Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Application for exemptive relief in relation to a proposed distribution of securities by the issuer by way of an "equity line of credit" -- a draw down under an equity line of credit may be considered to be an indirect distribution of securities by the issuer to purchasers in the secondary market through the equity line purchaser acting as underwriter -- relief granted to the issuer and purchaser from certain registration and prospectus requirements, subject to terms and conditions, including a 10% restriction on the number of securities that may be distributed under an equity line in any 12-month period, certain restrictions on the permitted activities of the purchaser and certain notification and disclosure requirements -- Under the Distribution Agreement, the Purchaser, its affiliates, associates, partners or insiders, will agree not to hold a "short position" in Shares during the term of the Distribution Agreement. For clarity, the Purchaser, its affiliates, associates, partners or insiders may sell Shares to hedge their obligations to purchase the Shares to be issued pursuant to a drawdown notice, subject to the restrictions provided by section 20, the Legislation and the TSX regulations.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1), 71, 74(1), 147.

National Instrument 44-101 Short Form Prospectus Distributions.

National Instrument 44-102 Shelf Distributions.

November 23, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

QUÉBEC AND ONTARIO

(the "Jurisdictions")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

LABOPHARM INC.

("Labopharm" or the "Company"),

YA GLOBAL MASTER SPV LTD.

(the "Purchaser") and

YORKVILLE ADVISORS, LLC

(the "Purchaser Manager" and,

together with the Company and the Purchaser,

the "Filers")

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (each a "Decision Maker") has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the "Legislation"):

(a) that the following Prospectus (as defined below) disclosure requirements under the Legislation (the "Prospectus Disclosure Requirements") do not fully apply to the Company in connection with the Distribution (as defined below):

(i) the statement in the Prospectus Supplement (as defined below) respecting statutory rights of withdrawal and rescission in the form prescribed by item 20 of Form 44-101F1 of National Instrument 44-101 -- Short Form Prospectus Distributions ("NI 44-101"), and

(ii) the statements required by Subsections 5.5(2) and (3) of National Instrument 44-102 -- Shelf Distributions ("NI 44-102");

(b) that the prohibition from acting as a dealer unless the person is registered as such (the "Dealer Registration Requirement") does not apply to the Purchaser and the Purchaser Manager in connection with the Distribution; and

(c) that the requirement that a dealer send a copy of the Prospectus to a subscriber or purchaser in the context of a distribution (the "Prospectus Delivery Requirement") does not apply to the Purchaser, the Purchaser Manager or the dealer(s) through whom the Purchaser distributes the Shares (as defined below) and that, as a result, rights of withdrawal or rights of rescission, price revision or damages for non-delivery of the Prospectus do not apply in connection with the Distribution.

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the Autorité des marchés financiers is the principal regulator for this application;

(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System ("MI 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince-Edward-Island and Newfoundland and Labrador; and

(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filers:

The Company

1. Labopharm is incorporated under the Companies Act (Québec) and has its head office located at 480 Armand-Frappier Blvd. in Laval, Québec.

2. Labopharm and its subsidiaries are engaged in the optimization of the performance of existing small molecule drugs using its proprietary controlled-release technologies.

3. Labopharm is a reporting issuer under the securities legislation in each of the provinces of Canada and is not in default of securities legislation in any Canadian jurisdiction.

4. Labopharm's authorized share capital currently consists of an unlimited number of common shares (the "Shares"), without par value, and an unlimited number of preferred shares, without par value and issuable in series, of which 57,411,663 Shares and no preferred shares were outstanding as at October 21, 2009.

5. The Shares are listed for trading on the Toronto Stock Exchange (the "TSX") and NASDAQ. Based on the closing price of $1.74 of the Shares on the TSX on October 21, 2009, the current market capitalization of Labopharm is approximately $100 million.

6. Labopharm is qualified to file a short form prospectus under Section 2.2 of NI 44-101 and therefore to file a base shelf prospectus under NI 44-102.

