Notice and Proposed Rule: OSC Rule - 54-501 - Prospectus Disclosure in Certain Information Circulars

NOTICE OF RULE UNDER THE SECURITIES ACT

RULE 54-501

PROSPECTUS DISCLOSURE IN CERTAIN INFORMATION CIRCULARS

Substance and Purpose of Proposed Rule

The substance and purpose of the proposed Rule is to require information circularssent to holders of voting securities of a reporting issuer in respect of certaintransactions under which securities are to be issued to contain prospectus disclosure.

Background

Paragraph 24 of OSC Policy 5.1 was adopted by the Commission on June 28, 1991. Itwas adopted in order to clarify Item 11 of Form 30 to the Regulation, the Form settingout the contents of an information circular. Item 11 requires an issuer when preparingan information circular relating to a meeting of securityholders at which action is to betaken in respect of a property acquisition or disposition, amalgamation, merger orreorganization to briefly describe the substance of the matter in sufficient detail topermit securityholders to form a reasoned judgement concerning the matter. Item 11also provides that where a reorganization or similar restructuring is involved, referenceshould be made to the prospectus form for guidance as to what is material.

Summary of Proposed Rule

The proposed Rule requires information circulars sent to holders of voting securities ofa reporting issuer in respect of a meeting of securityholders for which proxies are beingsolicited and which is being held to consider certain transactions under which securitiesare to be issued to contain prospectus disclosure. This includes the financial statementand other disclosure that is required to be included in a prospectus if the transactionresults in the acquisition of a business.

Authority for Proposed Rule

Paragraph 39 of subsection 143(1) of the Securities Act allows the Commission tomake rules requiring or respecting the media, format, preparation, form, content,execution, certification, dissemination and other use, filing and review of all documentsrequired under or governed by the Act, the regulations or the rules and all documentsdetermined by the regulations or the rules to be ancillary to the documents, includinginformation circulars.

Alternatives Considered

As the Commission believes that holders of voting securities should receive prospectusdisclosure for transactions described in the proposed Rule, the Commission is of theview that a rule is required. Accordingly, no alternatives were considered to theadoption of a rule.

Unpublished Studies

In proposing the Rule, the Commission has not relied on any significant unpublishedstudy, report or other written materials.

Anticipated Costs and Benefits

The proposed Rule requires issuers to incur time and expense in order to provideprospectus disclosure in an information circular. The benefits of the proposed Rule areinvestor protection and the promotion of fair and efficient capital markets.

In the Commission's view, the benefits justify the costs.

Regulations to be Amended or Revoked

The adoption of the proposed Rule does not require any regulation to be amended orrevoked.

Specific Request for Comment

In addition to welcoming submissions on any provision of the proposed Rule, theCommission specifically seeks comment on the scope of the disclosure required to beincluded in an information circular under sections 2.1 and 2.3 of the proposed Rule.

Section 2.1 of the proposed Rule prescribes the disclosure to be included in aninformation circular concerning an issuer whose securities are being distributed inconnection with a proposed transaction. The section requires an information circular tocontain all of the disclosure that would be in a prospectus of the issuer whosesecurities are being distributed. Section 2.2 is an interpretation section, whichemphasizes that financial statement and other disclosure concerning a businessacquired or to be acquired by the issuer must be included in the information circular, ifthe disclosure would be required in a prospectus of the issuer. This disclosurerequirement is not limited to situations where the acquisition pertains to the proposedtransaction in respect of which the information circular is being prepared. Reference ismade to Parts 6 and 7 of Rule 41-501 General Prospectus Requirements, whichprescribe the disclosure required for significant acquisitions and for multipleacquisitions that are not individually significant. Reference is also made to theanalogous provisions for POP issuers, Parts 4 and 5 of National Instrument 44-101Short Form Prospectus Distributions.

Section 2.3 of the proposed Rule prescribes the disclosure required to be included inan information circular concerning the sender of the circular in circumstances where nosecurities of the sender are being distributed in connection with the proposedtransaction. The prescribed disclosure is not full prospectus disclosure; rather, it islimited to business acquisition disclosure. Section 2.3 requires financial statement andother disclosure concerning a business acquired or to be acquired by the sender of theinformation circular, if the disclosure would be required in a prospectus of the sender.As with section 2.1, this disclosure requirement is not limited to situations where theacquisition pertains to the transaction in respect of which the information circular isbeing prepared.

The Commission believes that full prospectus disclosure concerning the issuer whosesecurities are being distributed in connection with the proposed transaction is essentialto securityholders voting on the transaction. The Commission is also of the view thatbusiness acquisition disclosure concerning the sender of the information circular isimportant, even if the sender is not distributing securities. The Commission specificallyinvites comment on the appropriateness of the scope of these disclosure requirements.

Comments

Interested parties are invited to make written submissions with respect to the proposedRule. Submissions received by June 16, 2000 will be considered.

Submissions should be made in duplicate to:

John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 1902, Box 55
Toronto, Ontario
M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferablyWordPerfect) should also be submitted. As the Securities Act requires that a summaryof written comments received during the comment period be published, confidentialityof submissions received cannot be maintained.

