario Commission outlined the alternatives to the Ontario Draft Rule, being the 1993 and 1994 Proposals, that it had considered. The available alternatives have not changed.

Unpublished Materials

In proposing the proposed National Instrument, the CSA have not relied on any significant unpublished study, report or other written materials.

Anticipated Costs and Benefits

The exemptions from the prospectus requirement provided by section 2.1 of the proposed National Instrument form part of the general relief being provided to eligible institutional investors in that Instrument and in National Instrument 61-103, which should serve to reduce compliance costs for eligible institutional investors.

The relief provided by section 2.2 of the proposed National Instrument should facilitate the disposition of securities by pledgees.

Amendment to Regulation - Ontario

In Ontario, the adoption of the proposed National Instrument does not require any Regulation to be revoked or amended. Section 25 of the Regulation will be revoked in connection with the implementation of Rule 45-501 Exempt Distributions.

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument. Submissions received by December 7, 1998 will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario Commission, in duplicate, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Department of Government Services and Lands, Newfoundland and Labrador
Registrar of Securities, Northwest Territories
Registrar of Securities, Government of the Yukon Territory

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows: Claude St Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.

Questions may be referred to any of:

Brenda Leong
British Columbia Securities Commission
(604) 899-6647

David Sheridan
Alberta Securities Commission
(403) 297-2630

Barbara Shourounis
Saskatchewan Securities Commission
(306) 787-5645

Douglas Brown
Manitoba Securities Commission
(204) 945-0605

Tanis J. MacLaren
Ontario Securities Commission
(416) 593-8259

Fernand Lavigne
Commission des valeurs mobilières du Québec
(514) 873-5326

Bill Slattery
Nova Scotia Securities Commission
(902) 424-7355

Proposed National Instrument

The text of the proposed National Instrument follows, together with footnotes that are not part of the National Instrument, but have been included to provide background and explanation.

DATED: September 4, 1998.

PART 1 DEFINITIONS
1.1 Definitions
1.2 Interpretation

PART 2 PROSPECTUS EXEMPTION
2.1 Prospectus Exemption
2.2 Pledgees

PART 3 EXEMPTION
3.1 Exemption
NATIONAL INSTRUMENT 62-101⁽⁴⁾ CONTROL BLOCK DISTRIBUTION ISSUES

PART 1 DEFINITIONS⁽⁵⁾

1.1 Definitions - In this Instrument "control distribution" means a trade to which the provisions of securities legislation listed in Appendix A apply.

1.2 Interpretation - Terms defined or interpreted in National Instrument 62-103 The Early Warning System and Related Take-over Bid and Insider Reporting Issues and used in this Instrument have the respective meanings ascribed to them in National Instrument 62-103.

PART 2 PROSPECTUS EXEMPTION

2.1 Prospectus Exemption

(1) The prospectus requirement⁽⁶⁾ does not apply to a control distribution made by an eligible institutional investor if

(a) the eligible institutional investor

(i) has issued and filed the news releases and filed reports under the early warning requirements or Part 4 of National Instrument 62-103 for the reporting issuer reflecting the current securityholding percentage of the eligible institutional investor in classes of voting and equity securities of the reporting issuer,

(ii) does not have knowledge of any material fact or material change with respect to the reporting issuer that has not been generally disclosed,

(iii) does not receive in the ordinary course of its business and investment activities information of any material fact or material change with respect to the reporting issuer that has not been generally disclosed, and

(iv) either alone or together with any joint actors, does not possess effective control of the issuer of the securities;

(b) there are no directors or officers of the reporting issuer who were, or could reasonably be seen to have been, selected, nominated or designated by the eligible institutional investor or any joint actor;

(c) the control distribution is made in the ordinary course of business or investment activity of the eligible institutional investor;

(d) if the trade was not a control distribution, the securities would not be subject to any requirements of securities legislation⁽⁷⁾ requiring them to be held for a specified period of time; and

(e) no unusual effort is made to prepare the market or to create a demand for the securities and no extraordinary commission or consideration is paid in respect of the control distribution.

(2) An eligible institutional investor that makes a distribution in reliance on subsection (1) shall file a letter within 10 days after the distribution that describes the date and size of the distribution, the market on which it was made and the price at which the securities being distributed were sold.

2.2 Pledgees

(1) For purposes of a distribution of securities by a pledgee, the period of time referred to in the provision of securities legislation set out in Appendix B⁽⁸⁾ is considered to commence on the date that the pledgor acquired the securities being distributed.⁽⁹⁾

(2) If a pledgee is distributing securities, then for the purposes of the provisions of securities legislation set out in Appendix C

• (a) a reference to a "seller" or "vendor" shall be construed as a reference to the pledgee; and

(b) the pledgee shall be considered to have held the securities being distributed for the applicable time period provided for in that provision.

PART 3 EXEMPTION

3.1 Exemption

(1) The regulator⁽¹⁰⁾ or the securities regulatory authority may grant an exemption to this Instrument, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.

(2) Despite subsection (1), in Ontario, only the regulator may grant such an exemption.

Footnotes

1. (1995), 18 OSCB 4893.

2. (1996), 19 OSCB 4221.

3. (1993), 16 OSCB 4539.

4. This National Instrument is expected to be adopted as a rule in each of British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, as a Commission regulation in Saskatchewan, and as a policy in all other jurisdictions represented by the Canadian Securities Administrators.

5. A national definition instrument has been adopted as National Instrument 14-101 Definitions. It contains definitions of certain terms used in more than one national instrument. National Instrument 14-101 also provides that a term used in a national instrument and defined in the statute relating to securities of the applicable jurisdiction, the definition of which is not restricted to a specific portion of the statute, will have the meaning given to it in that statute, unless the context otherwise requires. National Instrument 14-101 also provides that a provision or a reference within a provision of a national instrument that specifically refers by name to a jurisdiction, other than the local jurisdiction, shall not have any effect in the local jurisdiction, unless otherwise stated in the provision.

6. The term "prospectus requirement" is proposed to be defined in National Instrument 14-101 Definitions. The proposed definition is "the requirement in securities legislation that prohibits a person or company from distributing a security unless a preliminary prospectus and prospectus for the security have been filed and receipts obtained for them".

7. The term "securities legislation" is defined in National Instrument 14-101 Definitions as meaning the particular statute and legislative instruments of the local jurisdiction set out in an appendix to that instrument and will generally include the statute, regulations and, in some cases, the rules, forms, rulings and orders relating to securities in the local jurisdiction.

8. The provisions listed in Appendix B are the provisions that would restrict the availability of an exemption from the prospectus requirement for a distribution by a pledgee unless the pledgee has held the securities to be distributed for a specified length of time; these provisions are the equivalent of subsection 25(1) of the Regulation to the Securities Act (Ontario) which will be replaced by section 3.11 of Ontario Rule 45-501 Exempt Distributions.

9. This provision permits the aggregation of the time that the securities in question were held by the pledgee and the pledgor, for purposes of calculating the hold period contained in the referenced provision of securities legislation.

10. The term "regulator" is defined in National Instrument 14-101 Definitions as meaning, in a local jurisdiction, the person set out in an appendix to that instrument opposite the name of the local jurisdiction. The term "local jurisdiction" is defined in National Instrument 14-101 Definitions as "in a national instrument adopted or made by a Canadian securities regulatory authority, the jurisdiction in which the Canadian securities regulatory authority is situate". The term "Canadian securities regulatory authorities" is defined in National Instrument 14-101 Definitions as meaning the securities commissions or similar regulatory authorities set out in an appendix to that instrument.