7. Labopharm intends to file with the securities regulator in each of the provinces of Canada a base shelf prospectus pertaining to various securities of the Company, including the Shares (such base shelf prospectus and any amendment thereto and renewal thereof, being referred to herein as the "Base Shelf Prospectus").

8. The statements in Subsections 5.5(2) and (3) of NI 44-102 included in the Base Shelf Prospectus will be qualified by adding the following: ", except in cases where an exemption from such delivery requirements has been obtained." (the "Additional Disclosure").

The Purchaser

9. The Purchaser is an Exempt Company incorporated in the Cayman Islands with Limited Liability.

10. The Purchaser is managed by the Purchaser Manager, a Delaware limited liability company, having its head office at 101 Hudson Street, Suite 3700 in Jersey City, New Jersey, USA.

11. Neither the Purchaser nor the Purchaser Manager is a reporting issuer or registered as a registered firm as defined in National Instrument 31-103 -- Registration Requirements and Exemptions in any jurisdiction of Canada. The Purchaser and the Purchaser Manager are not in default of securities legislation in any jurisdiction of Canada.

The Distribution Agreement

12. Labopharm proposes to enter into a standby equity distribution agreement with the Purchaser (the "Distribution Agreement") pursuant to which the Purchaser would agree to purchase, and the Company would have the right but not the obligation to issue and sell, up to $25 million of Shares (the "Aggregate Commitment Amount") over a period of 36 months in a series of drawdowns.

13. Under the Distribution Agreement, the Company has the sole ability to determine the timing and the amount of the investment for each drawdown, subject to a maximum investment amount per drawdown and the Aggregate Commitment Amount.

14. The purchase price per Share and the number of Shares to be issued to the Purchaser for each drawdown will be calculated based on a predetermined percentage discount from the daily volume weighted average price of the Shares traded on the TSX over a period of ten trading days following a drawdown notice sent by the Company (the "Drawdown Pricing Period"). Labopharm may fix in such drawdown notice a minimum purchase price below which it will not issue any Shares for any given trading day.

15. On the 11th trading day following the date of the drawdown notice (the "Settlement Date"), the amount of the drawdown will be paid by the Purchaser and the relevant number of Shares will be issued by the Company.

16. The Distribution Agreement will provide that, at the time of each drawdown notice and at each Settlement Date, the Company will make a representation to the Purchaser that the Base Shelf Prospectus, as supplemented (the "Prospectus"), contains full, true and plain disclosure of all material facts relating to the Company and the Shares being distributed. The Company would therefore be unable to issue Shares when it is in possession of undisclosed information that would constitute a material fact or a material change.

17. On or after the Settlement Date for any drawdown, the Purchaser may seek to sell all or a portion of the Shares purchased under the drawdown.

18. The Purchaser, its affiliates, associates, partners or insiders, will agree not to own at any time, directly or indirectly, Shares representing more than 9.9 % of all issued and outstanding Shares.

19. Under the Distribution Agreement, the Purchaser, its affiliates, associates, partners or insiders, will agree not to hold a "short position" in Shares during the term of the Distribution Agreement.

20. The Purchaser and the Purchaser Manager will also agree, in effecting any resale of Shares, not to engage in any sales, marketing or solicitation activities of the type undertaken by underwriters in the context of a public offering. More specifically, the Purchaser and the Purchaser Manager will not (a) advertise or otherwise hold itself out as a dealer, (b) purchase or sell securities as principal from or to customers, (c) carry a dealer inventory in securities, (d) quote a market in securities, (e) extend or arrange for the extension of credit in connection with securities transactions, (f) run a book of repurchase and reverse repurchase agreements, (g) use a carrying broker for securities transactions, (h) lend securities for customers, (i) guarantee contract performance or indemnify the Company for any loss or liability from the failure of the transaction to be successfully consummated, (j) participate in a selling group, or (k) during a Drawdown Pricing Period, together with any affiliate, associate, subsidiaries, partners or insiders, sell Shares for gross proceeds in the aggregate exceeding the amount of the drawdown.

