Continuous Disclosure

• Author: Christopher C. Nicholls, Jeffrey G. Macintosh
• Pages: 253-294

CHAPTER

9

DISCLOSURE

A.

INTRODUCTION

AND

OVERVIEW

As

discussed

in

chapter

6,

when

a

company

(an

issuer)

first

sells

its

securities

to the

public,

it is

required

to

produce

a

detailed information

disclosure document called

a

prospectus.

The

prospectus provides

"full,

true

and

plain disclosure

of all

material

facts

relating

to the

secu-

rities"1

being sold

to the

public. However, most Canadians

who own

securities

did not

purchase them directly

from

the

issuer

at the

time

of

a

public

offering.

Rather,

they acquired them

in the

secondary market,

usually

through

the

facilities

of a

stock exchange. People

who

purchase

securities

in the

secondary market

do not

receive

a

copy

of the

prospec-

tus

that

was

produced

by the

company when those

securities

were

first

distributed

to the

public. But, even

if

such

a

prospectus were delivered

to

these secondary market purchasers,

it

would

be of

little,

or no, use

to

them.

The

prospectus would have been prepared

by the

issuer

months

or

even years

in the

past. Such

a

stale-dated document cannot

be

relied upon

by an

investor trying

to

assess

the

current value

of a

company's

securities.

Accordingly,

it is

important that public companies provide regular,

up-to-date information

to

current

and

potential investors.

The

require-

ment

to

produce such information

is

generally

referred

to as a

contin-

uous disclosure obligation.

The

importance

in

Canadian securities

law

CONTINUOUS

1

Securities

Act

(Ontario), R.S.O. 1990,

c.

S.5, [OSA]

s.

56(1).

253

of

ongoing

or

continuous disclosure

by

public companies

is

growing

as

we

move increasingly

from

a

system

of

transaction-based disclosure

to

a

system

of

integrated

or

issuer-based disclosure.

The OSA

requires reporting issuers,

as

defined,

to

comply with

rules relating

to two

basic types

of

continuous disclosure obligations:

1.

Regular

or

periodic disclosure

of,

among other things, annual

and

quarterly

financial

statements, annual reports,

and

information circu-

lars

in

connection with soliciting proxies

for

shareholders' meetings

2.

Timely disclosure

of

material

business

developments when they

occur

The

increased regulatory emphasis

on

continuous disclosure

has

led,

in

recent years,

to

important developments

and

proposals

in

sever-

al

related areas, including

the

following:

Civil

liability

for

misrepresentations

in

continuous disclosure docu-

ments, including common

law

remedies

and

statutory civil liability

Selective

disclosure. Communication with

beneficial

owners

of

securities where those securities

are

registered

in the

name

of a

nominee

An

issuer-based "integrated disclosure system"

Each

of

these

issues

is

canvassed later

in

this

Chapter.

Of

course,

the

rapid increase

in the use of the

Internet also

has

important

implications

for the

ongoing disclosure

of

information

by

securities

issuers.

Some

of

those implications

and the

regulatory

initia-

tives relating

to

Internet

use are

also discussed

briefly

here.

B.

REPORTING

ISSUER

Only

"reporting issuers"

are

subject

to the

OSA's

continuous disclosure

rules. "Reporting issuer"

is

defined

in

section

1 of the

OSA. Although

the

definition contains seven clauses,

the

most common

way in

which

an

issuer

of

securities becomes

a

reporting issuer

is by

filing

a

prospec-

tus and

obtaining

a

receipt

for

it.2

Once

an

issuer becomes

a

reporting issuer,

it is

subject

to all of the

periodic

and

timely

disclosure

obligations

(discussed

in

more detail

below)

until such time,

if

any, that

the

issuer applies

to the OSC and

is

granted

an

order deeming that

it has

"ceased

to be a

reporting

2

OSA,

ibid.

s.

l(l)(b)

(definition

of

"reporting issuer").

SECURITIES

LAW

254

issuer."3

Prior

to

1999, only reporting issuers with

fewer

than

fifteen

securityholders

were permitted

to

apply

for

such

an

order,

but the OSC

now has

greater latitude

to

grant such

an

order, provided

it is not

prej-

udicial

to the

public

interest.

The

concept

of

"reporting issuer"

was

introduced into Ontario

law

in

1978;4

but,

the

idea came

from

an

important

OSC

committee report,

commonly

referred

to as the

Merger

Report.5

The

Merger

Report,

in

turn,

borrowed

the

concept

from

U.S.

federal

securities

legislation.6

The

con-

cept

is

fundamental

to the

so-called

closed

system.

Those

issuers

that

choose

to

access Ontario's public markets obligate themselves

to

ensure

that

current information about their businesses

is

readily available

to

the

investing public. Investors buying

or

selling securities

of

such

issuers

in the

secondary markets are, therefore, better able

to

make

informed

trading

decisions.

Moreover,

the

fact

that

a

body

of

informa-

tion about such issuers exists,

and is

regularly updated,

facilitates

the

development

of

more streamlined procedures

for

additional public

financings,

such

as the

short-form, shelf,

and

PREP

procedures dis-

cussed

in

chapter

6.

In

1999,

the OSA was

amended

to add

section 83.1. This

new

sec-

tion provides

the OSC

with

the

authority

to

deem

an

issuer

to be a

reporting issuer where

it

would

not be

prejudicial

to the

public inter-

est

to do

so.7

The

section

is

primarily aimed

at

ensuring that compa-

nies with publicly traded shares

—

especially companies that have

completed public

offerings

in

other Canadian jurisdictions

—

may,

in

appropriate

circumstances, acquire

the

benefits,

and

simultaneously

be

subject

to the

obligations,

of

reporting issuers

in

Ontario.

In

2001,

the OSC

promulgated

a

policy statement outlining

the

procedures

and

information relating

to the

granting

of

orders under section

83.1,

principally with respect

to

reporting issuers with securities listed

for

trading

on the

CDNX

and

other issuers

from

various Canadian

provinces that were reporting issuers

in

their home jurisdictions

for

at

least

one

year.8

3

Ibid.

s. 83.

4

Securities

Act, 1978, S.O. 1978,

c. 47.

5

Ontario Securities

Commission,

Report

of

the OSC on the

Problems

of

Disclosure

Raised

for

Investors

by

Business

Combinations

and

Private

Placements.

(Toronto:

Department

of

Financial

and

Commercial

Affairs,

1970)

[Merger

Report].

6

Securities

Exchange

Act

of

1934,

15

U.S.C.

78a et

seq.

1

OSA, above note

1, s.

83.1.

8 See

"Notice

of

Proposed Ontario Securities Commission Policy 12-602" (2001),

24

OSCB

1531.

Continuous

Disclosure

255