Questions may be referred to:

Cynthia Rogers, Senior Legal Counsel, Corporate Finance
Ontario Securities Commission
(416) 593-8261
e-mail: [email protected]

Proposed Rule

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

DATED: March 17, 2000.

NOTICE OF RULE UNDER THE SECURITIES ACT

RULE 54-501

PROSPECTUS DISCLOSURE IN CERTAIN INFORMATION CIRCULARS⁽¹⁾

PART 1 DEFINITION AND APPLICATION⁽²⁾

1.1 Definition of "Dissident Circular" - In this Rule, "dissident circular"means an information circular that is sent to holders of voting securities ofa reporting issuer soliciting proxies otherwise than on behalf ofmanagement of the reporting issuer.

1.2 Application - Subject to section 1.3, this Rule applies only to aninformation circular that is sent to holders of voting securities of areporting issuer in respect of a meeting of those holders

(a) for which proxies are being solicited, and

(b) that is being held to consider a statutory amalgamation, statutoryarrangement, statutory merger or reorganization involving thereporting issuer and another issuer, under which securities are tobe distributed or transferred to securityholders of the reportingissuer.⁽³⁾

1.3 Exception for Dissident Circulars - This Rule does not apply to adissident circular, unless the sender of the dissident circular is proposinga statutory amalgamation, statutory arrangement, statutory merger orreorganization involving the reporting issuer and the sender, under whichsecurities of the sender, or an affiliate of the sender, are to be distributedor transferred to securityholders of the reporting issuer.

PART 2 PROSPECTUS DISCLOSURE IN CIRCULARS

2.1 Prospectus Disclosure of Issuers Distributing Securities

(1) An issuer sending an information circular, other than a dissidentcircular, shall include in the information circular the disclosure thatwould be required in a prospectus if the information circular were aprospectus of each issuer whose securities are being distributed ortransferred in connection with the transaction referred to in section1.2, with necessary modifications.

(2) A sender of a dissident circular shall include in the dissidentcircular the disclosure that would be required in a prospectus if thedissident circular were: (a) a prospectus of the sender, if securitiesof the sender are to be distributed; or (b) a prospectus of theaffiliate, if securities of an affiliate are to be distributed, in eithercase with necessary modifications.

2.2 Interpretation of Section 2.1 - The disclosure required under section 2.1to be included in an information circular concerning an issuer whosesecurities are being distributed or transferred includes the financialstatement and other disclosure, if any, of a business acquired or to beacquired by the issuer prescribed by Part 6 or 7 of Rule 41-501 GeneralProspectus Requirements or Part 4 or 5 of National Instrument 44-101Short Form Prospectus Distributions, as applicable.

2.3 Business Acquisition Disclosure for the Sender of the Circular - If nodisclosure concerning the issuer sending an information circular isrequired under subsection 2.1(1), the issuer sending the informationcircular shall include in the information circular the financial statementand other disclosure, if any, that would be required under Part 6 or 7 ofRule 41-501 or Part 4 or 5 of National Instrument 44-101, as applicable, ifthe information circular were a prospectus of the issuer.^{(4) (5)}

PART 3 EXEMPTION

3.1 Exemption - The Director may grant an exemption to this Rule, in wholeor in part, subject to such conditions or restrictions as may be imposed inthe exemption.

1. This proposed Rule is derived from section 24 of OSC Policy 5.1 Prospectus Disclosurein Information Circulars: Amalgamation, Arrangements, Mergers and Reorganizations.

2. A general definition rule has been adopted as Rule 14-501 Definitions. It containsdefinitions of certain terms used in more than one rule. Rule 14-501 also provides,among other things, that terms used in a rule and defined or interpreted in section 1 ofthe Securities Act or subsection 1(2) of the Regulation will have the respective meaninggiven to them in the Securities Act or the Regulation, as appropriate. Rule 14-501 alsoincorporates terms defined in subsection 1.1(3) of National Instrument 14-101Definitions. National Instrument 14-101 contains, among other things, definitions forterms used in more than one national instrument.

3. A reference to "a reporting issuer" has been added to make it clear that the proposedRule applies to information circulars sent to securityholders of a reporting issuer. Thewords "and another issuer" have been added to make it clear that the proposed Ruledoes not apply to a reorganization of the issuer alone. The wording that appears insection 24 of OSC Policy 5.1 has also been modified generally.

4. Section 24 of OSC Policy 5.1 requires disclosure of the information that an issuer isrequired to include in a prospectus if the proceeds of the offering under the prospectusare to be applied, in whole or in part, directly or indirectly to finance a material businessacquisition. The language has been changed to tie into proposed Rule 41-501 GeneralProspectus Requirements and National Instrument 44-101 Short Form ProspectusDistributions.

5. The exclusion for change in the number of outstanding securities that appears in section24 of OSC Policy 5.1 has been omitted as being unnecessary given the addition of thewords "involving another issuer" to section 1.1.