21. The Purchaser will not solicit offers to purchase Shares and will complete all sales of Shares through one or more dealer(s) unaffiliated with the Purchaser, the Purchaser Manager or Labopharm.

The Prospectus Supplements

22. Labopharm intends to file with the securities regulator in each of the provinces of Canada a prospectus supplement to the Base Shelf Prospectus (each a "Prospectus Supplement") within two business days after the Settlement Date for each drawdown under the Distribution Agreement.

23. The Prospectus Supplement will include (i) the number of Shares sold, (ii) the price per Share, (iii) the disclosure required by Subsection 9.1(3) of NI 44-102, (iv) other information required by NI 44-101 omitted from the Base Shelf Prospectus in accordance with NI 44-102, and (v) the following statement:

Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment are not delivered to the purchaser, provided that the remedies for rescission, revisions of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province. However, such rights and remedies will not be available to purchasers of common shares distributed under this prospectus because the prospectus will not be delivered to purchasers, as permitted under a decision document issued by the Autorité des marchés financiers on November 23, 2009.

In several of the provinces, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment contain a misrepresentation, provided that the remedies for rescission, revisions of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province. Such remedies remain unaffected by the non-delivery of the prospectus, as permitted under the decision document referred to above.

The purchaser should refer to any applicable provisions of the securities legislation of the purchaser's province for the particulars of these rights or consult with a legal adviser.

(the "Amended Statement of Rights")

24. The Base Shelf Prospectus, as supplemented by each Prospectus Supplement, will (a) qualify the distribution of Shares to the Purchaser on the Settlement Date of the drawdown disclosed in the relevant Prospectus Supplement, (b) qualify the distribution of such Shares to purchasers who purchase them from the Purchaser through the dealer(s) engaged by the Purchaser through the TSX (or another exchange recognized by the securities regulator in each of the provinces of Canada) (the "TSX Purchasers") during the period that commences on the Settlement Date and ends on the earlier of (i) the date on which the distribution of such Shares has ended or (ii) the 40th day following the Settlement Date (collectively, the "Distribution").

25. The Prospectus Delivery Requirements are not workable in the context of the Distribution because the TSX Purchasers will not be readily identifiable as the dealer(s) acting on behalf of the Purchaser may combine the sell orders made under the Prospectus with other sell orders and the dealer(s) acting on behalf of the TSX Purchasers may combine a number of purchase orders.

26. The Prospectus Supplement will contain an underwriter's certificate in the form set out in Section 2.2 of Appendix B to NI 44-102 signed by the Purchaser.

27. At least three business days prior to the filing of any Prospectus Supplement, the Company will provide for comment to the Decision Makers a draft of such Prospectus Supplement.

Press Releases / Continuous Disclosure

28. The Company will promptly issue and file a press release upon execution of the Distribution Agreement, disclosing certain terms of said agreement, including the Aggregate Commitment Amount, and will file a copy of said agreement and a material change report within ten days of such execution.

29. The Company will promptly issue and file a press release upon issuance of a notice of a drawdown to the Purchaser, disclosing the amount of the drawdown, the maximum number of Shares to be issued and the minimum price per Share, if any, for such drawdown.

30. The Company will promptly issue and file a press release at each Settlement Date stating: (i) the number of Shares sold and the price per Share in such drawdown, (ii) that the Base Shelf Prospectus and the relevant Prospectus Supplement will be available on SEDAR and specifying where and how a copy of these documents can be obtained, and (iii) the Amended Statement of Rights. The Company will file a material change report within ten days of the Settlement Date if the Distribution constitutes a material change under applicable securities legislation.

31. The Company will also disclose the number and price of Shares sold to the Purchaser pursuant to the Distribution Agreement in its annual financial statements and MD&A filed on SEDAR.

Deliveries upon Request

32. The Company will deliver to the Decision Makers, upon request, a copy of each drawdown notice delivered by the Company to the Purchaser under the Distribution Agreement.

33. Pursuant to the Distribution Agreement, the Purchaser will agree to make available to the Decision Makers, upon request, full particulars of trading and hedging activities by the Purchaser or the Purchaser Manager (and, if required, trading and hedging activities by their affiliates, associates, partners or insiders) in relation to securities of the Company during the term of the Distribution Agreement.

Decisions

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.

The decision of the Decision Makers under the Legislation is that:

(a) the Prospectus Disclosure Requirements do not apply to the Company in connection with the Distribution, so long as:

(i) the Additional Disclosure is included in the Base Shelf Prospectus;

(ii) the Company files Prospectus Supplements that (A) qualify the Distribution, (B) include the disclosure required by Subsection 9.1(3) of NI 44-102, and (C) include the Amended Statement of Rights;

(iii) the Company issues a press release immediately:

(A) upon entering into the Distribution Agreement, disclosing certain terms of the agreement including the Aggregate Commitment Amount,

(B) upon delivery of a drawdown notice to the Purchaser, disclosing the amount of the drawdown, the maximum number of Shares to be issued and the minimum price per Share, if any, for such drawdown, and

(C) at each Settlement Date, disclosing (i) the number of Shares sold and the price per Share for such drawdown, (ii) that the Base Shelf Prospectus and the relevant Prospectus Supplement will be available on SEDAR and specifying where and how a copy of these documents can be obtained, and (iii) the Amended Statement of Rights;

(iv) the number of Shares distributed by the Company under one or more equity lines of credit, including the equity line of credit established under the Distribution Agreement, does not exceed:

(A) in any 12 month period, 10 % of the aggregate number of Shares outstanding calculated at the beginning of such period, and

(B) during the term of the Distribution Agreement, 19.9% of the aggregate number of Shares outstanding calculated at the date of the Distribution Agreement; and

(v) the Company delivers to the Decision Makers and the TSX, upon request, a copy of each drawdown notice delivered by the Company to the Purchaser under the Distribution Agreement;

(b) the Dealer Registration Requirement does not apply to the Purchaser or the Purchaser Manager in connection with the Distribution, so long as:

(i) the Purchaser and the Purchaser Manager do not solicit offers to purchase the Shares in any of the provinces of Canada and effect each Distribution to the TSX Purchasers through the TSX (or other recognized exchange) using one or more dealer(s) unaffiliated with the Purchaser, the Purchaser Manager or the Company;

(ii) no extraordinary commission or consideration is paid by the Purchaser or the Purchaser Manager to a person or company in respect of the Distribution to the TSX Purchasers; and

(iii) the Purchaser and the Purchaser Manager make available to the Decision Makers, upon request, full particulars of trading and hedging activities by the Purchaser or the Purchaser Manager (and, if required, trading and hedging activities by their affiliates, associates, partners or insiders) in relation to the securities of the Company during the term of the Distribution Agreement;

(c) the Prospectus Delivery Requirement does not apply to the Purchaser, the Purchaser Manager or the dealer(s) through whom the Purchaser distributes the Shares and that, as a result, rights of withdrawal or rights of rescission, price revision or damages for non-delivery of the Prospectus do not apply in connection with the Distribution, so long as the conditions (i) through (iii) provided in paragraph (b) of the decision are met; and

(d) this decision will only apply to any Distribution completed within 36 months following the date of execution of the Distribution Agreement, at which point such decision will terminate.

"Louis Morisset"
Superintendant, Securities Markets
 
"Mario Albert"
Superintendant, Distribution

Furthermore, considering the application received from the Filers under the Legislation, the decision of the principal regulator under the coordinated review system for applications is that the Filers' application for exemptive relief in connection with the Distribution, its supporting materials, subsequent correspondence and this decision document be kept confidential and declared inaccessible until the earlier of:

(a) the date the Company publicly announces by way of a press release the execution of the Distribution Agreement,

(b) the date the Company advises the principal regulator that there is no longer a need for the Confidential Materials to remain confidential or be declared inaccessible, or

(c) December 31, 2009.

The decision of the principal regulator evidences the decision of the securities regulatory authority or regulator in Ontario.

"Benoit Longtin"
Interim Corporate Secretary